CP Rail Restarts Freight Network After Law Ends Strike

Canadian Pacific Railway Ltd. restarted its freight network in Canada today after Parliament passed a bill ending a weeklong Teamsters strike that snarled industry supply chains and seaport traffic.

Work on the Canadian freight lines of the Calgary-based railroad resumed about 7 a.m. New York time, Ed Greenberg, a company spokesman, said in an e-mail. The legislation sends all unresolved issues between Canadian Pacific and the union to binding arbitration, giving them 90 days to settle on a new contract or face one drafted by an arbitrator.

“We are very pleased to see them working again,” said Richard Phillips, executive director of the Grain Growers of Canada, which represents grain and oilseed producers. About 1.6 million tons of grain were backed up as a result of the strike, he said.

It will take “a couple of months” for the shippers to work through that backlog, he said in a telephone interview. “The bigger concern is the longer-term damage it does to our reputation as a reliable supplier.”

The Forest Products Association of Canada, which represents wood, pulp and paper producers, said it anticipates a shortage of railcar supply for member companies in seven to 10 days as shippers work through backlogs.

“Even in good times, it’s difficult to get enough cars to service all the requirements of our member companies,” said Isabelle Des Chênes, a spokeswoman for the group. “So there is concern now that this will manifest itself, have a multiplier effect as CP works to get everything going again.”

Share Performance

Canadian Pacific fell 3.1 percent to C$73.70 at the close in Toronto as the broader S&P Toronto Stock Exchange Composite Index declined. The shares have dropped 1.6 percent since the labor action began.

The strike by the Teamsters Canada Rail Conference, which represents more than 4,000 engineers, conductors and rail-traffic controllers, will curb Canadian Pacific’s quarterly earnings and probably benefited its larger competitor, Canadian National Railway Co., Fadi Chamoun, a BMO Capital Markets analyst in Toronto, said yesterday.

“The strike could potentially impact about $13 million in revenues per day and nearly 100,000 carloads for the quarter,” Chamoun wrote in a note to clients. “The volumes lost by CP Rail would have partially shifted” to Canadian National, said Chamoun, who rates the stock as market perform.

The Teamsters contract talks with the company stalled over points including pension payments and fatigue rules.

Operating Expenses

The railroad sought to cut costs after contributing C$1.9 billion ($1.84 billion) to its retirement programs in the past three years to reduce funding shortfalls, while union members resisted what they said was a 40 percent cut in pension benefits.

The pensions helped push Canadian Pacific’s operating ratio, or operating expenses as a percentage of sales, above those of its peers. Those costs were criticized by activist investor William Ackman during a months-long proxy fight that led to the departure of CEO Fred Green and five other board members on May 17.

Ackman said this week that the permanent CEO selected to succeed Green would “sit down at the table” to craft a new contract with the Teamsters union. Ackman told CNBC on May 29 that Hunter Harrison, his choice to run Canadian Pacific, has always taken a direct approach to negotiations, talking personally with workers.

‘Negotiating Dynamics’

Harrison, 67, previously ran Canadian National and has targeted an operating ratio of 65 percent in 2015 if he’s selected for the top job at Canadian Pacific. The railroad’s operating expenses were 80.1 percent of sales in the most recent quarter.

“It’s very interesting negotiating dynamics,” said Lee Klaskow, an analyst with Bloomberg Industries in Skillman, New Jersey. An improved ratio of operating expenses to revenue “is not just going to come through better operating the network more efficiently, it’s going to be cutting costs.”

While employees want to improve the company’s profitability, too, they don’t want to “give up something to get there,” he said.

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