CN says rival CP will eventually catch up after Harrison fixes shortcomings

MONTREAL – The head of Canadian National Railway says rival Canadian Pacific Railway will eventually catch up to its industry-leading performance with new CEO Hunter Harrison at the helm and it will benefit the entire industry.

Claude Mongeau told a CIBC investor conference Wednesday that his former mentor and boss will improve the basic fundamentals of the Calgary-based railway.

“While they focus on fixing the basics. we’re charting ahead on a course which I believe is constructive for the industry,” he said.

“At some point they’ll catch up, but we’re not going to make it easy.”

While the two railway network don’t overlap everywhere, they do in congested areas like Vancouver.

“If both railroads have the same mentality of managing a pipeline, of understanding what it takes to promote efficiency and asset utilization, fluidity and velocity then we should be able to go through tough places like Vancouver more effectively, so I see that as constructive from a railroad standpoint,” said Mongeau, who succeeded Harrison as chief executive at CN (TSX:CNR).

He noted the railway has been experiencing a “soft patch” this quarter, but said he believes that barring an outside shock it can deliver years of solid returns.

Meanwhile Brian Grassby, senior vice-president finance for CP, told the conference that Harrison continues to examine the railway’s network and terminals, ask questions and focus on service as it tests a new train design.

Already, he said the speed of decision making has been improved and there is an increased focus by employees on service and controlling costs.

“Most people are embracing the change,” he said.

Grassby said CP is performing better than last year and sustaining the new performance level.

While the U.S. grain crop has been hit by a severe drought, a good harvest is expected in Canada helped by strong prices and global demand.

CP also foresees growth opportunities for potash and oil.

However, analysts have suggested CP will report “disappointing” results on Oct. 23 for the third quarter on modest volume growth due to short-term challenges for potash and agricultural products.

Analyst Walter Spracklin of RBC Capital Markets said he doesn’t expect the results will temper investor optimism in the railway’s new CEO, who will report on his plans at an investor day in December.

“We continue to have strong conviction in CP’s long-term prospects as the company continues to make progress on operating initiatives and is executing on growth in strategic markets,” he wrote in a report.

On the Toronto Stock Exchange, CN’s shares lost three cents at $91.59, while CP’s shares gained $1.55 to $82.92 in Wednesday trading.