Canadian National, Canadian Pacific confident of their post-pandemic response

A photograph of a train hauling intermodal containers.

The Canadian railways say they will have the network capacity available to handle an anticipated surge in volumes once the coronavirus pandemic plays out and consumer patterns shift back to normal.

Speaking at the virtual BMO Capital Markets investor conference last week, executives with Canadian National (NYSE: CNI) and Canadian Pacific (NYSE: CP) said they have adopted measures that will enable them to respond quickly to any volume surges later this year.

Rail observers have said that the Class I railroads have a tendency to struggle to respond to sudden surges in rail demand because it takes some time to get assets, power and crews in order, especially if the railroads have reduced power and crews in response to a downturn.

“At this point, I don’t know what the rebound will be – whether it will be fast – but the [situation is]  so volatile, that if people can leave their homes and eventually go back to work, in a couple of months, this [situation] could look drastically different,” said Canadian National (CN) CEO JJ Ruest on March. 26. Ruest was referring to nationwide recommendations that citizens practice social distancing and minimize trips outside of the home as a means to safeguard them from contracting the novel coronavirus, or COVID-19, as well as provincial orders to stay at home. However, the recommendations have also crippled small businesses, the hospitality industry and retail, among other consumer-oriented sectors.

CN has created a plan that lays out how to determine which locomotives and railcars to park and where they should park these assets. By doing so, CN hopes to have these assets ready to respond to any volume rebounds quickly. 

As railcars come back from an interchange, CN’s network centers have lists that detail which railcars to park and where to park them, Ruest said. “We want to do this strategically so that when business comes back for specific commodities or for a specific geography, we will have assets deployed in ways that can [help us] actually respond better,” he said. 

As the coronavirus pandemic plays out throughout North America, CN’s roughly 5,000 office employees are working remotely or are using social distancing techniques, Ruest said. About 20,000 employees work in field operations, and CN has adapted policies such as staggered start times and smaller groupings for maintenance work. CN also expanded its rail traffic control from three physical locations to five – Edmonton and Chicago each have two separate locations, while Montreal continues to serve as a rail traffic control center. Each of these five locations have medical personnel on staff, Ruest said. 

CN has “rightsized” its employee headcount to match volumes, but the railway has people in reserve, Ruest said. CN has closed its training campuses in Winnipeg and Chicago temporarily, and it could slow down activity at its smaller rail yards and repair shops if carload business dwindles. 

However, service metrics such as train speed and car velocity have improved, although rolling stock was down in March to 100,000 cars compared to 110,000 cars in March 2019, Ruest said. 

And while Chinese manufacturing appears to be returning, with roughly 90% of large-scale enterprises in operation, with 70-80% of their workers back at their jobs, according to CN”s freight forwarders working in China, one issue will be whether there will be enough demand in the U.S. and Canada to support an anticipated return in container volume in May at the western Canadian ports, Ruest said. 

Meanwhile, CP CEO Keith Creel said precision scheduled railroading (PSR), an operating model that seeks to streamline operations, will enable the railway to respond quickly to any sudden surge in rail volumes.

PSR helps because it allows CP to look at rail productivity at various timetables, including daily, weekly and month-to-date compared with last year, and it helps CP analyze asset use, Creel said on March 24.

“When you get a feel for those things and you know where the number should be or what your potential is…as soon as you start to see slippage, we have an ability with our measures to drill down to territory-specific, to lane-specific. So, it’s not just at a global number,” Creel said. 

In these next several months, CP will continue to retrofit locomotives so that they’re more fuel-efficient, Creel said. Right now, the railway is determining which leases and fleets to keep online and which ones to put into storage, he said.  

“We’ll constrain and take resources out so that the supply chain will run faster. And when you run faster, reliably, you’ll be able to move more product, and your costs and your margins are going to be protected,” Creel said. CP’s actions are “a bunch of singles and doubles that we’ll do to protect the margins on the downside and [we’ll] have the resources in hand and even the willingness of the employees to bounce back when the economy bounces back.”

CP could lay off roughly 250 employees in the next several months, but it is working with the unions and speaking with workers to help determine how to lay off people in such a way that lessens the blow, both for employees and for the railway, according to Creel. 

“If I talk about the people side…working with the union – okay, let’s talk about what we can do to keep them in here as long as we possibly can, what we can do when the economy bounces back to make sure that our employees are back quicker than they otherwise would be,” Creel said. 

For instance, “What can the employees do working with the unions and with the collective agreements to tweak some of what would be a normal call back time, which is normally 14 or 15 days? How about if we adjust that to make it a 48-hour or 72-hour [call back time]? So, those kinds of discussions are fluid discussions and they’re going on today with their union leadership as we try to navigate this thing together. And I think that bodes us well for the bounce back,” Creel said.