Additional container volumes coming into Vancouver will help spur growth as CP looks to existing assets for capacity.
Canadian Pacific (NYSE: CP) is vying for a larger share of the North American intermodal market as Canada’s ports become larger and the railroad rejiggers its existing yard capacity.
The fifth largest Class 1 railroad by revenue, CP laid out a case for shippers to take advantage of shorter shipping times to the Midcontinent through its network.
In pitching for more intermodal business, CP chief executive Keith Creel told an audience of investors and analysts yesterday that the company is looking to capitalize on its turnaround from six years ago.
The turnaround stemmed from Hunter Harrison’s tenure as CEO from 2012 through 2017 and his strategy of “precision scheduled railroading.”
“We were known to be the worse performing railroad in North America.” Creel said. “We’ve reinvented ourselves and it’s based on the premise of precision scheduled railroading.”
The turnaround appears to be paying off as CP reported its highest quarterly revenue and earnings. Third quarter revenue will reach $1.9 billion, up 19%, with earnings of $4.35 per share and an operating ratio below 58.5%. CP also raised its 2018 earnings guidance to 20% growth for the year.
Intermodal is the largest piece of CP’s business, and it said revenue ton miles on intermodal have grown 6% annually since 2013. Still, Canadian National (TSX: CNR) remains the largest player intermodal carrier in Canada with revenue ton miles double that of CP..
But Creel hopes to close that gap. He says CP’s track mileage on two key routes, Vancouver-to-Chicago and Toronto-to-Calgary, are 200 miles shorter than Canadian National. All else equal, Creel says CP “can beat them to market every time.”
CP is also working on adding capacity at its Bensenville yard in Chicago along with a potential sale of the now closed Schiller Park facility. Creel says the container volumes coming from its haulage deal with Japanese shipping line ONE will help fill the Chicago facility.
“We have a plan to create a world class intermodal facility in one of the most capacity constrained locations in the world,” Creel said. “With our recent contract win with ONE, we need that additional capacity.”
In addition, CP’s Vancouver intermodal yard has another 100 acres for growth. Likewise, the Vaughn Intermodal facility in Toronto has 150 acres of undeveloped land adjacent to the site’s 500 acre footprint.
Other large undeveloped sites include yards in Calgary, Edmonton and Montreal. But Creel says those facilities will have to be developed in concert with an anchor tenant.
“Part of the solution is the customer spending the money to create transportation solutions that benefit them,” Creel said.
Jonathan Wahba, vice president of intermodal at Canadian Pacific, said at the investor day more intermodal capacity will be needed due to growing container volumes coming out of Vancouver.
Global Container Terminals is adding another 1 million twenty foot equivalent unit (teu) of capacity to its Deltaport terminal this month. The nearby Vanterm Terminal also plans to expand.
The increasing size of ports also means larger inland terminals. Wahba says Canadian Pacific’s inland terminals have the ability to handle 20% more capacity than what is currently being used.
Wahba also expects to take market share from trucking, thanks to the increased reliability of CP’s network due to precision scheduled railroading. He says rail is outperforming trucking on major routes, particularly with the onset of electronic logging devices. The result is that the rail is gaining more time-sensitive freight.
“The competition is the highway that the largest part of market share, that’s where the growth in coming from,” Wahba said.
The railroad is also tackling at how to smooth intermodal demand, which typically spikes between Wednesday and Friday. CP introduced dynamic pricing and algorithms to divvy up freight based on customer’s required delivered date.
The result has been CP is able to run more uniform train lengths, rather than more variable length trains.
A more reliable intermodal service, Wahba says, should help the company gain more alliances with shipping lines. Wahba says it was able to gain more business from Hapag-Lloyd (XETRA: HLAG) for reconfiguring its service to Detroit, which can be reached two days quicker through Vancouver.
CP also added service to Ohio, which offers ocean liners headhaul service bringing containers to a nearby Honda (NYSE: HMC) plant and backhaul cargoes of containerized grains from the Ohio valley.
“We put two important dots on the map for international intermodal,” Wahba said.
CP also reconfigured its terminal gates to use a mobile application for drayage trucking. Wahba says the application allows drivers to see congestion and smooth out truck turns, which should help relieve some of the pricing pressure in that sector.
“For steamship lines, the biggest challenge is purchasing dray,” Wahba said. “If we can save for a steamship line, that makes us advantageous to a customer.”
CP is also looking to take on a greater share of the automotive business. This year, the railroad started a deal with Glovis, the logistics arm of Korea’s Hyundai, for shipments through its Ayr yard in Ontario. CP also plans to develop an auto terminal in Vancouver with Ford (NYSE: F)