If the first six months under Hunter Harrison’s leadership is an accurate barometer of Canadian Pacific Railway’s future success, then it’s safe to say the competition in the railway industry has legitimate cause for concern.

Canadian Pacific has been operating its North American transcontinental railway system since being built in the late 1880s joining eastern Canada and British Columbia. It was all part of a promise made by the federal government to British Columbia when it entered Confederation in 1871.

Today, CPR provides freight transportation services, logistics solutions and supply chain expertise. Incorporating best-in-class technology and environmental practices, CP is re-defining itself as a modern 21st century transportation company built on safety, service reliability and operational efficiency.

CPR received a major operational and psychological boost when Harrison was lured out of retirement earlier this summer to take over the reins as president and CEO. Doing the luring was Bill Ackman, the aggressive, no nonsense 46-year-old activist investor and head of Pershing Square Capital Management, which now owns just less than 15 per cent of CP’s shares.  Pershing Capital began acquiring CP stock in September 2011 when the share price dropped dramatically based on lower than expected returns. Once Pershing Capital began gaining power within CP, Ackman became embroiled in a very bitter proxy battle with former chief executive Fred Green, who opted to resign just hours before the railway’s annual shareholder meeting in May, quite likely realizing that defeating Ackman and his supporters wasn’t possible. Along with Green, five other board members also resigned in the upheaval, including chairman John Cleghorn.

For those unfamiliar with the rail industry and Harrison’s name, if this were hockey, it would be the equivalent of landing Sidney Crosby as a free agent onto your team. If you needed an anchor for your relay team, you’d be getting Usain Bolt. It’s not an overstatement to say Harrison is widely acknowledged as a legend in the industry thanks in large part to his uncanny ability to turn the fortunes of sagging companies into successes. His very presence is enough to create anxiety and consternation amongst his competitors, not to mention rumours that crop up from time to time that some executives may jump trains and join Harrison at CP.

With nearly 50 years of railroad experience, the 68-year-old Harrison previously served as the president and CEO of Canadian National Railway and prior to that he held the same dual role at Illinois Central Railroad. CN showed heightened concern upon hearing about Harrison’s return, worried that sensitive information made available to him during his time with them could potentially be used to CP’s advantage and possibly CN’s detriment.

Any concern about executives leaving to join Harrison were downplayed by CN CEO Claude Mongeau during a media scrum at the Toronto Board of Trade earlier this year, where he expressed confidence that the members of his team were happy where they are. Most of the scuttlebutt has seemed to focus on CN’s chief operating officer Keith Creel and whether he will remain at CN or rejoin his old boss at CP, who plans to retire for good within five years. If Creel or others in a similar situation have aspirations of being CEO of a major rail company, it stands to reason it’s far more likely to happen somewhere other than CN, with Mongeau still having quite a number of years to go before heading into retirement – at least that’s the widespread assumption. 

Just recently CN, the largest railway operator in the country, picked up some business that had been abandoned by CP, with the latter streamlining operations in an effort to become more efficient. It would seem that CN will benefit after CP’s exit from the market in Milwaukee and also from its service between Vancouver and Detroit.

Harrison’s Transformation

CBJ had the opportunity to hear first-hand what Harrison had to say about his initial CP report card during a conference call.

“CP is an incredible franchise with significant market opportunity, solid infrastructure, and

innovative and hard-working employees,” says Harrison, in his unmistakable deep southern Tennessee accent. “I am proud to be working with one of North America’s iconic companies.”

One thing that’s known about Harrison – he works fast. He has a vision and begins implementing his transformation at the word “go”. That aggressive persona worked exceptionally well for CPR; its third-quarter results impressive.

“Two words are the key here – progress and momentum – are both building,” Harrison begins. “There have been a lot of management changes that have taken place for various reasons. The new team, for lack of a better term, is effectively in place with possibly the exception of one or two other positions.”

Harrison says the moves are geared towards improved service and efficiency at CP. Since his arrival, the company has taken a day out of the transcontinental markets between Vancouver, Toronto, Montreal and Chicago which has yielded improvements in the intermodal efforts in those locations as well as having a big impact on asset turns. 

“We are streamlining a lot of headquarters’ processes,” Harrison continues. “My view is that we were a little heavy at headquarters. About 28 per cent of our non-union employees were headquartered here (Calgary) and we’ve gone to work on that area. Overall, and I say this hesitantly, we’re clearly ahead of the schedule if you’re kind of watching overall, the four-year plan.”

The biggest hindrance to the plan at this stage according to Harrison is that everyone involved is going through a learning curve, and because of it, there is a degree of unknown territory with which to navigate. On the labour front, Harrison has spent time with Teamsters representatives and he doesn’t foresee any rail blocks there in terms of work stoppages. But that doesn’t mean Harrison doesn’t have a contingency plan, should his assumption be inaccurate. He’s says the company is prepared more than it’s ever been. In addition, he’s very pleased with the five-year deal signed with the steelworkers.

“There’s been some very nice progress on the labour front,” he says. “Overall, I’m very pleased with where we are.”

CP trains were idled for nine days in May when 4,800 locomotive engineers, conductors and traffic controllers walked off the job. The disruption cost the national economy an estimated $80 million. The strike was ended when the federal government legislated a back-to-work bill, forcing both sides to come to a binding agreement.

Since Harrison’s arrival in late June, system velocity is up, transit times are faster and product delivery has been more consistent with customer response being very positive. There was a solid 8 per cent revenue growth for the third-quarter. In energy, the new strategy has delivered CP’s fifth consecutive quarter of double digit revenue growth.

Networking Growth

There’s a lot of talk in the industry about structural differences between networks. There is a large bulk franchise at CP relative to the network. Harrison was asked if it can drive significant improvement of what a merchandise or intermodal network can do.

“We have a situation with bulk in Canada where it’s regulated, so that puts it in a different ballpark,” Harrison replies. “Bulk is governed more by outside agencies: the weather, regulatory issues than for example our merchandise business. We have some long-term contracts in bulk. I think those are good for both of us.”

Harrison says the employees at CP are tired of hearing about slippage and market decline and they want to be part of the turnaround and future success. He says that the overwhelmingly response to his new transformation plan has been met with enthusiasm and optimism, and why wouldn’t it be.

“I think their attitude is very favourable and it’s contagious,” he says.

With Harrison’s substantive desire to get the operating ratio down as much as possible, it stands to reason the resulting impact will have to be felt somewhere within the organization, be it labour, capital spending, customer service or another frontline category.

“If you had to pick out one area for possible adverse impact at these type business levels, there’s not going to be as many employees as we’ve had,” Harrison candidly admits. “But at the same time, the high rate of attrition will take care of most of that so the plan is that the service gets better so the customer is not hurt; I don’t see any bubble in capital spend. When you provide better service you turn assets, you lower your costs, you treat your people right – it’s a good story.”     

Harrison did say if he had to source a negative aspect at this point, it would likely be the pension fund, although he sees positives there as well.

“If you look across Canada, a lot of people have problems with pensions,” he continues.

Harrison was also asked how the improvement in efficiency would impact on higher pricing and whether CP can continue to drive higher pricing based on those improvements.

“The marketplace will tell us that,” was the response. “The marketplace gives you the price; you decide whether you want to play. If we put a good service out there that’s competitive, we’re going to get rewarded there. We provide the service and if we’re better than the competition I expect to be rewarded for it and I don’t apologize for that.”

Two Strong Railways

Ironically, Harrison’s full-court press of Canadian Pacific Railway’s transformation may actually yield benefits to his former company, CN. Much of it centres upon the Port of Vancouver where the rival companies are helping one another transport their grain shipments. CP controls the south shore and CN has the north shore. By opening up one another’s territory, both rail companies should see a boost in productivity. It’s a co-operative that is working because both sides are benefitting. Furthermore, both rail companies are committed to improved supply chain management, including a renewed focus on customer service, and train schedule reliability. 

Both national carriers are also moving quickly to build terminals to load oil beyond the reach of pipelines in some of North America’s remotest regions. The Alberta’s oil sands are providing business to Canadian National while Canadian Pacific benefits from tracks serving North Dakota’s Bakken Shale formation. Earlier this year, CP opened a rail hub in North Dakota and is investing $90-million to upgrade a Saskatchewan-to-Minnesota line. CP has previously predicted it will reach an annual rate of about 70,000 oil tank cars by early 2013. 

There also is the potential for growth on the eastern side of the country when it comes to transporting crude by rail and stronger penetration through that region, to which CP’s boss was asked to comment on.

“I hear so many stories about the opportunities, it scares me, so I don’t want to comment on it too much,” Harrison chuckles. “If you put it all together, it’ll make people forget the Gold Rush in 1849.”

Intermodal Service

CP is looking for the new intermodal service to bring new value to the company and its customers. The improvement is designed to provide gains in both volume and price. But because each customer is different, with an assorted mix of traffic, it’s going to vary on a customer by customer basis. In aggregate, it’s clear CP will be pushing for both market share volume and price. The new intermodal service has been viewed as a positive platform to position CP with faster train service for customers to get to a broader North American market.

“We’ve been setting close to, if not new records at Vancouver for the amount of grain being delivered,” Harrison states. “We’re doing everything the coal market is asking and everything the potash market is asking for – but they aren’t asking for much right now, but whatever they’re asking for, we’re doing. But to my knowledge, we don’t have service issues. One of the things we need to determine is what do people mean by good service and what is the market willing to pay for and where are the sweet spots we can hit.” 

Besides offering better service in one day’s less time, it reduces the fleet by about 45 locomotives according to Harrison’s recollection. Picking up additional business is always a primary objective. Harrison was asked where CP is best positioned to do that.

“With our competition we effectively serve the same markets,” he replies. “There are certain lanes we have advantages in; there are certain lanes they have advantages in, but intermodal’s certainly an area. Some of the investment the company has made in the U.S. in the Kansas City corridor offers a lot of opportunity that has not been fully taken advantage of and there are individuals.”

Harrison also believes his company has some clear advantages in energy, both at origin and destination along with a lot of operating initiatives that will continue.

“This is not the deck we’re going to be playing with,” Harrison advises. “If you look out next year and the next year and the year after that, we’re going to be in a much more competitive position than we are today. We’re ahead of schedule on the four-year plan.”

One thing that hasn’t been determined is who will assume the full-time position of chief operating officer. For now Harrison is wearing two hats, CEO and COO.

He says it will be beneficial for him during the early part of his tenure so he can better understand the goings-on with day-to-day operations and quickly cut to the chase of what needs to be done. While he recognizes the importance of the position, he’s also not going to make a rash decision on putting somebody into that seat.

“It’s not something I or the board is going to rush in to,” Harrison confirms. “When the right person appears, whether it’s internal or external, whether it’s next week or next year, then we’ll be ready to make that move, and not before. We can carry on this way if my energy level can stay up. But we’ve got to recognize this is not a long journey for me – this is a three to five-year story. Obviously the selection of the COO would be some indication that here’s the next successor if they don’t blow it – and it’s not going to be part of the contract obviously. But we’re blessed to be in a position that we don’t have to rush into that.”