Market Trends

The ‘Perfect Storm’ in Rail Congestion Turns Fleet into Collateral Damage

June 10, 2014

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Fleet order-to-delivery (OTD) has been brutal this model-year due to severe weather conditions, which exacerbated rail congestion, creating huge backlogs of vehicles needing to be shipped. We are still several months away from publishing AF’s annual OTD survey, so we are reliant on anecdotal stories we are hearing from the field. They’re not pretty. Railway backlog is particularly impacting ship-thru units requiring upfitted equipment. Bodies are ordered, but the chassis are delayed, which creates a domino effect where upfitters don’t produce additional bodies until the chassis arrive. These delays shift one fleet’s production into another fleet’s reserved schedule. Now, body production is out of sync with chassis delivery, which means fleets have a depreciating chassis sitting at an upfitter, which is unusable. There are numerous other stories, but the worst part is that some fleets are being warned to anticipate rail delays again this winter.

Freight Volume is Booming

One man’s misfortune is another man’s fortune. Such is the case with the rail transport business in North America, which, although struggling to keep up with demand, is experiencing boom times. However, as all fleet managers are painfully aware, this strong demand to haul freight has created widespread railway congestion. Rail shipment of fleet vehicles is critical to acceptable OTD times. While fleet is important, in the larger scheme of things, fleet vehicle shipments only represent a tiny percentage of overall rail shipments. Fleet represents less than 20 percent of overall automotive shipments, which, in turn, only represents 9 percent of total rail freight. The fastest growth in railroad traffic is in the shipment of crude oil. This has been heaven-sent for railways as it has helped offset declining coal shipments, but this has been the root cause of much railway congestion. The demand on rail assets for oil shipments will only increase. Predictions are that oil production in the Bakken formation in North Dakota and Montana could increase to 2 million barrels per day in the coming years.

In addition, there have also been dramatic increases in the rail shipment of agricultural products. In 2013, record harvest occurred in many states and Canadian provinces, causing delays in getting grain to market, primarily due to the shortage of rail cars and crews, along with increased congestion, especially for freight traveling through the Dakotas to the Pacific Northwest. But, what brought everything to a head was last winter’s severe weather, which created the proverbial “perfect storm” that severely strained the rail network throughout North America. Some are beginning to believe the rail congestion experienced this winter is more of a symptom of a systemic infrastructure weakness and not solely the consequence of severe weather.

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The weak link is the looming shortage of locomotives to move this increased freight volume, which some view as the Achilles heel of the rail industry. As rail industry trade publications report, each of the seven North American Class 1 carriers is “power short.” These reports state that putting older locomotives back in service will not work in many cases, due to fuel costs and emissions requirements. Weather and regulatory issues, such as braking, dictate train length, which, in turn, determines overall freight capacity. In addition to a shortage of locomotives, there is also a shortage of crews. As the national economy improves, railroads are ramping up to hire enough new employees, in particular engineers. Most railroads have increased their locomotive orders for 2014. The industry’s locomotive production capacity is approximately one thousand units per year, and reports indicate that the two major manufacturers – EMD and GE – will be sold out in 2014.

One beneficiary of the rail congestion is the vehicle hauling industry, with many OEMs having a positive experience with truck haulers and are considering making some of these switches permanent. While there is an additional cost to move vehicles long distances by truck, it is less expensive than having vehicles sit stranded waiting for rail pickup.

Expanded North American Production Capacity

One factor contributing to rail congestion is the increasing automotive production capacity in North America. With seven new plants forecasted to come online in Mexico between 2013 and 2020, the expected exports to the U.S. will rise substantially. Rail-based vehicle exports from Mexico to the U.S. and Canada will increase from 1.67 million units in 2013 to 2.81 million by 2018.

Over the past 32 years, most global OEMs have built new assembly plants in North America. There are currently 18 transplant assembly plants in the U.S., with the majority of them located in states where, traditionally, there has not been domestic automotive assembly plants. These 18 plants now represent a growing share of automotive rail shipments.

Another example is the Volkswagen Group, with imports from Europe to the U.S. projected increase from 248,500 units to 350,000 units by 2018. In addition, VW will increase the number of vehicles it exports from Mexico to the U.S. from 246,000 in 2013 to 310,000 by 2018. This expansion in production capacity will add further pressure on its rail network, which it uses extensively to ship vehicles assembled in Mexico to the U.S.

Lastly, many people are unaware that the U.S. has become a significant exporter of American-assembled vehicles, which are transported by rail to ports for shipment. For instance, General Motors, Ford, and Chrysler exported over a million cars in 2012, including 740,000 to Canada. Honda exported more than 20 percent more automobiles from the U.S. than it imported from Japan in 2013. Similarly, Toyota exported 130,000 U.S. assembled units in 2013 to 32 countries. Other significant exporters of U.S. assembled products are BMW from its plant in Spartanburg, S.C., and Nissan, which had a 37 percent increase in exports.

Worrisome Clouds on the Horizon

The growing suspicion is that we may experience railway congestion next model-year similar to what we experienced this model-year, with the degree of congestion contingent on the severity of the weather. This is one time where I hope my forecasting intuition is dead-wrong. However, the clouds on the horizon look worrisome.

Let me know what you think.

mike.antich@bobit.com

Comments

  1. 1. Rachel Johnson [ June 10, 2014 @ 09:27AM ]

    I hope you are wrong too! I didn't realize the entire scope of the problem. Thanks for the enlightenment.

  2. 2. John Steere [ June 17, 2014 @ 12:14PM ]

    I can tell you 1st hand that the backlog of trucks waiting to be shipped is getting critical. Customers are wondering why their orders were produced 45 days plus ago and are still waiting to be shipped out. What a mess ....

  3. 3. Mario Moses [ June 18, 2014 @ 02:25PM ]

    MIke,

    I think your article is right on target. I spent a good deal of time digging into this issue this past winter and into spring with both our FMC and our primary OEM. Our problem was also exasperated by a larger than projected need for upfitting and thus we experienced the central upfit order as well. I've sugguested to the OEMs and FMC that historically quotes OTDs may no longer be valid especially since I've heard no confirmation that OEMs have been able to influence new rail cars into service that were retired during the economic decline. I also have heard that the fuel industry pays more than the auto industry for rail space, so I can't see where they would be incented to invest in more rail space/cars for a lower paying customer.

  4. 4. Chris Blumberg [ September 04, 2014 @ 01:15PM ]

    Mike,

    Good summary, although I would like to add a few things.
    1. The average age of the entire US rail fleet is 17 years old and growing. Manufacturers have increased production of cars from about 53,000 on average to almost 60,000 (which nearly 30,000 is being oil cars) but with a fleet size of about 1.2 million this is creating a huge demand for hoppers and intermodal cars. as 50% of production is now going to oil cars where this used to be to other types of cars. The difference in the size of the fleet from 2012 to 2013 was an increase in 7,000 but nearly 60,000 cars were delivered meaning that 53,000 cars had to be retired. This means 57,000 hoppers, intermodal and other types were retired, but only 30,000 were built to replace them.
    2. Manufacturers have created new rail cars that can store 10 to 20% more grain and other products, but a lot of rail lines cannot in the Midwest cannot handle the 286,000 or 312,000 pound axle weight (you can see this on UP and BNSF rail maps). This means these places are increasingly reliant on older cars that are being retired, but cannot use the new Hopper cars for transport that are being bought.
    3. US-Mexico trade is almost done entirely by truck because the Mexico rail lines simply can't handle the volume. Somewhere around 3 or 4% of Mexico freight is moved by train compared with 40% in the US. The US should start a joint venture with Mexico and UP/BNSF to build double or triple tracked lines from Houston and Dallas down to Hubs in Mexico. It would reduce emissions, road traffic, and rail congestion hugely.
    4. A lot of the train car manufacturers have their own companies that lease rail cars. Prices for leases have quadrupled and they are holding back production to take advantage of the leasing prices, further increasing demand. Rail manufacture companies and leasing companies profits have gone up nearly 80% in 2 years.

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Author Bio

Mike Antich

Editor and Associate Publisher

Mike Antich has been covering the fleet management and vehicle remarketing markets for more than 20 years. During this period, Mike has written or edited more than 4,600 articles on the subjects of fleet management, manufacturer fleet activities, the fleet leasing industry, and vehicle remarketing. He was inducted in the Fleet Hall of Fame in 2010.

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