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February 2013



Rail Industry Trends Article
Rail finance and leasing outlook: What has been the biggest change during the past 10 years? What will the next big change be?



Rail Industry Trends

Compiled by Pat Foran, Editor

During the information-gathering process for our 13th annual Finance & Leasing Guide, we ask industry execs a question or two in an attempt to develop a snapshot of the U.S. rail finance and leasing industry. One of the questions we asked more than 60 industry executives was a two-parter: What's been the biggest change within this rail industry sector during the past 10 years? What might the "Next Big Change" be?

Cited among the biggest changes during the past decade were the rises of intermodalism and shale plays, and the fall of coal. The elevation of uncertainty to "constant" on the state-of-mind meter also merited mention for a number of respondents.

What's next, as big changes go? Although fewer respondents offered up specific predictions, those who did tended to reference the energy evolution and a requisite fogginess that accompanies it — all predictions these days, really. As one equipment provider/lessor put it: "Along with many of our customers, our crystal ball for the 'Next Big Thing' is extremely cloudy; however, we're optimistic that market certainty and sustained growth will prevail as consumer (and producer) confidence increases."

For more on what U.S. rail finance and leasing execs are thinking about on the "change" front, read their unedited (except for typos) responses, which we received during the last three weeks of January.


What's been the biggest change within this rail industry sector during the past 
10 years? What might the "Next Big Change" be?

"Last 10 years: The relatively sudden implosion of the coal markets and coal car demand. Conversely, the huge tank car build up to support new market segments. Next 10 years: Fleet expansion due to fundamentally lower energy cost that reenergizes US economy through on-shoring of manufacturing."


"Rail capacity constraints lead to much greater attention on operations planning, improvements in asset utilization, and much better operating plans. Modern locomotives provide unprecedented power and reliability, allowing these better operating plans to be met. The last 10 years have seen a virtuous cycle — greater reliability in assets, service improvements, increased traffic/revenue, more investment, service improvements. The next big change will be making use of the tremendous investment in PTC to actually get some value out of it and use it to drive more precision rail services."

"The biggest change in the rail industry in the last 10 years has been the shale plays in the East and the upper Midwest and Texas. This has resulted in a huge demand for frac sand cars. Has this car type been overbuilt? Concerns have been raised on that topic, but the thought is that when the construction market rebounds (we are beginning to see some signs of a strengthening), any over capacity in small cube covered hoppers will be short lived. The next big change is underway and in the form of tank car demand for oil-by- rail service from the shale regions of the Bakken, Niobrara and Eagle Ford. These oil-by- rail shipments run from the oil producing shale regions to the refineries in the Gulf. Is export coal the next big thing? It could be if the environmental issues can be addressed."

"Over the last 10 years, the railroad companies finally achieved the predicted financial benefits from 286,000 lb. rail cars first introduced in the early 1990s, and from the mega mergers of the 1990s. It took about 10 years for the new HAL fleets to replace the older, smaller cars to make a difference, and for the systems and culture of the railway business to embrace the synergies enabled by the mergers.
 In much the same way, today’s investment in PTC will have to go through some initial birth pains, but over the next 10 years will ultimately be the information backbone supporting a new paradigm in railroad operations that will result in significant improvements in safety, capacity utilization, service reliability, velocity, customer service and pricing."


"The demise of the leveraged lease market and the decline in the number of institutions that are experienced finance lessors and secured lenders."


"The advent of the large rail amalgamations has both benefitted and complicated rail transportation’s environment: benefitted in the sense that economies of scale have been maximized and the companies are doing very well; complicated in the sense that conventional structural assumptions may be called into question. For example, in the financial arena, scale and stimulus have meant that many forms of innovative finance have been discarded in favor of direct reliance on general credit of the borrower and relatively loose covenants, in other words a borrowers’ market prevails for those who command credit. With a possibly abrupt change of debt markets, this could change rapidly and previous, more innovative forms of financing might have to be 'reinvented.'
 In the regulatory arena, concerns for the fragility of the industry in the 1980’s and 1990’s have given way to celebration of its success and a spreading view that the industry “can afford” to give up some protections  with respect to geographic franchise  granted by its owning its own tracks. Depending on the scope of any regulatory change, the unintended consequences could mean significant negative considerations for credit ratings and financial analysis of shareholder value."


“Over the past 10 years, we’ve seen the market change as consumers and now producers have become less optimistic and increasingly insecure. We've noticed that most all industries are expressing uncertainty and showing signs of hesitation when forecasting their financial models and planning for the future which, at times, necessitates last minute drastic actions. We've noticed that executives are acting for the short term against long term projections as they brave a ride on a turbulent wave of uncertainty. Along with many of our customers, our crystal ball for the 'Next Big Thing' is extremely cloudy; however, we’re optimistic that market certainty and sustained growth will prevail as consumer (and producer) confidence increases.”


"Tank car 'boom' years (ethanol and now crude oil) and uncertainty for future tank car regulations. Future: More regulations."


"The rate of change has accelerated in virtually every major area: the regulatory environment has become more hostile and expensive; specifications are changing faster than ever before for both newly built cars as well as the existing fleet; maintenance and automatic detection have resulted in significantly greater expense (to the equipment owner) without a corresponding benefit, and the list goes on. When the 'New Normal' is fully recognized and its associated costs are understood, the lessors will be forced to increase prices and the overall cost of transportation will be greater. The next big change will come in the area of an energy shift as the USA begins to use and export its massive liquid and gas energy reserves. Compressed natural gas will transform the use of the internal combustion engine in both automotive vehicles and locomotives; it will also result is massive infrastructure build-out to pipe product from point of recovery to point of consumption or export."


"Tremendous tank car demand."


"The biggest change is that surplus capacity had been consumed. The next big change is that to meet anticipated traffic growth, railroads will have to become builders and not down-sizers. The capital to support the required building can only come from solid financial performance that is not impaired by selective tinkering with the market based principles of Staggers."


"The dramatic surge in intermodalism which has taken traffic from long haul truckers.  The preference for containers over truck on flat cars also has been major. The next big change will be the amount and types of tank cars to handle larger and larger volumes of oil from the Dakotas and Canada."


"The last 10 years have witnessed fleet expansions and a resurgence of bulk commodity shipments in tank car unit trains. First was ethanol, which has now been followed by crude oil. How our industry manages the long-established pattern of the feast or famine cycle will be fundamental over the next five to seven years."

"Unquestionably the energy booms, from ethanol in the middle of the last decade, to shale gas in the latter part, to the current demand for equipment to carry crude oil, have created shifts in demand never before seen in the industry. Rail has been a primary beneficiary of the energy plays, and should continue to benefit as the manufacturing and chemical sectors obtain competitive advantages not seen in decades, thanks to the abundance of feedstock material. One downside to the lessor community is that car costs have risen at a much faster rate than inflation, to record levels, and any softness in demand for the assets being built that leads to lower lease rates could have a very adverse affect on many of the equipment providers, particularly those that continue to take large speculative positions. Additionally, 2014 will see the end of the 40-year statutory limit on rail cars operating in interchange. The percentage of cars [that] will be in service to their full 50-year life remains to be seen."



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