Canadian Pacific Railway is launching a pair of new intermodal train services that will reduce transit times between Vancouver and Chicago or Toronto to four days. The new services, which will operate seven days a week and 365 days a year in both directions, will shave a day off the Vancouver-Toronto trip and two days off the Vancouver-Chicago route.

“With lower dwell times, more efficient transit times, and optimized asset utilization, we can provide improved service which, in turn, makes our customers more competitive in the markets they serve,” Jane O’Hagan, CP’s Executive Vice-President and Chief Marketing Officer, said in a news release announcing the new services. “Making CP’s performance more competitive creates new growth opportunities for the railway and for our customers.” The four new services represent half of the eight transcontinental trains that CP launches daily across its network.

Building longer and faster trains with less downtime

CP has been able to achieve the faster times by tweaking efficiencies in several ways. According to information provided by the railway, these measures include the following:

• building trains at origin, such as at CP’s intermodal terminal in Vancouver, with blocks of cars for long-haul destinations. This significantly reduces the number of stops and streamlines the connections these transcontinental trains make en route to their final destinations;

• increasing capacity by redesigning trains to have average lengths of 7,000 to 12,000 feet, and which can be adjusted in length to meet customer volumes and the addition of new customers;

• changing the timing of and locations for servicing of equipment, and speedier fueling of locomotives dedicated to these trains to ensure they are consistently ready when they need to be ready;

• reviewing all daily scheduling across CP’s network to ensure smooth and efficient coordination of train movements;

• capital projects and investments in key corridors, including $1.2 billion in infrastructure renewals announced in 2012 and about $1 billion in capital projects the previous year; and

• working with customers to improve coordination of cargo at both ends of the service.

New services follow corporate shake up

The announcement of the new services, which CP has been testing this summer, comes on the heels of big changes at the company. A proxy fight in May led by New York activist investor Bill Ackman of Pershing Square Capital Management LP, resulted in several new faces on the CP Board of Directors and the appointment as CEO of Hunter Harrison, who had previously been President and CEO of rival Canadian National Railway Company from 2003 to 2009, but came out of retirement at Mr. Ackman’s urging in June.

CP also made headlines this spring when the federal government ordered 4,800 striking CP workers, members of the Teamsters Canada Rail Conference, back to work. Federal Labour Minister Lisa Raitt appointed William Kaplan as an arbitrator in the dispute between the company and the union on July 19. He has insisted that talks remain confidential, according to the union. Jane O’Hagan said, “Certainly, the arrival of Hunter Harrison has been an important catalyst for this type of change for us as a company. He recognizes that intermodal is one of the fastest growing segments of our business.”

Intermodal accounts for a quarter of CP revenues

Intermodal – the movement of freight via multiple transportation modes such as ship, rail and truck – represented $1.3 billion or 26 per cent of CP’s overall 2011 revenues. CP’s domestic intermodal – which involves moving containerized commodities such as food, forest products and consumer goods – made up 49 per cent of that business. The company’s international intermodal business, which is marketed to ocean carriers, makes up 50 per cent of the intermodal portfolio. Domestic intermodal, which includes cross-border business between Canada and the U.S., is delivered mainly through intermodal marketing wholesalers. On the international side, CP provides line-haul intermodal containerized service through four ports: New York, Philadelphia, Montreal and Vancouver.

Traffic through the two Canadian ports accounts for 90 per cent of CP’s international intermodal revenue, with Port Metro Vancouver handling the larger share. Vancouver and Montreal primarily serve markets in Canada and the U.S. Midwest.

“When you improve this overall fluidity on your network and [are] focusing on reducing the travel times between terminals, and reducing the time that cars spend in yards, what this means is that you get an overall improvement in performance that translates into higher speed,” Ms. O’Hagan said.

The new intermodal services transit 3,555 kilometres (2,209 miles) between Deltaport near Vancouver and CP’s Bensenville yard in Chicago, and 4,292 kilometres (2,667 miles) from CP’s Vancouver intermodal terminal and the Vaughan intermodal terminal near Toronto. The railway has been testing the new services this summer, with O’Hagan expecting them to be in full operation by the time this article goes to press. CP wasn’t able to estimate how the new services will affect revenues, but the impact is expected to be significant.

“Do I believe that this is probably the first step in more that we’re going to see? Absolutely,” Ms. O’Hagan said. However, she added that it would be up to Mr. Harrison to decide when to make CP’s full game plan public.

Closing inefficient terminals

In tandem with announcing the new services, CP is also shutting down three of its less efficient intermodal terminals, which will leave the railway with a dozen intermodal terminals by the end of the year. A factor enabling that rationalization is the need for less storage space, which has resulted from the improved efficiency of the network as well as customer incentives such as changes to tariffs on container storage and driver wait times. “So these are all positive upsides of it becoming a better service to the customer,” Ms. O’Hagan said.

CP plans to close its Schiller Park East Intermodal Terminal in Chicago by the end of September with all its traffic shifting to Bensenville, which is open around the clock, 364 days a year, seven days a week. In contrast, Schiller is open only Monday to Friday and not 24 hours a day. According to CP, Bensenville Intermodal Terminal is already set up to handle the extra business, which would bring the terminal to 80 per cent of capacity. The company also plans to add more lift equipment and additional storage racks. A new gate will also be built to expedite traffic.

Plans are also in the works to close CP’s Obico Intermodal Terminal in Etobicoke, Ontario, likely by the end of November. That leaves Vaughan Intermodal Terminal in Kleinburg to serve as the Toronto hub.

CP also closed its Milwaukee Intermodal Terminal effective September 1. That announcement did not go over well with Milwaukee Mayor Tom Barrett, who expressed “alarm and dismay” in a letter to Mr. Harrison and urged him to reconsider, the Milwaukee Journal Sentinel newspaper reported in August.

The paper quoted CP spokesman Ed Greenberg as saying, “We’re a privately owned and operated railroad, and we must consider the service needs and efficient operations for our whole customer base, and our shareholders.”

Proxy battle put in the past

Shareholders, led by Mr. Ackman, had their say in May when they voted in eight Directors endorsed by him to gain a majority on the CP Board. Fred Green, who had been CEO since 2006, saw the proxy coup unfolding and resigned just hours before the May 17 annual general meeting, as the Globe and Mail noted.

“The proxy contest is behind us,” Ms. O’Hagan said. “We’ve turned the page. I’d just like to emphasize that at the end of the day, our focus is on serving our customers and creating value for our shareholders in the best and most innovative way that we can. And we’re going to do the best things that we can do to grow our business.”

In its coverage, the New York Times called the turn of events “a blow to Canada’s business establishment,” noting that CP is one of Canada’s oldest and most prominent companies. CP certainly has a hallowed place in Canadian history. As iconic author Pierre Berton noted in The Last Spike, his chronicle of the building of Canada’s trans-continental railway in the 1880s, “no other private company, with the single exception of Hudson’s Bay Company, has had such an influence on the destinies of the nation.” In the very next sentence, Berton added: “Nor has any other come so close to ruin and survived.”

CP itself acknowledges that difficult birth in a company history on its website by noting that construction costs “almost broke the syndicate” that built the railway. But by 1986, the company – which then boasted hotels, an airline, a maritime shipping company, an oil and gas company and a real estate investment division – had become Canada’s second largest with $15 billion in annual revenues.

CP faces stiff competition

In recent years, however, CP has faced stiff competition from Canadian National Railway, which announced in December 2011 that it is building a “superior intermodal product” that appears similar to CP’s new intermodal train services. “I can’t speak directly about what has happened at CN,” Ms. O’Hagan said. “We have our own game plan. And our game plan is really around capitalizing on our growth opportunities.”

Those opportunities are helped along by CP’s recent track infrastructure renewal program, which includes up to $100 million to increase productivity on the Western corridor from Calgary to Vancouver, $250 million for the North Main Line from Winnipeg to Edmonton, and more than $90 million along CP’s corridor in the U.S. Midwest. With those improvements already in place, CP didn’t have to make any additional capital investments in order to launch the faster intermodal services, Ms. O’Hagan said.

“We’ve also worked with our customers to adjust what we call our cut-off times and when they make traffic available to us,” she said. As part of that strategy to induce customers to help make the supply chain more efficient, CP is also making changes to its tariffs, effective September 15, for such items as driver waits, trailer drops, tarping, and extra deliveries and re-deliveries. The tariff for a driver wait, for example, has increased to $90 an hour. Previously the rate was $10 per 15 minutes, or $40 an hour. “We’re finding ways for us to talk to the customers and for us to find ways to create these win-wins so that we both are joined at the hip in terms of making this a more consistent, reliable service,” O’Hagan said.

Success also depends on labour relations

Given CP’s recent labour strife, customers aren’t the only people the company needs to get on board. In a June 30 posting on the Teamsters website, Bill Brehl, President of Teamsters Canada Rail Conference – Maintenance of Way Employees Division, said of Mr. Harrison, “Like all railway Presidents, he is not a friend to labour. And so one thing is for certain, life at CP may not be getting any easier … at least for a while.” Brehl went on to say that “our relationship will depend solely on how he treats us.”

Ms. O’Hagan said the company’s employees also want to see its business grow and that the new intermodal service is one step in creating a platform for that growth. “We have employees who are shareholders in this business and everybody wants to be successful,” she said.

CP has made strides in improving efficiency, such as increases in average train weights, length and speed, and a drop in terminal dwell time, as noted in an August 6 Canadian Sailings article. However, those gains coincided with a seven per cent reduction in employee productivity, which suggested a mismatch between the number of employees needed and the number on the company payroll. Sources at CP were unable to answers questions about how Mr. Harrison plans to deal with that issue.

Another important issue is whether Mr. Harrison can produce the results that shareholders expect him to produce. The share price has crept up from about $45 to just under $85 during the past twelve months in anticipation of Mr. Harrison’s long-rumoured appointment, and his reputation for engineering significant improvements in bottom-line results. Sources confirmed that CP will be hosting an Investor Day in New York the first week of December, which will be the first opportunity for Mr. Harrison to share more details of plans to produce improved results.

Mr. Harrison did say in July that CP planned to cut its operating ratio, which measures expenses against revenue, down to about 65 per cent in the next four years, Bloomberg reported at the time. Bloomberg calculated that the first quarter [2012] average for “peer” railroads was 73.9 per cent, while CP’s ratio in the second quarter was 82.5 per cent. Mr. Harrison also told Bloomberg that a 20 to 25 per cent reduction in the locomotive fleet might be seen in the next four years.