Skip to main content

Canada's two major railways reported quarterly results on Tuesday, and both posted record revenue and a hefty increase in profits. But the tone on the respective conference calls with analysts could not have been more different.

During the Canadian Pacific Railway Ltd. conference call, chief executive officer Hunter Harrison spent 90 minutes taking questions and explaining why congestion on the rail network in the United States has forced his company to seek a merger partner. Gridlock, especially in Chicago and Minneapolis, is bad and getting worse, he said. Surging oil shipments are tightening the choke-points, and only a partner with a complementary network could fix it. But he added that merger talks with Florida-based CSX Corp. had failed, and CP would continue to look for a partner.

Mr. Harrison complained about the business being choked by government orders to speed up grain shipments and slow down oil cars. He also cited difficulties expanding rail yards and tracks. He denied being obsessed with building a transcontinental railway, but said he was trying to fix a problem for the company before it became too severe.

Those complaints aside, CP has every reason to gleeful. The company had a record third quarter that was lauded by analysts. But Mr. Harrison essentially hung a For Sale sign on the 133-year-old company, saying he could be on either side of a transaction; as a buyer or seller.

Executives at Canadian National Railway Co., meanwhile, could scarcely contain themselves. CEO Claude Mongeau declared on his conference calls that the railway's supply chains were in sync, and revenue was soaring. There was no mention of clogged rail lines or network congestion.

"There is no question our network is fluid," Mr. Mongeau said. He dismissed a question about mergers, saying the company liked its network and would continue to grow the old-fashioned way – winning contracts and serving customers.

CP's main problem – and CN's advantage – lies in Chicago. One quarter of all U.S. rail traffic passes through the midwestern hub. In addition to CP, western rail heavyweights Union Pacific Corp. and Burlington Northern Sante Fe stop there too. So do the two eastern rail companies, CSX and Norfolk Southern Corp.. As a result, the companies must co-ordinate rail car movements and crew and locomotive changes. It's a complicated and slow process.

Not for CN. That's because it owns a railroad that skirts the city – the Elgin, Joliet and Eastern Railway. CN can interchange with other railways at Chicago, or bypass the congestion altogether, as it continues south to the refinery-rich U.S. Gulf Coast. As Mr. Mongeau put it: "The ability to connect our own networks in these webs around Chicago is just huge, it's a great asset."

Another CN executive, marketing chief Jean-Jacques Ruest, went further. He said CN's way around around Chicago is preferable to a "mega-merger root canal."

Mr. Harrison agreed mergers and takeovers "are difficult at best." Egos, fights for jobs and culture clashes can get in the way, he said, and the responsibility of creating shareholder value can be forgotten.

For both railways, crude oil is a rapidly growing segment. But unlike CP, CN does not need to hand off trains transporting western crude and Bakken oil to other carriers. CN's routes stretch from the oil patch to the refineries on the U.S. Gulf Coast. In the middle is its Chicago by-pass, which one analyst called a "jewel."

But Mr. Harrison doesn't need to be reminded of that. He knows all about CN's Chicago edge. After all, he was the one who bought the EJ&E when he was running CN in 2007. And now he's looking to buy another jewel to get himself out of the mess in the midwest.

Report an error

Editorial code of conduct

Tickers mentioned in this story