CALGARY, Alberta – Canadian Pacific CEO Keith Creel sought to reassure investors that the railway is well positioned to weather the economic downturn related to the coronavirus epidemic despite an anticipated decline in traffic and revenue.
“This company is weathering the storm, and weathering the storm quite well,” Creel said during an investor call on Tuesday morning.
The railroad expects demand for several traffic segments — including domestic intermodal and automotive — to fall and then bounce back once steps taken to slow the spread of COVID-19 are lifted.
The big question, Chief Financial Officer Nadeem Velani says, is whether a global recession is short or prolonged.
“There’s a lot of uncertainty … a lot of guesswork still going on,” Creel says, and it’s unclear whether the economic disruption caused by the pandemic will last two months, three months, six months or even longer.
CP anticipates laying off 250 people in the next month, or about 2% of its work force, as traffic declines, the executives said.
But Creel said CP wants to be ready for a quick rebound in traffic and is talking with rail labor about ways to retain people for as long as possible and then speed up the process for recalling furloughed employees.
Creel, who was chief operating officer at Canadian National during the Great Recession of 2008-09, says CP will respond the same way CN did to the financial crisis: Reduce its resources in line with demand, then bounce back. “We did it before and we’ll do it again,” he says.
CP is not immune to anticipated traffic declines as manufacturing slows and unemployment reduces consumer spending, the executives say. But Creel says CP is somewhat insulated by its bulk network of grain, potash, and coal traffic, which account for 41% of its revenue, a higher total than the other Class I systems.
Canadian crude oil has taken a hit from the collapse of global oil prices due to the Saudi-Russian price war and reduced demand. CP’s crude oil train volumes will fall to 33 to 40 trains per month or less, down from a peak of 100 to 120 trains per month, Creel says.
CP didn’t stake its future on crude oil, Creel says, and the decline in oil traffic will be softened by contracts that include take-or-pay volume commitments.
BMO Capital Markets analyst Fadi Chamoun, who hosted the call, noted that an extended period of low oil prices could wind up hurting other energy-related traffic in Canada, such as chemicals and plastics that have driven carload growth.
“I agree,” Creel says. “The tentacles go out to a lot of different locations. So it’s going to be a drag.”
CP has a strong balance sheet, expects to continue to lead the industry in growth once the economy rebounds, has a “battle tested” management team, and will use its Precision Scheduled Railroading operating model to pull cost levers in real time, Creel says.
