Friday, September 30, 2011

Canadian Pacific charts a comeback course

Written by  William C. Vantuono, Editor

Bigger is indeed better for this transcontinental carrier, which is operating some of the longest freight trains in North America. A railroad's stock performance isn't its only measure of excellence, but it's a good one.

A Wall Street analysis in mid-September of "The World's Best Stocks" noted that four of the major North American railroads were trading near their 12-month high, with Canadian Pacific Railway leading the parade. CP was just 0.67% off the mark, the closest of them all, and has posted a profit in 34 consecutive quarters, beginning in 2002.

Compared to the rough, bouncing movements seen since November 2009 in the S&P 500, the NASDAQ, and the Dow Jones Industrial Average, CP, though experiencing a few air pockets, has taken off like a jet aircraft, rapidly rising, and then finding stability while still ascending (chart, p. 20). The accolades from Wall Street have been mounting.

For example, from Donald H. Gold of Investor's Business Daily: "You've heard lots of talk of a double-dip recession, thanks to some disappointing data and, perhaps, human nature. But rail stocks' earnings, and the increased traffic they reflect, tell another story. Among the best rated railroads, you'll find two Canadian companies, Canadian Pacific and CN. Each of these two rail carriers have traded in relatively tight ranges since May 2010. Both companies recently ended a long rough patch.

Revenue leaped by double-digit percentages for both in the two most recent quarters. Thos were the fattest gains seen in recent years. Full-year consensus estimates for CP show 44% growth in 2010 and 20% in 2011."

Some of this has to do with a return to rising traffic levels that CP prepared itself for with numerous capacity improvements, like Westcap (Western Capacity Expansion Project), the massive, $160 million double-tracking, siding extension, and resignaling program between Calgary and Vancouver the railroad conducted in 2005 and 2006. Westcap's primary purpose was to accommodate rapidly increasing exports of Canadian resources and commodities like metallurgical coal, potash, and grain through the Port of Vancouver, as well as surging imports of containerized cargo arriving at Vancouver from the Pacific Rim. CP developed the capacity to run 38 trains a day across the Rocky Mountains.

Said CP President Fred Green to Railway Age at the time, "We looked at our capacity a couple of years ago and made some educated guesses, placing a bet that the market would remain strong. Our bet was correct." Green's prediction, despite the traffic downturn the industry has experienced during the Great Recession, remains essentially correct.

Recently, the capacity improvements have been augmented by productivity improvements achieved through increases in maximum train length, what CP Executive Vice President and Chief Financial Officer Kathryn McQuade describes as "inexpensive capacity—safely building longer trains to drive productivity."

The train length increases have been implemented across CP's entire network and across all business lines. This breakthrough has ben made possible by the integration of LOCOTROL® DP (distributed power) technology from GE Transportation with CP's TrAM 2 (Train Area Marshalling) software. This has given CP the ability to safely operate very long trains, reducing train starts, extending rail asset life, and saving fuel. CP has been running many of its transcontinental intermodal trains consistently at 10,000 feet, maintaining this practice even throughout the winter, where historically it has had to reduce train lengths for cold weather operations.

This productivity improvement, coupled with the equipping 200 locomotives with GE's Trip Optimizer fuel conservation technology, has allowed CP improve fuel efficiency by over 4%.

CP's application of Trip Optimizer was the system's first commercial deployment. Trip Optimizer is described by GE as "an advanced energy management system that optimizes fuel consumption based on a specific train's makeup and the route being traveled. The system calculates a fuel optimal speed profile for the trip and then automatically controls the throttle to maintain that planned speed. Trip Optimizer uses GPS, a digital track database, and advanced algorithms that automatically learn the train's characteristics throughout the trip to achieve the fuel savings. The system evaluates train length, weight, grade, track conditions, weather and locomotive performance to calculate the most efficient way of running the train while maintaining smooth train handling."

CP was the first North American railroad to test and implement Trip Optimizer.

CP's train length increases have been dramatic, for the most part. The largest leap so far has come in intermodal, where train length grew from 63 cars in 2008 to 90 cars this year, a 45% gain. CP's goal is to reach 105 intermodal cars per train, an improvement of an additional 16.7%. For other business lines:

• Export coal trains grew slightly in length from 124 cars in 2008 to 129 cars this year, but CP's target is 152—an 18% increase.

• Hauling capability for export potash, a major bulk commodity for CP, grew 15%, with train length increasing from from 124 cars to 142 this year. The target train length is a whopping 170 cars, for a total train length increase of nearly 30%.

• Merchandise trains grew from 86 cars in 2008 to 105 cars this year, a 22% increase. CP's target train length is 115 merchandise cars, for a total train length increase of nearly 34%.

• Grain train length has remained steady at 114 cars per train since 2008, but here, CP is looking for a giant leap, to 168 cars. That's an increase in train length of 47%.

LOCOTROL-equipped locomotives are inserted into a train midway in the consist, and at the rear. Units used primarily as helpers are easily picked up and set out enroute at dedicated staging/setoff tracks strategically placed throughout the CP network.

"With LOCOTROL Distributed Power," says GE Transportation, "railroads can optimize the distribution of power and braking control over the entire length of a train. Installed on more than 8,500 locomotives around the world, these systems provide control of remote locomotives by command signals sensed at the lead locomotive and transmitted over a radio data link to the remote units. LOCOTROL is designed to operate safely if radio communication is lost and will interface with almost every type of braking and train line control system."

Among LOCOTROL's features:

• Message repeaters, for improved radio coverage in critical areas.

• Tower control, for unmanned loading or dumping.

• Slow speed/plug mode, for loading and dumping control of heavy trains.

GE Transportation cites a half-dozen key benefits of using LOCOTROL:

• "30% faster and smoother starting and stopping distances."

• "22% faster and smoother starting and stopping times."

• "Brake pipe charging times reduced by 60%."

• "Improved fuel efficiency, depending on territory."

• "System throughput increases."

• "Operating cost reductions averaging 10%."

CP's "opportunity for low cost growth," Kathryn McQuade told a recent transportation conference, lie in "asset velocity, long train strategy, 'lean' process improvements, and technologies." CP certainly has come a long way, literally and figuratively.