Canadian National anticipates a rough May

A photograph of a train. It is running next to a pond and a reflection of the train is on the pond's surface.

The worst of the COVID-19 pandemic’s effect on freight rail activity is yet to come, said executives during Canadian National’s (NYSE: CNI) first-quarter earnings call on April 27.

“We still feel that the worst is not behind us,” said Canadian National (CN) Chief Financial Officer Ghislain Houle. Both he and CN CEO JJ Ruest said May could be the worst month, but “at this point, it’s all guessing work.”

Executives have been looking at various economic recovery scenarios, but it’s still unknown when North America would return to a “natural economy,” which is when consumers feel confident to engage in pre-pandemic activity in such a way that would boost freight volumes. As a result, CN’s expectations of generating C$2.5 billion in cash flow assumes worst-case scenarios to occur during the year. April revenue ton miles are down roughly 15% so far, Houle said.

“We’ve run scenarios that are better but we wanted to offer investors the floor,” Houle said. 

Sectors that appear to be hit hard by the pandemic are the auto sector, where volumes are down by almost 90%, and U.S. coal volumes. Energy and frac sand volumes could also “get worse” according to Ruest, although CN’s crude-by-rail product is mainly a type of heavy crude that is more shielded from crude market shifts.

To manage the volume downturn so far, CN has furloughed about 2,500 workers, including a 20+% reduction of train and engine employees, and it reduced train starts and stored 500 locomotives and about 14,000 railcars in storage. Train and engine employee headcount tends to be more sensitive to market demand. 

CN has also idled switching yards in Battle Creek, Michigan; Jackson, Mississippi; Garneau, Quebec; and Kamloops, British Columbia, and it has reduced its mechanical activities in more than 20 locations. Whether the idled switching yards will return to service and when they would reopen will depend on when and how rail volume comes back, according to Rob Reilly, CN chief operating officer. 

CN has been in discussion with its ocean partners and shippers to gauge how cancelled or blank sailings in the second and third quarters will affect rail volumes. The railway won’t be as affected by blank sailings in the second quarter, but another factor is also the number of discharges off the vessel that also occur, according to Keith Reardon, CN senior vice president of the consumer product supply chain.

“At this point in time, we’re not seeing that many blanks…for the second quarter for us. That doesn’t mean that there are not that many blanks that are going to happen, but after talking to our customers, that’s what we’re seeing is going to be impacting us for the West Coast,” Reardon said. “We do see a few East Coast blanks, but I also want to caution you it’s not necessarily the number of blanks. It’s how much those blanks are affecting…[the] discharges on that vessel.”

Amid the pandemic-induced rail downturn, CN is performing track maintenance, which the railway says will help the company with network capacity once volume rebounds, and it is continuing to invest in capital projects, such as at Vancouver and between Edmonton and Prince Rupert, because of anticipated activity for trans-Pacific trade for bulk and container volumes.

Although some nearshoring could occur because of higher labor costs in China and a desire to diversify the supply chain, the nearshoring opportunities for now are around essential goods, such as medical supplies. Goods that pass through the Canadian ports, such as automotive products, electronics and garments aren’t as “strategic” and security-sensitive, Reardon said. But he added that CN has service at Mobile, Alabama, and New Orleans, Louisiana, should some nearshoring opportunities occur. 

First-quarter performance

In the first quarter, CN increased its train velocity by over 6% while reducing its dwell time by nearly 5%. This allowed the railway to use fewer locomotives on its network while still moving the same amount of gross ton miles, Cairns said. 

It also removed 700 weekly train starts, and it has stored railcars and locomotives in locations where they would be needed once demand rebounds. 

Canadian National ($ in Canadian dollars)

2020 Value 2019 Value Y/Y Gross Change Y/Y % Change
Freight revenue (in millions) $3,424.0 $3,413.0 $11.0 0.3%
Carloads (000s) 1,335 1,418 -83.00 -5.9%
Revenue per carload $2,565 $2,407 $158.00 6.6%
Intermodal shipments (000s) 548 624 -76.00 -12.2%
Intermodal revenue per carload $1,549 $1,362 $187.0 13.7%
Revenue ton miles (in millions) $58,370 $59,067 ($697.0) -1.2%
Employee counts (quarterly average) 25264 26024 -760.00 -2.9%
Train velocity (mph) 18.2 17.1 1.10 6.4%
Dwell time (hours) 8.3 8.7 -0.40 -4.6%
OR% 65.7% 69.5% -3.80% -5.5%
EPS $1.42 $1.08 $0.3 31.5%

Despite the rail blockades and the COVID-19 pandemic, CN reported higher net profits in the first quarter of 2020.

First-quarter net income totaled C$1 billion, or C$1.42 per diluted share, a 28.6% increase from C$786 million, or C$1.08 per diluted share, in the first quarter of 2019.

For more first-quarter results, go here