Wednesday, April 11, 2007

CN Rail Earnings DeRail

CN (NYSE:CNI) continues to experience union problems. Yesterday the union membership rejected the contract offer and voted to strike. Management says they are disappointed. The union was out on a two week strike in Feb and basically ruined Q1 results and left behind operating difficulties that will persist into Q2. While there is the threat of back to work legislation Canada's national parliament is on Easter recess for another week.

CN has been known for huge productivity and efficiency increases which resulted in attractive stock performance. Management failed to engage their unionized workforce and are now reaping the failure. Essentially this means you can write off this fiscal year. The strike scenario seems to be this. Immediate strike action in Kamloops and other critical points in BC. Rotating strike action and other work stoppages in the east. The membership understands rail schedules and they will delay trains at the worst possible times.

The membership even if legislated back to work is madder than hell. Legislation will only sweep the problems under the carpet and create a passive aggressive labor situation which will sap profits and productivity. The contract was rejected by an overwhelming majority. The workers have even begun a campaign to replace their current union affliation and become Teamsters. (Over 65% of members have signed up allowing for a new union to be certified) Management may have won at the negotiating table but they appear to be losing on the track. This will create lower profits for shareholders.

If this problem cannot be cleared up quickly and profits fall then senior officers need to be replaced quickly. Given current public comments by management it appears they have miscalculated and misunderstood. The so called gains at the negotiating table have created a back draft. Investors are getting burnt needlessly.