Canadian Pacific CEO predicts rail strike in August

Operations at Canadian Pacific Kansas City Ltd. will likely grind to a halt due to a strike expected in the second half of August, says CEO Keith Creel, as shippers gear up for the threat of massive rail shutdown.

“We’re far apart,” Creel said Tuesday, referring to the railway and the union representing 3,300 workers, which remain at loggerheads over a new collective agreement.

“I’m just being transparent and honest. It’s going to be a challenge.”

A work stoppage is “most probable” toward the end of the month, Creel told analysts on a conference call.

The prediction stands in contrast to expectations spelled out by Canadian National Railway Co., which also faces the prospect of a system-wide stoppage. CN said last week it does not believe the situation will escalate to a full-fledged strike or lockout.

While CPKC has baked the financial hit into its earnings forecast, the potential disruption has already dented operations and may delay some shipments for months afterward, the railway said.

Canadian Pacific and rival CN are awaiting a decision from the country’s labour board on whether some shipments would be considered essential services in the event of a strike by the Teamsters Canada Rail Conference, which represents about 9,300 engineers, conductors and yard workers at the two companies.

Though no strike or lockout can take place until at least 72 hours after that decision is made — a ruling expected by Aug. 9 — the situation has cast a cloud over rail transport in the near term.

“You can imagine the impact, obviously, of most railroads in the nation being shut down,” Creel said, warning of “mass chaos” if the railway can’t alert their clients to a work stoppage several weeks in advance.

A year-over-year dip in container revenues in the most recent quarter stemmed largely from customers rerouting cargo ahead of the possible labour disruption, CPKC executives said.

Last week, CN lowered its forecast for earnings growth amid fallout from the strike threat as clients seek to steer clear of Canadian ports and rail lines.

However, Creel said a labour disruption would not affect CPKC’s financial guidance of double-digit earnings-per-share growth so long as the stoppage lasts less than two weeks.

On Tuesday, the company reported a bump in revenues and shipment volumes in its second quarter, even as profits dropped amid higher costs.

Net income attributable to controlling shareholders fell 32 per cent to $905 million in the three months ended June 30 from $1.33 billion in the same period a year earlier, the railroad operator said.

Total revenues jumped 14 per cent to $3.60 billion from $3.17 billion, while operating expenses rose nearly five per cent to $2.34 billion, the company said.

Meanwhile, freight volumes nudged up by more than one per cent year-over-year to nearly 1.09 million carloads.

Bulk grain and potash revenues both rose by roughly one-quarter, with a strong grain harvest this year poised to compensate for softer demand for lumber products, coal and frac sand.

Automotive shipments also soared, boosting revenues in the segment by 39 per cent year-over-year to a record $358 million last quarter amid higher volumes out of Mexico.

However, revenues from container traffic — often CPKC’s biggest segment — fell four per cent year-over-year as customers rebooked their shipments.

“We’ve already faced some revenue headwinds in May before the labour disruption was delayed, if you will.” said chief financial officer Nadeem Velani.

“We will see the network be brought to a halt and then ramp back up. It takes some cost, it takes some time.”

In June, the Teamsters rejected offers from CPKC and CN to enter into binding arbitration, a development that raised the risk of a strike. Then-labour minister Seamus O’Regan, who recently announced his resignation from cabinet, asked the Canada Industrial Labour Board to address whether some shipments would continue as essential services in the event of a work stoppage.

The disruption would postpone some shipments “certainly into Q4 and likely into Q1 of next year,” depending on the length of the stoppage, said chief marketing officer John Brooks.

CPKC said core adjusted combined diluted earnings increased 27 per cent last quarter to $1.05 per share from 83 cents per share the year before. The result beat analysts’ expectations of $1.00 per share, according to financial markets firm LSEG Data and Analytics.

Canadian Pacific acquired Kansas City Southern in December 2021 in North America’s first major rail merger in decades, but had to wait to merge operations until April of last year following regulatory approval of the deal.

The fusion created the only railway stretching from Canada through to the U.S. and Mexico. It stretches from Vancouver to Saint John, N.B., and snakes down through New Orleans and Houston to Mexico City, reaching ports in the Gulf of Mexico and the Pacific Ocean.

This report by The Canadian Press was first published July 30, 2024.

Companies in this story: (TSX:CP, TSX:CNR)

Christopher Reynolds, The Canadian Press