Canadian Pacific operating efficiency weakens

Thu Jan 26, 2012 2:08pm EST
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By Julie Gordon

(Reuters) - Canadian Pacific Railway (CP.TO: Quote) said on Thursday an important measure of operating efficiency weakened in the fourth quarter even as profit jumped, a trend that will likely fuel demands by CP's largest shareholder for a new CEO at the country's No. 2 railroad.

CP's shares dipped after the company reported its operating ratio worsened to 78.5 percent in the quarter from 77 percent in the year-earlier period. The higher the ratio, which measures operating costs as a percentage of revenue, the less efficient the railway.

For the full year, CP's operating ratio was 81.3 percent, compared with 77.6 percent in 2010. Canada's largest railway, Canadian National Railway (CNR.TO: Quote), reported a 2011 operating ratio of 63.5 percent.

On this measure, CP is one of the less efficient of the major North American railways, a main reason why William Ackman's Pershing Square Capital Ltd wants CP to name Hunter Harrison, a former CNR CEO, as its new chief executive.

"Pershing Square believes that CP can produce an operating ratio of 65 percent by 2015, which we have previously suggested is probably an overly optimistic goal," said National Bank analyst Cameron Doerksen in a note to clients after the results.

CP reiterated its plans to drive down its operating ratio within three years, and refined the target to 70-72 percent from what was previously pegged as the "low 70s".

CEO Fred Green said that his target was based on driving volume growth and expanding network capacity, while controlling costs over the next three years. He said that an operating ratio of 65 percent by 2015 is not a feasible target.

CP's trains battle with steeper mountain grades than CNR's do, and the company has heavy exposure to a single big customer, diversified miner Teck Resources TCKb.TO.   Continued...