Canadian National (CNI) Q3 2025: CapEx Cut to $2.8B Unlocks Free Cash Flow Acceleration
Canadian National’s decisive $600 million CapEx reduction signals a shift from expansion to disciplined capital allocation, unlocking free cash flow even as volumes stagnate. Management is leaning into aggressive cost takeout and commercial urgency to offset macro headwinds, while network productivity and asset utilization improve. Investors should watch for how this leaner, more flexible model positions CNI for upside when volume growth eventually returns.
Summary
- CapEx Reset Drives Cash Prioritization: Lower 2026 capital spend reflects a matured network and focus on shareholder returns.
- Commercial Urgency Intensifies: New sales strategies and market share wins partially offset structural volume headwinds.
- Lean Model Sets Up Optionality: CNI’s operational agility and cost discipline create leverage for future growth inflection.
Performance Analysis
CNI delivered modest top-line growth as revenue increased 1% year-over-year, supported by intermodal strength and select merchandise categories. Operating ratio improved by 170 basis points to 61.4%, highlighting the impact of cost initiatives and productivity gains. Free cash flow rose 14% year-to-date, a direct result of disciplined capital allocation and ongoing cost containment.
Volume growth was muted, with revenue ton-miles (RTMs) up just 1% and carloads up 5%. Intermodal led the way, particularly through the Prince Rupert corridor, while forest products and certain merchandise segments faced persistent macro and tariff headwinds. Management’s response included accelerated workforce reduction, contractor spend cuts, and tighter asset management, resulting in a leaner cost structure that is expected to persist into 2026.
- Network Productivity Gains: Car velocity reached 211 miles per day, and locomotive availability improved to 93%.
- Cost Takeout Momentum: $120 million reduction in contractor spend and a 5% headcount cut drove operating leverage.
- Commercial Wins: $35 million in new business in Q3, with $100 million targeted for Q4, offsetting softness elsewhere.
While headline growth remains subdued, the quarter demonstrates a pivot to margin protection, cash flow optimization, and readiness for cyclical recovery.
Executive Commentary
"We’ve taken significant steps to move CN into a position that is tighter and front-footed to deliver for our shareholders. We’ve taken decisive action and will continue to do so. Our commitment to delivering value for customers and shareholders is steadfast through all economic cycles."
Tracy Robinson, President and Chief Executive Officer
"We are pleased with our Q3 results and are well-positioned to deliver on our full-year guidance. The network continues to operate very well with strong operating and service metrics. We continue to expect to have volume growth in the port quarter, as we lapped port labor disruptions from last year. We’ve accelerated cost initiatives to ensure the long-term competitiveness of this franchise."
Jislent Wu, Chief Financial Officer
Strategic Positioning
1. Capital Allocation Shift
The $2.8 billion CapEx budget for 2026 marks a sharp reduction, driven by the completion of major capacity projects and a now “properly sized” locomotive and railcar fleet. Management emphasized that this spend is sustainable at mid-teens percentage of revenue, aligning with U.S. peers and positioning CNI for higher free cash flow conversion. “No regret” capital—spend that removes bottlenecks and modernizes assets—has largely been completed, with flexibility to ramp up if demand returns.
2. Productivity and Cost Discipline
The company is doubling down on productivity, with workforce reductions, contractor spend cuts, and automation across the organization. These efforts are intended to structurally lower the cost base, not just deliver one-off savings. Management labor costs will be reduced by $75 million, with nearly 90% impacting OpEx. Ongoing initiatives in predictive maintenance, shop productivity, and asset utilization are expected to sustain margin gains even in a flat volume environment.
3. Commercial Agility and Market Share
New Chief Commercial Officer Janet Drysdale has implemented a boots-on-the-ground sales program, chasing both large and small opportunities. This commercial urgency led to $35 million in incremental Q3 business and is targeting $100 million in Q4. Intermodal, chemicals, and plastics saw market share wins, while the team actively mitigates softness in forest products and metals. Pricing discipline remains a pillar, with rates set to outpace underlying rail cost inflation.
4. Network Readiness and Optionality
With western corridor and port capacity now in place, CNI is positioned to flex up quickly when volumes recover. Key network projects (Edson sub, Vancouver corridor, Prince Rupert) are either complete or on track, providing headroom for growth without incremental investment. The company maintains “dry powder” on the balance sheet for M&A or opportunistic investment if industry dynamics shift.
5. Balanced M&A Stance
While management continues to argue that further rail consolidation is unnecessary and potentially detrimental to competition, CNI stands ready to defend its franchise and pursue value-accretive opportunities if industry mergers proceed. The company’s diversified network and port access provide strategic leverage in any industry realignment.
Key Considerations
CNI’s Q3 results reflect a strategic pivot from growth investment to operational discipline and cash generation. The company’s actions are shaped by a prolonged weak macro environment, tariff uncertainty, and industry consolidation risk. Investors should closely monitor:
Key Considerations:
- CapEx Downshift Impact: Lower capital intensity will reduce depreciation headwinds and support ROIC improvement as earnings recover.
- Volume Mix and Headwinds: Tariffs on forest products and weak North American industrial production remain structural drags on merchandise volumes.
- Commercial Execution: The new sales approach is delivering incremental wins but must scale further to offset macro softness.
- Operating Leverage: The leaner cost base and network flexibility create upside if and when demand returns, but also expose CNI to downside if volumes deteriorate further.
Risks
Persistent macroeconomic weakness, especially in North American industrial sectors and housing, continues to cap volume growth. Tariff volatility on forest products and metals introduces unpredictable downside, while regulatory and industry consolidation risks could reshape the competitive landscape. Execution risk remains if cost discipline cannot fully offset revenue headwinds or if commercial wins stall.
Forward Outlook
For Q4 2025, CNI expects:
- Volume growth as port labor disruptions from last year roll off
- Continued margin resilience from cost actions and productivity gains
For full-year 2025, management reaffirmed guidance:
- Mid- to high-single-digit EPS growth
- CapEx envelope of $3.35 billion
Management highlighted several factors that will shape 2026:
- Capital spend reset to $2.8 billion, supporting free cash flow acceleration
- Limited volume growth expected, with commercial intensity and cost discipline as key levers
Takeaways
CNI’s Q3 marks a structural shift toward capital discipline and operational agility, positioning the company for resilience in a stagnant volume environment and future leverage to recovery.
- Network and Asset Readiness: Major capacity projects are complete, supporting a leaner CapEx profile and optionality for growth.
- Commercial and Cost Execution: Aggressive sales tactics and cost takeout are partially offsetting macro and tariff headwinds, sustaining margin and cash flow.
- Future Watchpoint: Investors should monitor the sustainability of commercial wins and cost discipline as well as CNI’s response to industry M&A and regulatory shifts.
Conclusion
CNI’s Q3 2025 results validate a disciplined, lean operating model that prioritizes cash flow and margin in a challenging environment. While volume growth remains elusive, the company’s strategic flexibility and capital discipline position it to capture outsized upside when demand eventually returns.
Industry Read-Through
CNI’s CapEx pullback and focus on operational discipline reflect a broader North American rail trend toward cash optimization over network expansion. The shift underscores that the era of large-scale rail capacity investment is pausing in favor of asset utilization, cost efficiency, and shareholder returns. Tariff volatility and macro stagnation are likely to pressure peers as well, with commercial agility and cost takeout emerging as industry-wide imperatives. Investors in the rail sector should expect muted volume growth but improving free cash flow profiles, with M&A and regulatory risk as persistent overhangs.