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NEWS<br />
THE WESTERN PRODUCER | WWW.PRODUCER.COM | DECEMBER 13, 2012<br />
CANADIAN PACIFIC RAILWAY | CUTTING COSTS<br />
Full steam ahead for CP’s cost reduction plan<br />
Effort to boost efficiency<br />
| <strong>The</strong> company is moving<br />
faster than expected on its<br />
turnaround plan<br />
CHICAGO, Ill. (Reuters) — Canadian<br />
Pacific Railway, the country’s second<br />
biggest rail carrier, announced<br />
Dec. 4 it will cut 4,500 jobs by 2016.<br />
<strong>The</strong> move is part of a drive by the<br />
company’s new chief executive officer<br />
to slash costs and improve operating<br />
efficiency, now the industry’s<br />
worst.<br />
<strong>The</strong> job reductions, announced by<br />
CEO Hunter Harrison during a<br />
speech in New York, were deeper<br />
than expected. <strong>The</strong> company, which<br />
has 19,500 employees and contractors,<br />
had earlier estimated it would<br />
cut five to 10 percent of its workforce,<br />
or 1,950 at the most.<br />
In his speech, Harrison said he has<br />
pushed hard to cut costs in the five<br />
months since he was installed as<br />
CEO after a proxy battle led by William<br />
Ackman’s Pershing Square<br />
Capital Management Ltd, the U.S.<br />
hedge fund that is CP’s largest shareholder.<br />
“Make no mistake, this is clearly,<br />
initially, a cost take-out story,” he<br />
said. “I would emphasize to you this<br />
is not some experiment in a laboratory.<br />
This is a proven, tried and tested<br />
model.”<br />
Releasing an outline of its formal<br />
turnaround plan ahead of the<br />
speech, the company repeated its<br />
pledge to achieve an aggressive target<br />
for operating efficiency.<br />
It aims to lower its operating ratio to<br />
the mid-60s by 2016 from 74.1 percent<br />
now.<br />
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A push for efficiency has seen Canadian Pacific Railway’s hump yards closed and senior executives let go. <strong>The</strong><br />
company plans more efficiency changes and more job cutting by 2016. | FILE PHOTO<br />
<strong>The</strong> ratio, which shows operating<br />
expenses as a percentage of revenue,<br />
is a key indicator in the rail industry:<br />
the lower the number, the better. CP’s<br />
ratio in the third quarter was the<br />
highest among North America’s six<br />
biggest railways.<br />
Harrison said the pace of the<br />
change may be faster than predicted<br />
for the first 18 months, but will then<br />
“settle in.”<br />
He said the company has closed<br />
hump yards, which are used to sort<br />
rail cars, in Toronto, Winnipeg, Calgary<br />
and Chicago since he took the<br />
helm. That will save $40 to $50 million<br />
in direct costs, with “much more”<br />
in indirect savings, he added.<br />
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<strong>The</strong> company has also closed intermodal<br />
terminals in Milwaukee,<br />
Toronto and Chicago.<br />
<strong>The</strong> company expects compound<br />
annual revenue growth of four to<br />
seven percent, measured against a<br />
2012 base, as it moves toward its 2016<br />
target. It expects cash flow before<br />
dividends of $900 million to $1.4 billion<br />
by 2016.<br />
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Harrison also said the company<br />
will relocate its headquarters from<br />
downtown Calgary to a rail yard in<br />
the city, saving $18 million annually.<br />
CP is also considering the sale of surplus<br />
real estate.<br />
In another measure to boost efficiency,<br />
the company said it would<br />
build longer rail sidings to accommodate<br />
longer trains, which will<br />
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allow it to move greater volumes of<br />
material with fewer trains.<br />
CP said it would review options for<br />
its Delaware and Hudson Railway<br />
Co. line in the U.S. Northeast as it<br />
looks for potential assets to divest.<br />
“<strong>The</strong> first thing I did when I came to<br />
this organization ... was take the map<br />
home at night and start saying what<br />
if, what if,” Harrison said. “What if we<br />
could do this? What if we could do<br />
that?”<br />
<strong>The</strong> company also said it was<br />
exploring options and partnerships<br />
for the western part of its Dakota,<br />
Minnesota & Eastern Railroad.<br />
A string of senior executives have<br />
left the company, including the chief<br />
operating officer, under Harrison’s<br />
push to reduce bureaucracy and red<br />
tape.<br />
Harrison, who is currently serving<br />
as COO and CEO, said the company<br />
is in no hurry to hire his successor. He<br />
has previously said he plans to stay at<br />
CP for three to five years.<br />
Harrison was Ackman’s favoured<br />
candidate for CEO ahead of the<br />
boardroom coup that saw Fred<br />
Green, the previous CEO, resign on<br />
the eve of the company’s May annual<br />
meeting.<br />
A lifelong railroader who headed<br />
up CP’s chief rival, Canadian National<br />
Railway, until 2009, Harrison is<br />
widely credited with making it into<br />
North America’s most efficient railway.
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