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July 2016

Rail News: Mechanical

Rule change could help ease box-car supply problem — commentary by Richard Kloster

Those who know me have heard me say this before: "There's a reason they call it a carload — if you don’t have the car, you won't get the load." Back in my railroad days, a marketing VP told me: "Car supply = market share." Lessors understand that leasing rail cars is an availability game. "He who has the car gets the deal," they say.

Well, certain rail markets struggling with adequate car supply are missing out on opportunities. Parts of the North American rail-car fleet have been overlooked from an investment perspective for so long that there's a very real risk that some traditional rail traffic segments could disappear due to car supply issues. There are excessively overbuilt fleets, fleets that lack investment and fleets that were significantly retired after the Great Recession.

Going forward, more prudent investment decisions will be needed to protect car supply. Efforts to increase car life expectancy could help relieve the near-term car supply pressure.

The Association of American Railroads' (AAR) Rule 88 originally allowed for a maximum 40-year car life, but grants an additional 10 years through Extended Service Status (EXS). Today, all cars operating in interchange service are 50-year cars, either because they were built on or after July 1, 1974, or received rebuilt status of EXS under Rule 88.

Paper industry aims to protect the fleet

The most recent option for rail-car life extensions — Increased Life Status (ILS) — allows for a process to increase a car's life to 65 years from the date it was built. So far, two factors have limited the application of ILS: (1) It can only be applied for within three years of the mandatory retirement age, i.e., 50 years; and (2) there's a 50-year life limitation for castings on an ILS candidate car. Casting life and car life are considered independently, and extending a car’s life will likely require costly new castings.

However, a coordinated effort within the paper industry to stem the dramatic decline of the box-car fleet could increase the use of ILS. As the predominant user of box cars, the paper industry is extremely concerned about the fleet’s future. Since 2007, about 110,000 box cars have been retired and only 8,500 cars have been built. New box cars are problematically expensive, and the modal-competitive nature of this freight makes new-car investment difficult to justify.

Regardless, the paper industry's desire to preserve the box-car fleet is strong. In 2015, the Paper and Forest Industry Transportation Committee convinced the AAR board to consider changes in the ILS rules. The AAR Equipment Engineering Committee (EEC) is sympathetic, but a review likely will take several years. Changing the casting rules from an age-based life limit to a conditioned-based life limit would be a big hurdle for the committee, given that casting life is subject to both AAR and Federal Railroad Administration rules. Lowering the ILS application from age 47 also is critical in order to provide car owners a larger window of opportunity in which to consider ILS.

If the proposed changes are enacted, would ILS remain exception-based or a one-off solution, or could it become a broader equipment solution that offers economic and competitive value? The answer is probably in the middle. It would depend on the type of car and the market it serves, as well as the car owners' strategic view; but ultimately, economics will rule. ILS might make economic sense in fleet segments with a combination of high comparative new-car costs, low mileage, lighter loading weights and single-car manifest shipments. Less likely would be the inverse, especially for fleets that are highly utilized in their first 50 years.

As always, safety is paramount and ILS rules will not be adopted unless the AAR's EEC ensures the practice is safe. That said, the rail community cannot afford to overlook any opportunity to reduce its cost curve in this day and age of challenged and modal competitive freight markets. New-car build prices remain near all-time highs, and as the new-car market moves from an energy-driven growth to a more broad-based replacement cycle, many segments may not be able to stomach these inflated prices.

ILS may provide an additional option to resolve car-supply problems. Remember: "Rail car supply = rail freight market share."

Richard Kloster is senior vice president and chief commercial officer of AllTranstek LLC, a private transportation consulting company that provides fleet management, technical and strategic consulting to the rail industry.


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