Vancouver, CA terminal. Source: Canadian National Railways.

Canadian National Railway (NYSE:CNI) is feeling the impact of weak demand for Canadian commodities like oil, coal, and grain, but the company's incredible operational efficiency led to another solid quarter. CN reported third-quarter earnings on October 27, with improvements in a number of key measures. Here's a closer look at the key details. (Note: All dollars reported in this article are Canadian dollars.)

The numbers 

  Q3 2015 Q3 2014 Change
Revenue $3.22BB $3.12BB 3%
Net income $1BB $853MM 18%
EPS $1.26 $1.04 21%

Note: Data in Canadian dollars. 

CN may have only increased revenue 3% in the quarter, but that was particularly impressive when you consider the significant declines in volume the railway has seen in a few key categories. Gross ton miles, which measures the total number of miles the railway moved one ton of freight, fell 5% in the quarter. The company managed to recapture much of the revenue, however, through a combination of higher prices, and the benefits of a strong U.S. dollar. 

Since the revenue came on less freight volume, CN was able to generate more income from less business. 

What happened in the quarter 
A number of Canada's key commodity exports, such as oil and coal, are experiencing weak demand, and reducing freight volume for CN, while the railroad is seeing growth in demand in other categories:

  • Sharp carload declines in several categories: Grain and fertilizer, -7%; petroleum and chemicals, -4%; metals and minerals, -25%.
  • Increased carloads of automotive (up 2%) and intermodal (up 4%) freight. 

CN reported solid improvements in several operational categories, as well:

  • Gross ton-miles per train mile increased 2%, meaning more freight moved per train load. 
  • Car miles per day increased 10%, driven up by higher average train velocity, 11% lower terminal dwell time, and a 9% increase in yard productivity to highlight a few. 

This led to a record 53.8% operating ratio, a whopping 500 basis points below last year's 58.8%. This ratio was driven down by a number of factors, including the benefit of lower fuel costs as a percentage of revenue in addition to the improved operating metrics above. 

For some broader industry context, Canadian National is one of the few railroads to see profits increase in the current weakening volume environment. CSX Corporation (NASDAQ:CSX) reported a 9% decline in revenues and a 2% drop in profits earlier in October. CSX reported a 3% decline in volume, but said that fuel prices and operational improvements led to costs falling 11%, far outstripping the 9% decline in revenue. 

CSX also had a record-level operating ratio in the quarter, at 68.3%. This highlights the benefits of falling fuel costs across the industry, but also just how much more cost-efficient CN is than its major railroad peers. 

What management said 
The first thing to mention is the health of CEO Claude Mongeau, who recently had his larynx removed due to a rare kind of soft-tissue tumor. From the earnings release:

Mr. Mongeau underwent a procedure to remove his larynx and a voice prosthesis was placed in his throat. He is currently receiving radiation treatment and is expected to return to work early in the new year following his complete recovery.

Operational excellence and efficiency remains at the core of CN's success. COO Jim Vena pointed out that the company's excellent performance came in the face of what is becoming a challenging environment:

It would be a much easier story if the economy was giving us more upside. But at the end of the day, I think we've shown that we can react properly as an operating team, and I'm very comfortable and very happy with the results that the team was able to deliver this quarter.

A big part of the company's performance is how management keeps costs inline. CFO Luc Jobin spoke about the company's 6% reduction in labor and benefit costs from last year. And while reducing payroll and headcount is painful -- after all, these are real people with families -- it's a necessary part of dealing with variable levels of freight, and a weakening economic environment. 

Looking ahead 
CN's board of directors also approved a share buyback program for up to 33 million shares, 4.1% of shares outstanding, during the next 12 months. The company just completed its prior program, buying back 24 million shares during the past year. 

CN continues to get it done, and with some of the best efficiency measures in the industry. And while there's certainly some weakness in commodities and energy-related demand, there is strength in areas like intermodal and automotive. 

Management is confident that the overall economies of Canada and the U.S. are strong, and that conditions are relatively favorable going forward. The company reaffirmed its 2015 guidance for double-digit earnings growth, and is holding firm on its planned capital expenditures program for the rest of the year. These investments are key to the company's long-term success.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.