Tank cars: The year of the shipper — commentary by Richard Kloster

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.

If tank-car owners were part of the Chinese calendar, 2016 would be the “Year of the Shipper.”

Tank cars are tough beasts. They have to be. They carry onerous and volatile commodities, which requires them to be built and maintained to exacting standards. Ensuring compliance to these standards requires a major commitment from everyone involved in owning and operating a tank car.

It is in the context of regulatory compliance that 2016 could be considered The Year of the Shipper. This is a product of the Federal Railroad Administration’s (FRA) continued progression toward its goal of making sure all tank-car regulatory standards are met, with this year’s focus shifting toward shipper-owned fleets.

A little history

Back in 1995, the FRA enacted HM-201, a landmark regulation that required owners to develop and implement qualification programs for tank cars. In 2012, the FRA implemented the “next generation” of regulatory standards with HM-216B, replacing HM-201 while also expanding and clarifying the responsibilities for compliance. Ultimately, the newly expanded rules dictated qualification programs be developed to ensure a tank car or component would not fail prior to the next scheduled inspection or test.

As such, the 2012 standards have triggered changes in how companies maintain compliance, mitigate risk and manage costs. Compliance is an ongoing effort and car owners need to respond through a more aggressive commitment to the new regulations under the FRA’s increased auditing plan. This marks the best way for companies to reduce risk exposure on different levels, whether passing an FRA audit, or most important, avoiding equipment related failures and potentially catastrophic events. But everything costs money: Compliance and risk mitigation ultimately require a larger financial commitment from all tank-car owners. And shippers are next on the list to face increased FRA scrutiny.

The largest tank-cars owners — leasing companies — were the initial focus of the FRA’s enhanced enforcement efforts. This focus is shifting to smaller fleets, which are overwhelmingly shipper owned. And smaller tank-car players are being held to the same standard.

The concern is that as the FRA’s focus shifts to smaller fleets, compliance gaps will be greater, since regardless of fleet size, compliance obligations are the same. The regulations only spell out the “what you have to do” part, not the “how you do it” part. For example, a tank-car owner is required to provide “written procedures that outline where to inspect, how to inspect and the acceptance criteria.” However, the owner must figure out the “how” part of what needs to be in the procedures. This may be difficult for a smaller fleet owner with resource challenges; they may need to budget for new employee or vendors. Companies with larger fleets generally have greater resources and also may be more up to date on the regulatory requirements and market realities.

Shop space at a premium

Maintenance procedures are just one part of tank-car compliance, which also requires repair shop audits, repair/inspection data collection and retention, component interval analysis and training.

These compliance requirements come together in the qualification of a tank car, which must be completed by a certified tank-car facility every five to 10 years. The industry currently is in a qualification cycle that is expected to run through 2020 and peak in 2018. From a resource standpoint, this cycle is putting extreme pressure on the tank-car repair network. Shop space is at a premium, costs have risen and the market for tank-car maintenance and repair services is tightening. Shop capacity constraints are posing problems for small tank-car owners and new market entrants.

While the immediate risk facing tank-car owners is non-compliance (and big fines from the FRA), the greater risk actually may be access to the industry resources required to achieve compliance.

So, while a few years ago all the excitement in the tank-car world was around the expanding crude market and all the new cars being built, lost in the euphoria were the everyday realities of maintaining tank cars in a compliant manner.

With the drop in oil prices, the excitement has receded. Compliance, of course, never recedes — to which, in 2016, shippers certainly can attest.