The Exchanges

Q There are classes of business where trucks have an advantage over rails?

A Yeah, and this is part of probably why, in, in large terms, why rail has diminished in importance and, and even the freight that's moved in America today, and that's because of reliability. So just-in-time inventories, manufacturing facilities, product lines where they need to make sure that they know, the transportation manager knows that the product's getting to the shelf or getting to the assembly line. Uh, trucks have played a big role in that because they've been much more nimble And obviously, back to your point about infrastructure, you know, we only run where our rails run, too. Trucks have the benefit of the nation's interstate systems, and highway systems, and road systems, so they're much more agile and flexible than a rail network is. So that agility and flexibility, coupled with historically, railways have not always been the most reliable when it comes to a schedule, providing a What I call a truck-like reliable service. I think that has led to the demise of, of the freight that's hauled by rail. And that's exactly, you know, kind of the narrative that we've tried to change to try to create the benefits of scale that a railroad brings with the reliability of truck, that truck brings. It's, it's kind of a hybrid model. That's, that's the way we operate our railway to, to try to make ourselves more attractive to our customers.

AI assessment note: “just-in-time inventories, manufacturing facilities, product lines where they need to make sure”

Q How do you think about volume variance? Like I'm thinking, you know, an auto company that knows how many cars are going to sell every month that works for PSR really well, but something like grain where the variance might be, you know, 20, 30% on any given year and you're expected to carry all of that capacity. How does that work?

A Whenever you get two key points. Number one, any customer that can Can give us accurate forecasting, um, as much as they can. The more information we have, the better we can plan the way, where our models work. Uh, but some things like grain, and that's a great example, and especially relevant in Canada, uh, there are ebbs and flows. There are peaks and valleys. You know, there's, there's droughts, and there's peak harvest. Um, so what we have to do is size our network. You know, we look at Five-year averages, three-year averages, um, you know, the, the big swings, they're, they're quantum swings sometimes, but historically and generally they're not. They're within a, a range. Uh, so again, back to my principle, we can never build a railroad for Easter Sunday. I could never build a railroad that says I can handle a 40% peak in one year because the next 10 years I've gone out of business. Uh, so what we have to do is keep Some surge capacity, and we do. Uh, by nature, our railroad, because we operate in Canada, uh, winter requires surge capacity as well. You just can't run trains as long and as large as you, in the winter time as you can in the summertime because of mechanical limitations. Air going through a train, train line, you just physically can't do it. Uh, so by nature, We have some laden capacity or surplus that we design. Back to your point about that trade-off between…

AI assessment note: “we look at Five-year averages, three-year averages... we can never build a railroad for Easter Sunday.”

Q Why don't trains move faster? Not only freight trains, but like, why in Canada and the US don't we have high-speed rail, and why aren't the freight trains moving faster? Why are they limited in terms of the speed? Again, we're on a closed network. I'm just asking from an outsider looking in.

A Let's, you're mixing apples with the R just so that it's, it's important to start from a basic understanding. When we talk about passenger rail, they can move faster. And obviously there are numerous examples of locations where they do, but if we look at the Canadian example and the preponderance of the U.S. example, their freight, those faster trains are running on freight rails. It's not often that you have a dedicated passenger network. So when you intermix the two, the complexities and the needs of the traffic, track infrastructure for the two creates a disconnect. So a freight train is heavy. You're limited by tons in weight. So we go back to that scale question. You want to run long, big, heavy trains that are safe and efficient. Well, they're not going to move as fast As a passenger train, which can accelerate quickly, can decelerate quickly, just all of those scientific facts of passenger trains conflict with passenger, uh, freight trains, so if you try to create an infrastructure that allows both, you get into safety concerns, and I've experienced this, I, at Canadian National, actually, in my history, I remember several developments that I went to, And it was created because of a disconnect between the two. You have to super elevate curves. So for a passenger train to go fast around a curve, which the curves are out in, in the geography, uh, you elevate the outer rail…

AI assessment note: “if we look at the Canadian example... those faster trains are running on freight rails.”

Q And it sounds like that actually makes the rails less capital intensive as well. Fewer sidings, fewer maintenance, the yard switching. Does that change at all?

A Uh, no, you're exactly correct. At the end of the day, you're able to do more with the less. Uh, you'd be able to, you're able to run the railway more efficiently, and listen, this is a capital-intensive business. You know, I think about, um, I'll give you a great example. At CP, when we implemented Precision Scheduled Railroad back in 2012, 2013, uh, we were running with 1500 locomotives in service a day. Uh, today we're moving more freight With about two-thirds of that, so a thousand to 1100. Well, if you think about in simple terms, 500 additional locomotives, well, just in capital expense alone, they cost two to three million dollars apiece, and then you've got to have two or three mechanics per locomotive to maintain them, you've got to have repair parts, and then if you apply that, that thinking, not just to locomotives, but to rail cars, Uh, to track infrastructure, to switches and track the facilities. I mean, you get into this virtuous cycle of inefficiency if you don't really right size and optimize your assets. So it's, it's, um, through that process, again, it's just the right way to run any business. I think you could apply it to any manufacturing business. You could apply it to the airlines. You can apply it to the trucking lines. You can apply it to the assembly plant. Again, it's all, all goes back to Process refinement and executing what good looks like through…

AI assessment note: “no, you're exactly correct. At the end of the day, you're able to”

Q Are there any examples that come to mind that you can share?

A Um, yeah, contract examples. You know, we just recently went through a contract negotiation with a customer that, uh, because their current service provider is not providing them an ability to grow in their markets and satisfy their existing customers' needs, they came to us with a big opportunity, and they would have loved for us to take all their business. That said, I know my network can't handle all their business and still satisfy all the commitments that we've made. To all of our other customers, so we sat down with the customer and said, listen, number one, and I was involved in these discussions, I can't service all your business. I'm just going to set you up to fail and set myself up to fail. However, if there's business lanes that I can help you and you can help me and we have capacity and existing train starts, then I'm more than happy to entertain those lanes. So we literally went through With a fine tooth comb, every OD pair, so every origin, destination. So if it's coming into Vancouver, and it needs to go to Chicago, if it's coming into Vancouver, it needs to go to Montreal. We pick and selectively worked with the customer to customize the lanes that we served, and that's the business that we bid on, and that's the business that we won. So I've not jeopardized my ability to meet any existing commitment, and I've created a superior product that allows this custome…

AI assessment note: “we just recently went through a contract negotiation with a customer”

Q sports or business, is that they set a bar that is higher than other people think is possible. And then they challenge people to reach that. And I'm wondering, are there any stories that stick out in your mind of when Hunter did that with you? Uh, cause you mentioned he was the most challenging person you worked for. There's probably moments where you wanted to quit or give up.

A Yeah, I've got, I've got so many of them. I'll, I'll tell you though, he was a master at doing that. He would raise the bar so high, uh, that even if you didn't make it all the way, you were accomplishing a whole lot more than anybody else was. Um, because he caused you, he created a world where you had to stretch. You had to really understand your business in every detail and drill issues to the root cause and define what good looks like in a way that, um, you don't know what you don't know and you don't think it's possible. And I'll, I'll tell you this one situation. Back when I first really was learning the way he thought, in my mind, I, I worked in the other railroad for four years before I joined the Illinois Central, where's, where I first met Hunter, and I, my first job, I worked my way up from a frontline operating position. Um, I pride myself in being an operating officer, and I thought I knew a little bit about running trains from my previous four years of experience. I went to Memphis, Tennessee. I was in a tower, and in our terms, the tower train masters were like an air traffic control. You've got a yard master that's directing train movements, and you're in the background overseeing the priorities and the coordination, connecting all the dots, building the train plans. So I, I remember we had a train design, which was kind of new to me, um, but it prescribed all t…

AI assessment note: “I'll tell you this one situation. Back when I first really was learning”

Q Why don't we have driverless trains? It seems like that would be the place to innovate because we have a closed track basically that's fully controlled by a company.

A Well, actually, in some locations in the world, they actually do, uh, but again, it's at a location where probably not as exposed to the societal issues, so you might have a piece of track that runs across a terrain that's not complex, uh, flat terrain, point A to point B without road crossings in between, you know, there, there are situations like this, perhaps in Australia, there are other countries in the world where In very limited fashion, it exists, but the reason it doesn't occur here locally, specifically, again, it's that change word. It's, uh, it represents huge technology challenges. It also represents huge societal challenges, and when I say societal, in our definition, it's, it's the workforce that we work with. You know, we're heavily unionized workforce in the rail industry. Heavily regulated, so the regulations would have to change, and the will for our employee base that are unionized would have to change. So again, that's eventually in time, perhaps, the technology's not there, and the will of the change is not there at this time.

AI assessment note: “the reason it doesn't occur here locally, specifically... represents huge technology challenges”

Q When you say PSR, what do you mean?

A Precision Scheduled Railroading, it's, um, it's an acronym that has been coined by the industry to truly define an operating model that Hunter Harrison, who is a legendary railroader, that I had the honor and privilege to, to mentor me and work with and for for over two decades, uh, pioneered in the industry. And essentially, it's, it's, it's a people in process business, uh, and it's really is just defining a process for every Process within the movement of freight from point A to point B, and that's the train movement process, that's the mechanical process, that's the locomotive process. It's, it's defining the process and, and then applying the right number of people in measures to create a service that your customers want to buy. So it, it really is. I liken it to lean manufacturing. It's all about define the process. What does good look like? What should The process look like and then managing to that outcome. And then you end up in our industry, which is heavily capital intensive. You have a great service product that allows people's freight or customers freight to move from point A to point B efficiently. You move a lot of it back to the skilled question and you, you do it in a scheduled manner back to the truck like reliability question. That's truly what PSR is.

AI assessment note: “Precision Scheduled Railroading, it's, um, it's an acronym that has been coined”

Q You mentioned earlier having five-year plans, three-year plans, one-year plans, and monthly plans. What's your system of execution internally at CP?

A Uh, well, we have a, a very unique, um, position that was created actually when I took over as the CEO, uh, because I'm so sensitive about matching capacity and not oversubscribing our network. So we have an individual, the team, uh, that sets between literally myself and marketing. Uh, so when it comes to pursuing business, securing business, there's a very methodical approach to it so that we're matching, uh, Track capacity, yard capacity, people capacity, locomotive capacity, and car capacity. So this one particular group, I call them, uh, they, they maintain the tension in an organization. They're not about harmony. They're about doing the right thing. So they have to assess the marketing opportunities, and in turn, they sign off on, we have the capacity, whether it's track people, Physical assets, terminal assets, uh, before we sell the product. So it's, it's, it's truly a triangle where you have the marketing, you have this capacity or asset utilization piece in the middle, and then you have operations, and we all together, collectively make decisions. And to me, that's been a recipe for success. Elimiting the silos that most organizations have, or you have Marketing, going out and selling a product, and then operations, they're told to deliver it. Well, marketing doesn't even understand if operations can or can't really deliver it. So they're over committing the company.…

AI assessment note: “it's truly a triangle where you have the marketing, you have this capacity”

Q Why don't the rails own the terminals? It seems like a logical vertical integration for you guys.

A It is, um, you know, sometimes it's a government-owned entity, sometimes it's a private entity, and there's no willingness to, to sell it. I can give you a couple of cases of one in Canadian soil, there's a couple of terminals that if I had control, to your point about vertical integration of the port, I could control throughput. I would argue that we could probably be a bit more efficient, because there's so many Complexities in those handoffs, even with the port operator, the terminal operator doing their very best, and the railroad doing their very best, when there's not one voice of command and control and coordination, uh, complexities introduce inefficiencies. Um, so I would suggest it's either the government owes it, they don't want to sell it, because it's an asset to be used by all modes of transportation, not just Canadian Pacific, but Canadian National or the other railroads On the U.S. standpoint, indoor, it's individually or privately owned, and they understand the importance of that piece of the supply chain, and it's a revenue stream for them, and they just, it's not for sale.

AI assessment note: “sometimes it's a private entity, and there's no willingness to, to sell it.”

Q Speaking of the long game, can you take us behind the scenes of the Kansas City Southern decision, um, from sort of the idea being floated to signing the deal? What does it look like? How did you make a twenty seven billion dollar decision?

A Well, it goes back to, um, sort of my history. You know, I've, I've said this, you know, a man's heart pursues his path, but a Lord determines his steps. And I went through. 20 years before CP, uh, that gave me an experience set where I kind of understood ways and losses and what reach means, um, in service offerings. And I worked at Canadian National where we had a lot of reach. And we benefited from that, and we expanded and grew the network to create more reach, you know, through the transactions and the integrations that we successfully achieved in my experience there. And then I came to Canadian Pacific, and I had a very origin-rich network, ah, but it was destination poor. It was destination poor. I was disadvantaged in Canada because I didn't reach as far east as my competitor did. And I was disadvantaged in the U.S., and when I say I'm disadvantaged, that means my customers are disadvantaged too, because I didn't reach markets south of Kansas City or south of Chicago. So I knew in time, as we grew the company, you know, we pivoted to growth in 2017 when I took over as the CEO. You know, the first four or five years of my experience at CP was get the engine fixed. You know, Implement PSR, fine-tune the assets, make sure we've got the right culture, make sure our terminals, processes, all those things that allow us to produce a great service product at a low cost. Uh, we'…

AI assessment note: “I had a very origin-rich network, ah, but it was destination poor.”

Q And how do you think about driverless trucks?

A Eventually it'd be inevitable. Uh, I think that there's obviously a big social hurdle. I know myself, I try to put myself, be a human all I can. Obviously when I'm out on the streets, if I were to see a, an AT-weller going by me, they make me nervous as they are. Passing me on an interstate, um, or perhaps when they're not paying attention, but they make a mistake, you know, they can pretty much demolish a vehicle. I can't imagine Looking up and seeing no one there. It's, uh, it's something I'm not personally comfortable with yet, and I would suggest that, uh, society's not comfortable with yet. But eventually, in time, change occurs. We all have to get comfortable with the uncomfortable. I think it's inevitable.

AI assessment note: “Eventually it'd be inevitable. Uh, I think that there's obviously a big social hurdle.”