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This year seemingly has brought more challenges than any year in recent rail history, although I continue to believe there are many or more opportunities. But ambiguity begets insecurity, and the “i” word is anathema to the financial community, one of the larger stakeholders in the “railroad renaissance.”
To be sure, rails have outperformed the broader as well as related transport markets during the past 15 years. Nonetheless, words such as “volatility” and “uncertainty” and “scale” — previously unheard in staid and traditional railroad circles — have replaced “stability” and even “guidance” in today’s investor-management dialogue. In fact, new phrases such as “stranded assets” have become part of the discourse.
Always audible to some degree, the calls to cut capex and the drum beat to “rightsize” the networks and reduce the overall level of spend have been getting louder each quarter (three and counting) of general railway underperformance. Some in the press and government continue to state that rails have under spent and continue to do so, particularly at the height of last year’s service issues. But by far, the loudest drum beat has been for the rails to justify the current level of capex given the changes in traffic expectations and mix. Meanwhile, global capex (i.e., for the S&P Global) is finally beginning to increase, and railroads’ self-described over-exposure to energy is now an issue as they continue to pivot to consumer/manufacturing.
Of course, Class I management teams — most of them are new — aren’t just fielding questions about capex. There’s plenty more on their minds and plates:
Regardless, “big spend” will be the ongoing trend. The new capex norm has implications for the types of spend, in a lighter (lower gross tons/mile, lower weight per axle load) but more service- and I.T.-intensive world. Improved service, a steady economy and rail’s secular prospects will justify the longer-term capex goals of 15 percent to 17 percent (or more) of revenue.
The 2016 spending plans will be the most interesting — and perhaps telling — of this century. We should get a few hints at what they’ll be at the major rail industry conferences that’ll be held in the months ahead.
Tony Hatch is an independent transportation analyst and consultant, and a program consultant for Progressive Railroading's RailTrends® conference. Email him at firstname.lastname@example.org.