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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Friday, 06 February 2009 11:27

Flash Video: Matt Rose interview

Editor William C. Vantuono's interview with Railroader of the year, Matt Rose, sponsored by Western-Cullen-Hayes and Plasser American

 

Friday, 06 February 2009 11:27

Video: Matt Rose interview

Editor William C. Vantuono's interview with Railroader of the year, Matt Rose, sponsored by Western-Cullen-Hayes and Plasser American

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!

By Douglas John Bowen, Managing Editor

 

doug-bowen.jpgDallas gets it. It’s expanding its existing light rail transit network, augmenting regional rail, and bolstering existing Amtrak service, even as it faces the bumpy realities of advancing high speed rail. Texas’ second-largest city has a real-world, practical hold on matters mixed with a vision of what can be. Combine those elements with the ubiquitous optimism and “can-do” attitude all Texans seem to carry, and you have a potent force much of the U.S. would do well to emulate.

 

And please forget “right” or “left”; in this case; Dallas is front and center, in some ways perhaps the ambitious edge of the current U.S. passenger rail renaissance.

 

My latest trip to Dallas in late January only reaffirmed this, even as I delighted over the passenger rail progress the city has notched. More than many places, Dallas residents and officials, be it DART President Gary Thomas or a taxicab driver, mix that powerful Texas pride with a practical “what’s up in your town” inquiry. Where other cities pump up boosterism to an extreme, Dallas (I’ve found) seeks real information. “We’ve got this problem; do you? How are you guys dealing with it?” reflects an honesty, an open-mindedness, that bodes well both for urban rail transit and any future HSR development.

 

DART President Thomas and his staff are justly proud of the agency, and it shows. But more than they might know or sense, DART is a pointed refutation of the naysayers insisting passenger rail transit will not work and does not affect development, that it’s meant for only us “rat-grey New Yorkers” (in author Tom Wolfe’s words) who don’t know any better. It’s bolstered and energized Dallas’ downtown, a downtown long ignored per many U.S. “cities” but reasserting itself as a real place with a real purpose.

 

I base that not just on the gracious guided tour of new construction provided me by DART Director, Media Relations Morgan Lyons—a task he performed with relish and with obvious pride—but on my own multiple trips on DART’s Red and Blue lines. I saw “those people” (commuters) but also saw students, shoppers, and travelers with other purposes, generating on-off traffic for many stations along the routes.

 

One of those stops is at Union Station and the Reunion Center complex, served by DART, Trinity Rail Express (TRE) regional rail service linking Dallas with Fort Worth, and Amtrak. In the 1980s, a refurbished Union Station stood more as a monument to the past—almost a mausoleum—with few passengers coming or going. Not anymore; it may not yet be 30th Street Station in Philadelphia, but rail passengers now are in evidence throughout much of the day. A  modest four Amtrak trains per day don’t do Dallas justice. But it’s  more than six trains a week and, along with TRE’s presence and DART service, the station is set to welcome whatever HSR (or even just HrSR) might lie ahead.

 

That last component won’t arrive immediately. Advocates gathering at the historic Magnolia Hotel for the 6th Annual Southwestern Rail Conference, “Turning Vision into Reality” Jan. 29, were clearly  disappointed when FRA Deputy Administrator Karen Rae, the luncheon speaker, affirmed what the group already had heard the day before: Texas wouldn’t get the big bucks for any HSR project, at least in the first round. Rae delivered the “bad” news as diplomatically as she could, saying, “Should you be disappointed and concerned? You should be focused” on proceeding with HSR cohesively.

 

Indeed, even before Rae addressed the group, Texas DOT Executive Director Amadeo Saenz allowed that the state needed a “comprehensive” approach to HSR, noting Texas submissions to FRA during 2009 were “fractured” into nine distinct projects or pieces. But Saenz remained upbeat, noting TexDOT now has a Rail Division to guide the state “in focusing on a comprehensive [statewide] rail plan.” The words and labels matter, Saenz said: “Not too long ago, we all were ‘the highway department.’”

 

Beyond accepting reality, and vowing (in Saenz’s words) that “we learned from what we did” and perhaps didn’t do, Texas HSR advocates also showed their magnanimous side to the FRA “winners.” Those assembled bore no demonstrative grudge in congratulating California, Florida, and Chicago-St. Louis for their first-round fiscal victories. Many took time to  congratulate conference moderator Fritz Plous, a Chicago resident and longtime rail advocate, for Chicago’s successful HrSR bid,  something perhaps Rep. John Mica (R-Fla.) could learn to emulate rather than acting as a sore winner. In Dallas, they get it.  Here’s hoping they get the real thing, HSR, real soon.

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

In the midst of unprecedented and historic regulatory changes demanding our attention and resources during the past year, short line railroads had the safest year in our history!

richard-timmons-web.jpgIn the past 18 months, challenging new laws and regulations have swept across our industry, demanding investments, time, and new procurement, as well as customer and union acceptance. These changes will be felt during the next decade as we strive to comply with numerous phased-in requirements intended to enhance railroad safety across the industry. While many of these initiatives have merit, the difficulty is how to pay for them. These unfunded mandates will prove to be a significant burden in the years ahead, one that must not intrude on our daily safety focus.

These ongoing requirements notwithstanding, the questions of why and how our segment of the railroad industry has achieved this significant safety milestone are worthy of consideration. The continuous rail industry focus on every aspect of safety is the backbone of the dramatic downward trend for all railroads in terms of injuries and fatalities. This safety conscious orientation began about 20 years ago and has proven its value through years of steady improvements.

And while no fatality or injury is ever acceptable, the reduction in both categories over the years is commendable and demonstrates the wisdom of the determined approach that railroads, large and small, have applied to safety. This focus and determination to reduce accidents, injuries, and fatalities started at the senior levels of management and has ultimately been embraced by every functional level in the railroad industry. The perseverance of rail leadership to protect employees, the public, and rail resources, and the improved metrics-based approach used to understand weakness in our systems, receives the bulk of the credit for the dramatic safety changes in the railroad industry.

For 2009, Class II and III railroads logged a total of 26,160,055 employee hours over 52,000 miles of railroad. Operating on that system, 563 short lines experienced 1 fatality and 441 injuries. This is a 7% reduction in fatalities and a 25% reduction in injuries from 2008 with just 17% fewer hours operated. This is a record for the short line industry and a tribute to the competence of those railroaders at every level that are responsible for such impressive results.

But this has been a challenging path we have traveled over a number of years. I believe there are many contributing factors that have made this record possible. As mentioned earlier, the consistent safety focus and the measurements developed to assess progress have made clear to management and employees where we stood and what demanded our attention and resources year over year.

The obvious shortcomings described by an annual analysis prompted numerous training initiatives from both internal short line resources as well as partnerships with the Class I community and TTCI. In addition, the American Short Line and Regional Railroad Association sponsored programs and classes, and in partnership with the FRA hosted a variety of training events over the years that were necessary for compliance. Additionally, ASLRRA provided templates, documents, procedures, programs, and on-site safety assessments to assist small railroads in continuously working to improve their safety posture.

Possibly the most effective safety initiative was the establishment of the ASLRRA Safety and Training Committee. This body of short line railroad members has been instrumental in creating products, programs, and safety policies that contributed significantly to the improved safety performance of small railroads. Their individual and collective contributions have been invaluable.

The difficult and challenging work of this committee coupled with its involvement with the ASLRRA Safety Awards recognition program each year has served to highlight individual and short line railroad company performance, and rewarded those members and companies whose efforts have paid off with improved annual results.

At the end of the day, these exceptional outcomes boil down to people. Railroaders are responsible for these results, and their professionalism, training, awareness, and dedication to doing their jobs correctly every day under all conditions make for safe operations. The results are evident. We will continue to strive to achieve these high standards in the coming months and years. There is no alternative for railroaders and their companies because safety our the first priority. 

By Anthony Kruglinski


anthony-kruglinski-web.jpgRailroad Financial Corp. (my firm) recently wrapped up its 24th Annual Rail Equipment Finance Conference in Palm Springs, Calif. This year nearly 250 people attended (two dozen more than last year). They were railroaders, manufacturers and suppliers, shippers, lessors, investment bankers, bankers, and just about every variety of individual interested in rail equipment. Despite the fact that we hold the Conference at a golf resort, every business session was packed with people trying to glean some sense of where the market for railcars and locomotives is headed.

For instance, they learned that while 2009-2010 had seen nearly a third of the railcars in North America parked out of service, those totals were coming down—for some car types, briskly. They learned that some locomotive lessors were prepping elements of their parked fleets for service in the third and fourth quarter of 2010. They learned that declines in rail traffic and rail employment seemed to have bottomed out and reversed themselves. Most important, they packed the evening social functions seeking to network themselves into whatever business activity was threatening to poke its head above the top of the trenches in which we all have been living for two years or so.

Put another way, there are a lot of people seeking to jump on this recovery if, in fact, the leased-car market is in a recovery. Is it? Good question.

If you take a look at railcar rental rates, you will still see amazing deals in the marketplace. While rental rates may be firming, we are still getting reports of lessors agreeing to current depressed market rents for terms of up to five years! This is occurring when logic suggests that if the market is turning they should be keeping their terms short so as to be able to take advantage of any surge in rental rates. What’s behind this willingness to commit to cheap rents for so many years? Fear—abject fear that cars currently on lease will be returned and be parked in the weeds. That does not spell recovery.

But other lessors smell recovery and are willing to risk cars coming back rather than be manipulated into locking in today’s low rates for years to come.

What’s likely to happen? The lessors willing to fall on their swords will do so and that element of the market (which we believe to be limited) will be sucked up into certain deals, leaving the rest of the market to take advantage of the old adage, “a rising tide lifts all boats.”

As rail traffic picks up, as it seems to be doing, not only will it require cars that are currently in storage to be put back into service, it will have an effect of some kind on the velocity at which rail traffic has been moving during this business downturn. Clearly, no one wants to return to the bad old days of gridlock in certain rail corridors, but just as velocity increased when traffic went down, there should be a reduction in velocity when traffic rebounds. That will cause more cars and locomotives to be reactivated to service.

Let’s talk about locomotives. Scuttlebutt suggests that during the business downturn, the Class I’s may have stored locomotives taken out of service for mechanical reasons rather than repair them (which suggests that if you are a locomotive lessor who has a requirements in your leases that your leased locomotives remain in running condition, it’s time for some inspections). In any case, it may be more efficient for one or more of these Class I’s to tap the pool of thousands of leasable high horsepower locomotives, which may be already parked on their property by lessors, rather than sink cash from tight capital budgets into fixing their own broken units.

While we are on locomotives, I should note that both GE and EMD spent significant amounts of time reporting to the Rail Equipment Finance attendees on their efforts to prepare for the next tier of EPA rules and regulations due in 2015. Make no mistake about it: Class I’s are watching this situation to learn what their 2015 locomotive options are likely to be, especially if significant mechanical adaptations will need to be put in place to comply with the 2010 rules.

Whatever the OEMs develop for 2015, it will have an impact on what the Class I’s do with their existing fleets. Do they invest money in repowering existing locomotives? Do they rebuild existing units in kind for service beyond 2015 to take advantage of presumed grandfathering for existing units or do they scrap everything they can and buy new, when they understand what “new” is likely be and to cost?

Of course, what the Class I’s do with their fleets will impact the future for the thousands of leased locomotives that remain on the books of operating lessors!

What is this writer’s advice at this point in time?

• If you are a lessee: Jump into this market now and get the best lease terms possible for as long as possible.

• If you are a lessor: Hang tough. Better days are around the corner and perhaps only months away.

Everyone else should stay tuned to this space!




By Jerry Vest

jerry-vest-railamerica.jpg

Almost 20 years ago, federal surface transportation policy changed for the better. Enactment of the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) meant the days of Congress simply passing a “highway bill” were over. Since then, Congress has expanded the multimodal focus of surface transportation public policy. An integrated approach allows for better policy decisions through the reauthorization process, with each mode recognized for its own strengths and role in ground transportation.

With the most recent surface transportation bill, SAFETEA-LU, up for renewal, discussions include the national limits on truck sizes and weights. This issue could have a dramatic and possibly unintended impact on the future health of ground transportation in the U.S. A handful of trucking companies and freight shippers are seeking to include in reauthorization higher federal highway truck weight and size limits. Their arguments are simply not good public policy.

First, proponents of heavier and larger trucks suggest that by allowing such trucks, fewer trucks will be on the roadways, producing less highway congestion, less pollution, and fewer accidents. These claims are not based on the properties of bigger trucks themselves, but on the idea that fewer total trucks will be required to move freight.

But as demonstrated by diversion studies done in 2007 by Carl Martland of the Massachusetts Institute of Technology and in 2009 by TTX Co., a tremendous diversion of freight from rail to truck would occur with increased federal weight and size limits. According to the Martland study, allowing a 97,000-pound national weight limit would divert 44% of all merchandise traffic handled by short line and regional railroads to trucks. The TTX study found that larger trucks would divert almost 25% of all carload and intermodal rail traffic (excluding coal and ores), resulting in 330 billion new truck ton-miles every year. “Bigger but fewer” trucks also fails from a historical perspective: Following every national truck weight limit increase in modern history, more, not fewer, trucks have appeared on our highways.

Second, advocates of heavier and larger trucks imply highways will see very little impact. One proposal calls for a third rear trailer axle for tractor-trailers carrying 97,000 pounds, claiming this will result in less pavement damage than a similar 80,000-pound truck with a standard rear tandem trailer. Pavement experts appear to be divided on this, but one can ask: If another trailer axle reduces pavement wear, why don’t trucking companies promoting this view simply add another axle to their 80,000-pound trailers immediately? But there is no doubt that heavier trucks will exacerbate deterioration of roadway bridges, problematic for states facing significant inventories of roadway bridges rated as “substandard.” Heavier trucks will simply make this problem worse.

Third, many highway safety experts strongly disagree with the idea that bigger trucks are as safe as current trucks. Both the International Brotherhood of Teamsters and the Owner-Operator Independent Drivers Association have issued warnings of the safety hazards presented by heavier trucks. Law enforcement agencies across the country, including the National Troopers Coalition and the National Sheriffs’ Association, have formally declared their opposition to bigger trucks. And when higher federal CAFE standards result in smaller and lighter passenger vehicles, heavier trucks sharing public highways ignores the laws of physics, placing all of us driving on the national highway network at a higher level of risk of harm in a truck-auto accident.

Finally, federal officials should not overlook the negative impact bigger trucks would have on our multimodal system. The Martland and TTX diversion studies make clear that a substantial reduction in freight rail shipments would occur. This has been confirmed at the state level, when increases in weight allowances on state roads created an almost immediate loss of rail traffic for some short line railroads. The Government Accountability Office understands this, quoting USDOT statistics in stating, “[L]arger trucks weighing over 100,000 pounds pay only 40% of their costs. From an economic standpoint, this relationship between revenue and cost distorts the competitive environment by making it appear that heavier trucks are a less expensive shipping method than they actually are and puts other modes, such as rail and maritime, at a disadvantage.”

This is not simply a “railroader vs. trucker” fight. Most people appreciate the role trucking plays in our national economy. But favoring a handful of shippers and trucking companies with cheaper rates or lower costs is not good public policy. Continuing, without change, the current national weight and size limits on all federal highways is the right policy decision, one that all of us need to support.

Jerry Vest is Vice President, Government and Industry Affairs for Genesee & Wyoming Inc., which owns and operates short line and regional railroads in the U.S., Canada, Australia, and the Netherlands.

By Tony Kruglinski, Financial Editor

anthony_kruglinski_web.jpgAs readers of this column already know, the rail industry has enjoyed more than 30 years of seemingly limitless financing of its equipment needs by banks, insurance companies, and operating lessors. The result? Of the nearly 1.6 million railcars in North America, more than 60% of them are owned by non-railroads and leased to railroads and other industry participants under a variety of financing structures. The costs inherent in these financings have also been regularly subsidized by Uncle Sam as the owners have made use of the depreciation deductions that come with ownership of the equipment and passed a portion of the benefits on to the lessees in the form of lower rents—all in all, a win/win situation for all involved.

However, the financial crisis we have just weathered and a series of pending regulatory changes are likely to severely impact the amount and/or cost of this kind of financing available to the industry in the coming years. The 25th Anniversary Edition of Railroad Financial Corporation’s Rail Equipment Finance Conference, set for March 6 -9, 2011 in Palm Springs, Calif., is set to tackle this thorny issue of financial capacity for the next generation of rail equipment finance, along with regular agenda items profiling the status of the North American railcar and locomotive fleets.

Since many of our readers won’t be journeying to Palm Springs to be with us, we thought we would use this month’s Financial Edge to at least point out the issues involved in this financial conundrum so that you can track its development in your own situation.

Shrinkage of the operating lessor pool: Perhaps the most easy to observe evidence of a change in the circumstances facing rail equipment operators who do not wish to own their rolling stock is the reduction in the number of operating lessors willing to make substantial purchases of railcars and locomotives for lease to third parties. While the absolute number of rail equipment lessors has only shrunk slightly, the number of players willing to write a big check to take over a large order for an end-user seeking operating lease financing is down materially.

Why? The financial crisis has rocked several of them back on their heels to the point that they are still in the market but seeming reluctant to write big checks. The impact of this situation is somewhat muted at this time by the slow market in new building for railcars and locomotives. The issue, we believe, will become more apparent when the market for new building comes back in the next couple of years and the number and appetite of the operating lessors willing to make big equipment bets has shrunk.

Will this create a huge problem for the industry? Will rents rise materially to compensate for these changes and to lure new players into the market? Will end-users end up purchasing equipment for cash or with debt financing? These are all questions that we intend to examine in March.

Regulatory changes due to impact finance leasing: Over the past months and years, we’ve used this column to highlight pending regulatory changes likely to impact banks and other financial institutions that have been big players in the financing leasing market, which has supported billions of dollars in finance leasing for the rail industry. (With a finance lease, the lessee usually controls the future of the equipment at lease end. Not so with operating leasing, where the lessor recovers the equipment for release.)

For instance, we have warned that capital requirements inherent in the capital adequacy rules generally referred to as Basel II would have a significant impact on long-term leveraged financing leasing (the cheapest type of finance lease available to lessees due to its inherent low-cost debt component).

What’s happened during the past year or two? Virtually all leveraged leasing to the rail industry has been replaced by single-investor leasing (more expensive due to the absence of a low-cost debt component). You can still get your deal financed, but it just costs you more.

We are also awaiting the impact of as-yet-to-be-finalized changes to the account rules relating to just who records what assets and liabilities on its books relative to the kinds of finance transactions that have been the mainstay of rail equipment finance in North America.

The impact of these rule changes will likely be massive. What will these changes likely be when the rules are finalized? How will lessors and lessees react and tailor their transactions as a result? Most important, will the economics of finance leasing change for the worse? These are all questions that, as yet, have no answers, but we are sure to shed further light on them at Rail Equipment Finance 2011. We invite you to join us for this discussion and others that can shape the way you will be doing business in 2011 and beyond. See www.railequipmentfinance.com for information on the conference.

By Mike Ogborn

mjogborn.jpgThe Surface Transportation Board is about to embark on a series of hearings that could result in major changes in the railroad industry, including the way railroads compete, price their service, and make capital investment decisions.

The first hearing will be held in February and will review the long-standing exemptions for boxcars, commodities, and TOFC/COFC rate and commodity exemptions. The second hearing will be held in May and will “explore the current state of competitiveness in the railroad industry and possible policy alternatives to facilitate more competition,” including competitive access, bottleneck rates, terminal access, and reciprocal switching.

This announcement comes on the heels of an unsuccessful attempt by the Senate Commerce Committee to draft compromise legislation on these subjects in the 2010 Congress. While we do not know what the end product of these hearings will be, we do know that they will be wide-ranging and deal with issues that go to the heart of the railroad industry’s ability to compete for business and to adequately invest in its infrastructure.

The short line railroad industry will be full participants in these hearings. We have put together an internal process for developing and presenting our position on each issue so as to do everything we can to protect the interests of all short line railroads.

Most important, we will make a substantial effort explaining to the STB how short line ratemaking and service practices work, and how those things are weaved into the fabric of our relationship with the Class I’s.

These are very complex subjects, but a number of simple principles will guide our response to these hearings.

If we are not the problem, do not make us part of the solution. Short line railroad pricing and service practices are not the reason this debate is taking place. Applying blanket solutions to short line railroads will have virtually no impact on the outcome, but will have significant impact on the financial viability of our small businesses.

Short line railroads contribute to competition. The vast majority of short lines were created to preserve or enhance rail service where it otherwise was going to be abandoned or severely restricted. More than 300 of the nation’s 545 short lines connect to two or more Class I carriers, and this provides a significant competitive advantage to short line-served shippers. Enacting regulations that reduce our revenues will severely restrict our ability to maintain and rehabilitate these competitive alternatives.

Short line railroad transactions were predicated on established economics. Short line buyers purchased a given amount of traffic and a presumed rate. The goal is always to earn enough to improve and grow that service, and virtually all of today’s short lines have done so. Many of the ideas being discussed in the debate could destroy the economics of our transactions.

For instance, mandated terminal access would allow another carrier to service our best customers for a trackage rights fee. A typical trackage rights fee is no more than the direct cost associated with maintaining a particular segment of track. That is not what the short line owner paid for in the first instance, and allowing that to occur will turn these transactions upside down to the detriment of all the remaining shippers on the line.

A reduction in Class I investment and service will hit short lines hard. To the extent regulatory changes result in reduced Class I investment and service, those reductions will occur first on those line segments with the least traffic—where most short lines operate. This will reduce our traffic and our revenues, and we will in turn be forced to reduce investment and curtail service.

It is no secret that the impetus for these hearings is the unsuccessful effort of Sen. Jay Rockefeller (D-W.Va.) to craft a compromise piece of legislation during the 2010 Congress. While the short line railroad industry had serious concerns with portions of that legislation, it needs to be noted that Sen. Rockefeller was attentive to those concerns.

Sen. Rockefeller and the Commerce Committee devoted substantial time listening to and understanding short line positions. In many instances portions, of the proposed legislation were altered to address those concerns. In every instance, they did their very best to understand the intricate financial and operating relationships between the big and small railroads.

We sincerely appreciate that effort and we hope the STB will give us that same consideration.

Mike Ogborn is Managing Director of OmniTRAX, Inc., a transportation management company that provides management services to 17 short line railroads and other transportation companies in Canada and the United States.

By Chris Taylor, for Railway Age

 

c.taylor_update.jpgWoody Allen once said, “I took a speed-reading course and read War and Peace in twenty minutes. It involves Russia.” Speed is compelling. From restaurant service to medical treatment, we use speed to define quality. Transportation is no exception. But as Allen illustrates, by focusing solely on speed you can miss other essential elements. U.S. passenger rail is a case in point.

Headlines often blare about the speed of European or Asian high speed trains. But those vaunted speeds are rarely sustained in practice, due to operating costs, logistic constraints, and maintenance requirements. The unspoken story is overall performance—efficient, reliable, and comfortable ways of getting passengers to their destinations, using rail as one well-integrated component of an overall journey. But performance can be hard to define and even harder to quantify. Speed becomes the defining principle by default. Unfortunately, U.S. passenger rail cannot afford to live by that definition. To advance passenger rail here, advocates should focus on high-performance rail (HPR).

Things are different on this continent, and headlong implementation of European or Asian-style HSR may not be the best strategic choice for us. Different transportation corridors have unique needs and constraints. Choosing appropriate rail solutions by corridor is the key to our successful implementation of passenger rail. Appropriate phasing is critical to deliver early, visible gains and long-term potential. Credit the Obama Administration and the FRA for embracing that principle. Modifying the original High Speed Rail Strategic Plan, the FRA now recognizes three corridor categories: Core Express, 125 mph or faster; Regional, 90–125 mph;, and Emerging, below 90 mph.

This refocus is practical. Passenger rail is not a one-size-fits-all business. From political realities to legislative and budget constraints to market-capture issues, unique corridor conditions prevail throughout the U.S. Recognizing these complexities, the FRA has endorsed HPR for passenger rail. What exactly is HPR?

HPR is an approach that delivers an appropriate rail system for each market, and measures that system in terms of ride quality, frequency, reliability, safety, ontime performance, amenities, station environments, local transit and airport connectivity, and yes, speed. Using these criteria collectively puts rail in a new light. Rather than being a foreign, elitist, or extravagant expense, it becomes an attractive, effective, and affordable transportation alternative. Passenger rail can thus be transformed from an abstract indulgence to an urgent local priority.

HPR optimizes solutions by addressing the needs and constraints of individual corridors. In one corridor, 90–110 mph on a shared freight asset may be best. In the Northeast Corridor (where the existing system already operates at capacity), a separate, dedicated HSR system is preferable. In other corridors, new commuter service on existing freight assets might be the optimal solution (and HSR could develop later, once ridership is established).

HPR is also cost-effective—an important consideration since infrastructure funding is limited and the competition for funds is intense. Money is especially tight for major capital projects like HSR, for obvious reasons. For most Americans, HSR is a distant, theoretical construct. At full build-out, it would only capture a small share of the overall travel market. Taxpayers are reluctant to fund a system they perceive as “fast trains for businesspeople and tourists.”

Such perceptions have unfairly damaged the case for HSR; that small overall share is a critical, large share in key corridors, and HSR would free up capacity in other elements of the larger multimodal transportation network. HPR mitigates the perception problem by focusing on performance, efficiency, and corridor-appropriate solutions that benefit everyone. We need passenger rail travel to become a reality again for many taxpayers. And once the country accepts HPR, the step up to HSR will be easier.

Speed is compelling. But it is not always the best criterion. In truth, most transportation modes actually “sell” performance. Airlines never talk about how fast their planes fly, but they are expert at selling performance—legroom, in-flight movies, airport lounges, and so forth. We must bring that perspective to passenger rail by promoting HPR. By taking a holistic approach to rail, by shrewdly and fairly apportioning limited funds, the FRA is, in effect, advocating high-performance rail.

Chris Taylor is the New York–based deputy director for high speed rail at AECOM.

By William C. Vantuono, Editor

February 2009 

Twenty-nine years after the Staggers Rail Act freed the railroads from the shackles of excessive regulation and sparked a renaissance, the specter of re-regulation is stalking the industry. Now before Congress are two pieces of legislation that have been floating around Capitol Hill for the better part of two years. One, as its proponents propagandize it, is designed to “improve competition” for captive shippers. The other will eliminate the “anti-trust exemption” the railroads currently “enjoy.”

 

Dire and unintended consequences could ensue if thra_7.october.57_cover.jpgis legislation becomes law. Every stakeholder in the industry, freight and passenger, will suffer—shippers included.

This special edition of Railway Age is designed to reacquaint Congress and other opinion leaders with why the Staggers Act of 1980 was passed in the first place, and what it has accomplished—particularly, the capital investments that have enabled growth, productivity, and reliable, high-quality service. The reality is that most of the legislators who were present for the signing of Staggers are no longer around. And, almost no one in Congress remembers the dark days of the 1960s and 1970s, when America’s railroads were on the brink of collapse, and nationalization was seriously considered. 

Railway Age is not new to this fight. More than a half-century ago—Oct. 7, 1957, to be exact—we published our landmark “Outrage” edition, which spelled out how the combined effects of government regulation and government-funded competition had seriously weakened the railroads. 

Masterminded by Executive Editor Joe W. Kizzia, “Outrage” went into more than one million reprints and is widely credited with jump-starting the movement within the industry and on Capitol Hill that resulted in Staggers 23 years later. The similarity between our two magazine covers is intentional, only this time, we’re trying to stop history from repeating itself.

“By stripping away needless and costly regulation in favor of marketplace forces wherever possible, this act will help assure a strong and healthy future for our nation’s railroads and the men and women who work for them,” President Jimmy Carter said when he signed Staggers in one of his last acts as chief executive. “It will benefit shippers throughout the country by encouraging railroads to improve their equipment and better tailor their service to shipper needs. America’s consumers will benefit, for rather than face the prospect of continuing deterioration of rail freight service, consumers can be assured of improved railroads delivering their goods with dispatch.”

Staggers, as we well know, did exactly that.

There is no sensible reason trwafebcv1.jpgo turn back the clock—especially now, when America’s economic recovery requires investment in efficient transportation. Why destroy nearly 30 years of steady, hard-fought progress?

Our special report, “Renaissance—or Retreat?”, represents an industry that speaks with one voice.

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