Calgary Alberta - The dramatic restructuring underway at Canadian Pacific Railway Ltd. has been a boon for investors but appears to be ruffling the feathers of some of the railway's customers.
 
A new survey conducted by RBC Capital Markets polled 53 customers of the six Class I North American railways, including CP, Canadian National Railway, and their U.S. rivals, on a number of issues, including their expectations for pricing and volumes in 2014.
 
Overall, the sentiment was positive from an economic standpoint, but the report says CP is losing some of its international customers to its chief rival.
 
There has been a significant shake-up of the management at the Canadian railways in recent years, which among other things saw CN's chief operating officer, Keith Creel, defect to CP and be replaced by Jim Vena at CN in 2013.
 
That shake-up followed the appointment of Hunter Harrison as CP's chief executive after a lengthy proxy battle led by Bill Ackman's Pershing Square Capital Management in 2012.
 
The subsequent restructuring underway at CP has put it on track for a record year in 2013 but has also seen it lose several major contracts to rival CN in the process, including international intermodal shippers APL Ltd., Mitsui O.S.K. Lines, and Orient Overseas Container Line Ltd., and automaker Chrysler in 2014.
 
"The topic of market share gains and losses between the two competitors has become a focus of recent discussion with investors," said Walter Spracklin, the RBC analyst who conducted the shippers' survey, in a note to clients.
 
As a result, RBC decided to ask the respondents how the management changes had affected service levels and market share in Canada, he said.
 
The results pointed to more discontent with CP than there was for CN.
 
For CN, 15 percent said they'd seen continued improvement since Mr. Vena took over as chief operating officer with only one respondent saying service was worse.
 
But for CP, 28 percent of those surveyed said the railway's service had worsened with only 10 percent saying it had improved.
 
"We note that major corporate restructuring is often disruptive at the outset and that cost reduction initiatives that are based on increasing efficiency have the opportunity to yield service improvements in the later stages of the transformation," Mr. Spracklin said.
 
"We will be monitoring CP for evidence of service improvements, but we are mindful of the negative consequences if they do not materialize," he said.
 
Mr. Creel argued at a conference in Toronto this week that the contracts CP lost in recent months were the result of the railway shifting its priorities from international intermodal shipments to more lucrative domestic ones.
 
"The flagship was international intermodal," he told the conference Tuesday.
 
"So, the international train was the one that took the priority."
 
He said that surprised him when he arrived last February because 55 percent of CP's intermodal revenue was coming from 35 percent of the domestic market.
 
That essentially meant CP would have to move two international containers to match the revenue it received from one domestic container, Mr. Creel said.
 
But prior to his arrival, the international intermodal trains were given the priority in terms of schedules and optimizing the network, Mr. Creel said.
 
"Unfortunately, international is your smallest margin," he said.
 
"We effectively flipped the focus."
 
Mr. Creel said this led to several large international intermodal contracts being lost to CN.
 
But he added the purge of those non-profitable, large contracts is largely behind CP and the only remaining ones that may be lost are minor ones.
 
Mr. Creel also said as the restructuring takes hold at CP, its lower cost structure would eventually allow it to compete again for the contracts it lost.
 
The RBC survey also found that the overall sentiment of the shipper had declined slightly year over year with 64 percent reporting "good" or "excellent" service, down from 69 percent in 2013.
 
Roughly 71 percent of respondents also said they expecting pricing increases in 2014, the bulk of them (42 percent) expecting them in the range of 1 percent to 3 percent.
 
The shippers were also more bullish on their volume expectations for 2014 with 68 percent saying they expected volumes increase between 1 percent and 5 percent, but more (26 percent) saying this year they were expecting significant increases of 5 percent or more than last year (15 percent).
 
"Current sentiment supports steady rate increases for the foreseeable future barring any regulatory action that could inhibit these gains," Mr. Spracklin said.
 
"We expect higher pricing to support revenue and free cash flow growth driving improved shareholder returns," he added.
 
Scott Deveau.

Author unknown.