Analysis: CP Rail back-to-work legislation may hurt efficiency push

Arbitrated settlement will lead to "long-term pain": Labour expert
By Susan Taylor
||Last Updated: 05/28/2012

(Reuters) — Back-to-work legislation alone probably won't resolve the issues of high labour costs and restrictive work rules for Canadian Pacific Railway Ltd. whose operating performance is still the worst in its industry.

The Canadian government has vowed to end a strike by 4,800 locomotive engineers and conductors by the week of May 28 if necessary, and CP Rail shares have risen more than three per cent since the work stoppage began early on May 23.

UPDATE: Canada expected to legislate striking rail employees back to work

Even so, experts say, CP can best achieve its goal of lowering labour costs through collective bargaining, and a government-imposed end to the strike might complicate matters for Canada's second-largest railway.

"When you take the process away from the parties, particularly the employees and the unions, they will react," said George Smith, who teaches labour relations at Queen's University in Kingston, Ont.

In CP Rail's case, "employees, if they decide to disrupt the operation, they can do that with great ease and with very little recrimination."

CP Rail is under heavy pressure to get results. A boardroom coup at the storied company and impending management changes have highlighted the urgency of the task.

Last week, CP Rail's chairman and its chief executive resigned when it became clear that most shareholders supported a slate of dissident directors nominated by Pershing Square Capital Management, CP's largest shareholder. Led by the brash William Ackman, the hedge fund is pushing for an aggressive turnaround plan.

"Irrespective of the strike, I think that shareholders have voted for change," said Jeff Kauffman, an analyst at Sterne, Agee and Leach.

"The new management has a mandate to look at everything from labour productivity to train length to equipment to sidings to rates charged customers to the type of business they do."

In its latest quarterly report, CP Rail showed improvement in most key measures, from profit to operating metrics. But critics led by Ackman say the now-ousted management did too little, too late.


To be sure, the nationwide strike at CP probably won't last long enough to have an immediate impact on the company's financial performance, analysts said.

Contract talks, which first began in October 2011, have continued in Ottawa this week with a conciliator.

A big stumbling block has been CP's aim to cut pension funding by 40 per cent, according to the Teamsters Canada Rail Conference (TCRC), which represents the strikers. The issue of work rules is also contentious.

"We are far apart on pension issues," said union spokesman Stephane Lacroix. "CP wants to devalue the existing pension and reduce the future pension."

CP maintains pension costs helped push its expense margins higher than those of its rivals. The railway says it has contributed $1.9 billion to trim its pension solvency deficit over the past three years, and that the union has agreed to a less costly pension at rival Canadian National Railway.

But there is no "magic bullet" to fix CP's productivity problems, said Canaccord Genuity analyst David Tyerman. The solution may require changes to a range of areas — from shipment volumes to operations and to management.

"If it is true that CP's competitiveness is affected by excessive cost because of the pension, or the work rules that they have, and those aren't resolved, then the company will continue to be at a disadvantage," he said. "There's no question about that."

CP Rail has some options, analysts say. One possibility is trading off productivity gains for pension concessions.

"Really, this whole thing is about trading off wealth, or money, for productivity. That leads to being able to do more with less people," Kauffman said.

That said, if the strike lasts less than a week or two, as is expected, the damage to CP's next quarterly financial results will likely be a "rounding error," he added.


All sides agree it's best if the company and union forge an agreement on their own.

Government-imposed resolutions usually don't work in labour disputes, said Smith.

The Conservative government has used back-to-work bills and other measures to end labour disruptions at Air Canada, the country's largest airline, and Canada Post, a Crown corporation that delivers the mail. Poor morale and wildcat strikes have resulted, Smith said.

A back-to-work bill more than triples the likelihood of a similar order or arbitration in the next round of bargaining, said a report by Canadian think tank C.D. Howe Institute. It also reduces by two-thirds the chances of a freely negotiated settlement, co-authors Benjamin Dachis and Robert Hebdon wrote.

Both the union and management should make every attempt to reach an agreement on their own, said Smith, or face "long-term pain" from an arbitrated settlement that will require major concessions from both sides.

"They need a relationship with those employees and that union in order to turn around the company," he said.

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