Introduction
The Canadian Pacific Railway was founded to connect Canada and its people from coast to coast geographically. The rapid decrease in crude oil prices was one of the primary factors Canadian Pacific pursued Norfolk, an overseas dealer, and CSX before that. Railroads rely mainly on the transportation of energy-related products, particularly coal, and as the cost of coal decreased, so did traffic on the main railways. As a result, CP struggled worldwide, particularly in the US railway business. Its unsuccessful quest to acquire Kansas City Southern railroad increased the prominence of its main railroad rival Canadian National, lowering its overseas market revenue.
Additionally, the shutdown of the US-Canada border lowered the need for cargo and passenger public transit in business. As a result, freight transportation across borders is crucial in industry attractiveness and is expected to decline significantly in 2020 and 2021 (Smith et al., 2018). Therefore, a decline is noticed when comparing Canadian Pacific’s 2019 revenue ($7,792) and 2020 ($7,710) income (Canadian Pacific, 2021). However, despite these obstacles, Canadian Pacific developed a successful enterprise architecture, the quickest links in significant markets, and is now making considerable progress in customer service and revenue growth.
Businesses are developing new competitive measures to respond to evolving trends in the transportation industry. Service quality and contentment are increasingly essential components of the sector’s growth. The introduction of speedier transit modes, such as air travel, has posed a significant challenge to the Canadian Pacific, particularly regarding the continuing US-Canada border issue. In 2021, more assertive economic circumstances and a rising global crude oil price drove sales increase for the industry following a drastic fall in 2020 (Smith et al., 2018). With a decline in earnings in 2020 and a new initiative to boost customer service and satisfaction across its fleet, can this be enough to fend off the tough rivalry from Canadian National Railway? What would Canadian Pacific do to improve its income prospects?
The Global Railway Industry
The rail transport sector comprises enterprises that sell rail transport services and associated items, such as companies, sole proprietorships, and collaborations that operate trains to convey people and freight. Railroads function as systems with physical infrastructure, labor personnel, and equipment scattered across a wide range of locations or as regional rail lines that operate over a limited distance (Sattari et al., 2021). This industry does not include street railroads, public transport, metropolitan transit systems, and scenic and tourism train services.
The rail transport segment is divided into passenger rail and cargo rail. The worldwide rail transport industry is predicted to increase at a compound annual growth rate (CAGR) of 10%, from $468.7 billion in 2020 to $519.3 billion in 2021 (Roy & Cofsky, 2020). The growth is due mainly to significant corporations reorganizing their procedures and convalescing from the COVID-19 implications. These effects had previously occurred in prohibitive countermeasures such as social isolation, teleworking, and the shutdown of economic activities, all of which created operational difficulties. As a result, the market is estimated to reach $658.9 billion in 2025, growing at a 6% compound annual growth rate (Roy & Cofsky, 2020). The Asia Pacific dominated the worldwide rail transport sector in 2020, contributing to 42% of the industry (Zou et al., 2021). Western Europe ranked second, representing 21% of the worldwide mass transit business (Zou et al., 2021). Africa was the world’s smallest rail transit market during the year 2020.
The rail transportation operations market is anticipated to expand rapidly due to the macroeconomic stability projected in several advanced and emerging economies. The International Monetary Fund (IMF) forecasts global GDP growth of 3.0% in 2020 and 3.0% in 2021 (Rothengatter et al., 2021). Restoring inflationary pressures following a prolonged downturn is also projected to assist market expansion. Rich nations are likewise predicted to expand steadily over the projection period. Moreover, emerging nations are likely to grow at a somewhat quicker rate than established countries throughout the forecast period.
Overview of the Canadian Railway Industry
In Canada, the rail sector is dominated by freight rail transportation, but it also comprises interstate rail service, passenger transit systems in metropolitan areas, and many city commuter rails or subway systems. Additionally, the nation is served by a variety of recreational railway networks. At the end of 2019, Canada’s rail system covered over 64,800 kilometers of the route and employed an aggregate of over 34,600 people, the bulk of whom were actively involved in transportation activities (Roy & Cofsky, 2020). As a result, Canada has a massive and well-developed rail infrastructure, with a total track length of 49,422 kilometers (30,709 mi) (Roy & Cofsky, 2020). However, only 129 kilometers (80 mi) are powered and almost entirely comprised of urban rail transport structures.
Canada’s railway model is primarily comprised of 1,435 mm standard gauge equipment. Rail freight is a critical component of Canada’s transportation network, contributing around $10 billion in revenue each year (Roy & Cofsky, 2020). Revenues are generated almost entirely by rail freight movements, at 95%, and by commuter, transcontinental, and touristic commuter trains in metropolises, routes, and areas, at around 5% (Roy & Cofsky, 2020). The Canadian Rail Network’s 45,199 route kilometers of tracks are primarily utilized for freight movement (Roy & Cofsky, 2020). The following companies hold them: CN owns 49.1% (22,186 km), CP owns 25.6% (11,574 km), and other railways possess roughly 25.3% (11,439 km) (Roy & Cofsky, 2020). Canadian National Railway (CN) and Canadian Pacific Railway (CP) are Canada’s two largest freight rail providers. Both are Class I railroads, with revenues exceeding $250 million in the preceding two years (Roy & Cofsky, 2020). CN generates almost 50% of total rail transport earnings in Canada, while CPR constitutes 35%. CN and CP together account for more than 85% of Canada’s yearly rail ton-kilometers, more than 75% of the sector’s lines, and three-quarters of total rail tonnage handled (Roy & Cofsky, 2020). These two enterprises are critical supply chain connectors for Canada’s major trade routes and entrances.
A Brief History of Canadian Pacific
Canadian Pacific Railway was founded in 1881 to connect Canada and Canadians from coast to coast geographically, and the railway’s construction is regarded as one of Canada’s outstanding engineering marvels. The company’s mission statement is as follows: “We provide mobility solutions that link North America to the rest of the world. By conducting business securely and effectively, we generate long-term sustainability value for its stakeholders and the greater economy,” (Canadian Pacific, 2021).
Internal Analysis
Key Resources: (Amounts listed in millions of Canadian dollars)
Tangible Assets – As per 31st December 2020:
- Cash and cash equivalents ($854)
- Investments ($1,014)
- Material and supplies ($762)
- Properties ($80,510)
- Other assets ($1,846) (Canadian Pacific, 2021)
Intangible Assets:
- Goodwill and Intangible assets ($1,164)
- Accounts receivables, net ($3,326)
- Pension asset ($4,536)
- Other Current assets ($465)
- Favorable consumer response to the organization’s mission statement and reducing GHG emissions
- Ethical and responsible operations
- Diversity and gender inclusivity through three new diversity councils – racial, indigenous, and gender (including 2SLGBTQ+) (Canadian Pacific, 2021)
Table 1: VROI Analysis of the Tangible and Intangible Assets
Key Functions
Operations
- Installation of solar energy fam at Calgary to avoid 2,600 tons of carbon emissions
- 13,000-mile railway network
- 11 ports served on the West and East coasts
- Over 100 transload facilities
- 873 miles average length of a haul
- Shortest routes (Vancouver to the United States, Midwest Toronto to Calgary, and Saint John to Montreal and Toronto)
- Opening on a new world-class transload and distribution facility in Vancouver in partnership with AP Moller Maersk
- Most border crossings in West Canada (Canadian Pacific, 2021)
Financial and Accounting
- The fourth quarter of 2020 shows a revenue decrease to $7,710 (in millions) as compared to the same quarter in 2019 of $7,792
- There is an increase in net income from $2,440 in 2019 to $2,444 in 2020
- Its business mix composed 43% bulk, 36% merchandise, and 21% intermodal of the total freight revenue in 2020
- Total revenue attributed mainly due to the transportation of grain (Canadian Pacific, 2021)
Research and Development
- Leveraging in technology to lead in safety and service
- Installation of solar energy farm to generate up to five megawatts of electricity while avoiding an estimated 2,600 tons of carbon emissions yearly and taking approximately 57 cars off the road
- CP’s hydrogen locomotive program aimed to develop a zero-emissions line-haul locomotive prototype by retrofitting a diesel-powered road (Canadian Pacific, 2021)
Human Resources
- Employs 11,904 CP workers (Canadian Pacific, 2021)
Marketing, Sales, and Services
- Training and leadership development programs for their railroaders
- Shortest key routes in leading markets such as Vancouver
- Selling a competitive class to their customers, Class-1
- Purchases and mergers with other Railroad companies, for instance, acquisition of Detroit River Tunnel Partnership (DRTP) and Central Maine and Quebec Railways (CMQ)
- Low Federal Railroad Administration (FRA) personal injuries per 200,000 employee-hours
- Reduced train accidents per million train-miles (0.96) (Canadian Pacific, 2021, p. 10)
Performance Metrics
Table 2: KPIs
- The KPIs shows a decrease in revenue and cash while an increase in net income
Competitor Performance Comparisons
All the information about Canadian National Railways is found in exhibit 3, expressed in millions.
- The main competitor is Canadian National Railways (CNR)
- CNR has an increased average per ton-mile revenue ($230,390) than CP’s ($151,891) in the year 2020 (Canadian National, 2020)
- CNR’s train length of 8,572 feet offers more carriage than CP’s 7,929 feet fleets
- CNR offered more employment opportunities to Canadian citizens by the end of 2020 (24,381) than CP (Canadian National, 2020)
- Growing technological skills at CNR offers stiff competition to CP.
SWOT Analysis
Strengths
- Cash and cash equivalents ($854) (in millions)
- Investments ($1,014) (in millions)
- Material and supplies ($762) (in millions)
- Properties ($80,510) (in millions)
- Favorable consumer response to the organization’s mission statement and reducing GHG emissions
- Ethical and responsible operations
- Diversity and gender inclusivity through three new diversity councils – racial, indigenous, and gender (including 2SLGBTQ+)
- Low FRA personal injuries per 200,000 employee-hours
- Reduced train accidents per million train-miles (0.96) (Canadian Pacific, 2021, p. 10)
- CP’s hydrogen locomotive program aimed to develop a zero-emissions line-haul locomotive prototype by retrofitting a diesel-powered road
Weaknesses
- 873 miles average length of a haul
- A decrease in revenue and cash
- Employs only 11,904 CP workers despite the considerable number of its fleet
- 13,000-mile railway network
- 11 ports served on the West and East coasts
- Most border crossings in West Canada
- Canadian Pacific’s customer base is declining while its earnings are expanding
Opportunities
- Purchasing and mergers with other Railroad companies, for instance, acquisition of Detroit River Tunnel Partnership (DRTP) and Central Maine and Quebec Railways (CMQ)
- Adapting cold wheel technology to the intermodal fleet to transcontinental cars that receive a lot of mileage to identify maintenance opportunities
- Offering a competitive class to their customers, Class-1
- Customer perceptions of the company’s authenticity and dependability due to its low train accidents per million train-miles (0.96)
Threats
- Growing technological skills at CNR
- Competitive pressures by CNR
- The deteriorating political atmosphere created by the US-China trade war
2021 Challenges
- Failed fresh $27 billion bid for Kansas City Southern
- Closure of USA-Canada border
By purchasing Kansas City Southern by one of its Canadian rivals, the first straight railway connectivity between Canada, the United States, and Mexico would be established. CP made a new $27 billion proposal for Kansas City Southern, considerably less than Canadian National Railway’s competitor deal of $28 billion, hoping that antitrust worries about the latter will give it an advantage (Roy & Cofsky, 2020). Canadian Pacific had hoped the Surface Transportation Board (STB) would come against Canadian National’s request.
The STB did not release a statement for comment regarding the timing of its decision. However, another factor that influenced Canadian Pacific’s decision to reverse course was the views of prominent proxy advice companies. In addition, the closure of the USA-Canada border during the COVID-19 pandemic halted the movement of people and cargo from and within Canada. As such, trading activities beyond Canadian territories were affected, reducing Canadian Pacific’s revenues and other players in the transportation sector.
External Analysis
PESTEL Analysis of Canadian Pacific
Political Factors
Other decision-makers, such as non-governmental agencies, peaceful demonstrations, campaign groups, and advocate movements, play an essential role in Canadian policy development. Canadian Pacific Railway should work collaboratively with these institutions to contribute to the community and organizational objectives. Furthermore, Canada’s current political structure has fulfilled its purpose for an extended period. Little will transform in the process, even if it produces leaders capable of departing from the statistical norm in terms of policy decisions.
Economic Factors
Canadian Pacific Railway’s connections to solid economic markets and widespread accessibility of financing in Canada’s stock market help it develop abroad. However, CP’s investment plans may be impacted by Canada’s unpredictable currency rate in the near term and the medium to long term. Moreover, while consumption expenditure has remained consistent, growing social inequality will negatively influence consumer confidence and consumer buying behavior.
Social Factors
Clients in Canada place a premium on experiential products over traditional value propositions in the transportation industry. Canadian Pacific Railway may capitalize on this development by producing goods that offer a superior consumer experience. As liberalization progresses, attitudes about health and safety become lax. Canadian Pacific must avoid these mindsets because the consequences of failure are costly in Canada. CP has demography to its advantage when it comes to transportation commodities.
Technological Factors
The transportation sector rapidly reduces manufacturing and service costs due to advanced technologies. Canadian Pacific Railway’s distribution network must be restructured to promote efficiency to meet customer expectations and cost constraints. Canadian Pacific Railway’s rivals have adopted recent technological advancements. As a result, this can provide meaningful input into what opponents are contemplating and Railroads’ business strategy prospects. Mobile technological improvements and proliferation have altered customer requirements in the transport industry.
Environmental Factors
Due to increased consumer perception, environmental concerns have been elevated to the forefront of the Canadian Pacific approach. Clients demand CP comply with regulatory obligations and surpass them to be productive concerned citizens. Severe weather also adds to the CP Railway’s operating costs, making its distribution chain more resilient. Regular inspections by environmental organizations also contribute to the Canadian Pacific’s operating costs.
Legal Factors
Before entering the global market, Canadian Pacific Railway’s executives must identify the following legal requirements: exclusion laws, prejudice against domestic players, and trademark rules. Confidentiality has evolved as a significant component of privacy concerns and intellectual property protection during the previous decade. Canadian Pacific Railway must assess if Canada has a credible data breach response system in place. Finally, CP must evaluate the implications of Canadian labor rules on the railroads’ corporate strategy.
Porters Five Forces Analysis of Canadian Pacific
Bargaining Power of Buyers
Buyers’ negotiating power in the Canadian Pacific Railway and Transportation industry plays a significant role in determining its revenues. When buyers have considerable bargaining power, they generally force prices down, reducing the Canadian Pacific Railway’s ability to produce maximum profit.
The threat of New Entrants
New competitors to the railroad industry pose a threat to Canadian Pacific and existing railroad corporations. Suppose the Railroad companies industry faces a significant threat of new players in the market. In that case, older firms will be prepared to accept reduced profits to mitigate the competition from new participants.
Bargaining Power of Suppliers
Vendors’ bargaining leverage in railways. Suppliers with significant bargaining strength will obtain a premium from the Canadian Pacific Railway. As a result, it will affect Canadian Pacific Railway’s ability to generate above-average revenues in the Rail lines business.
The Threat of Substitute Products
The availability of substitutes and operations in the railroad business poses a significant threat to railroad companies. Suppose the danger of substitute commodities and services is excellent. In that case, Canadian Pacific Railway must invest consistently in research and development (R &D) activities or risk losing market share to competitors.
Rivalry from Existing Market Players
Competition between existing railroad companies such as the Canadian National Railway is significant in Canadian Pacific earnings. However, when competition is fierce, it becomes problematic for established freight companies such as Canadian Pacific Railway to attain sustainable profits.
The Road Ahead
The Canadian Pacific Railway has to address many issues that lead to its deteriorating revenues. The firm’s performance would depend heavily on the assessment of its current portfolio. Given the company’s poor performance in foreign markets like the USA and outstanding success in its domestic market, what strategy would the organization adopt? Canadian Pacific Railways had attempted several bids in the acquisition of the Kansas City Southern, which ended up as a failure. The issue is, was it running of merger or acquisition options in the foreign market? On the other hand, should Canadian Pacific consider acquisitions as it did with Detroit River Tunnel Partnership and Central Maine and Quebec Railways?
References
Canadian National (2020). Essential. 2020 Annual Report, 1-140. Web.
Canadian Pacific (2021). Investor fact book. 2021 Data Supplement, 1-17. Web.
Rothengatter, W., Zhang, J., Hayashi, Y., Nosach, A., Wang, K., & Oum, T. H. (2021). Pandemic waves and the time after Covid-19–Consequences for the transport sector. Transport Policy, 110, 225-237. Web.
Roy, R. J., & Cofsky, D. (2020). An empirical investigation for Canadian class I railways both performance and industry cost structure. Research Branch Canadian Transport Commission, 1-20. Web.
Sattari, F., Macciotta, R., & Lefsrud, L. (2021). Process safety approach to identify opportunities for enhancing rail transport safety in Canada. Transportation research record, 2675(1), 49-66. Web.
Smith, M. J., Ray, S. B., Raymond, A., Sienna, M., & Lilly, M. B. (2018). Long-term lessons on the effects of post-9/11 border thickening on cross-border trade between Canada and the United States: A systematic review. Transport Policy, 72, 198-207. Web.
Wiegmans, B., Champagne-Gelinas, A., Duchesne, S., Slack, B., & Witte, P. (2018). Rail and road freight transport network efficiency of Canada, member states of the EU, and the USA. Research in Transportation Business & Management, 28, 54-65. Web.
Zou, W., Chen, L., & Xiong, J. (2021). High-speed railway, market access and economic growth. International Review of Economics & Finance, 76, 1282-1304. Web.
- Exhibit 1: Share of Canada’s Railway Network
- Exhibit 2: Canada’s Railroad Network Revenue Share (%)
- Exhibit 3: Canadian Pacific Railway Stock Performance (Canadian Pacific, 2021, p. 3)
- Exhibit 4: Canadian Pacific Railway Quarterly Income Statement (in millions) (Canadian Pacific, 2021, p. 9)
- Exhibit 5: Canadian Pacific Railway Quarterly Consolidated Balance Sheet (in millions) (Canadian Pacific, 2021, p. 9)
- Exhibit 6: Railway Transport Data of Canada, USA, and Europe (Wiegmans et al., 2018)