REF 2023: Driving the Pursuit of the Most Obvious Modal Share in Years

The demand for Class I by other stakeholders in the rail industry is to pursue modal share gains more aggressively, but at this year’s Railroad Financial Corporation’s annual Rail Equipment Finance It feels more obvious than

We held one-on-one and group meetings with several rail car manufacturers, lessors, shippers, investors and other professionals. Rail service remains suboptimal and the volume outlook is overwhelming. Class I needs to further improve its service and track highway freight more effectively. This is a reverberating message that, over the years, has been emphasized more than ever.

We’ve heard it from stakeholders in the rolling stock and locomotive industry, some shippers, and even short-haul railroads. I think some may have shed some light on the shortcomings of the PSR and the entrenchment of rail margins due to problems with rail service over the past three years, but global port turmoil is also a major factor behind rails. Note that the cause We are unable to fully meet the surge in freight demand of the pandemic.

A possible, but not yet definitive, link between the recent derailment and PSR operational practices. This could be another factor encouraging industry stakeholders to seek a more balanced approach to profit and growth. Class I industry capacity utilization improved from about 80% in 2005 to about 61% in 2022. During the same period, rail traffic decreased slightly. This was primarily due to a long-term decline in coal, partially offset by an increase in intermodal, but not recent. Lack of growth means a decline in rail’s land transport share, but with the exception of coal, the decline is less dramatic. This makes the pursuit of modal share even more important for carriers themselves.

Broad wagon tensions continue. And with challenges in the supply chain limiting the industry’s ability to produce to meet demand, the leasing rate momentum looks sustainable. The spot rate improved for the 11th straight quarter in the first quarter and is expected to continue to perform well throughout 2023. Manufacturer turmoil appears to have eased slightly in recent weeks, but not necessarily as much as expected in the most recent earnings calls. The production consensus among industry insiders is that this year he is at 40,000 to he is at 45,000 units (48,000 units are modeled), and it looks like 2024 will be at a similar level.

Secondary market valuations remain strong, but have eased slightly in some areas. The strength of lease payments appears to offset the negative impact of higher interest rates, keeping valuations high. While further rail service improvements are needed to gain meaningful modal share, one of the medium-term risks to equipment demand is a further softening of the economy and key end markets, even if services improve dramatically this year. when it does not lead to the intended amount of addition. This will be a double headwind for rail cars and locomotives. Although a significant risk, this is not our basic assumption.