Various factors spur declines in Class I railroads 2016 capital expenditure projections

While the investments are beyond impressive, 2016 capital expenditure investments rolled out by Class I railroads in recent weeks paint a picture of lower annual spending levels compared to past years.

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For several years, the amount of annual capital expenditures made by freight railroads into things like upgraded track, new locomotives, and freight cars, among others, could be viewed as staggering.

Why staggering? There are a few ways to explain it, but some perspective is needed to digest the capital commitments these carriers are making each and every year. Perhaps the best way to view it is through the lens provided by the Association of American Railroads (AAR).

The AAR says that freight railroads spend 18 percent of their revenues on capital investment compared to 3 percent invested by the average U.S. manufacturer. That is quite a spread there and it really speaks to the steep levels of investments being made into railroad networks every year.

As previously reported in LM, for 2015 the AAR said that freight railroads spent an estimated $29 billion on the country’s rail network, ahead of 2014’s $27 billion, which equates to roughly $79 million a day, while bringing the total investment made by freight railroads going back to 1980 to $575 billion.

While these investments are beyond impressive, 2016 capital expenditure investments rolled out by Class I railroads in recent weeks paint a picture of lower annual spending levels compared to past years.

A quick look at the data issued by the seven Class I railroads bears that out, too, based on these figures below:
-CSX, $2.4 billion in 2016 and $3.4 billion in 2015;
-BNSF, $4.3 billion in 2016 and $5.8 billion in 2015;
-Union Pacific, $3.75 billion in 2016 and $4.3 billion in 2015;
-KCS, $580-to-$590 million in 2016 and $649 million in 2015;
-Canadian Pacific, $1.1 billion in 2016 and $1.5 billion in 2015;
-CN, $2.9 billion in 2016 and $2.7 billion in 2015 (the lone carrier expecting an increase); and
-Norfolk Southern, $2.1 billion in 2016 and $2.4 billion in 2015

These decreases in what are still very impressive spending figures reflect a railroad and intermodal market that from a volume, and, in some cases revenue and net income, perspective. United States rail carloads in 2015, for example, were down 6.1 percent annually, with total carload and intermodal volumes down 2.5 percent.

To be sure, these volume declines are a byproduct of issues in some key sectors served by freight railroads, with coal’s ongoing steep declines still front and center. 

And that by no means suggests that even with volumes down in 2015, followed by reduced 2016 capital expenditure plans, that the Class I’s are in free fall by any stretch. Instead, it speaks to being able to get expenses in line with what is happening on the front lines, as well as planning for the future, too. Would anyone be surprised to see 2017 capital expenditures set a new record, with 2016 being viewed as, to borrow a sports term, “a bridge year?” Hardly, I think, but at the same time 2016 is basically in the first inning still and there is a lot of the game still to play.

But before jumping to conclusions it is wise to look at the factors that led to the 2016 capital expenditure declines, which were succinctly outlined by Brooks Bentz, president of Transplace Consulting Services. 

“The rail industry’s rapid resurgence was continuing at a strong pace, despite the decline in coal loadings, largely buoyed by oil and related commodities (e.g., frack sand, pipe, etc.) and strong growth in the automotive sector and sustained growth in intermodal,” Bentz said. “The rapid rise in the cost of oil only a short time ago, enabled the extensive development of the domestic oil patch.  With the bottom falling out of the per-barrel cost of Middle East oil, the profitability of domestic production crashed with a loud bang.  So, when you put that together with the continuing decline in coal, it’s a significant drain on revenue and profitability that simply can’t be made up easily, if at all.  On top of that, the declining cost of oil and resulting ‘cheap’ diesel fuel has dissipated the increasing advantage intermodal was reaping over OTR trucking.  The next result of that has been a ‘re-diversion’ of traffic back to OTR from intermodal and sluggish or declining intermodal volumes.”

And Bentz added that maintaining the capital investment programs that were on the books just isn’t feasible, with what he called “inevitable cutbacks” appearing, which is just good economic sense, under the current circumstances. 

But at the same time he made it clear that does not change the long-term need for sustained investment in infrastructure and capacity expansion, as other issues, such as highway congestion will still contribute to sector growth.  Instead, he explained, the question will be how long this will last, what the options might be and at what level will the Class I’s be able to continue to invest if the current predicament persists with no relief?

These are questions with no easy answers at the moment, but given the proven track records freight railroads have demonstrated over the years, especially when considering they are on the hook for all of their capital investments, it stands to reason they will assess the situation and react accordingly and wisely in the form of measured and calculated capital expenditures investments. 

About the Author

Jeff Berman, Group News Editor
Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman

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Article Topics

AAR · Carload · Class I Railroad · Intermodal · All Topics
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