Morningstar | We Expect Canadian Pacific to Continue to Improve its Operating Ratio
The heavy lifting is done in transforming Canadian Pacific from worst in class to tied for best. In early 2017, operations expert Keith Creel took the helm at CP, following his longtime mentor, legendary railroad leader Hunter Harrison. We awarded Harrison Morningstar's CEO of the Year award for his radical transformation of CP during 2013. While the cadence of change was breathtaking under Harrison as CEO and Creel as COO, we expect Creel to continue to guide CP on its margin improvement trajectory for several more years and to thoroughly infuse CP's culture with precision railroading excellence, such that it does not rely on having a key man running operations or the entire organization. We think Canadian National has been at that stage for years. CP is closing in on the best in class mid-50s operating ratio mark, and we have no qualms about Creel, who worked alongside Harrison for 20 years and led operations at both top Class I railroads, CN and CP. CP has made astonishing changes since mid-2012. Upon installation at CP's helm, Harrison quickly closed three intermodal terminals and four hump yards to rightsize the network, sold some nonessential rail lines, replaced most of the leadership team, moved headquarters to an operating yard to cut costs, reduced the workforce from 19,500 to 11,700, cut locomotives, and returned thousands of leased cars. CP closed in on peers' mid-60s operating ratio performance in 2014 and achieved a sub-60% OR in 2016 (58.6%).CP hauls a mix rich in bulk commodities such as grain, fertilizer, and metallurgical coal. We believe demand will continue to recover and service will improve, and we project increased rates for most cargo. We're impressed by several CP franchises, such as Canpotex potash, Teck coal, and the domestic intermodal operation (85% of which is located in Canada).Canadian Pacific Railway operates a transcontinental railway in Canada and the U.S. Co.'s business mix includes bulk commodities, merchandise freight and intermodal traffic, serving the principal business centers of Canada from Montreal, Quebec, to Vancouver, British Columbia, and the U.S. Northeast and Midwest regions. As of Dec 31 2016, Co. operated on a network of approximately 12,400 miles of track, of which CP owns 10,800 miles and has access to 1,600 miles under trackage rights and lease agreements. Of the total mileage operated, about 5,600 miles were located in western Canada, 2,000 miles in eastern Canada, 4,400 miles in the U.S. Midwest and 400 miles in the U.S. Northeast.
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