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TORONTO - Hit by a 40 per cent plunge in second-quarter net income, Canadian Pacific Railway Ltd. vowed Tuesday to be leaner organization, appointing a new senior management position dedicated to driving out inefficiencies in the railway's operations.

The news couldn't come at a better time for Canada's second largest railway, with the rapid rise in fuel, a sluggish economy, and flooding in the U.S. Midwest squeezing earnings for the three months ended June 30 to $155 million, or $1 diluted earnings a share, down from $257 million, or $1.64 a share, for the same period last year.

With considerable uncertainty still ahead, CP trimmed its earnings outlook for a third time this year - its most severe cut yet - saying it now expects its earnings per share in the range of $4 to $4.20 this year, down from $4.32 last year and from its original estimate in January of between $4.70 and $4.85.

"It wasn't pretty," Fred Green, CP chief executive, said in an interview, discussing the railway's second quarter. "Our challenge is to say, 'What are we going to learn from it and what are we going to do about it?'"

First and foremost, CP has reassigned Brock Winter, its vice-president of operations, to a new role dedicated to trimming as much fat the railroad's operations as possible. His new title will be "senior vice-president of reporting to me," Green joked.

"We need to be a leaner organization, we need to be more nimble, and we need to expedite the time between concept and delivering value to our shareholders," Green said.

Winter will lead a review of the company's operations and report back this fall with a game plan.

Green said he expects to start seeing results from the new efficiency drive in the fourth quarter.

Winter has already been making his presence felt in the company's efforts to renegotiate its fuel surcharges with shippers. Currently about 40 per cent of the railway's contracts for those surcharges is based on oil prices rather than highway diesel prices, which implicitly include the cost of refinement.

During the recent run-up in the price of fuel, the cost of refinement has outpaced that of oil, causing a headache for CP as its struggles to recover those costs from its shippers.

The railway aims to have roughly half of its contracts based on highway diesel by year end, and up to 75 per cent by the end of 2009.

Winter is not only renegotiating those contracts that are set to expire, but also legacy contracts that have years left on them, Green said.

The goal is to reverse the current slide in the railway's operation ratio - an important gauge of the its profitability that measures operating costs as a percentage of revenue.