OTTAWA -- Canadian National Railway Co. reported marginally improved results yesterday against the backdrop of an increasingly difficult environment for the rail sector, the National Post reports.

The Montreal-based railway said net income for the first quarter was up 3% and Paul Tellier, the president and chief executive, pronounced himself satisfied with the results.

"At this point in time we're on target and I am very pleased about this," he told a media conference call. "The focus remains on cost containment and market share gain."

The strong results came despite a harsh winter, sluggish economy and 31% rise in fuel costs from a year ago, he noted.

CN's operating ratio, an all important measure of efficiency, edged up 0.3 of a point to 72.5%.

The results, released after the close of markets, were in line with analyst expectations. Still, CN's shares (CNR/TSE) lost $2.25 to close at $57.25 in regular trading. They were dragged down along with those of others in the rail industry during yesterday's session due to a downgrade of the entire sector by Scott Flower, an analyst at Salomon Smith Barney.

Mr. Flower based his downgrade on the fact the rail sector has returned 33% on average since Jan. 1 and that historically railways perform best in the first three to four months after an initial rate cut by the U.S. Federal Reserve. The first cut was Jan. 3.

For the quarter ended March 31, CN's net income was $202-million ($1.03 per share fully diluted), excluding a $73-million after-tax gain on the sale of its 50% interest in Detroit River Tunnel. That compares with $196-million (96¢), excluding a one-time item a year earlier. Revenue was up 2% to $1.39-billion.

Mr. Tellier had little to say about Mr. Flower's move, apart from pointing out that CN still remains the influential analyst's favourite rail stock.

A further indication of possible troubles for the CN and rival Canadian Pacific Railway Co., which reports results today, is that traffic growth remains minimal to non-existent. Cumulative originations for the first 15 weeks of 2001 on the Canadian railroads totalled 948,969 carloads, down 3.2% from last year, and 517,412 trailers and containers, up 1.8%from last year.

In line with these numbers CN saw intermodal revenue increase 13%, while petroleum and chemicals, metals and minerals, and grain and fertilizers were up slightly. Automotive revenue fell 14% and forest products 2%.

Mr. Tellier attributed the stronger intermodal results to longer hauls, rate increases and a fuel surcharge. Unfortunately for CN, intermodal is one of the least lucrative segments of its business because competition with trucks keeps rates low.

Overall, however, he clung to predictions he made earlier this year that CN should see 3% revenue growth in 2001 and one percentage point drop in its operating ratio. "What we have said is we should be able to grow our revenue line in line or slightly better than the growth in the economy, and when I say this I am talking about the economy on both sides of the border. So we are still comfortable with this proposition."