I’m singin’ the boxcar blues

The future of the North America rail freight boxcar been a lingering question for about four decades during my railroad career. Much like the proverbial frog asks in slowly heating water, “Is it boiling yet?

The strategic issue is simple—and harsh. Is the historic boxcar freight business model now just a boutique market? At what point of volume demanded and car assets supplied does the mismatch hit a dysfunctional critical level? Is that sometime in between 2024 and maybe 2029?

Multiple parties have followed this issue in periodic media reports, the latest at Rail Equipment Finance 2019 David Humphreys of Railinc, and by other REF speakers between 2016 and 2019.

There was also a useful report by Paul Ziobro in the Wall Street Journal (June 2018). Here is that report’s WSJ-produced graph identifying the continuous downward car supply:

A check against Umler Railinc Umler files confirms the numbers. The long-run car supply drop in the face of lost share to trucking is not disputed.

Here is a second source that shows a CAGR decline in boxcar supply in the –4.4% trending range:

In contrast, the U.S. economic growth rate is trending in ~+2.5%. That difference can’t be ignored.

Some parties remain optimistic. Year after year, I have listened to top railroad executives selectively speaking optimistically of their corporate boxcar fleet plans, but the rate of replacement with new-builds has, in metrics, been frankly rather anemic.

On the demand side, economically, the fundamental market fact is that today a pretty small hard core of shippers still depend on the boxcar. Most of them are a class of large corporate paper, pulp and wood-type commodities. They’re still dependent because, in most cases, their physical plants have logistics doors and shipment dimensions that fit into a 50-foot or a 60-some-foot boxcar at much better cubic capacity utilization than a truck offers.

There is also a group of perishables shippers that can use a modern 70-foot or longer high-cube refrigerated boxcar.

The PSR Era Market Hurdle

Here are a few harsh strategic realities that should not be ignored:

1) In the era now of the push for financial returns from PSR (Precision Scheduled Railroading), the amount of internal corporate railroad management energy available to resolve and restructure and then resupply the boxcar segment frankly isn’t there.

2) What Chief Financial Officer at the “Big Seven” Class I railroads is going to write a boxcar-requirement capex check when the target ROI assets pretax is likely in the 20% range? Perhaps CN, since CN has a very large boxcar-suited commodities market in Canada. But who else?

3) Every 10,000 new boxcars is about a $1.3 billion investment added to the PSR balance sheet. That kind of money represents a huge leap of market turnaround faith. Which PSR railroads are so inclined?

4) What is a reasonable strategic business critical mass of a renewed boxcar fleet? That metric never seems to get calculated. Why not? What is the expected 40- to 50-year service life gross revenue and net operating income “pro forma” estimate of cash flow and earnings for both the car investor and a railroad’s internal commodities marketing group? Are the numbers relevant in the rush toward PSR profitability and EPS accounting management tactics? This unanswered series of questions, to me as a railway economist, flashes a due–diligence alert.

5) Who made the last big boxcar fleet life extension financial commitment? That was likely GATX, the leasing firm, which risked in 2014 some $340 million dollars to buy out about 18,500 railcars—with a calculated 17 years or more of car-use life. It was $18,400 or so bet per car, for an annual revenue stream of maybe $70 million. Before maintenance and other annual expenses, that’s maybe $3,800 a year (~$320 a month) in revenue income. Net profit would be less. This is versus maybe $130,000 if bought new with a 50-year life. Five years later, was it a good deal? I don’t have that answer. Who does?

6) A Georgia rail colleague commented this week, “Is watching the break-bulk boxcar business with pallet freight like watching the last ocean break-bulk freighters resist containerization? He is an engineer. But that is a flat-out great marketing question. Break-bulk boxcar loading can be so disruptive of PSR local train pickup and delivery that one U.S. Class I is on a campaign to discipline shippers to clean up their boxcar side track operations. Boxcar pickup and delivery on a PSR schedule is often inefficient.

Thinking outside the box is challenging. If the business model is broken, and the continued asset investment looks perilous, it’s time to seriously consider changing the business model.

How? One way is for break-bulk, cubic-capacity-oriented shippers and receivers to buy out the boxcar assets and hire a limited box car pool manager. Sounds drastic? Maybe. But such a bold move might then secure their niche market use for the long term.

“Continuing to depend upon the old model is a high stake gamblers bet.” Who is going to step up and lead a new approach? What kind of critical mass of users need to support such a hypothetical startup shift?

There are some rumblings that the higher-growth reefer boxcar fleet might be a good business sector to try a new model. In my opinion, the limited Class I promises of reefer fleets to expand these past 15 years to multiple East Coast markets has stalled. Today, huge staff downsizing under PSR isn’t an encouraging sign for railroad-led initiatives in the refrigerated-goods market.

What do you readers think?

Independent railway economist Jim Blaze has been in the railroad industry for well over 40 years. Trained in logistics, he served seven years with the Illinois DOT as a Chicago long-range freight planner and almost two years with the USRA technical staff in Washington, D.C. Jim then spent 21 years with Conrail in cross-functional strategic roles from branch line economics to mergers, IT, logistics, and corporate change. He followed this with 20 years of international consulting at rail engineering firm Zeta-Tech Associated. Jim is a Magna cum Laude Graduate of St Anselm’s College with a master’s degree from University of Chicago, Married with six children, he lives outside of Philadelphia. “This column reflects my continued passion for the future of railroading as a competitive industry,” says Jim. “Only by occasionally challenging our institutions can we probe for better quality and performance. My opinions are my own, independent of Railway Age.”