TORONTO (Reuters) - Two years after taking control of Canadian Pacific Railway (CP.TO), Chief Executive Hunter Harrison said his aggressive overhaul of the former industry laggard will soon hit pay dirt, with its transformation into North America’s most efficient carrier.
The gruff rail veteran said that CP, the country’s second-largest carrier, will roll into fresh territory in the next two quarters as the lowest-cost operator among Class 1 railroads.
More efficient operations open the door to a host of new business opportunities, including “everything that might ride the rails”, said Harrison, a Memphis, Tennessee native who still speaks with a drawl.
“You’re going to see a good second and third quarter. I think you’ll be impressed,” he told Reuters in a phone interview after the Calgary-based company’s annual meeting.
Canadian Pacific’s first quarter results were bruised by ferocious winter weather that ate into profits.
The surging crude-by-rail business, while just a sliver of CP’s overall revenue, is one area with strong growth potential. Harrison said the company has the network capacity to move triple the amount of crude it hauls today.
CP transported 90,000 carloads of crude last year and forecasts that it will move 140,000 to 210,000 carloads of crude oil a year by the end of 2015.
In 2011, CP scraped the bottom of the efficiency barrel, spending about C$81 ($73.80) of every $100 in revenue to cover operating expenses, producing an industry-worst ratio of 81 percent. The lower the number, the better.
The result of thousands of job cuts, a sharp reduction in fleet size and “sweating” assets, efficiency gains mean that CP can now make money on new lower-margin business, Harrison said.
In a 2012 proxy battle to wrest control of CP from its former CEO and a group of loyal directors, Harrison and hedge fund Pershing Square Capital Management promised to squeeze the railway’s operating ratio to 65 percent by mid-2016.
In 2013, CP improved the measure by 710 basis points to a record low 69.9 percent. It is on track to do even better this year, eyeing 63 percent.
Harrison began his railroad career as a carman-oiler with the St. Louis-San Francisco Railway in 1963, when he was still in high school. After rising through the ranks, he went on to earn his reputation for turning companies around by rebuilding Illinois Central Railroad CNRILR.UL and Canadian National Railway (CNR.TO) into two of the industry’s most profitable and admired companies.
At CP, his work has earned the gratitude of investors, whose shares have soared some 135 percent since he took control.
Railroads are under intense scrutiny from regulators and an increasingly worried public following a spate of fiery high-profile crashes involving oil trains. Last summer, 47 people died after a runaway crude-carrying train exploded in Lac Megantic, Quebec.
On Wednesday afternoon, a CSX Corp CSX.N train carrying crude oil from North Dakota’s Bakken shale region derailed and erupted into flames in Lynchburg, Virginia. Some 15 cars derailed and three tumbled down an embankment into the James River.
“We’re seeing a lot of communities that were developed as a result of the railroads and wanted the railroads to be there that now don’t want us,” said Harrison, who favors a North American-wide policy approach to address safety.
Last week, the Canadian government said it will require older rail cars used for carrying crude oil be phased out by May 2017, moving ahead of the United States to ban the cars.
North American railways are required to transport all materials including hazardous products under common carrier obligations, which restricts them from rejecting cargo.
About a year ago, CP’s board of directors considered rejecting some hazardous materials, but ultimately decided to continue, Harrison said. The board worried the dangerous goods would otherwise move on highways, which it deemed a higher risk.
($1 = 1.0976 Canadian Dollars)
Reporting by Solarina Ho and Susan Taylor; Editing by Jeffrey Hodgson and Grant McCool