Survey says: Caveats abound, but rail finance and leasing execs expect a slightly better year
2/5/2024
By Pat Foran, Editor-in-Chief
Business for those who toil in the North American rail equipment market should be slightly better this year than it was last year. That’s the overwhelming (if underwhelming) sentiment rail execs have been sharing with us in conversation during the past couple of months. They also shared it in a survey conducted in January as part of the information gathering for Progressive Railroading’s 24th annual Finance & Leasing Guide, which was published in the February print edition.
Yes, cautious optimism rules. The way it has every year since … well, since. And caveats abound — from the interest rate environment (Have rates truly topped out? Will they stay steady?) to the bigger economic picture (Will we steer clear of recession?) to high rail equipment prices and high lease rates (How high is too high?) to the prospects for freight-rail growth (Will railroads “actually pivot to growth?” as RailSolutions Inc. President Michael Mahoney, posing the question of the moment, posited). But as of early ’24, few of the folks we’ve heard from expect this year to be worse, or even slightly worse, than last year.
Here’s a representative sampling of the survey responses:
From a business perspective, will 2024 be better than 2023? Worse? Same? Why?
Joe Devoe, senior vice president, Helaba (Landesbank Hessen-Thüringen) New York Branch: Better, in my mind. With interest rates trending down, and recent leasing rates having been strong, I think it will be a good year for borrowers to return to the bank and capital markets to finance or re-finance transactions at more attractive all-in rates.
Tina Beckberger, chief commercial officer, American Industrial Transport Inc. (AITX): AITX is committed to growth in the market, and we believe that shipping customers want partners who can provide resources and expertise. We are hearing that they want full-service solutions that can handle the complexities of leasing and repair as a single, integrated solution as the railcar business has become too complicated and specific.
For these reasons, AITX was aggressive in 2023 with the acquisition of SMBC Rail Services and investing in expansion of our repair network, including the dramatic growth of our Brookhaven, Mississippi, facility.
In 2024, we expect to maintain supply tightness in the market for new and existing cars, despite flat to slightly positive carloadings. We will continue to see scrapping in the market contributing to tightening supply, as well.
Richard Flynn, president and founder, NorthEast Logistics Systems: Slightly better.
Richard Kloster, president, Integrity Rail Partners Inc.: Slightly better. Freight volumes should be improved from 2023. Equipment demand will be strong, except for a few chronically overbuilt fleets. New car builds will be up a little and all replacement driven. Lease rates will remain high.
Michael Mahoney, president, RailSolutions Inc.: 2024 will be better if (1) interest rates fall and we avoid recession as forecast and (2) railroads actually pivot to growth.
Julie Mink, president, Tealinc Inc.: Short of an economic recession, we anticipate that 2024 will be a more prosperous year for the shipping industry. The interest rate runup has run almost all if its course, railroads are slowly providing more consistent service and are starting to welcome new business, and shippers and receivers are realizing that they will forever have to provide the equipment to facilitate the move — thus requiring a thoughtful look at adding rail cars to their fleet.
Russ Warren, managing director, EdgePoint Capital Advisors LLC: Better due to upcoming election. No bets yet for 2025.
What is the key issue facing the rail finance/leasing sector in 2024? Why?
Beckberger: We anticipate that the repair business will continue to see high-capacity shops due to tank car qualifications, where those with capacity capabilities and competitive cycle times will have real competitive advantage.
In a high price environment, shippers want full-service partners who can be comprehensive on pricing, component relationships, labor and materials and competitive rates. Working with fewer, more strategic partners combats volatility and avoids having to negotiate for every aspect of the business.
Devoe: Class I service issues are very important, looking at the longer term. PSR did a very good job of both improving railroads’ profitability while also driving freight to other modes of transportation. If that pendulum can swing back, attracting more freight to rail and the reasons to invest in rail assets will be a more compelling, or at least an easier, sell for transportation departments. [Both] the cost advantages of rail shipping and the environmental benefits of using more rail and less truck are compelling … really, it would be a shame if the railroads would not take advantage of those well-understood selling points to bring more freight to their lines.
Flynn: Uncertainty and weak demand.
Kloster: High new car costs, interest rates, and input costs. There’s concern that the high cost of new equipment will dissuade buyers from placing orders in 2024. If so, the existing fleet remains tight and rates high. For car supply, damned if you do, damned if you don’t.
Mahoney: Will lease rates support investors’ higher capital costs, pushed up by higher new rail-car prices and interest rates?
Mink: The key issue facing the rail finance/leasing sector is twofold. One is the steadiness (or unsteadiness) of interest rates, which are key to being able to obtain competitive financing; and two is the ability to secure rail cars — the most appropriate types of rail cars — required to haul the commodities that keep America and the world moving.
Warren: Interest rates.
