* Underlying fundamentals of industry expected to be good * Market watching to see effects of currency, fuel costs
By Allan Dowd
VANCOUVER, British Columbia, Oct 20 (Reuters) - Canada's two major railways are expected to reveal few surprises when they announce earnings in coming days, though the market will be looking to see if a weaker Canadian dollar and falling fuel prices have offset the impact of a slower economy on volumes.
Canadian National CNR.TO, which reports on Tuesday, is expected to report a slightly higher profit than it did a year ago, while Canadian Pacific's (CP.TO) numbers, due next week, are expected to be down slightly on a year-to-year basis.
On average, analysts forecast CN to post earnings of about C$1.00 a share, compared with 93 Canadian cents a year ago, which did not include a tax benefit of 3 Canadian cents per share.
CP's earnings are expected to come in at about C$1.12 a share this year, versus last year's C$1.23 a share, which excluded foreign exchange gains and losses on long-term debt.
"The underlying fundamentals of the railroad industry remain good. You saw that with the CSX numbers last week and the pre-release by Union Pacific," said Randy Cousins, an analyst with BMO Capital Markets.
CSX Corp CSX.N, the No 3 U.S. railway, said its profit rose 29 percent in the last quarter as prices offset lower freight volumes, while Union Pacific Corp (UNP.N) North America's largest, raised its third-quarter earnings outlook last month, crediting falling diesel costs.
Montreal-headquartered CN and Calgary-based CP both have significant operations in the United States.
Analysts already know that carload freight traffic was down for both carriers in the third quarter, although CN Rail did see an increase in intermodal traffic as it picked up new Pacific Coast port business through Prince Rupert, British Columbia.
Canaccord Adams analyst Tom Varesh said with that information already in hand, the question that remains is what kind of pricing each carrier got -- including through fuel surcharges.
Diesel prices were higher than a year ago, but dropped through the quarter. Railways use fuel surcharges to recoup the higher costs, but the pricing mechanisms tend to lag the actual cost of filling fuel tanks on their locomotives.
Varesh said he expects the railroads will be able to say they were not hurt by the Canadian dollar as much as last year, although the benefit of the weaker currency may not been seen until the fourth quarter. The Canadian dollar has slid from near par with the greenback in recent months to about 84 U.S. cents.
Canadian Pacific won permission at the end of the third quarter to complete its takeover of U.S.-based Dakota, Minnesota and Eastern Railroad, which it has had to operate on a hands-off basis since last year.
"Obviously they have got a freer hand to talk about the DM&E than they did prior to approval," Cousins said.
CP has not announced yet if it will pursue the DM&E's plan to expand into Wyoming's Powder River coal fields.
Canadian National is still awaiting word on whether a U.S, federal appeals court will fast-track its request that U.S. regulators be required to rule by year's end on its plan to purchase the Elgin, Joliet and Eastern Railroad.
$1=$1.19 Canadian Reporting Allan Dowd, editing by Rob Wilson