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CP chief says Ackman's goals 'unrealistic'

Fred Green can't move mountains, but he's vowing to put Canadian Pacific Railway Ltd. on the comeback trail.

CP's chief executive officer, under pressure to stage a turnaround at the railway, says his company faces geographical barriers that slow down trains. CP locomotives have to haul freight through spiral tunnels and the Kicking Horse Pass in the Rocky Mountains and also have to negotiate the Rogers Pass in the Selkirk Mountains.

Mr. Green said Thursday that rival Canadian National Railway Co. has an easier western route than CP faces, calling it a "substantial difference in the structural makeup of different railroads."

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CP trains do face much steeper climbs than CN's when hauling containers with consumers goods eastward from Vancouver toward Alberta, industry experts say. And CP trains carrying bulk commodities from the Prairies to the Port of Vancouver must overcome grades that are steeper than CN's gentler terrain through the Yellowhead Pass. But observers say that CP isn't as handcuffed as it claims, at least travelling westward. In the mid-1980s, CP completed a series of major infrastructure projects that made its mountainous route less steep than had been the case for decades for trains travelling west through Lake Louise in Alberta, and the Rogers Pass, Revelstoke and Salmon Arm in British Columbia.

Bill Ackman, the CEO of New York-based hedge fund Pershing Square Capital Management LP, is pressing underperforming CP to steadily reduce its operating cost-to-revenue ratio to 65 per cent by 2015.

"It is unrealistic in these time frames, in our view, to get to those numbers," Mr. Green said during a conference call with industry analysts.

He provided greater detail on CP's own targets for the operating ratio, which is a key indicator of productivity that measures costs as a percentage of revenue. CP, which previously set a goal of reaching an operating ratio in the low 70s within three years, disclosed Thursday that it's aiming to have a ratio between 70 per cent and 72 per cent as an average for the full 12 months of 2014.

A lower number is better, and CP's operating ratio averaged 81.3 per cent in 2011, up from 77.6 per cent in 2010.

Montreal-based CN has the industry's best operating ratio, which it lowered to 63.5 per cent in 2011 from 63.6 per cent in 2010.

Mr. Green declined to comment on Calgary-based CP's fight with Pershing Square, but he defended his railway's recovery strategy of running longer, faster trains, upgrading tracks on the Edmonton-to-Winnipeg route and installing new sidings along stretches of single-track territory. CP is also deploying new locomotives through tough terrain in mountain ranges in Alberta and British Columbia.

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Pershing Square, CP's largest shareholder, wants to replace Mr. Green with Hunter Harrison, CN's former CEO, in a proxy battle at CP's annual meeting on May 17 in Calgary.

CP reported Thursday it posted a $221-million profit in the fourth quarter, up 19 per cent from $186-million in the same period in 2010. Its adjusted share profit of $1.08 missed analysts' expectations by 1 cent. CP's operating ratio increased to 78.5 per cent in the fourth quarter from 77 per cent a year earlier.

The freight carrier had a $570-million profit last year, down 12 per cent from $651-million in 2010.

CP's freight deliveries suffered in 2011, especially during winter storms and spring floods.

Besides striving to overhaul train operations, CP is also tackling pension funding challenges. Over the past three years, CP has made large lump-sum payments to reduce its pension solvency deficit. The freight carrier made voluntary pension contributions of $500-million in 2009, $650-million in 2010 and $600-million in 2011.

Canadian Pacific (CP)

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Close: $71.65, unchanged

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About the Author

Brent Jang is a business reporter in The Globe and Mail’s Vancouver bureau. He joined the Globe in 1995. His former positions include transportation reporter in Toronto, energy correspondent in Calgary and Western columnist for Report on Business. He holds a Bachelor of Commerce degree from the University of Alberta, where he served as Editor-in-Chief of The Gateway student newspaper. Mr. More

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