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Before jumping into the 2019 outlook for the rail equipment markets, a review of 2018 is in order. Going into 2018, the expectation was that freight-rail traffic growth would be strong, at 2.7 percent. Well, 2018 did not disappoint and volume is projected to finish the year up 2.9 percent, with almost all segments posting signs of improvement.
The rail-car surplus was projected to decline considerably and it did, falling almost 29 percent since last year. Retirements were supposed to jump 50 percent for the year, but will end up 65 percent higher. Fleet utilization increased by over seven points and is now above the long-term average, another overperforming metric for the year. New car deliveries will end the year at about 50,000 cars, considerably higher than expectations at the beginning of the year. Finally, the fleet is a little smaller than it was a year ago.
So, 2018 turned out to be a relatively good year for rail equipment, even though lease rates haven’t increased as much as some would have liked and secondary market rail-car prices remain high.
At the beginning of the year, we viewed 2018 as a transition year, with the equipment markets shifting from over-dominance by energy car types to a more traditional replacement-driven market. Now, it looks like this transition period is going to extend into 2019. Some of these trends will continue but some will fall back.
FTR projects freight-rail traffic growth in 2019 to exceed 2018’s growth, at 3.4 percent, which would be positive for the rail-car fleet. However, the decline in the surplus will slow considerably, dropping only 6 percent in 2019, and the retirement pace will fall to a more normalized rate of about 50,000 cars. Fleet utilization will remain flat, with a only modest one-point improvement in 2019. On the other hand, new car deliveries will see a strong increase in 2019, jumping to over 60,000 cars, pushing the total fleet size up almost a full 1 percent larger.
Overall, the 2019 outlook looks to be cautiously positive, but the devil is in the details with challenges in some key equipment market segments.
The first is the energy-related fleets. Demand for crude-by-rail (CBR) tank cars has been red-hot due to high oil prices and lack of pipeline takeaway capacity in some basins. However, oil prices are falling again and the opportunity window for CBR may close sooner than expected. While the frac sand covered hoppers fleet is fully utilized, and new cars continue to be built, the potential impact of local sand sourcing on rail-car demand has not yet been fully felt.
The grain covered hopper fleet is huge and new car demand is growing. However, trade and tariff issues are affecting carload volumes and rail car demand, and unless these issues are resolved sooner rather than later, there is serious risk to the performance of this fleet segment in 2019.
The non-energy tank car fleet has benefited from strong economic and freight growth in 2018, and while these conditions will continue into 2019, growth rates will slow and expose this large tank-car fleet segment to potential downside risk.
On the supply side, 2019 will bring some changes to the competitive landscape. One large builder recently shed its non-rail assets, and another is going private. A recent start-up builder has closed its doors but another new builder is starting up. The secondary market remains very active and competitive, but so far there haven’t been any significant changes in the leasing community. This could change in 2019. Regardless, the leasing market will remain competitive next year.
New lease accounting rules go into effect on Jan. 1, 2019, and have the potential over time to change shipper’s attitudes regarding operating leases vs. ownership or financing. In 2019, most shippers will be focused on dealing with the financial compliance and reporting issues of these changes, as opposed to the strategic issues of ownership vs. leasing. It will likely be a few years before there is any measurable effect on the markets from these changes, if there is any. So, while 2019 is shaping up to look a lot like 2018, there are enough differences that next year will have its own personality. We’ll just have to wait and see how 2019 evolves.
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. He also is a principal at FTR Intel, where he forecasts the rail equipment markets for a broad client base.