Imagine this: you’re a transportation professional who has just received notice from the railroad that they are no longer going to provide you with the type or quantity of railcars you’ve used in the past. You ask yourself “Can they do that?” The answer… Absolutely! Supply cars to the shipper is only a business decision for the railroads and what they’re telling you by not supplying you with railcars is that railcars for your business isn’t a growth area for them. Note: I didn’t say the business isn’t a growth area for the railroad; supplying railcars to support the business isn’t a growth area for the railroad.
Now you have several options. You can accept alternative railcars out of the railroads “readily available” pool even though they’re potentially not ideal nor reliable (think guaranteed availability) railcars, you can shift your modes of transportation to truck or barge if that’s an option, or you can obtain private railcars to lock in your railcar supply and the sustainability of your business.
Here’s the important question: What does your business look like and what do your transportation costs look like if you’re not shipping by rail?
According to the July 2020 issue of Progressive Railroading magazine, private railcar ownership continues to outpace railroad railcar additions. Drilling deeper, if you look at the top five railroads that own/supply railcars and compare it to the top five private railcar suppliers (excluding third party managed cars and TTX cars) you’ll find a mix of 67% private railcars to 33% railroad owned. Furthermore, if you count all of the railroad and private companies listed the mix comes in closer to a whopping 80/20 breakout. The handwriting on the wall is clear: the railroads aren’t investing in railcars.
Now, you’re at a crossroad and it’s time to ask yourself “Why Change” and “Why Now?” This is the point where you have to assess if you’re going to make a change in your process (and decide how) or stay the course and hope against all odds that the railroads will change their mind and reinvest in railcars that support your business. Keep in mind, the railroads decision to stop investing in railcars is most likely due to other capital constraints and the need to focus on the operating ratio. If you’re not familiar with Precision Scheduled Railroading, we highly recommend you educate yourself with it. Call us if you wish to discuss or need some guidance on where to look.
Time for a story to set the relevance of this stage. We’ll compare to drastically different industries and scenarios below to bring light to this point.
We were consulting to a potentially large northern California dairy feed processing and grain company. This client had a foothold on the northern California feedstuffs market. They typically took in carloads of corn, various grains and grain byproducts. During our assignment, we identified an opportunity to take in larger quantities of products, but it would require setting up a unit train unloading facility. At the time, unit trains were just getting established and were an unknown quantity but did carry a rail rate incentive sufficient enough to justify the investment. Consecutively, we were also consulting to a smaller client in southern California and during our analysis we drew the same conclusion and offered advice to both customers to invest in a unit train unload facility and utilize private railcars. The two clients could effectively split the market and each have a significant presence in their geographic areas. The first client, being of larger market presence at the time, decided that the questions “Why Change?” and “Why Now?” didn’t apply to them and they passed on the idea. They now have a volume of 20% of what they previously had. Meanwhile, the second client embraced the questions and concept and has had a 300% growth rate. They’re now twice the size of the northern California client. The big difference? Controlling what they could control and embracing it. Investing in private railcars was a large portion of the overall strategy to make their strategy successful.
We have a client who was faced with a similar situation about seven years ago. The railroad was divesting itself of the railcars used in the clients’ business and not maintaining the base railroad car-type required to support the customers shipping needs. At the time, the number of railroad supplied railcars consistently in service was around 300. That’s a significant number of railroad railcars to replace with private assets and they came to Tealinc for help. With our expertise in owning, leasing and managing private railcars, we were able to help the customer recognized the value of “Why Change?” and “Why Now?”. They knew their alternative was to risk not having railcars available to support their business which was a costly preposition. Working together, we immediately put in place a strategy to lease them private railcars and instead of hiring an internal logistics team, they outsourced the management of the railcars to Tealinc too. What did the client gain? A dedicated supply of well-maintained railcars with a management package to boot! The most significant gain though was the knowledge that they could get their feedstock product to the plants that required them in quantities that would support their manufacturing operations. Additionally, they realized the benefit gained was the process in which the management, monitoring and reporting of the movement and mechanical health of the railcars was taken care of by experts. Over the past seven years they’ve saved $31.78 per railcar per month on a total of 300 railcars. This has yielded them a return of $633,255 in savings over the alternative to not change when they did. Since that time the railroad has further depleted their railcar pool. How large would the impact have been if the customer would not have asked the “Why Change?” and “Why Now?” questions? Devastating. It’s not a gamble any business should take.
The trend towards private railcar ownership was set years ago and continues to be driven by cost cutting measures by the railroads. Railroads want to be railroads, not equipment owners, unless that ownership offers the railroad a strategic advantage. In the west, this trend started with the coal fleet in the mid-1980’s. Railroads had enormous expenditures building out and upgrading track in the Powder River Basin that it made sense to defer railcar expenses to shippers. That thought process grew across all railcar types and moved from a majority of railcars being owned by railroads to the majority now being owned by railcar leasing companies and private shippers. Mergers, acquisitions and investors now fundamentally mandate that railroads stick with their core competencies and that continues to drive this trend.
Our two stories are a bit different in their application, but both have the same conclusion. Buying or leasing private railcars should be part of your strategic analysis and now is the time. The gains are evident. Reliability of product delivery, ability to ship your product and gain premiums when others can’t get railroad supplied equipment, keeping factories and manufacturing fluid, e.g. not shutting down factories for want of product, and the ability to deliver a product to your customer while the competition waits for railcars is paramount to being successful. Whether you buy or lease railcars entails another series of questions and analysis which we’ll explore in future blog posts so be sure to check back regularly or, if you’re not already signed up to receive our updates, reach out to us and request that we stay in touch. Send us an email at webmail@tealinc.com.
Railcars, depending on type, are generally in a surplus status at this time and there are some great deals to be had for those willing to step up. You’ll need to look forward to the future with a bit of optimism because it is inevitable that better times are ahead of us.