Railways get poor grades from freight shippers: survey

MONTREAL—Freight service on North American railways has deteriorated significantly in the past year, according to an annual RBC Capital Markets survey of railway customers.

More than three-quarters of shippers surveyed labelled service as fair or poor, compared with 32 per cent who gave the railways such a grade last year.

Analyst Walter Spracklin attributed the widespread dissatisfaction to the impact of congestion and severe weather on deliveries last winter.

“We consider the decline in customer satisfaction to be a temporary sentiment shift caused by unforeseen factors that were largely out of carriers’ control,” he wrote in a report Tuesday.

Spracklin said the poor grade shouldn’t hurt the railways’ stock price because of the strong price and volume outlook by shippers for 2015.

Canadian National Railway received the most positive ratings of the six large railways in Canada and the U.S. The next best performer was Union Pacific Railway.

Rankings for the other four, including Canadian Pacific, were not given.

Montreal-based CN benefited from relatively strong operating metrics such as train speeds and dwell time in terminals to beat rivals. Still, the proportion of shippers who gave CN just a fair or a poor rating doubled to 63 per cent this year. Just seven per cent rated CN’s service as excellent, down from 15 per cent last year and 22 per cent in 2013.

Criticism focused on capacity constraints, railcar shortages and transit time issues.

“Service has been terrible, but CN Rail has been the best of the group,” said one shipper, who was not named.

Spracklin said CN has suffered a bit from its success in achieving record volumes as extreme weather exacerbated network congestion. He said the railway was addressing capacity concerns with targeted capital investments that should manage volume growth and severe weather.

Shipper sentiment on Canadian Pacific Railway was mixed as the proportion of negative responses jumped to 79 per cent from 48 per cent last year, reflecting weaker speed and dwell times. But the Calgary-based railway also received positive comments for shorter transit times and better on-time performance.

The federal government responded to service concerns of Prairie grain farmers by introducing minimum grain volume requirements in March to increase the movement of a bumper crop to international markets. Those thresholds were extended last week until March 31, 2015.

CN and CP have blamed the backlog on the size of the harvest and extremely cold weather.

They survey highlighted mixed views by shippers on the rail regulations. About 40 per cent had a negative view, while 15 per cent supported Ottawa’s move.

Criticism included that the grain volume mandate disadvantaged other sectors while supporters said it put service issues in the spotlight.

Shippers want an ongoing review of the Canada Transportation Act to recommend holding the railways accountable for service by imposing financial penalties for poor performance.

Service was the leading factor for shippers in deciding which carrier to use this year, with freight rates not playing a prominent role, the survey said. Service and price were equally important to shippers who shifted their business between the two Canadian railways last year.

Meanwhile, the survey of 51 large customers found that more expect higher prices and volume growth in 2015 because of an improved economy and tighter railway capacity.

A majority expect rail freight price increases of four to six per cent, up from about a quarter of respondents who expected such a price increase last year.

About 80 per cent also expect trucking prices to increase by up to six per cent next year, compared with last year’s forecast for flat or modest rate increases.

Most expect rail volumes are forecast to increase 1.4 to 5.1 per cent next year.

BMO Capital Markets analyst Fadi Chamoun said rail demand to move heavy crude from Western Canada is unlikely to be impacted by the recent decline in crude prices.

“With limited pipeline capacity available until 2018 or later, … (the) projected production ramp-up over the next two years is expected to be shipped by railroads,” he wrote in a report.

Chamoun said frack sand is most vulnerable if lower prices curtail drilling. But reduced demand for crude or frac sand shipments would help the railways restore overall service levels.

Low crude prices would need to stick around for six to 12 months before there is any major change in production or capital expenditure plans, added Turan Quettawala of Scotiabank. He estimates flat energy volumes would result in a five per cent EPS hit for CP and two per cent for CN.