Canadian Pacific Railway Ltd. has pulled back its full-year profit forecast after delivering a 40 per cent decline in second-quarter earnings, hit by surging fuel costs, flooding in the Midwest and a slackening U.S. economy.

The Calgary-based railway said yesterday it now expects full-year earnings per share of between $4 and $4.20, down from its previous guidance of $4.40 to $4.60.

Management predicts revenue will grow by 6 to 8 per cent over last year, up from previous guidance of 4 to 6 per cent.

But operating expenses are expected to increase by 11 to 13 per cent over 2007, revised from the earlier outlook of 6 to 8 per cent, owing mainly to soaring crude oil prices.

The guidance reduction appears worse than expected, UBS analyst Fadi Chamoun wrote in a note to clients. However, barring a further hit from the strong Canadian dollar or a new surge in diesel fuel costs, Chamoun sees CP at a positive turning point, with pricing growth accelerating and fuel recovery improving into 2009.

Canadian Pacific said it earned $155 million or $1 a share in the April-June period, down from $257 million or $1.64 a share in the year-ago quarter.

Revenue was essentially unchanged at $1.22 billion, while the railway's operating ratio -- operating costs as a proportion of revenue -- deteriorated to 79.4 per cent from 74.7 per cent a year earlier.

Fuel costs were the railway's "biggest headwind" during the quarter, taking a 43-cent bite out of earnings per share, said chief financial officer Mike Lambert.