CN's JJ Ruest skates toward the future of railroading

Posted by Bill Stephens
on Thursday, July 23, 2020

Canadian National CEO JJ Ruest. CN photo
No chief executive lays out his railroad’s long-term strategy better than JJ Ruest of Canadian National. Ruest paraphrases hockey great Wayne Gretzky, saying that CN wants to head where the puck will be rather than where the puck is today. “Where the puck will be next is going to be increasingly toward the consumer economy,” Ruest told investors last month.

So Ruest wants to tie CN’s future more closely to the consumer. And that means an increased emphasis on intermodal, which carries the stuff that winds up on store shelves or at your front door when you order online.

Ruest neatly divides the railroad’s traffic into two segments: rail centric (carload and bulk) and consumer centric (intermodal and automotive). The long-term outlook for those segments is quite different.

Make no mistake: The rail centric business is still vital, particularly to Canada’s export-oriented natural resources economy. But when Ruest looks out three, five, and 10 years, he sees commodities like thermal coal and crude oil shrinking and becoming less important. Moreover, the industrial output that feeds the merchandise network is declining in Eastern Canada as well as in CN-served areas in the U.S. Midwest.

But Eastern Canada and the Midwest are home to hundreds of millions of consumers, whose spending drives 70% of the economy. So you can understand why Ruest wants to take advantage of CN’s unique three-coast network to bring international intermodal traffic to the Midwest, Toronto, and Montreal. 

That’s particularly important when trade patterns were shifting before the pandemic and are likely to continue shifting afterward. More containerized cargo is landing on the East Coast thanks to the trend of manufacturing moving from China to lower-cost locations in Southeast Asia, which favors routings to North America via the Suez Canal and the Atlantic. 

To capitalize on the shift, CN is partnering with ports in Eastern Canada, including Halifax, Nova Scotia, and a new terminal planned for Quebec City, to gain container volume that’s currently handled via the Port of New York and New Jersey. CN has plenty of capacity east of Chicago and can easily handle 14,000-foot stack trains that can make the service work economically over long hauls from Canadian ports to inland markets. 

Import volume is picking up on the Gulf Coast, too, due to more big-ship sailings through the expanded Panama Canal. That’s small potatoes compared to the ports in British Columbia – Vancouver and the CN-served Port of Prince Rupert – that have rapidly gained market share at the expense of the U.S. West Coast ports. 

CN is working on shorter-haul international intermodal, such as the interline service launched last year with CSX Transportation linking Philadelphia and New York/New Jersey with Toronto and Montreal. The service, which is growing, hitches a ride on existing merchandise trains.

And CN is all-in on boosting its domestic intermodal volume in a way that makes it closer to consumers. It has purchased two trucking companies that specialize in temperature-controlled shipments. CN now uses its in-house trucking line to deliver reefer containers directly from its intermodal terminals to individual stores rather than distribution centers. This is a big deal. CN also has become a full member of the EMP domestic container pool, extending its intermodal reach to more locations in the U.S.

(CLICK Map for a larger image.) 

Ruest seems to have one foot outside of the Cult of the Operating Ratio, the term the analyst Anthony B. Hatch coined for the hyperfocus that investors and railroads put on the efficiency and profitability metric. The trick, Ruest says, is not to have the lowest operating ratio or the highest, but to find a sweet spot in the middle that allows the railroad to grow. CN would rather have $20 billion in revenue and a 60% operating ratio than $15 billion in revenue and an operating ratio of 59%. It's this outlook which will allow Ruest to pursue filling up the Eastern part of CN's network.

The other thing you can admire about CN: Ruest is maintaining the railway’s long-term view despite the pandemic’s economic carnage. CN is forging ahead this year with capacity expansions in Western Canada to support ongoing growth through Vancouver and Prince Rupert. It’s also continuing to invest in technology that will make the railway safer, more efficient, and easier to do business with.

Compare this to some of the other Class I railroads, which have dramatically scaled back their capital spending. Railroading is a long-term business and, to be successful, requires long-term thinking. You don’t hear enough of this from other railroads.

What you hear from Ruest is navigating through short-term challenges with an eye toward the long-term opportunities, which he spells out much more specifically than his counterparts at the other big Class I systems.

You can reach Bill Stephens at bybillstephens@gmail.com and follow him on twitter @bybillstephens

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