2015 OUTLOOK: Can we handle it?

The biggest challenge the railroads will face in 2015 isn’t the possibility of some form of reregulation. It isn’t captive shippers demanding open access or reciprocal switching. It isn’t stricter, EPA-mandated Tier 4 diesel locomotive emissions standards. Nor is it the fast-ticking clock to get PTC up and running by the end of next year.

These challenges are serious, but not as much as an ongoing capacity shortage that, combined with what is projected to be another harsh winter, may produce some fairly substantial service problems as 2015 unfolds.

With crude oil movements growing, intermodal at an all-time high, coal on the rebound, a second-consecutive record grain harvest, and most other commodities on the upswing, the Class I railroads can’t build additional capacity fast enough. But building it they are, and they will continue to do so for the foreseeable future.

The best example of this boom in building is BNSF Railway, whose planned capital expenditures for 2015 will be $6 billion—another record for a company that, including next year’s amount, will have made more than $50 billion in capital investments since 2000. BNSF also updated its planned capital expenditures for 2014, which now are expected to be $5.5 billion—$400 million more than initial projections.

“Our 2015 plan marks the third year in a row that BNSF has committed a record amount for capital investments,” said President and CEO Carl Ice in announcing next year’s program. “Our capital investment program since the beginning of 2013 through the end of 2015 is unprecedented and is clear evidence of our confidence in a growing economy and our intention to meet the demand for service that comes from all our customers. We have made great progress in expanding the segments of our railroad that have been most constrained by rapidly increasing demand. Once these new capital programs are completed, we expect to further restore the capacity flexibility we have historically enjoyed to manage the periodic demand surges that come from a dynamic and fast-paced economic environment.”

The largest chunk of BNSF’s 2015 capital plan, $2.9 billion, will be for infrastructure renewal and maintenance. These projects will go toward replacing and upgrading rails, ties, and ballast that are due for updating. As with practically all other railroads, such infrastructure projects “typically make up the largest percentage of BNSF’s annual capital projects and are important for ensuring that BNSF can optimize its rail network for ideal speeds for trains that carry a wide range of commodities,” Ice said.

BNSF also plans to invest almost $1.5 billion in expansion projects. Nearly $500 million of that expansion work will occur in the Northern Region, where BNSF has been experiencing the fastest growth—as well as the most congestion. That region primarily serves agriculture, coal, crude oil, and materials related to crude oil exploration and production, such as sand for hydraulic fracturing. In 2014, $1 billion was spent on the Northern Region. With next year’s program, capacity there is expected to be well in line with projected growth, freeing up capital dollars for expansion programs on other areas of the network.

BNSF will also increase the size of its locomotive fleet, adding 330 new units to its fleet of 7,500 and replace others that will soon reach the end of their useful service life. (Details for the various line capacity and maintenance projects BNSF plans to undertake, particularly those in its Northern Region, will be announced in early 2015.)

In the East, CSX—which Canadian Pacific recently approached about a transcontinental merger, said it has taken “a number of actions to overcome the transition in the energy markets in recent years, emerging a stronger company that is better positioned to capitalize on momentum across nearly all the markets it serves,” Chief Financial Officer Fredrik Eliasson recently told investors and analysts. “Our future is built on the continued execution of our core strategy, which means enhancing our ability to grow faster than the economy, price above inflation, make strategic investments, and produce ever more efficient operations to continue delivering superior shareholder value. The foundation of that strategy is service excellence, and we are putting the resources in place now to deliver strong service to continue creating sustainable value for our customers and shareholders. By focusing on inflation-plus pricing and efficient operations, CSX is better positioned to capitalize on continued economic momentum and develop new customers. We remain confident in our ability to deliver double-digit earnings growth and margin expansion in 2015 as we progress toward a mid-60s operating ratio over the longer term.”

Record freight car backlog

As much as the railroads are scrambling to add needed capacity, freight car builders and component suppliers are scrambling to keep up with demand. The freight car backlog at the end of third-quarter 2014 amounted to 124,437 cars and platforms, the highest backlog level since October 1979’s 127,887 (when figures were compiled monthly), according to figures Railway Age obtained from Economic Planning Associates (EPA) and the Railway Supply Institute. This backlog dwarfs prior high points of first-quarter 2006’s 86,853
 units and third-quarter 1998’s 69,858.

“The railcar market continues to surge,” said EPA Peter Toja. “Even though assemblies accelerated in the third quarter, incoming orders of 42,900 cars and platforms far outpaced deliveries of 18,432 units. Most noteworthy of the third-quarter expansion in orders was the widespread demand for a number of car types. Strong increases were recorded by all types of covered hoppers, intermodal equipment, Class F cars, and tank cars. Even the long-neglected boxcar segment expanded at a vigorous pace in the third quarter.”

Based on ongoing strength in several railcar types, EPA raised its short- and long-term deliveries forecasts. Toja expects deliveries of 68,500 cars and platforms in 2014, followed by assemblies of 84,500 units in 2015. Longer term, he expects deliveries to moderate at significantly higher levels than EPA’s most recent forecast. After 76,800 cars are delivered in 2016, deliveries will remain at “the healthy level of some 75,000 cars through 2019.”

“In spite of a sluggish economy, the major railroads recorded strong financial performances in third quarter, and were indicating strong investments in a number of areas, primarily for intermodal equipment and terminal facilities,” said Toja. “In addition to new intermodal terminals, expansion and modernization of existing facilities were cited by the railroads. And, we believe that these investments will be well-founded as railroads look to increase market share at the expense of the long haul truckers.

“On a positive note, demand for boxcars jumped in the third quarter. According to industry sources, the 3,510 cars ordered in the third quarter were primarily for equipment destined for TTX. It now appears that after years of neglect, TTX is looking to upgrade its extremely aged general service cars.

“Aside from TTX, there seems to be little support for boxcars from individual investors or users of boxcars. As we mentioned in previous reports, we continue to believe that the steady expansion in motor vehicle demand and production is leading to a revitalization of auto parts boxcars. However, non-automotive demand seemed quite subdued until the TTX order was placed with two builders.

“Demand for hi-cube covered hoppers turned in another impressive gain in the third quarter. Orders for 2,875 cars nearly matched the 2,950 cars ordered in the second quarter. As a result, even with a significant increase in third-quarter assemblies, backlogs expanded once again to 9,764 cars at the end of September.

“Responding to an apparent shortage of grain service cars, demand for mid-sized covered hoppers rose to an impressive 4,230 cars in the third quarter. With only a moderate pickup in third-quarter assemblies, backlogs at the end of September were 9,578 units, ensuring that carbuilders would have hefty backlogs as 2015 unfolds. And the outlook for grain will also support further gains in demand for grain service cars.

“Orders for small-cube covered hoppers jumped to 16,597 cars in the third quarter. And, with orders through September far outpacing production runs, backlogs have expanded from 3,228 units at the beginning of the year to a very formidable level of 34,334 cars at the end of September We expect deliveries of 13,000 this year and 16,000 in 2015.

“Demand for coal cars expanded moderately in the third quarter. After only 154 cars were ordered in the second quarter, third-quarter orders amounted to 705 units. Still, the increase in third-quarter assemblies moderately eased backlogs from 2,140 cars at midyear to 2,092 units at the end of September. While electric utility coal consumption improved in this year’s first half, we expect limited demand for coal equipment until export markets rebound.

“In spite of further idling of coal-fired capacity by the utilities and continued pressure by the Obama Administration and the Environmental Protection Agency, domestic coal consumption advanced 3.4% year over year in the first half of 2014. And though through July of this year, exports were running 15.5% below the comparable period of last year, we believe that over the longer term, coal exports will expand.

“Demand for intermodal equipment is gaining momentum. First-quarter orders of 2,207 platforms were exceeded by orders of 3,313 platforms in the second quarter, followed by a further strong increase to 4,696 platforms in the third quarter. Backlogs at the end of September were 8,184 units, almost a tenfold expansion over opening year backlogs of 825. And, we expect further gains in demand for intermodal equipment, longer term.

“Demand for non-intermodal flat cars is expanding rapidly. After 1,050 units were ordered in the second quarter, third-quarter orders amounted to 2,150 cars. As a result, backlogs expanded for the second consecutive quarter and now amount to 3,104 cars, the highest level since the first quarter of 2013. Demand is being driven by autorack carriers. Given the expansion in North American light vehicle production as well as anticipation of further growth, we look for more gains in demand for the autorack carriers. We continue to look for deliveries of 3,000 Class F flats both this year and next.

“After 1,542 cars were ordered in the second quarter, there was no interest in mill gondolas in the third quarter, so acceleration in assemblies served to draw dawn backlogs to 2,228 cars at the end of September.

“Demand for tank cars continues to impress. After 10,628 cars were ordered in the second quarter, third-quarter orders amounted to 8,137 cars. In spite of a significant pickup in assemblies, end-of-September backlogs amounted to a healthy 51,582 cars. And, based on the latest projections of oil production and impending legislative issues, we look for further growth in demand for oil service tank cars. The anticipated growth in U.S. oil production, particularly from the Bakken oil shale formation, has been well documented.

“Spurred by the use of fracking, U.S. oil production has jumped from 5.0 million barrels per day in 2008 to 7.4 million last year and is expected to average 8.5 million this year and 9.3 million next year. Due to the rapid expansion in oil production and the lack of any significant pipeline additions, rail will continue to benefit, and we anticipate strong deliveries of oil tank cars throughout the forecast horizon.”

The record freight car backlog, said RSI President Tom Simpson, “is a number that had not been achieved since the late 1970s. Given the current annualized delivery rate of roughly 96,000 cars, it will take at least one year to work off the current backlog, even without additional orders.”

Capitol Hill: A full agenda

On the regulatory front, the RSI Committee on Tank Cars (RSICTC) expects the U.S. Department of Transportation and Transport Canada to finalize rules governing the movement of flammable liquids by rail early in 2015. “RSICTC has submitted a comprehensive plan to both USDOT and TC arguing for a holistic approach to the issue that addresses rail operating issues and the proper classification of the flammable liquids,” said Simpson. “RSICTC also recommends steps to continue to remove risk from the tank car. The recommendations include new tank car standards and modifications to the current flammable liquid tank car fleet. RSICTC has proposed an achievable modification schedule that should not disrupt the movement of crude and ethanol by rail.”

“In 2015, the Obama Administration and the new, Republican-controlled Congress will have a full transportation and infrastructure agenda before them,” noted Simpson. “Surface transportation reauthorization legislation, Moving Ahead for Progress in the 21st Century (MAP 21), extended by the last Congress, expires at the end of May 2015. Congress will again confront the need to reauthorize or extend federal transportation programs and answer the fundamental question of how to pay for it. Embedded within MAP-21 reauthorization debate will be the issue of allowing bigger and heavier trucks on our nation’s highways, reauthorization of the section 130 highway rail grade crossing safety program, funding for Operation Lifesaver, and perhaps a dedicated source of funding for intercity passenger rail.

“Additional rail issues debated could include extending the short line infrastructure tax credit, preserving balanced regulation through Surface Transportation Board reauthorization, Amtrak reauthorization, reforms to the Railroad Rehabilitation and Improvement Financing (RRIF) program, rail safety and operations, as well as the impending deadline for PTC. Add to that list nomination hearings for new FRA and PHMSA Administrators, and the Congressional rail agenda seems daunting. But the supply industry will continue to be heard on Capitol Hill and within the executive branch in pursuit of our industry’s legislative and regulatory goals. Our mission is to have a proactive legislative and regulatory strategy.”

The strength of the railway supply industry is perhaps best indicated by the strong interest shown in Railway Interchange 2015, scheduled for October 4-6 in Minneapolis, with outdoor locomotive, rolling stock, and M/W machine exhibits. “RSSI, REMSA, and RSI have expanded the indoor venue to include the entire Minneapolis Convention Center to accommodate the growth this event has enjoyed,” said Tom Simpson. “Our portion of the Convention Center is already nearly 50% subscribed.”