William Vantuono

William Vantuono

With Railway Age since 1992, Bill Vantuono has broadened and deepened the magazine's coverage of the technological revolution that is so swiftly changing the industry. He has also strengthened Railway Age's leadership position in industry affairs with the conferences he conducts on operating passenger trains on freight railroads and communications-based train control.

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Wednesday, 08 December 2010 18:00

Video: Wick Moorman interview

Editor William C. Vantuono's interview with 

Railroader of the Year, Wick Moorman

SPONSORED BY:

www.amstedrail.com

 wch-color-logo.jpg  

By Keith T. Borman

keith-t.-borman.jpgLegislative “cures” to improve railroad safety act just like medicines on human populations: Drugs developed for one group can be disastrous when given to another for whom they were not intended. In the Rail Safety Improvement Act of 2008, Congress concocted a powerful cocktail of safety remedies enacted primarily for Class I railroad consumption. As the Federal Railroad Administration begins to dispense the implementing regulations, serious operational and financial side effects are starting to appear among small Class II and Class III carriers.

The forthcoming new hours-of-service rules illustrate why small railroads are starting to feel queasy. The Rail Safety Improvement Act created a new 276-hour cap on the number of hours train service employees may work in any calendar month, and mandated two days rest after six consecutive days of train service and three days rest after seven consecutive days of train service. These and other provisions throughout the new law reveal a consistent intent by Congress to address perceived safety issues arising from train crew fatigue. For example, in the legislation Congress imposed for the first time ever limitations on so-called “limbo time,” the hours spent in tasks other than operating a train, such as waiting for transportation back to the terminal before marking off duty or attending training classes. Further, Congress was so concerned about train crew fatigue that it expressly prohibited railroad managers from any form of communication with a train crew employee during a statutory rest period that “could reasonably be expected to disrupt the employee's rest.”

Certainly the demands of Class I operations create potential opportunities for fatigue. Big railroads operate 24 hours a day, seven days a week. Their train crews operate over long distances and often that requires them to work longer than the typical eight-hour day, and at the end of their run they often must check into hotels far from their home terminals to get their required rest. Crew schedules are sometimes unpredictable, and crew members can be called for service at odd hours with only a few hours notice.

Small railroad train service employees inhabit a different world. They don't have to lay over at remote, away-from-home terminals. Their routes are short and at the end of the workday they go home, not to a hotel. Most work exclusively during daylight hours, and while some may work six or seven days in a row, it is often because their workday is five or six hours, and they want and need the extra days to put in a normal 40-hour workweek. In other words, six-or seven-day workweeks on short lines are not the fatigue issue Congress had in mind when it mandated two days' rest for six days work and three days off for seven consecutive days on the job. For short line employees, six-and seven-day workweeks are a lifestyle choice, not a fatigue problem.

Tasked by Congress to deliver the medicine, FRA has been sympathetic to the small railroads' claim that fatigue is not a short line problem. But FRA sees no alternative to imposing the new rest requirements on short lines as well as Class I's. When ASLRRA cried, “Stop! These medicines are meant for huge 24/7 railroads only!” FRA responded, in effect, “Doctor's orders! Congress didn't expressly exempt small railroads; now open wide!”

So the small railroad industry must swallow a bitter pill that will have painful side effects. The short lines that seasonally work seven days a week to bring in the wheat harvest will tell their customers that they just don't have the crews available, and moving the grain will have to wait. Other small carriers serving shippers once a day six or seven days a week will reduce their service levels. Hiring more employees is no antidote: Small railroads work on thin margins and are unlikely and often unable to increase their operating expenses to maintain the same level of service.

The side effects will be contagious as well. Small carrier train crews will begin to feel cramps in their paychecks as the days available to work diminish. Some may even experience job losses as the smallest carriers succumb, because they can no longer serve the customer adequately with their existing crews and cannot afford to hire more.

One way to remedy this malady is to go back to Congress for a new “prescription,” to exempt small railroads who do not suffer from fatigue related safety issues. But by the time Congress finds time to take a second look, it may be too late for some short lines. Seeking relief from the FRA under its limited statutory authority to grant waivers is another possibility which ASLRRA will explore. Meanwhile, public policy makers would do well to recall the ancient advice given to all healers who prescribe medicines: primum non nocere: First, do no harm.

Keith T. Borman is Vice President and General Counsel of the American Short Line & Regional Railroad Association.

By Douglas John Bowen, Managing Editor

doug_bowen.jpgWords matter, so the overall talk is encouraging: Believers in passenger rail’s potential, and its worth within the larger realm of railroading, have every right to think their trains may have finally arrived. It’s an attitude reinforced at many venues, like the annual rail conferences hosted by the American Public Transportation Association.

Those words and attitude matter when APTA members and others get their points across to various media. Print and other media talk more often about reliance on “public transit” instead of the more pejorative-sounding “mass transit.” And, in a switch that at times is almost total, “dependence” is now applied to auto drivers and not (just) rail riders. (I think of myself as “rail reliant.”) At last month’s APTA Rail Conference, President Bill Millar alluded to this shift, part of the “choice” rail transit gives a nation starving for options. It’s hard for Americans of any ideology to denigrate “choice”; Millar was on target.

The delicious irony now, too, is hearing oil junkies demand some kind of government action or protection (“Drill! Drill! Drill!” and/or “I need my car!”) with the same gusto and reverence they once reserved for “free market” transportation. They got the “free” part down; the automobile has had a decades-long subsidized trip, and it won’t end soon, but at last it’s in the glare of the taxpayer spotlight, just like “subsidized trains.” 

Words matter, and I say this not just as an editor but as a believer in the product. So can we now also shun “commuter rail” as a label, and seek something better?

Too many North American “regional rail” systems, old and new, must still overcome the ephemeral but all-too-real obstacle of “commuter rail” mentality, a tag applied not just by average citizens but by the industry itself. It’s damaging and it’s limiting, even if at times a true “commuter rail line” exists within a system, used for the classic “citybound by morning, homebound by night” rider that makes up an important part of many rail networks.

It’s 1950s thinking at its best—half a century out of date.

“Commuter rail” is damaging because it gives aid and comfort to its adversaries. Preposterous? Here’s a test: Substitute “those people” for “commuters” next time a press release crosses your desk from any source—rail authority, rail advocacy group, anti-rail partisans. Hear the problem now? “Those people” may want a choice, but since “I” don’t commute by rail, what do I get out of it? Why should I care? Why should I pay?

“Commuter rail” is also limiting. In one swipe, we, as an industry, discourage other potential riders from trying the product. Day trippers, shoppers, vacationers, and others aren’t bidden, encouraged, to ride when the equipment (and often the crews) are available and the capacity is more plentiful.

Ridiculous? Why, then, is Amtrak’s Northeast Corridor, of all things, often referred to as a “commuter railroad,” when the parallel New Jersey Turnpike isn’t a “commuter highway” in turn? Lots of commuters use the Turnpike, or Chicago’s Dan Ryan Expressway, or California’s I-5, right? But the media persist with a false distinction. In part it’s our fault as a passenger rail bloc to not object.

Some passenger players already see this (though not enough, in my view). MTA Metro-North Railroad dropped the “Commuter” out of its name more than a decade ago, and actively seeks (and talks about!) other passenger market niches. Chicagoland’s Metra, another top-flight regional railroad, continually plays with weekend and off-peak service options and price packages that are outright admirable. And, no surprise to this observer but still a pleasure all the same, at one of APTA’s sessions in Chicago last month, Eugene Skoropowski, managing director of California’s Capitol Corridor Joint Powers Authority, offered ideas on attracting more riders from all walks of life as one way of “Coping with Increased Ridership in the Face of Rising Costs.”

Even some political players get it. It took the governor of Connecticut to knock on nearby New Jersey’s proverbial door asking for regional rail access to and from New York Giant football games in the Meadowlands. To their credit, New Jersey officials, along with New Jersey Transit, belatedly caught on to the potential. True, the tri-state run (through Manhattan) is initially aimed just at sports fans and only on Sundays. But that still transcends “commuter rail.”

And so should we all, whether we’re a big rail transit property or a small one-line startup that, indeed, is counting on commuters to initially justify its existence and (one hopes) future expansion.

If “regional rail” doesn’t fit a given property, seek something else, something better, something (more) accurate—ideas welcome! But perception is part of the industry’s potential (and potential woes) just as high speed turnouts and positive train control issues are, and “commuter rail” is jargon, an albatross around our collective necks that needs to be shed. We should be focusing, and espousing, passenger rail’s potential across the rider spectrum. The words matter.

Comments? Email dbowen@sbpub.com.

richard-timmons-web.jpgBy Richard F. Timmons, President, American Short Line and Regional Railroad Association

No organization that prides itself on performance and measurable results can expect to grow and prosper without dedicated training—for employees, staff, and management, as well as the education of its customers. This is fundamental to team building as well as sound and profitable railroading. Of course, productivity is an important outcome as well, and one unquestioned benefit to any training program is that worker productivity significantly improves following training.

With the passage of HR. 2095, the Railway Safety Improvement Act of 2008 (RSIA), the world of railroading as we have known and understood it for decades has changed. This is a more far-reaching collection of changes than the Staggers Act of 1980. Staggers laid the foundation for the dramatic resurgence of freight railroads during the past 25 years, but the RSIA will have a much greater impact on a broader range of areas.

With the new law comes a wave of regulatory requirements that compel significant changes from many of the current procedures now in place, as well as unprecedented new technologies and equipment to be phased in during the next several years. Other federal government policy and equipment developments unrelated to HR. 2095 also are under way. These momentous changes bring to railroad management serious issues related to preparing its work force for the future to insure employee safety and professionalism while on the job.

The most effective and profitable organizations have traditionally embraced some form of structured employee training that focuses on worker education and skills to enhance knowledge, understanding, and the execution of job tasks to specified standards. The object, of course, is to make certain the employee is safe, productive, and well aware of required performance standards while serving the long term interests of the company and its’ customers.

However, for management, the balancing act of beneficial employee training while accepting costs and an absence during this training is a difficult tradeoff. The old on-the-job techniques are not going to do the job in this new era simply because much of what we are working with today is too new to rely on seasoned railroaders to cover all the bases. There is little question that the most successful process for educating and training a workforce is through dedicated instruction. This only succeeds, however, if senior management has employee development and competence as a priority, and invests the resources to pursue training programs that improve employee skills and professionalism. This training approach is not a one-shot concept, but a progressive year-in, year-out program for each employee aimed at steadily building worker expertise and mastery of his field.

Today the railroad industry is beginning to capitalize on new educational technologies that make training our work force achievable without divorcing the employee from his job for an extended period of time. Online training modules prepared with short lines in mind are available that can prepare the employee for many of the job demands of the future. Webinars now address specific aspects of the industry that need clarification or introduce wholly new subjects or equipment. Class I railroad schools provide the options of attendance or online training, and some sponsor specialized training at state-of-the-art facilities. A number of universities now offer railroad certificate or diploma programs that are structured for short stays at the university, a return to work followed a month later by another session at the university. Mobile training classes sponsored by the Class I railroads, ASLRRA, AREMA, and the FRA make available short, high-intensity programs across the country to get railroaders up to speed on the most current and important topics and procedures. A prime example of this is the wide range of bridge inspection and maintenance classes being provided in numerous forums in response to HR 2095. DVDs are now becoming an important component of training and can be shipped easily to railroads or individuals for their home station use. In recent months HazMat and Security DVDs have been provided to ASLRRA members.

Excellent educational opportunities that are inexpensive and convenient are at hand for those managers that are committed to safety, competence, and professionalism for their workers. Training lays the foundation for the future and develops railroaders with the correct attitudes, knowledge, and skills to adapt to the changing workplace. Many visionary railroad leaders have committed to this progressive training approach. Now is the time for all of us in management to focus on employee professional development to meet the demands of the future.

No organization that prides itself on performance and measurable results can expect to grow and prosper without dedicated training—for employees, staff, and management, as well as the education of its customers. This is fundamental to team building as well as sound and profitable railroading. Of course, productivity is an important outcome as well, and one unquestioned benefit to any training program is that worker productivity significantly improves following training.
With the passage of HR. 2095, the Railway Safety Improvement Act of 2008 (RSIA), the world of railroading as we have known and understood it for decades has changed. This is a more far-reaching collection of changes than the Staggers Act of 1980. Staggers laid the foundation for the dramatic resurgence of freight railroads during the past 25 years, but the RSIA will have a much greater impact on a broader range of areas.

With the new law comes a wave of regulatory requirements that compel significant changes from many of the current procedures now in place, as well as unprecedented new technologies and equipment to be phased in during the next several years. Other federal government policy and equipment developments unrelated to HR. 2095 also are under way. These momentous changes bring to railroad management serious issues related to preparing its work force for the future to insure employee safety and professionalism while on the job.

The most effective and profitable organizations have traditionally embraced some form of structured employee training that focuses on worker education and skills to enhance knowledge, understanding, and the execution of job tasks to specified standards. The object, of course, is to make certain the employee is safe, productive, and well aware of required performance standards while serving the long term interests of the company and its’ customers.

However, for management, the balancing act of beneficial employee training while accepting costs and an absence during this training is a difficult tradeoff. The old on-the-job techniques are not going to do the job in this new era simply because much of what we are working with today is too new to rely on seasoned railroaders to cover all the bases. There is little question that the most successful process for educating and training a workforce is through dedicated instruction. This only succeeds, however, if senior management has employee development and competence as a priority, and invests the resources to pursue training programs that improve employee skills and professionalism. This training approach is not a one-shot concept, but a progressive year-in, year-out program for each employee aimed at steadily building worker expertise and mastery of his field.

Today the railroad industry is beginning to capitalize on new educational technologies that make training our work force achievable without divorcing the employee from his job for an extended period of time. Online training modules prepared with short lines in mind are available that can prepare the employee for many of the job demands of the future. Webinars now address specific aspects of the industry that need clarification or introduce wholly new subjects or equipment. Class I railroad schools provide the options of attendance or online training, and some sponsor specialized training at state-of-the-art facilities. A number of universities now offer railroad certificate or diploma programs that are structured for short stays at the university, a return to work followed a month later by another session at the university. Mobile training classes sponsored by the Class I railroads, ASLRRA, AREMA, and the FRA make available short, high-intensity programs across the country to get railroaders up to speed on the most current and important topics and procedures. A prime example of this is the wide range of bridge inspection and maintenance classes being provided in numerous forums in response to HR 2095. DVDs are now becoming an important component of training and can be shipped easily to railroads or individuals for their home station use. In recent months HazMat and Security DVDs have been provided to ASLRRA members.

Excellent educational opportunities that are inexpensive and convenient are at hand for those managers that are committed to safety, competence, and professionalism for their workers. Training lays the foundation for the future and develops railroaders with the correct attitudes, knowledge, and skills to adapt to the changing workplace. Many visionary railroad leaders have committed to this progressive training approach. Now is the time for all of us in management to focus on employee professional development to meet the demands of the future.

Editor’s note: Since 1909, Simmons-Boardman’s Railway Educational Bureau has been providing training courses and materials to the railroad industry. For more information, see www.transalert.com

By Tony Kruglinski, Financial Editor

anthony-kruglinski-web.jpgI would like to use this month’s Financial Edge to comment on the standards of honesty and ethical behavior that we have come to expect in our industry as well as to say goodbye to GATX’s Jeff Riley (pictured, below), who retired at the beginning of August. Jeff was the ultimate practitioner of what could be model professional standards for anyone in our business. I would like to use Jeff’s professional life as a bit of a primer for anyone new to our industry and seeking to succeed.

Honesty and ethical behavior: When Jeff Riley and I were in this business (buying, selling, leasing, and financing rolling stock) in the 1980s, there were a lot of people running around trying to put together deals for what was then a market of significantly surplus rail equipment. The problem was that many of those seeking to broker transactions were dishonest about having an agreement with the owner to represent the equipment. It was like the Wild West! If they could secure employment for unemployed cars or locomotives, they could go to the owner or and pitch the deal. Unfortunately, they came to the owner purporting to represent the end-user. No one knew who was legitimately representing who or what! This caused a huge amount of wasted time and effort on everyone’s part when deals that should have come together crashed and burned!

Eventually, the market for rolling stock picked up and the marketplace identified many of these “operators” for what they were and either tossed them or legitimized them by putting them back on corporate payrolls where somebody could exercise some ethical control over them.

jeff-riley-2009.jpgJeff Riley never had these issues. In the nearly 30 years that we have worked together, he has never misrepresented a situation. Even beyond that, he has never even allowed me to misconstrue a situation without setting me immediately straight. Because of this honesty and ethical behavior, my partners and I have come first to Jeff and GATX with many transactions, knowing that we could get a quick and honest reaction from Jeff as to GATX’s interest in the deal. As a result, my firm, Railroad Financial Corp., has closed more transactions with GATX as a counter-party than any other single entity.

Ability to deliver the institution: When you are representing a mix of people seeking to buy, sell, lease or finance equipment, some of them are well known to you and some are new relationships. Where our engagement is with a new customer, there is a premium on our ability to quickly understand what the client is willing to do and is not willing to do as we interact with the market for their benefit.
This, in turn, puts a premium on our finding the right counter-party. Our client is counting on us not to waste its time with dead-ends or unsuccessful market initiatives and overtures.

Using Jeff and GATX as an example, I can remember no situation in all of the years during which I interacted with Jeff Riley when he was not almost immediately spot-on with his appraisal of GATX’s likely interest in participating in a transaction. There were two reasons for this: First, Jeff had been with GATX long enough and was bright enough to have learned what his company was interested in doing. And make no mistake about this, sometimes this changes from month to month in our industry. The other side of this coin was GATX’s confidence in Jeff. He earned the respect of not only GATX’s management, but the company’s credit apparatus as well. Jeff could reliably deliver GATX to the closing table when he said he could. There is a huge premium in our industry for anyone who can do that!

Being a nice guy (or gal): Over the years, I have had to deal with a lot of people who are not nice guys or gals simply because they were stitched into a big deal or important funding needed by a client. However, I (and everyone else I know in this industry) would rather deal with someone with a reasonable temperament. Fortunately for me and my partners, most highly talented people with whom we deal in this industry are also really nice people. The blood-sucking, win-at-all-costs, bait-and-switch types are usually well known and we deal with them only when we absolutely have to. Want to know who they are? Follow the trail of busted deals and you will find them in the debris.

Jeff Riley? He is one of the nicest people on the planet and because of this, one of the most successful in his job as GATX’s Executive Director Structured Finance. He was always ready with a smile, a helping hand, or a joke when tension was about to wreck a deal. He was, in fact, quiet confidence incarnate. When you heard his voice on the line, you wanted to talk to him, no matter what the situation. Jeff, we are most definitely going to miss you!

(Thanks also to Jeff’s wife of 33 years, Jodi, for her support of a guy on whom we all came to count.)

By Richard F. Timmons
President, American Short Line
and Regional Railroad Association

richard-timmons-web.jpgQuestion: How many man-hours  are hired when a short line railroad spends $1 million on upgrading typical short line track?
Answer: 20,800.

Q: How many man-hours are hired when a short line railroad spends the $2 million in company money required to match the $1 million tax credit?
A: 62,400.

Q: What percentage of the ties and rail required to upgrade short line railroad track are purchased from American manufacturers?
A: 100%.

Q: If the short line tax credit extension passed today, when could short line railroads begin hiring those man-hours and purchasing those materials to undertake new projects?
A: Tomorrow.

Q: Why hasn’t Congress extended the short line tax credit as part of its effort to stimulate the economy and create jobs?
A: Good question.

Time is running out for the short line rehabilitation tax credit (45G) which expires on Dec. 31, 2009.  At a time when the federal government is focused almost entirely on stimulating the economy through immediate job creation, extending the short line tax credit should be on everyone’s “to do” list.

I am encouraged that, as of this writing, 167 House representatives and 39 Senators have co-sponsored the extension legislation. That number grows every week. These are among the highest co-sponsor numbers of any bill being considered in this session of Congress.

Even more significant, the co-sponsors are divided almost evenly between Democrats and Republicans, representing the kind of bipartisanship that everyone says is so necessary to get things done in Washington.

While this support is gratifying, it will not mean much if Congress does not enact the extension by the end of the year.

Q: Who are the primary beneficiaries of short line railroad track rehabilitation?
A: Railroad shippers.

When their short lines upgrade track, shippers receive faster, safer, and more competitively priced service. Most important, they can utilize the newer heavier-load railroad cars that are becoming the standard for the Class I industry and that require a much stronger track structure than exists on many short lines today. Absent that ability to handle the new equipment, shippers are cut off from the main line rail network.

As Watco Cos. Inc. CEO Rick Webb recently testified before the House Transportation & Infrastructure Committee, “For small businesses and farmers, the short line’s ability to take a 25-car train 75 miles to the nearest Class I interchange is just as important as the Class I’s ability to attach that block of traffic to a 100-car train moving across the country. My Kansas grain customers cannot make the journey to export markets in the Gulf without Class I railroad service. But they can’t start the journey without short line service.”

Q: When is an investment in railroad track good for the highway?
A: Always.

Improving short line railroad service takes heavy trucks off the highway, and that reduces highway congestion and pavement damage. A single railcar can hold three to four truckloads.
Taken together, the short line industry diverts over 33 million truckloads from the nation’s highways and in so doing saves approximately $1.4 billion in pavement damage. Much of this savings is in rural areas where so many short lines operate and where state and local government is hard-pressed to come up with road repair money for local roads.

Question: If Congress extends the short line tax credit, will railroads put up a green sign beside track being rehabilitated that says “Project Funded by the 45G Rehabilitation Tax Credit?”
Answer: Yes!

Monday, 16 November 2009 10:25

Financial Edge: Inspect it, or regret it

By Anthony Kruglinski

anthony-kruglinski-web.jpgI had a conversation last month with Pat Mazzanti, president of Railroad Appraisal Associates (formerly Norman Seip & Associates), the oldest rail equipment appraisal organization in North America. I had called to check up on the amount of work his firm might or might not be doing on new equipment deals in this down market.

Pat confirmed that there is (compared to prior years) a dearth of significant numbers of new equipment deals that would otherwise require his services. He is doing some portfolio analysis as well as lease/buy analysis for several clients. He is also doing appraisal work for several new equipment financings and used equipment transactions, but not in the numbers seen in previous years.

Pat made a point of remarking that many equipment owners, lessees, and secured parties are not taking advantage of this “down time” in the equipment market to take preventative actions that are possible today. Asked what he meant by “preventative actions,” he provided the following summary:

• Shopping Equipment For Needed Mechanical Work. According to Pat, some car owners are recovering equipment from lessees and putting the cars and locomotives directly into storage. While avoiding potential expenses associated with repairs might make sense to a cash-strapped lessor, that lessor is taking a risk that its equipment will not be ready to return to service when the market turns. Pat’s point: Private shops are looking for work today, and getting needed mechanical work today might result in a lower cost than may be possible during a market upturn.

• Inspections At End-Of-Lease. There are many reasons to inspect rolling stock at lease end: 1) Net lessees that have been responsible for maintaining rolling stock may not have been doing so according to the mechanical requirements of the lease. 2) Excessive wear and tear on the equipment that might result in a lessor claim against the lessee may depend on identifying defects at the return. Even if there are no claims to be made, the wear and tear may be such that the lessor needs to shop the equipment to assure it is ready for similar or different services when the market rebounds.

• Identifying Impaired Assets. Pat points out that a significant number of railcars and locomotives may never return to service.
What does he mean? Pat has been hired to give his opinion on the short- and long-term viability of certain equipment types, given the current economic situation and likely future market highs and lows. For instance, the cost of rehabilitating certain locomotives or cars might be prohibitive given the likely market for this equipment in the future. Put another way, they may be “functionally obsolete.”

For instance, a worn-out SD40-2 may be worth more as scrap and recoverable parts than the cost of rebuilding it for any service that is likely in the next five years. Similarly, while some presently parked 20-year-old centerbeam flatcars will go back into service, it is not likely that all will do so. Pat’s customers have been briefed on their options and are therefore able to make decisions on scrapping equipment when scrap prices hit attractive levels. They are also aware of what they have to do relative to alternative uses for cars that are not “beloved” by the market today.

What other factors are coming into play as equipment owners strive to cope? Storage fees. According to Pat, owners of equipment out of service are having to face escalating costs for storing their cars and locomotives. For instance, two years ago the costs of storing a car was between $1 and $2 per day per car. Today, those costs are hitting $5-plus. If the current trend continues, it will force older cars (1970s built) that in past markets would have seen a second life to be scrapped during this cycle.

Asked for an example, Pat pointed to late-1970s-built C113 grain cars. In prior cycles, these cars would have been stored and reemployed when the market rebounded. If the present market downturn continues much longer, Pat feels, the increased storage costs for railcars may force the premature scrapping of an otherwise useful asset.

We asked Pat what else kept him awake at night. Here are two of his most pressing concerns:

• Potential Market Irrationality. Up to this point in time, the market has acted rationally with no significant “fire sales” of railcars and locomotives, despite the financial conditions of many owners. What happens if these owners find themselves, all at once, under the gun to sell?

• Manufacturing Capacity. Pat hopes that North American railcar manufacturers will ramp-up capacity less aggressively than in prior market rebounds. The alternative to this is the potential for further market dislocations in the future.

If our readers would like to challenge Pat Mazzanti on any of his views expressed herein or, even better, hire him to put them in the know relative to their equipment and its role in today’s and future markets. You can reach Pat at pat@railroadappraisals.com.

By Scott T. Matheson, CFA, CPA
Senior Director, Investment Research,
CAPTRUST Financial Advisors 

matheson.jpgOn Nov. 3, Warren Buffett announced his company’s intention to acquire BNSF. He commented on CNBC that “[the acquisition is] an all-in wager on the economic future of the United States.” Based on BNSF’s ties to the economy, we agree that Buffett’s decision is predicated on faith in eventual economic recovery.

The BNSF story is indicative of the railroad industry in general. As market analysts, CAPTRUST pays close attention to railroad trends, as freight data and company earnings reports/outlooks can provide tangible assessments of economic trends, particularly consumer demand. The preliminary Gross Domestic Product (GDP) release within the U.S. for the quarter ended Sept. 30 indicated that consumption continues to account for more than two-thirds of U.S. economic output, making consumers a key variable in economic growth—and an important gauge for the railroad industry’s health.

Here are few of the variables we think are critical to gauge the U.S. consumer’s health. In aggregate, we are seeing some modest improvements in each factor:

Unemployment: September’s unemployment rate stood at 10.2%, according to the Bureau of Labor Statistics. This figure is expected to rise is coming months and we are looking for stability in the latter part of 2010.

Credit availability: The U.S. consumer has relied on easy credit to facilitate spending over the past three decades. In spite of the substantial aid provided to financial institutions from the federal government, banks are not eager to extend loans to the average consumer, but we are seeing some pickup in available credit.

Housing: Home prices, as measured by the Case Schiller 20 City Composite, are down 32% since July 2006. While the U.S. has experienced several recent month-over-month increases in prices, we foresee a gradual recovery and stabilization within residential real estate.

The U.S. dollar: From early March 2009 to early November 2009, the U.S. dollar declined more than 15% vs. a trade-weighted basket of global currencies. The direction of the U.S. dollar is important to watch as it is not only impacts the volume of goods U.S. consumers import, but also as it impacts the volume of exports when U.S. goods look cheap to overseas buyers. Both these factors affect rail traffic.

Preliminary third-quarter U.S. GDP exhibited some economic growth that may mark the recession’s end, a positive for the economically-sensitive railroad industry. However, given the established importance of the consumer and considering the challenges outlined above, while we believe the U.S. is on the road to recovery, we expect it to be a slow and bumpy ride.
Rail operators should continue to monitor the challenges facing the U.S. consumer as they seek to assess the health of the U.S. economy in an ultimate effort to understand the impact to their bu.s.inesses, but we do see the glass as half full and are encouraged by increased U.S. export demand.

Scott Matheson oversees the investment research of CAPTRUST Financial Advisors, a 20-year-old independent investment research and retirement plan advisory firm that is headquartered in Raleigh, N.C.

 

By Keith Hartwell

 

images.jpgA friend of mine, a camp counselor as a teenager, often recounts an early learning experience. He was in charge of 10 eight-year-old boys. His primary disciplinary phrase was “if you do that one more time . . .” The phrase had no conclusion and never a real consequence. Two days into the camp session, the threat was repeated when the boys were violating a no-talking rule during a mandatory afternoon rest hour. Immediately one of his more precocious and perceptive wards popped up from his bunk and said, “Talk, talk, talk. When are we are going to get some action around here?”

2010 is going to be a year of action in Washington, D.C., and for the short line railroad industry it will be both eventful and challenging.

The short line rehabilitation tax credit (45G) expired at the end of 2009 and must be extended retroactively in 2010. The short lines have done their usual stellar job in setting up the legislation. To date we have secured more than 50% of the House (247) and the Senate (52) as co-sponsors. We are particularly proud that the sponsorship is almost evenly divided between Democrats and Republicans. In today’s Washington, that is rare.

The extension passed the House in late 2009 but was pushed aside by the health care debate in the Senate. The longer Congress waits to act, the more difficult it is for short lines to do the planning and make the material purchases associated with the certainty of the tax credit’s availability. If Congress holds up passage to the end of this year, even if it makes it retroactive to Jan. 1, 2010, it will have lost a real opportunity to maximize the job creating potential of the credit. The time to act is now.

Sen. Jay Rockefeller spent the better part of 2009 trying to hammer out compromise legislation on the issues surrounding railroad regulation. His legislation was approved by the Senate Commerce Committee in late December and now awaits action by the full Senate and, subsequently, by the House. This isn’t what the industry ever would have sought and the short lines, along with the Class I’s, have worked with the Senator to minimize the harm to our franchises.

In fairness, Sen. Rockefeller and his staff have devoted substantial time and effort to address our concerns, and the legislation does incorporate numerous changes advanced by the railroad industry. We are continuing those efforts as the legislation proceeds. Unlike past years, Congress likely will act on a final bill this year.

In 2009, Congress passed a new rail safety bill, and in 2010 the Federal Railroad Administration is implementing hundreds of requirements contained in that new law. The vast majority of these requirements will add significantly to our cost of doing business—in Washington lingo, unfunded federal mandates.

PTC, Hours of Service, enhanced bridge inspections, and dozens of other regulatory decisions will be made in 2010. The short line industry’s goal is to reduce the burden through the regulatory process and to convince Congress to provide a fair level of government funding for what remains.

SAFETEA-LU, which authorized federal surface transportation spending and established most modal transportation policy, expired in 2009. Reauthorization was discussed, but no action was taken, so the status quo was extended. The legislation is largely a highway and transit funding bill, but two items affect the railroad industry: truck size and weight limits, and funding for highway grade crossings. Many in the trucking industry seek to increase size and weights, and some congressmen seek to tear down the wall that prohibits state DOTs from using grade crossing funds for general highway repairs. Fighting both efforts will be a high priority for the short lines in 2010.

The SAFETEA-LU bill is traditionally a six-year bill funded primarily through the gas tax. Most observers believe that adequate surface transportation funding requires an increase in the gas tax, so passing this bill before the 2010 election be difficult.

Keith Hartwell is President of Chambers, Conlon &Hartwell, is Managing Member of the Board of CC&H subsidiary firm Seneca Group, and the firm’s lead lobbyist for the American Short Line and Regional Railroad Association.

 

By Anthony D. Kruglinski

 

anthony-kruglinski-web.jpgOur regular readers know that in addition to being a Contributing Editor at Railway Age, I am the President of Railroad Financial Corp., a financial advisor that works only in the rail industry. Several weeks ago, Railroad Financial Corp. celebrated its 21st birthday, and I had the opportunity to explain to a new acquaintance what my company does.

 

I explained that during the first five years of RFC’s existence, the majority of our financial dealings involved buying and selling and financing and refinancing older railcars and locomotives. The late 1980s and the early- to mid-1990s were mostly taken up with extending the lives of existing rail equipment. (There were certainly new cars and locomotives built and financed, but most of RFC’s customers at the time were shortlines and regional railroads, not Class I railroads.)

 

The mid-1990s through 2007 or so saw more new rolling stock being built and fewer cars and locomotives rebuilt or remanufactured. At the time, we reported in Railway Age that end-users of railcars and locomotives were voting with their checkbooks in favor of new modern equipment rather than to continue to plow more money into older equipment.

 

What’s happened recently? While RFC is still financing new cars, the vast bulk of our activity—well in excess of $1 billion in equipment last year—involved restructuring existing leasing agreements to attempt to wring more efficiency from existing transactions.

 

Sometimes we find ourselves working for a bankrupt entity seeking to restructure its operating lease fleet. Other times we work for financially healthy lessees who are seeking to lower their rental costs by trading term (longer) for rate (lower).

 

The point is that during the past 21 years we have gone from extending the lives of various types of railcars and locomotives, to building almost exclusively new equipment to, today, very little building any equipment of any kind.

 

We are all, more or less, sitting around waiting for developments:

• New cars are being built, but in numbers that are 25% or 30% of the numbers built only a few years ago.

• Locomotive OEMs are not inking any sizeable North American new locomotive orders. (Why would they when there may be as many as 10,000 locomotives in storage?)

• Depending on how you do your count (do you count cars awaiting the scrapper?), there may be as many as 500,000 cars stored in North America.

• Several large lessors reportedly are interested in selling some or all of their railcar and locomotive fleets, but not at material discounts. The cars they do want to sell are off lease; no one wants them.

 

Almost nothing is happening, except that RFC is making a reasonably good living restructuring and reformatting existing transactions involving railcars and locomotives to save lessees money.

 

Those of you who wait for this column’s annual predictions saw they did not come in December, January, or February. For now, I think that the big prediction for 2010 is for more of the same. That’s the first time that I have ever predicted that! But I can’t leave 2010 alone without some prognosticating, so here we go:

 

Operating lessor sales: I predict that there will be significant sales of operating leasing fleets during 2010. Nothing much has happened since the last fleet sale at the end of 2008, but I believe that several new investors are interested in making a foray into the acquisition of operating leased rail equipment. The situation just needs a bit of a push. What could that be? Foreclosure by lenders who have the opportunity to do so, due to payment or other defaults. The need for cash that’s required by one or more large diversified financial entities that would cause them to sale rail equipment at a modest discount. A decision by private equity investors to finally make investments they have been contemplating for several years.

 

Scrapping equipment: The next time there is an upward blip for the price of scrap steel, look for tens of thousands of railcars and locomotives to be scrapped. Owners of these items must face that many of these units will never go back into service. Surprisingly, the cost of storage is now also becoming an issue.

 

Planning for EPA Tier 4 locomotives: While the Environmental Protection Agency’s Tier 4 locomotive emissions regulations and 2015 are still a ways off, locomotive manufacturers and high-horsepower end-users have to think about compliance. Here are some of the questions that the railroads are asking:

• What should I do with my existing high-horsepower locomotives? Should I invest in rebuilding some or all of them now or should I cut my losses and start scrapping them as soon as possible?

• EMD and GE are apparently fielding two different solutions for Tier 4. The GE product reportedly uses an aftermarket scrubber using urea. The EMD unit appears to continue to use the existing technology adapted for Tier 4. Planning needs to get started, but what planning?

 

That’s the best I can do this year!

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