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CN confident in market share take from trucking via KCS merger

Canadian railway CN (NYSE: CNI) insists that ensuring competition among other railroads and shippers will be a priority should it succeed in merging with Kansas City Southern (NYSE: KSU). CN and rival railway Canadian Pacific (NYSE: CP) each are seeking to acquire Kansas City Southern (KCS). CP and KCS announced their agreement to merge last month, while CN announced its plans to acquire KCS last week.

Both have been aggressively seeking to win the hearts of shippers, stakeholders and the shareholders of KCS. CN is “firmly committed to maintaining open gateways to competitors’ networks. We believe this combination will enable better solutions to our customers; [improve] speed of movement of goods from country to country, coast to coast; enhance competition; create jobs up and down the railroad; and prevent millions of tons of greenhouse gas from entering the atmosphere by converting truck traffic to the rail supply chain,” said CN President and CEO JJ Ruest during his company’s first-quarter 2021 earnings call Tuesday. 

Both CN and CP anticipate that a merger with KCS would create a rail network that touches both coasts of Canada, the central U.S. and parts of Mexico. CN executives also reiterated how a merged railway can compete with long-haul trucking. For instance, the automotive industry would benefit from a second line of service between Detroit and Kansas City, while intermodal service from Mexico to the Upper Midwest and southern Ontario could compete with truck traffic on Interstate 35, according to CN Chief Operating Officer Rob Reilly.

Midwest agricultural shippers could have better access to Mexico and even to the Atlantic, Pacific and Gulf coasts, while lumber and panel buyers in Texas could have more access to CN’s forest products franchise with its fleet of over 10,000 center beams and boxcars, Reilly said. “Right now the rail network in North America is not really designed to really be as successful as it can be for long-haul distance from, say, Mexico City all the way to Detroit and Toronto on the east or Mexico City to Wisconsin and Calgary on the west,” Russet said. “In order to do that, you know, putting two railroads together really makes it appealing.” The timing for a merger with KCS comes as the railroads expect to benefit from the trade agreement between the U.S., Canada and Mexico, as well as from the desire to consider nearshoring and potentially moving some manufacturing operations to Mexico from China as labor costs rise in China, Ruest said.

KCS has also “crystallized” its value for its shareholders, he said.

CN’s view on 2021 volumes

CN expects carload volumes to grow in 2021, particularly in the second half of the year, when “we see the upside as the economy really starts to kick in,” Reilly said. The railway expects continued strength for forest products and grain, and it has seen steady exports of liquified petroleum gas and other similar products. CN is also in the process of hiring more train conductors to match staffing with forecast demand.

CN’s board has approved the acquisition of 75 locomotives over the next 12 to 24 months “to support the projected growth and economic improvement” for this year, Reilly said.   CN is focusing on optimizing earnings per share over seeking to lower its operating ratio (OR), executives said. This change in focus comes as the railway expects intermodal volumes to remain strong in 2021.

Since intermodal tends to result in a lower revenue margin, it affects how low an OR can go. Investors sometimes use OR to gauge the financial health of a company. Revenue ton miles for intermodal in the first quarter of 2021 grew 19% year-over-year to 15.2 billion amid a 23% increase in volumes.

CN’s net profit for the first quarter of 2021 fell 3.7% to CA£974 million, or £1.37 per diluted share, compared with CA£1.01 billion, or £1.42 per diluted share, in the first quarter of 2020. One Canadian dollar equals 81 cents in U.S. dollars. For more on CN’s first-quarter financial results, go here.

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