The future of the rail-car supply chain? It's all about the freight — by Richard Kloster

By Richard Kloster

I’m starting to get worried about the long-term future of the rail-car supply chain. Don’t get me wrong; it’s not going anywhere. It’s just that the most fundamental metric for rail-car demand — carload freight volume — has been stagnant for some time and rail has been losing modal share almost since the Great Recession.

My concern is that if this environment persists and the freight outlook is flat or worse for the foreseeable future, will there be enough business for all the current supply-chain members to survive, let alone business volumes that would allow for growth?

Think of it this way: There’s a reason a rail shipment is called a carload. Because if you don’t have the car, you won’t get the load. On the flip side, if you don’t have the load, you don’t need the car.

And if you don’t need the car, or as many as you did before, you also don’t need as many rail-car parts, or rail-car shops, or rail-car builders or rail-car leasing companies, and so on.

While this is what the rail-car supply chain has been living with for 15-plus years, it was masked somewhat by several consecutive fleet growth markets (i.e., ethanol, crude by rail and frac sand) that, from a rail-car perspective, took the attention off the bigger picture.

These growth market segments and build cycles, while significant in their own right, didn’t overcome the steady burn of year-over-year share losses occurring in other freight segments. Those segments utilized existing, imbedded fleets, and as the cars in those fleets aged, they were quietly retired — but not replaced, or at least at the same rate — and nobody really noticed, since all the focus was on the sexy, new growth car types.

These one-time growth cycles are gone now … over … done. And nothing has replaced them, which has laid bare the obvious: that overall carload growth today is non-existent. And there is nothing the rail-car supply chain can do about it since the supply chain doesn’t generate freight. The railroads do.

The burden is on the railroads, particularly the Class Is, to grow their carload volumes. Both for their own sake, as well as for the sake of their supply chains.

The freight train that is share loss ...

The share loss trend has been around for so long now that I worry that it’s become institutionalized at some railroad leadership and ownership levels. That it’s just assumed the current paradigm is all it’s ever going to be.

I hope this will not be the case and that the long-talked-about “pivot to growth” will actually take hold. But my fear is that slowing down and reversing this trend will be like stopping a freight train going 70 mph: It’s going to take a long time (pun intended.) And in the process, interest in investing in the rail-car supply chain will lessen because supply chain business volumes will be flat or worse, forcing or triggering companies to exit the market and reducing industry options.

We’re already seeing an uptick in consolidation and acquisitions of sector leaders in the industry. GATX acquired Wells Fargo in the lessor space. Eagle Railcar in the shop space. AllTranstek and Rescar in fleet management and mobile repair spaces, respectively, and several smaller component manufacturers. My gut tells me there will be more.

It almost seems like the investors interested in rail, as well as the more astute strategic players, recognize the coming low-growth “transition” period and are quietly staking out their claims — the thinking being that rail is still fundamental, and rail cars, along with their adjacent services, will still be needed. But with the sheen of 2010’s growth gone, maybe it’s a safer, less competitive place to hunt for scale or an entry point.

Just worrying thinking out loud.

The big will get bigger. I’d rather the overall market get bigger first.