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February 2020
By Pat Foran, Editor
Will business be better this year than it was last year? Will it be about the same? Worse? What are the key issues facing the rail finance and leasing sector in 2020?
We posed these questions last month to a sampling of rail finance and leasing execs as part of the information gathering for our 20th annual Finance & Leasing Guide. The guide was published in our February issue.
More than a few execs told us they didn't feel confident enough to predict anything (publicly) these days. Among those who did respond, more believe this year will be worse for their business and/or the finance and leasing segment. Why do they think so? Here's a sampling of their responses:
2020 will be an interesting year as national traffic patterns evolve to meet shifts in global markets, as well as changes in the traffic mix.
Worse. Decreasing lease rates and new car build levels. Bad press re: sand/frac oil, reduced rail-shipped freight. Precision scheduled railroading (PSR) efficiency gains' impact on the rail-car fleet.
Worse due to lower industry orders for new freight cars.
Worse. Oversupply of certain car types and weak demand.
Worse. There is no significant economic indicators showing an improvement in car loadings. PSR, along with decrease loadings, is causing an oversupply of rail-car assets.
Likely worse. More surplus equipment. Stranded values for underutilized equipment.
2020 will be a challenging year for railroads, builders and equipment owners. Railroads will be implementing PSR and grappling with surplus truck capacity in a slow-growth economy. Builders will fight for market share as new car orders dry up due to large car surpluses. Equipment owners will continue to see equipment returned due to declining shipments and PSR initiatives.
The rail environment will be better in 2020, but this is a relative statement. Freight volumes will improve gradually over the year. More freight cures a lot of ills. However, the effect that modest freight gains will have on rail-car demand will be dampened by rail efficiency gains that continued PSR implementation will bring. This environment will prevent lease rates from increasing above floor levels. New car additions to the fleet will be higher that most believe, but still lower than 2019. Recovery in the rail-car lease markets won’t begin in earnest until later in 2020, or more likely, 2021.
We believe there are some notable uncertainties on the horizon in 2020, but overall, we expect things to modestly improve. Freight markets experienced several headwinds in 2019 including PSR, a prolonged trade dispute with China, an unresolved USMCA, higher trucking capacity, and lower freight volumes in several sectors. We believe demand will improve in 2020 as trade relations improve and the strong consumer market pulls through demand for freight transportation by rail.
All early indicators are that it will be better than 2019. It may be a case that 2019 was recessionary like and any improvement even a small one is significantly more positive than what we’ve experienced. Most economic indicators (housing starts, employment rates, gross domestic product, inflation rates, etc.) are steady to improving which is also an indication of the times. Albeit given the some 400k rail cars in storage there appears to be a rail recession in the works, partially caused by overbuilding some rail-car types, market obsolescence of others and external competing non rail commodities (gas vs. coal) along with trade war impacts. Expect small, positive results — big wins will be difficult to execute.
For [us], better because in 2019, we invested heavily in additional professionals and office technology to increase capacity.
Better — a number of major commodities hauled by rail were adversely affected by trade barriers and weak overseas economies in 2019. Those issues will be resolved to some degree in 2020, allowing more grain, coal, and chemical movements overseas, as well as increased intermodal traffic.
An improvement in freight volumes are the No. 1 issue, but lessors have no control over this. Nor do they have control over lease rates — the market largely sets them. However, they do have control over the supply side, the size of their fleets, their plans for new car additions and retirements, as well as their maintenance spend. Another flat year will require more prudence by fleet owners if they want to have a chance to meet their earning goals. This year’s environment could also trigger the reevaluation by parent companies of their for-lease rail-car assets and platforms.
Flood of capital chasing rail investment, reducing investment discipline and upsetting the risk/return continuum.
Excess or expanded production capacity and overbuilding, which is negatively affecting pricing and lease rates.
How to address the continued oversupply of rail equipment (some captive to book values, some facing market obsolescence, some waiting for higher scrap values) and the challenge of writing off or discounting those assets on the books.
Car demand based on timing of trade pacts, economic performance and political/election turbulence. We are in the 8th or 9th inning of expansion — will there be [extra innings]? Hopefully so.
The reduction in rates is not supporting investments in rail cars or capital investments in assets. This includes oversupply of tank cars caused by continued regulations and uncertainty in the tank-car sector.
PSR initiatives have idled several thousand rail cars over the past year or so. This overhang of supply has kept downward pressure on lease rates for many car types. As demand returns in 2020 and railroads look to take share from trucking, we expect cars in storage will decrease and lease rates will improve.
Utilization and over supply of cars forcing prices downward.
Key issues include rail-car fleet sizing and utilization and optimization of assets.
Oversupply of new equipment in storage for certain rail-car types. Hopefully, an improving economy and stronger exports will ameliorate the situation somewhat during 2020.
The key issue will be the Class I railroads developing and marketing a service package that is truck-competitive for the merchandise market while maintaining market share in the bulk markets.
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