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March 2012

Rail News: Financials

The first pitch in the Pershing Square-Canadian Pacific proxy fight — by Tony Hatch

— by Tony Hatch

At a Feb. 6 "town hall" meeting/webcast in Toronto, Pershing Square Capital Management L.P. reintroduced former CN CEO Hunter Harrison to a rail world that's been eagerly following the firm's proxy fight against the Canadian Pacific board. 

Truth be told, it wasn't exactly a fact-filled, detailed-plan-unveiling kind of meeting, as CP officials noted immediately afterward in a press release. There was, however, a meeting afterward that wasn't (but, in my view, should have been) webcast that perhaps revealed a plan with a capital "P." 

A Lean, Mean O.R. Machine

To start with, Pershing Square wrapped itself in a maple-leaf flag and made public its board choices, which came off in a wide range of competency, and the presentations were solid if not unlike what we have read regarding CP's recent track record. But Pershing Square did unveil its ace card, Hunter Harrison, a lean and mean O.R. (operating ratio) machine ready for action like a latter-day railway action hero ("I don't need a detailed plan!"), having just put $5 million into CP shares. 

The recipient of Progressive Railroading's "Railroad Innovator" Award in 2009, Harrison told the town hall attendees his plan was simple: If he were CP's CEO, he would deliver on promises made to shippers. File this under the category of "Instituting a Schedule."

He also would control costs ("Not slash, control," he emphasized). This category covers even capex, because he would radically improve asset utilization (as he did at Illinois Central as well as CN), while maintaining a focus on safety.

It's clear where Hunter's skills would fit best (and quickly) — on the asset utilization front, even if delivering on promises made to shippers and controlling costs are what made him famous. That's where CP didn't benchmark well with CN in 2011: CP's locomotive utilization was 23 percent lower than CN's; rail-car utilization, 33 percent lower; train speed or velocity, 20 percent lower; and carloads per employee, 19 percent lower. Perhaps the timing and nature of the comparisons aren't perfect, but the spread is nonetheless significant. 

Under Harrison, CN reduced assets (employees, track miles, and especially yards, cars and locos) while growing the business through "precision railroading." It is this operational service improvement that I foresee for the rail group as a whole over the course of the next cycle; it will drive average operating ratios into the mid-60s. With CP, the effects could be dramatic.

Not everyone at the meeting would agree. A brave shipper stood up and offered his full support for CP CEO Fred Green. Customer relations never were CN's best category under Harrison, from Canadian carload customers unused to the restrictions of a "scheduled railroad" (i.e., shippers have to be on time, too) to Wisconsin paper shippers still in love with the erstwhile Wisconsin Central Railroad long after CN acquired it. And more than a few attendees noted the aforementioned lack of plan details. A few more would be nice — from both sides. They'll come eventually.

A Winning Record

In the meantime, a few thoughts: The 2007-08 proxy fight between CSX Corp. and the Children's Investment Fund Management L.L.P. (TCI) made CSX better and stronger —  and in a hurry.

Perhaps the CP story is like a struggling but talented baseball club: You can't fire the nine starters, so the manager's job is always on the line. Sometimes the team gets hot just in time; sometimes the new manager comes in and the club starts winning — just the appearance of a new guy serves as a change agent. And sometimes the new guy has a track record of winning wherever he's been, like Billy Martin (from the Twins to the Tigers to the Rangers to the Yankees several times and to the A's). The point: Talking to a manager with hall-of-fame credentials makes some sense, so let's see where the dialogue heads.

Tony Hatch is an independent transportation analyst and consultant, and a program consultant for Progressive Railroading's RailTrends® conference. Email him at


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