Canadian National Railway Eyes Mexico Growth With Union Pacific Deal

Key Points

• CN is targeting Mexico growth through its Union Pacific agreement, which would connect the railroad via Memphis to Ferromex. The opportunity includes rerouting existing rail freight, capturing Canada-Mexico traffic and converting some of the estimated C$3.5 billion truck market to rail.
• The company also sees long-term expansion in energy, agriculture and port-linked projects, particularly Western Canadian natural gas liquids, crude, potash and grain. CN expects natural gas liquids exports through Prince Rupert to accelerate from roughly 8% annualized growth over the past three years.
• CN says productivity and network investments are supporting growth without a major rise in capital spending, with normalized capital expenditures expected at 15%–17% of revenue. Improvements in car velocity, dwell time, workforce productivity and fuel efficiency are expected to support profitability and shareholder returns.

Canadian National Railway NYSE: CNI CEO Tracy Robinson said the railroad is pursuing growth opportunities in Mexico, energy, agriculture and selected domestic markets while relying on prior infrastructure investments to support volume gains without a major increase in capital spending.

Speaking at the Laguna Conference, Robinson said CN’s agreement with Union Pacific would extend its network access to Mexico through Memphis and a connection with Ferromex, or FXE. She described the arrangement as a “once-in-a-generation opportunity,” citing approximately C$45 billion in Canada-Mexico trade across commodities.

“We’ve got this tremendous origination network, so we’re matching that in a really lean, fast route through Memphis down to FXE,” Robinson said. She noted that FXE is Mexico’s largest railroad and said it has been growing faster than other North American railroads this year.

Mexico Opportunity Includes Existing Rail Freight and Truck Conversion

Robinson said CN sees three stages of opportunity from the Mexico arrangement. First, traffic that had moved through Chicago to reach Mexico can be rerouted through Memphis, extending CN’s haul and providing an immediate revenue benefit. Second, CN plans to pursue rail traffic already moving between Canada and Mexico, particularly into Eastern Canada, where she said the route could offer a three- to four-day transit-time advantage.

Third, the company sees an opportunity to convert freight from trucking to rail. Robinson estimated the Canada-Mexico truck market at C$3.5 billion and said trucking economics, including fuel and labor costs, could make rail a more attractive alternative.

She said 80% of the C$45 billion in trade between Canada and Mexico is between Mexico and Eastern Canada. CN expects to work with FXE on near-, medium- and long-term commercial plans, although Robinson said the company would provide more detail after those plans are established.

CN also has an agreement involving potential access to Kansas City if a pending merger receives approval. Robinson said the arrangement would include a haulage and trackage route into Kansas City, first rights to purchase the line under certain circumstances, and access to Neff Yard. The company expects the route would immediately extend its haul from Chicago to Kansas City, though it remains contingent on the merger proceeding.

Energy, Agriculture and Port-Linked Development

Robinson said CN remains bullish on energy and agricultural freight, emphasizing that several opportunities are tied to long-term infrastructure investment and global demand rather than solely to the North American economic cycle.

She pointed to development in the Western Canadian energy complex, including natural gas liquids, crude and related products. Robinson cited investments and projects involving AltaGas facilities in Prince Rupert, Keyera’s ACE Rail Terminal, the Strathcona crude facility, Dow’s Path2Zero project in Edmonton, the CANXPORT facility in Prince Rupert and BHP’s Jansen potash mine.

According to Robinson, natural gas liquids exports through Prince Rupert have increased at an annualized rate of about 8% over the past three years, and CN expects that growth rate to double over the next three years.

CN reported 4.5% growth in revenue ton-miles so far this year, though Robinson said growth would moderate in the fourth quarter because of a more difficult comparison period. She also said the railroad gained grain market share during a record crop year and has capacity in place to handle future demand.

In automotive, metals and domestic intermodal, Robinson said CN is pursuing both larger initiatives and smaller customer-specific opportunities. She said automotive volume growth has included import traffic through Halifax and Vancouver, while steel movements have shifted toward domestic Canadian and U.S. routes rather than cross-border traffic.

Productivity, Capital Spending and Returns

Robinson said CN’s network remains fluid, with car velocity up 6%, dwell down 5% and locomotive utilization up 7% in the Western Corridor despite higher grain and energy volumes. Workforce productivity has improved 5% this year, she said, while train-crew productivity has improved 13%.

The company has invested in debottlenecking, added 25% capacity in Western Canada and modernized its locomotive fleet, Robinson said. As a result, CN expects normalized capital spending of 15% to 17% of revenue going forward, including continued selective capacity additions.

Robinson said cost-reduction efforts under the company’s Fast Track initiative are continuing beyond yards and terminals into facilities, engineering equipment, procurement and support functions. She characterized the work as an extension of scheduled railroading and said the benefits from this year’s actions would carry into next year, alongside further initiatives.

CN is also using data from autonomous inspections and locomotive technology to improve predictive maintenance and network optimization, Robinson said. The company is exploring hybrid battery technology and has improved fuel efficiency by about 4% over the last three or four years, reaching record levels this year.

On profitability, Robinson said operating ratio is an output of growth, productivity and asset utilization rather than the company’s sole focus. Still, she said CN expects its operating ratio to “start with a five,” while emphasizing earnings growth, free cash flow and shareholder value.

Robinson added that fuel-price changes could create a modest earnings tailwind of roughly C$0.10 across the third and fourth quarters if prices remain at current levels. She estimated the operating-ratio benefit could be roughly 50 basis points in the third quarter and potentially 150 to 200 basis points in the fourth quarter, depending on fuel prices.

About Canadian National Railway (NYSE:CNI)

Canadian National Railway Company NYSE: CNI is a transportation and logistics company that operates a major freight railway network across Canada and the United States. Its rail system connects the Atlantic, Pacific and Gulf coasts with major industrial centers, ports and distribution markets, supporting trade across North America.

CN transports a diverse range of products, including grain and fertilizers, coal and minerals, forest products, petroleum and chemicals, metals, automotive goods, and consumer and manufactured products.

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