Once again, both of Canada’s major railways announced second quarter results for the period ended June 30, and both were able to produce bottom line results that were impressive. Top line performance? Well, not so great, with CP showing a 1.8 per cent drop in revenues, and CN producing an increase in revenues of only 0.3 per cent, compared to the second quarter of 2014. Still, with the economy in or near recession, those numbers are not bad.

During the quarter, CN’s operating expenses as a percentage of revenues declined from 59.6 per cent of revenues to 56.4 per cent, a considerable achievement resulting in an 8.3 per cent increase in operating income. At $1.203 billion, cash flow from operations was marginally lower than during the same period of 2014. “Free” cash flow, the amount remaining from operating cash flow after subtracting net investments made during the quarter and dividends paid to investors, declined from $585 million to $294 million, because of greatly increased capital expenditures.

CP’s operating expenses declined from 65.1 per cent to 60.9 per cent of revenues, a major achievement which boosted operating income by 10 per cent. In addition, this operating ratio was the lowest for any second quarter in the company’s history. Cash flow from operations declined by 9.3 per cent to $585 million. Free cash flow dropped steeply from $532 million to $181 million during the quarter because 2014 free cash flow benefitted from the proceeds of the sale of the west end of Dakota, Minnesota and Eastern Railroad, a one-time event.

For CN, the strain of the economy showed in a 7 per cent overall decline in revenue tonne miles (RTM), which resulted from RTM reductions in all of its business segments except Intermodal and Automotive. Coal suffered a 32 per cent reduction in RTMs. However, because CN was able to increase freight revenue per RTM in all segments except Intermodal and Automotive, overall revenues remained just about the same. Coal revenues declined by 26 per cent, but Automotive revenues increased by 17 per cent. Total carloads were down by 3 per cent, but at $2,070 freight revenue per carload rose by 3 per cent. At $3,709 per carload, revenues from carrying petroleum and chemical products were the highest of any category, up by 5 per cent, even though RTMs from this category declined nominally.

For CP, the really bright spot was Forest products (revenues up 9 per cent and revenue-tonne miles up 6 per cent). Other bright spots included Potash, Chemicals and Plastics. Overall, revenue tonne miles declined by 6 per cent, and freight revenue per RTM also declined, by 2 per cent. Hard hit was the carriage of Crude, which suffered a 29 per cent decline in revenues based on a 27 per cent decline in RTMs. Total carloads were down by three per cent, but freight revenues per carload were up by 1 per cent.

During the quarter, CP continued to make efficiency improvements, particularly by operating longer and heavier trains faster, and reducing dwell time. In addition, CP continued to achieve further reductions in its employee count as a result of which, together with further operational improvements, employee productivity rose significantly.

For its part, CN managed to increase rail freight revenue per RTM from $4.90 to $5.25 and lowered its operating ratio from 59.6 to 56.4 per cent. However, its employee count rose during the quarter, which it stated it would address subsequently.

During the quarter, CN repurchased 5.3 million of its own shares at a cost of $404 million. CP repurchased 3.1 million of its own shares at a cost of $590 million.

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 be a headwind. Moreover, with both railways having made stellar gains in operating efficiencies, it will be very difficult to achieve further 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 the economy stumbling, the latter must be considered a risk factor.

CN reaffirmed its outlook for double-digit adjusted earnings per share growth in 2015 despite weakness in several market segments and other challenges. CP updated its 2015 outlook by stating it expects revenue growth of 2-3 per cent, an operating ratio below 62 per cent, and adjusted diluted earnings per share of $10 – $10.40.

CN noted that its level of commitments to acquire railway equipment, rolling stock and IT services and licenses as at June 30 was $471 million greater than it was as at December 31. In addition, CN stated it had remaining commitments of $527 million in relation to U.S. legislative requirements to implement Positive Train Control (PTC).