Both of Canada’s major railways announced second quarter results for the period ended June 30, and both were able to produce remarkably robust bottom line results despite sharp drops in revenues. CP’s revenues fell by 12 per cent, while CN’s fell by 9 per cent, compared to the second quarter of 2015. Still, with the domestic economy in virtual stagnation, and exports in decline, those numbers should not be unexpected. The truly remarkable thing about Canada’s railways has been that they have been able to outperform economic and transportation norms for a number of years. Both carriers reacted quickly to the downturn by adjusting the size of the workforce and continuing, in minor ways, to improve efficiencies.

During the quarter, CN’s operating expenses as a percentage of revenues declined from 56.4 per cent of revenues to 54.5 per cent, which represents a new record for second-quarter performance. At $1.27 billion, cash flow from operations was 5.6 per cent higher than during Q2 of 2015 and, as a percentage of revenues, increased from 38.5 per cent to 44.7 per cent. “Free” cash flow, the amount remaining from operating cash flow after subtracting net investments made during the quarter and dividends paid to investors, rose to $306 million from $294 million.

CP’s operating expenses rose from 60.9 per cent to 62.0 per cent of revenues. Cash flow from operations declined by 12.5 per cent to $512 million. Free cash flow dropped from $181 million to $138 million during the quarter.

For CN, the strain of the economy showed in a 10.7 per cent overall decline in revenue tonne miles (RTM), which resulted from RTM reductions in all of its business segments except Intermodal and Forest Products which remained unchanged (Intermodal) and increased by 3 per cent (Forest Products). Coal suffered a 31 per cent reduction in RTMs. CN was able to increase freight revenues per RTM in all segments except Coal (-6 per cent), Metals and Minerals (-5 per cent) and Intermodal (-4 per cent), resulting in an overall increase in rail freight revenues per RTM of 1 per cent. Total carloads were down by 12 per cent, but at $2,118 freight revenue per carload rose by 2 per cent.

For CP, bright spots were Fertilizers and sulphur, Forest products and Automotive. Fertilizer and sulphur enjoyed a 9 per cent gain in revenue tonne miles, and a 1 per cent increase in freight revenue per RTM, resulting in a 9 per cent increase in freight revenues for the category. Forest products (RTMs up by 17 per cent and freight revenue per RTM down by 2 per cent, resulting in a 15 per cent increase in freight revenues for the category) benefitted from rising demand in the U.S. as a result of increasing housing starts in an expanding economy. Hard-hit were shipments of Crude oil and Potash, which commodities were both in an oversupply situation on a global basis, and which both suffered from low global prices. Crude oil, “manna from heaven” for rail carriers not long ago, fell to only 1.7 per cent of CP’s revenues during the quarter. Overall, revenue tonne miles declined by 12 per cent, and freight revenue per RTM also declined, by 1 per cent. Total carloads were down by eight per cent, and freight revenues per carload were down by 5 per cent.

During the quarter, CN repurchased 7.2 million of its own shares at a cost of $532 million ($73.80 per share). CP repurchased 5.1 million of its own shares at a cost of $867 million ($169.13 per share).

While the consensus economic opinion suggests the railways can look forward to increasing north-south traffic as a result of a recovering U.S. economy, domestic weakness in Canada and disappointing export levels resulting from weak demand for Canada’s commodities are expected to remain headwinds. Moreover, with both railways having made stellar gains in operating efficiencies, it is becoming very difficult to achieve significant continuous quarter-after-quarter improvements. Of course, there are two components to the operating ratios referred to above. One is corporate efficiency, specifically network operational efficiency, and the other is the corporation’s ability to raise prices. While the former is mostly in the hands of the management, the latter is determined largely by the demand for freight services. With a number of key commodities suffering from serious global price weakness, the latter must be considered a risk factor.