The issue is straightforward. Carloadings, centered mostly on CBR growth (oil and sand) and including growth in grain and intermodal, have increased about 4.5% for the year vs. 2013. Growth projections are off the chart as a mix of energy and industrial infrastructure buildouts combine with decreasing percentages of truck loadings to drive future growth. That’s in addition to the projected shortfall in truck drivers and concerns about trucking hours-of-service requirements and labor force shortages
But railroads seem to be struggling to keep up with the required increases in personnel and with the need to maintain and expand the existing rail network. This is in addition to the weather-related slowdowns that occurred as a result of the harsh 2013-2014 winter. As resources get stretched to the max, velocity decreases, dwell times increase, and transit times suffer. For example, the railroads have done excellent work using a fluid system to expand their presence in markets such as fresh-food transit on a transcontinental basis. However, as service has suffered, so have the businesses relying on scheduled delivery service.
For larger industrial companies not as absolutely reliant upon scheduled service, the impact has been significant as well. These companies, wanting to do more with less, instead find themselves having to source additional equipment to move product due to the decrease in service levels. Sources suggest that the service issues plaguing the system today are not likely to be resolved in the near future.
Overall, even the railroads acknowledge the difficulties in handling current and future traffic based upon projections for freight growth and the difficulty the railroads have had in staffing up to handle the growth. Add the projections for a harsh winter for 2014-2015, and you have the potential for additional downturns in service.
Not surprisingly, one angle on the issue of rail service and transit times is the impact on the equipment markets. Try to get an off-lease railcar for any one of the basic bulk commodity groups and see how rates have been on the rise in every sector. Even coal cars have found stability at rent levels not seen consistently since 2008.
Cars built a decade ago routinely are changing hands at amounts equal to or higher than their original build cost. This is happening in sand, steel, and grain. Cars that were trading at a fair market value that were a bit oversold (to the low side), such as coal cars built in the mid 1990s or early to mid 2000s, have seen their values rise rapidly. Some cars with good leases attached with an attractive mix of rent and term are trading for values that more than double the purchase price of the same off-lease car from ten months ago.
So what do investors in rail assets do? Most are keeping assets on lease and raising rates whenever possible. New money is moving into the market and significant quantities of assets are changing hands at price points that should be making sellers blush and buyers weep. Ongoing support from the Federal Reserve helps to fan the flames. Many in the railcar space are looking for investment opportunities. With new car backlogs out in many cases into 2017, investors in rail assets are struggling to find places to deploy capital today. It becomes the worst kind of “snake eats own tail” moment. Money is flowing into rail assets due to market strength. More money flows in so railcar prices rise, so more money flows in, and so on.
When the railroads add crews, power up, and return the system to more balanced levels, equipment markets will hold their breath to see where the excesses show up first. Many parties are banking on small-cube covered hoppers for sand as a leading candidate for oversupply. If oil prices continue to drop, a slowdown in frac drilling could change some of the demand on rail assets, causing some service disruptions. Be careful what you wish for here. The industry is committed to sand and oil. Just as decreases in service impact the industry as a whole, a market shift in these commodities would impact builders, investors, shippers, and railroads across the board.