(Adds quotes from CEO, market reaction, analyst comments)
By Allison Lampert
MONTREAL, Oct 20 (Reuters) - Canadian Pacific Railway Ltd reported a better-than-expected quarterly profit amid higher freight rates and lower operating costs, boosting its share price by more than 3 percent on Tuesday.
The country's No. 2 railway said freight revenue per carload rose 5 percent in the third quarter ended Sept. 30 even as carloads fell 2.6 percent.
Chief Executive Hunter Harrison said on a conference call the railway had a new labor agreement with 450 U.S. engineers which was "a big, big breakthrough" that would lead to similar deals with other unions.
The new hourly-rate agreement has the potential to further improve the railway's operating ratio by enhancing productivity, Citigroup analyst Christian Wetherbee wrote in a note to clients.
The multi-year agreement marks an end to a mileage-based system, providing the railway with increased labor flexibility.
Harrison said the deal made the company more efficient by controlling costs at a time of weaker volumes.
Revenue grew 2.3 percent to C$1.71 billion ($1.32 billion).
Operating ratio, or operating costs as a percentage of revenue, improved to 59.9 percent from 62.8 percent.
Excluding items, earnings rose to C$2.69 per share from C$2.31 per share a year earlier.
Analysts, on average, had expected earnings of C$2.67 per share on revenue of C$1.69 billion, according to Thomson Reuters I/B/E/S.
The results showed higher revenue in U.S. and Canadian grain, coal, potash, forest products, chemicals and plastics, which offset a decline in revenue from crude, metals, minerals, and consumer products.
Net income fell 19 percent to C$323 million, or C$2.04 per share, hurt by a foreign exchange loss on long-term debt.
CP Rail shares, which have fallen more than 14 percent in the past 12 months, were up C$6.33 at C$196.55.
$1 = 1.2974 Canadian dollars Additional reporting by Shubhankar Chakravorty in Bengaluru; Editing by Bernadette Baum