Canadian National Stays on Track

The rail line's Gulf operations escaped Hurricane Katrina largely unscathed. Now, CEO E. Hunter Harrison sees a big boost from reconstruction

As Hurricane Katrina was hurtling towards New Orleans on the last weekend of August, E. Hunter Harrison was overseeing Canadian National Railway's emergency preparations from his home in the suburbs of Chicago.

The company, through its Illinois Central subsidiary, has hundreds of miles of track and more than a dozen facilities along the Gulf Coast, including a big freight yard just west of New Orleans. Working through the weekend, crews hurried locomotives and other equipment out of the area and then halted all traffic.

Canadian National (CNI was lucky. Damage to its lines turned out to be minimal and, except for its intermodal facility near New Orleans, which lacks truck drivers to cart containers to and from its trains, the railroad was back to near-normal operations by mid-September. As a result, industry analysts are sticking with their bullish forecasts, projecting a 31.5% increase in earnings in 2005 and a 16% rise in 2006.

The 60-year-old CEO seems to be on a roll. With 22,500 employees and $5.5 billion in 2004 revenue, Harrison's company is dwarfed by the industry's bigs: Union Pacific (UNP ) and Burlington Northern Santa Fe (BNI ). But Canadian National tops them and every other major railway in North America in operating margins and total profits, with $1.22 billion in net income last year.


  The railroad has also been a rocket for investors. Founded in 1922, Canadian National was privatized by the Canadian government in 1995 in what was then the biggest IPO in Canadian history. It stretched into the U.S. through a series of acquisitions, starting in 1999 with Illinois Central, where Harrison was chief executive. On a split-adjusted basis, the stock began trading at $6.67. Shares were around $67, as of Sept. 15.

The secret to their success: timely service. Under Harrison, Illinois Central became the best-run freight line by running scheduled service. Copying passenger railroads and airlines, Harrison guaranteed pickups and deliveries to the hour, even across thousands of miles. He introduced the same plan at Canadian National when he came onboard as chief operating officer. Today, the Montreal-based railway is No. 1 in efficiency.

Harrison, who was promoted to chief executive in 2003, is a railroad man from way back: He hired on as a laborer with St. Louis-San Francisco Railroad Co. when he was still in high school in Memphis. Recently, Harrison, who splits his time between the company's headquarters in Canada and an office outside Chicago, talked with BusinessWeek Senior Correspondent Michael Arndt. Edited excerpts from their conversation follow:

You've been through hurricanes before. Did this one surprise you in any way?

I don't know if you're ever prepared for a hurricane. We were very fortunate, compared to others. We're on higher ground in New Orleans. We did have some outages north of New Orleans, for about a 30- or 40-mile stretch. Grain shipments have slowed down because of disruptions to employees and power supplies and communications lines. But it's not a significant impact.

Most of the revenue loss is more of a timing issue. The grain is going to move, but perhaps later than usual. In the grand scheme of things, by the end of the year, it will be of minimal impact.

Longer term, in fact, many economists think the hurricane will be a boon to the economy, as reconstruction proceeds.

I don't think there's any doubt about that. We're the largest hauler of forest products in North America. I would imagine that there will be a lot of building products moving into the New Orleans area for the reconstruction, and so we're making preparations for that. We're looking at putting in new infrastructure for transloading of lumber from railcar to truck, somewhere in the New Orleans area.

What about the economy today? How does it look?

It isn't quite as strong as it was 18 months ago. But[there's] pretty steady growth right now. The only soft spot is the automobile sector, and we anticipated that.

Are there any issues that could, pardon the pun, derail you?

Energy prices worry me from the impact on the economy. We have been very successful with our fuel surcharge and hedges. Basically, fuel is a pass-through for us. But the longer term implication of rising energy prices does give me concern. Somebody's got to foot the bill.

Your company is growing. Is that because the economy is growing, or are you taking market share from trucking and other railroads?

It's a little bit across the board. We have made significant market-share gains over the last five years. Most of that gain, we think, is the result of our service, which has become more competitive and more consistent.

If you're asking for shipment from Toronto, for example, to Baton Rouge, we'll quote it at 103 hours, not six to seven days. And we're delivering at the 92% to 93% level consistently. With that change of service, it has given us the ability to capture market share that we had previously lost to the highway.

I had thought that, over the years, trucking had been eroding rail's market share. So rail is starting to take that back?

I think there's a turnaround. Particularly at Canadian National, that has been the case over the last five to six years. But I do think the whole sector is gaining market share.

Canadian National has done a number of acquisitions, starting with Illinois Central. Is there much left for acquisition?

Not much. There are some regional short-line carriers. But the opportunities aren't like they used to be. When I first went to work, there were probably 50 Class I railroads. Today, that number is seven.

That said, I don't think a combination would run into antitrust issues if there were two carriers that decided they would like to get together. But whether that would happen is another issue. We think we're pretty good railroaders, and we're pretty disciplined in our acquisition strategy. If we can acquire rails and extend our reach at the right price, we'll continue to do that.

You've been in the rail business more than 40 years. How did you first get into it?

I was just a 17-year-old kid looking for a place to work, and the rails paid more money than anybody else. I was just fortunate to be at the right place at the right time. A rags-to-riches story? I know the rags. I'm not sure about the riches.

Canadian National is a Canadian company and you're an American. Has that raised any problems for you?

I think a few people would like to see it otherwise. But we like to think of ourselves as a North American company. It has worked very well for us.

Before it's here, it's on the Bloomberg Terminal.