UPDATE 2-CN Rail profit rises, upbeat despite economy

(Updates with comments on outlook, details)

By Allan Dowd

VANCOUVER, British Columbia, Oct 21 (Reuters) - Higher rates, including fuel surcharges, and a tax gain helped Canadian National Railway Co (CNR.TO) post a 14 percent rise in quarterly profit on Tuesday, despite the softening economy.

The railway, with operations in both Canada and the United States, said pressures such as the strong Canadian dollar and high fuel costs that ate into profit in the first half of the year have started to ease.

"I feel very very good about the fourth quarter, and I feel very very good about next year in spite of some of the issues that we will have to deal with," chief executive Hunter Harrison told analysts.

The company declined to make a specific forecast for its financial performance in 2009 due to economic uncertainty, although it still expects it will be able increase base pricing in the 4 percent to 5 percent range, as in 2008.

The railroad currently has a hiring freeze and is working on contingency plans such reduced capital spending in case the economic downturn becomes more serious, Harrison said, adding later he did not think things would get that bad.

CN said it earned C$552 million, or C$1.16 a diluted share, in the third quarter ended Sept. 30. That compared with a profit of C$485 million, or 96 Canadian cents a share, in the same quarter of 2007.

The latest results were aided by a deferred income tax recovery of C$41 million, or about 9 Canadian cents a share.

Analysts had, on average, expected CN to report earnings of about C$1 a share before items.

Operating income climbed 10 percent to C$844 million.

CN's operating ratio, which measures operating expenses as a percentage of revenues, eroded slightly to 62.6 percent from 62 percent. The railway said the figure would have been worse had improved operating efficiencies not helped offset fuel costs that were 55 percent higher than a year ago.

Revenue climbed to C$2.5 billion from C$2.02 billion, although the railroad said about two-thirds of that increase was because of fuel surcharges.

The industry's surcharges tend to lag actual increases in the price of filling fuel tanks in locomotives, so a continued drop in costs in the fourth quarter could allow CN to recoup some of the money it has already paid out.

CN remains hopeful it will be able to close its purchase of the Elgin, Joliet and Eastern Railroad by year end. The deal has run into extensive opposition from some wealthy suburbs near Chicago.

Harrison brushed aside analyst questions on whether the current market conditions would allow it to pursue other larger mergers in the United States, saying it was too early to speculate.