The race for who can create transcontinental offerings and win the most truck-to-rail conversions is on, with CN announcing that it is partnering with Union Pacific and Mexican company Grupo México (GMXT) to create a premium intermodal service that would connect eastern and western Canada with Chicago before heading south to GMXT terminals throughout Mexico.
CN’s (NYSE: CNI) announcement follows shortly after the merger finalized between Canadian Pacific (NYSE: CP) and Kansas City Southern. That new company, now named Canadian Pacific Kansas City (CPKC), also recently announced two partnerships: one with Schneider National (NYSE: SNDR) for a new intermodal service connecting Chicago and major ports and regions in Mexico and the other with Knight-Swift (NYSE: KNX), also for a new intermodal service.
CN officials during the railway’s first-quarter 2023 earnings call Monday were confident that CN would be able to garner more volumes and attract customers toward rail and away from trucks even as multiple transcontinental offerings come to the forefront. The service is expected to benefit those shipping automotive parts, food, freight all kinds, home appliances and temperature-controlled products, as well as those companies and the service seeking to expand on nearshoring opportunities.
Doug MacDonald, CN’s chief marketing officer, said the new offering with UP (NYSE: UNP) and GMXT’s Ferromex rail service would provide customers with “a consistent quick transit time.”
CN said Monday that the new intermodal service, named Falcon Premium, will connect all CN origin points within Canada and Detroit to GMXT’s terminals in Mexico, including Monterrey, Nuevo Leon, and Silao, Guanajuato, and it will utilize UP’s route from Texas to Chicago as well as CN’s Chicago bypass via its Elgin, Joliet and Eastern Railway subsidiary.
UP and GMXT have “historically been able to convert some of that product over that moves today between Mexico and Chicago and some of the UP’s network,” MacDonald said. “Now we’re layering on top of that CN’s network where really there wasn’t that product before. It’s a brand-new product coming into eastern Canada, somewhat into Detroit and even into western Canada. So that’s how we’re going to take those trucks off the road because they didn’t have an alternative before.”
MacDonald added that CN’s involvement in an equipment management pool program with UP and Norfolk Southern (NYSE: NSC) for domestic intermodal containers is another layer that would complement this new service with UP and GMXT and add to CN’s “ability to supply equipment into this market and really move it in as well as being able to send traffic back to their network.”
Company officials also said CN would work with key wholesalers and customers of UP and Ferromex so that they can benefit from the new service.
“We expect to be able to have this service offering out to everybody. CN has its own retail as well as retail product that we can help sell, as well as we have TransX that can help sell,” MacDonald said. “There’s a lot of different options we have there overall to be able to fill up these trains, hopefully, and we’ll be working together with the UP and FXE to be able to do it.”
CN says it will stay afloat despite recession headwinds
CN expects economic weakness in the year ahead. “Our current volumes reflect that we are in a mild recession and we’re uncertain about how deep or how long it will go on, but what we’re modeling is negative North American industrial production for the full year,” CN President and CEO Tracy Robinson said in prepared remarks during the earnings call.
But despite signs calling for a recession, CN has raised its earnings per share growth for 2023 to “the mid-single digit range, up from low-single digit previously,” amid higher net profit and revenue year over year, Robinson said.
Bulk commodities such as grain were “solid” in the first quarter, but Canadian grain demand could fall as the country heads into the planting season, MacDonald said, adding that CN is expecting grain harvest yields to be within the average range. Canadian metallurgical coal and automotive products are expected to do well in 2023, but international intermodal is expected to have multiple blank sales in the second and third quarters and inventories remain high.
Petroleum and chemical production volumes could also be soft since their output is tied to the economy, MacDonald said.
Should CN need to respond to any market downturn, the company expects to reduce train starts and “go after train length,” as well adapt to new work and rest rules, according to Ed Harris, chief operating officer.
Robinson said CN could also freeze hiring, although the company right now is continuing to hire to offset attrition.
But, CN CFO Ghislain Houle noted, “we are not going to have a knee-jerk reaction and send people home while we have the mild recession. I think that we are going to focus on, as Ed mentioned, training locomotive engineers and so on and so forth and be ready for the rebound. So we’ll carry a little bit more cost than maybe in the past we would have historically done.”
CN’s Q1 2023 results
CN’s adjusted net profit for the first quarter of 2023 was CA$1.22 billion (US$895.4 million), or a record $1.82 per diluted share, compared with $925 million, or $1.32 per diluted share, for the first quarter of 2022. (All monetary figures are in Canadian dollars.)
Revenues grew 16% to $4.3 billion year over year on higher fuel charges, an increase in Canadian grain exports, freight increases and a weaker Canadian dollar. Operating expenses rose 7% to nearly $2.7 billion on the weaker Canadian dollar, higher purchased services and material expenses and increased labor and fringe benefits expenses.
Operating income grew 35% to nearly $1.7 billion, while operating ratio improved to 61.5% from 66.6%.