Thursday, May 31, 2012

Canadian Pacific strike results in backlog of containers at Canadian ports

The month of May has not been kind to Canadian Pacific (CP) – a change in management and now a strike has Canada’s second largest railroad at a complete standstill. At the heart of the company’s problem is its pension.

The company had tried to cut costs after contributing $1.85bn to its retirement programs over the past three years, while union members resisted what they said was a 40% cut in post-retirement benefits. The pensions helped push CP’s operating expenses as a percentage of sales above those of other Class I railroad companies. As a result, those costs were criticized during a months-long proxy fight that resulted in the departure of CEO Fred Green and five other board members on May 17th.

On May 23rd, just days after the departure of the CEO and board members, union members went on strike protesting cuts to its pension and demanding a new contract since they have been working without an agreed one since December 31, 2011.

Emergency legislation to force an end to the strike passed the House of Commons early Wednesday morning and is now waiting debate by the Senate. However, it appears the Senate will not take up the measure until possibly the afternoon of Thursday, May 31 at the earliest which would mean the earliest CP can start back operations would be on Friday, June 1st.

As one can imagine, freight has piled up and the Canadian economy may be in jeopardy. According to the Canadian government, the strike is resulting in a negative impact of over C$500bn in economic activity a week.

Port Metro Vancouver reported its terminals have run out of spots for the vessels to dock – all 15 anchorages are full. Ships are being diverted to Vancouver Island to wait.

The “Big Three” automakers are using alternative means of transportation including air and marine to keep assembly lines running on both sides of the border.

The Canadian Wheat Board stated that more than C$50m in grain is sitting in elevators instead of moving to ports by rail. According to the Board’s president and CEO, six vessels are waiting to load grain in Vancouver and another eight are on the way.

Once the strike ends the question will be how long will it take for CP to clear the backlog and return to normal? The possibilities of a permanent major modal shift appear to be slim, particularly for the movement of bulk commodities which are dependent on rail movement. However, there may be slight shifts towards trucking for other commodities as well as shifts to Canada’s largest railroad, Canadian National.

What, if any, potential damage could have done to the Canadian ports themselves? Will some market share swing back towards the US west coast ports such as Tacoma and Seattle?

In either case, once the strike ends, CP still has many internal issues to resolve and hopefully will do so in an efficient and timely manner that will not negatively impact an already frustrated customer-base.