Rail Equipment Finance 2011 Day One:

PALM SPRINGS, CALIF: Close to 300 people from the mechanical, operating, financial, and supply sectors of the North American freight railroad industry are attending Railroad Financial Corporation’s 25th annual Rail Equipment Finance Conference at the La Quinta Resort & Club. The conference is organized by RFC’s Tony Kruglinski (Railway Age’s Financial Editor, top), David Nahass, and Will Geiger. Following are observations from Day One, “North American Railcar Review”:

David Humphrey and Chuck Hieronwymi, Railinc: The North American revenue-earning freight car fleet was at 1.543 million cars as of January 2011. Private ownership (including TTX) is at 68%. There has been a steady decline in the past year of stored cars; the amount is currently about 15%—“a good trend for the industry, though a hangover persists.” Railinc’s major project for this year is startup of the CEPM (Comprehensive Equipment Performance Monitoring) project, which deals with such wearable components as wheels, bolsters, etc.

Dennis Neumann, CEO, BNY Capital: The “Enron effect” resulted in the virtual end of leveraged leasing. Such key financial instrument terms as “cross-border leasing,” special purpose entity,” and “off balance sheet” were “villainized,” resulting in a “transparency witch hunt” by regulators.

Mike Dockman, Administrative Vice President, M&T Bank: The Tax Relief Act of 2010 allows 100% of equipment purchases to be expensed in 2011, but this is temporary. The percentage reverts to 50% in 2012. The railroads are generating a lot of cash, which means that they can finance railcar purchases internally. As a result, equipment users are carefully evaluating their funding options. The availability of leveraged leasing to fund new equipm nt purchases is greatly diminished, if not eliminated. Overall rail rolling stock remains a preferred asset for bank lessors, due to its longevity and favorable remarketing potential, as well as the industry’s strong fundamentals and growth prospects.

Paul Weyandt, Senior Vice President and Treasurer, Kansas City Southern: Borrowing costs are extremely attractive; “money is cheap again.” Capital markets have improved across the board and railroads continue to have excellent access to the markets. Debt and equity capital markets are open, railroad debt issues continue to price better than their ratings, all in-debt issuance costs are very attractive. Lending rates are not hurting the economy. However, government spending is out of control and new regulations are still confusing and likely to raise borrowing costs as they try to dictate bank fees. Banks will look for ways to replace any lost revenue streams. The country has dug a huge deficit hole that will have to be filled. The financial markets may be starting to forget the lessons learned during the recent financial crisis, and there are disturbing signs of “lending stupidity.”

Tony Hatch, Independent Wall Street Analyst: There is enormous potential for railroads due to many factors, not the least of which is the growth potential of both domestic and intermodal traffic. Domestic intermodal is the strongest driver of growth, and it involves “the age-old goal of taking truck offs the highways.” One question is whether government environmental policy will help to increase rail modal share. The potential exists for intermodal double its share to 10% of the rail/truck market.

John Winner, President, HWTSK, Inc.: Freight rail traffic growth trends are almost back to pre-recession levels. Many older stored cars are going to be scrapped, but there are still about 150,000 good cars available for service. Almost all 6,000 locomotives that were in storage been recalled to service. The railroads saw remarkable financial improvements in 2010, and rail traffic is growing faster than Gross Domestic Product, and equipment sales will deend upon the shape of the recovery. There will be tremendous growth in railcar deliveries over the next three years; we could see 43,000 cars this year, 71,000 in 2012, and 79,000 in 2013. Carbuilding will be tempered by the availability of castings and components, but “where there’s a will, there’s a way.”

Jack Thomas, President, First Union Rail: If railcar prices continue to increase faster than rental rates, new cars will not be affordable. Right now, inflation is low in the U.S., but overseas inflation is rising rapidly. Private car ownership could (not including TTX) reach 63% in 10 years. The cost of components is not going down. The railroads are purchasing more equipment directly. For example, Union Pacific recently ordered 1,300 cars; Norfolk Southern 1,500. BNSF plans to spend $350 million on equipment this year; CSX $300 million. The number of stored railcars is expected to drop by 100,000 units by year-end 2011. The future? There will be fewer leasing companies, private ownership will continue increasing. Railcars will have higher ownership costs due to AAR safety standards. There will be more railcar manufacturers in the market, and equipment oversupply will shrink, through retirement of older equipment.

David Sellers, Director, Car Management, CSX, on the evolving boxcar market: The paper industry is the driver. Such factors as electronic media, internet buying, and recycling have changed the industry, shifting it toward “brown paper” (for example, packaging needed for shipping items purchased on line at sites like Amazon.com). This year there will be well over 2,000 boxcars built—100-ton cars as replacements for old 70-ton cars. Boxcar average load cycles need to drop from 30 to 27 days to meet projected demand by 2015. CSX is developing strategies on customer dwell for continuous improvement in cycle dwell time. A lot of efficiencies have been accomplished through national boxcar pooling. New car types being added, for example, conversions from 60-foot Plate C to more-efficient Plate F (hi-cube) cars. The Plate F is the “boxcar of the future,” but we must be able to identify commodities that do not fit into 50- and 60-foot pooled Plate F cars.

Wayne Winkle, Senior Manager, International Asset management, KCS: We are looking forward to increasing KCS’s contribution to North American Boxcar Pool.

Robert Pickel, Senior Vice President, Sales and Marketing National Steel Car: Old Plate C boxcars are being replaced by Plate F hi-cube cars, and there have been many design improvements geared toward safety, efficiency (higher capacity/lighter weight), and reduced loss and damage. Among these are flat interior wells, top-hung doors with a roller-bearing design that move easier, recessed wall anchors for load security systems, and floor anchors for straps (i.e. the Holland Snugger system). Today’s boxcars are more competitive with trucks, and they’re more fuel-efficient and environmentally friendly. They’re commodity-focused. For example, an increasing number of major food products are being loaded in thermal (insulated) boxcars, rather than mechanically refrigerated cars, due to changes in American dietary trends (more fresh vegetables and fruit). These cars operate in unit trains and make 24-36 turns per year, opposed to 7 turns per year for mechanically refrigerated cars.

Ron Sucik, Principal, RSE Consulting: There are many positive signs for intermodal. The dollar value of intermodal is, at present, $11 billion, while the value of trucking is more than $500 billion. Some major shippers are increasing intermodal use by 10% to 15%, which translates to $10 billion of trucking converted to intermodal—effectively doubling it. Rail capital spending on infrastructure enables absorption of intermodal growth, and motor carrier driver issues and higher fuel costs will drive more business to rail intermodal. Railroads are offering much better service and will keep a greater percentage of any short-term market share gains. On top of that, House Transportation & Infrastructure Committee Chair John Mica (R-Fla.) says the new six-year transportation bill (successor to SAFTEA-LU) will be an intermodal bill, and U.S. DOT Secretary Ray LaHood has said the bill will be on President’s desk before Congress recesses for the year. “This could be the perfect storm for intermodal.”

—William C. Vantuono, Editor, Railway Age. Photos by the author.