October 25, 2011 / 11:53 AM / in 6 years

UPDATE 4-Bitten last year, CP Rail readies for harsh winter

* Lays out operating plan with extra employees, trains

* Analysts say it is right call although could raise costs

* Outlook strong for bulk market; modest for retail market

* Earnings down 5 pct in third quarter (Recasts with conference call, more analyst comment)

By Nicole Mordant

Oct 25 (Reuters) - Canadian Pacific Railway Ltd (CP.TO) laid out a beefed-up winter operating plan on Tuesday in hopes of preventing a repeat of the disruptions earlier this year that resulted from harsh weather.

CP, the country’s No. 2 railway, said it would have extra employees, locomotives and snowplows on standby to avoid the disarray its customers faced when avalanches and heavy snowstorms shut down its tracks in Western Canada this past winter, when it not have the manpower or equipment to deal with disruptions swiftly.

The railroad, which has tracks across Canada and across the border into the United States, does run the risk of being “over-resourced” and raising its costs because of the precautions it is taking, but it is the correct risk to take, analysts said.

“That’s probably the right decision to focus on regaining customer confidence as opposed to making sure that the next few months’ margins are better,” said BMO Capital Markets analyst Fadi Chamoun.

CP gave details of the plan on a conference call after it released third-quarter earnings that were down 5 percent, largely as expected, due to ongoing clean-up costs from flooding that followed rough winter conditions.

CP’s shares slid after its release of the results. By mid-afternoon they were down 72 Canadian cents, or 1.2 percent, at C$59.09 on the Toronto Stock Exchange.

Shares in its larger rival, Canadian National Railway (CNR.TO), which reports results later on Tuesday, were 0.7 percent higher at C$75.72.

This winter CP will have an extra 500 trades employees on its properties as well as 61 new locomotives, with another 30 coming on in the first quarter, said Mike Franczak, CP’s vice president of operations.

Any locomotives deemed surplus to the fleet will be placed in warm storage making them easily accessible.

“There are many, many other changes we have made to protect our service and production plans and I am very confident that we are ready,” Franczak said .

A TALE OF TWO MARKETS

The outlook for CP’s bulk shipments, which include products such as potash, coal and grains, remains “surprisingly strong”, despite media reports of a slowdown in Asia, where most of the goods are headed, CP Chief Executive Fred Green said.

The outlook for retail shipments is, however, not as rosy, he said, as U.S. unemployment remains high and concerns over the health of Europe’s economy abound.

CP reported third-quarter net income of C$186.8 million ($185 million), or C$1.10 a share, on Tuesday, largely in line with analysts’ estimates and down from C$197.3 million, or C$1.17 a share, in the year-before quarter.

Revenue rose 4 percent to C$1.34 billion, as the market had expected.

CP said its operating ratio - an important measure of a railway’s productivity - rose to 75.8 percent in the quarter, from 73.7 percent in the year-ago period.

The higher the ratio, which measures operating costs as a percentage of revenue, the less efficient the railway.

“The issue with CP is that right now they are the most inefficient railroad. They have the highest level of expenses compared to the rest of rails,” said Edward Jones analyst Brian Yarbrough.

“There’s this huge opportunity to improve that,” he said.

$1=$1.01 Canadian Reporting by Nicole Mordant in Vancouver. Additional reporting by Bhaswati Mukhopadhyay in Bangalore; editing by Rob Wilson and Peter Galloway

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