Our Market-Based Approach is Working, by Bill Sheehan, Vice President, Fleet, TTX Company
I read with interest David Nahass’ October 2024 Railroad Financial Desk Book article regarding boxcars. It reports that the lone shipper representative with whom Mr. Nahass spoke, Mr. Corthell of Packaging Corporation of America, sees the boxcar fleet as “close to right-sized for current demand levels” and “expects the replacement of boxcars reaching retirement age.”
Mr. Corthell is correct. The overheated rhetoric by some about a looming “boxcar cliff” is misguided. Rail industry participants—railroads, railcar leasing companies, and others—have continued to invest in boxcars, renewing the fleet with modern, efficient equipment. Thanks to a well-functioning market, the fleet is handling current demand and positioned to support long-term growth.
Unfortunately, other statements reported in the article perpetuate misinformation about boxcars and wrongly advocate for government regulation that would harm shippers and railroads.
There is a reason claims about an impending boxcar cliff have been made for decades, even though a cliff has never materialized. One set of industry participants—railcar leasing companies—has interests that diverge from the others. Railroads and shippers profit from transporting goods. They share an interest in a railcar fleet sufficiently large and diverse to meet transportation needs and operate efficiently, but not too large that many cars are idle, clogging the rail network and adding costs unnecessarily. By contrast, leasing companies profit from leasing railcars. They benefit when more of their cars are circulating on the network, even if supply exceeds demand.
The leasing companies’ interests explain why they combine claims about a boxcar shortage with complaints about the car-hire regime’s “default rate.” They want the government to assure a flow of income on their boxcars, so they can place more cars into circulation without regard to supply and demand. They want the Surface Transportation Board to transform the existing car-hire regime, which incentivizes right-sized, market-based investment, into a system that guarantees a return on their investments.
Statements by another contributor to Mr. Nahass’ article, Paul Titterton of GATX, one of North America’s largest railcar lessors, make clear what leasing companies are up to. Mr. Titterton suggests that default rates under current car-hire rules are not providing lessors adequate incentives to buy new boxcars. That is simply not true.
First, railcar lessors are not dependent on car-hire. If there is demand for their cars, lessors can enter into fixed rate leases that provide stable returns. Mr. Nahass’ article reports that “investors” believe “non participation in the car system would make them uncompetitive since the boxcar leasing market is dominated by per-diem leases,” but GATX’s experience proves otherwise Soon after GATX entered the market in 2014 by acquiring 13,000 boxcars from GE, its CEO said it planned to find “homes for these cars at very attractive rates on longer-term leases.” GATX’s CFO later reported the company had “largely convert[ed] [those boxcars] relatively quickly for the most part, to fixed rate leases.”
Second, railcar lessors have in fact been, and plan to continue, investing in new boxcars. Mr. Titterton told GATX investors just last year that “[w]e’ve been investing in boxcars, as has the industry … [W]hat we’re seeing here is the ageing out of the fleet, and then the replacement investment in higher-capacity newer cars to address that. And we think that that replacement demand is attractive.” Far from being a marketplace in which the car-hire regime is forcing out leasing companies, Mr. Titterton recently told investors that “for us, the boxcar portfolio has been a good portfolio for us. And we’re hoping and expecting it continues to be a good portfolio for us.”
GATX’s success in the boxcar business also shows that TTX’s acquisitions of boxcars are not an obstacle to investments by non-railroads. The article’s comments about TTX’s usage charges only highlight ways in which TTX’s charges are not comparable to car-hire charges—for example, they must account for TTX’s full-service maintenance obligations over the railcar’s life and users’ ability to end their obligation to pay charges via TTX’s “turnback” mechanism.
Third, Mr. Titterton suggests that raising default rates would incentivize railcar lessors to expand the boxcar fleet beyond what railroads and others are already doing, which he says would increase traffic moving in boxcars. This is backwards logic. All rail industry participants want to increase rail traffic, but an oversized fleet will not make new traffic materialize. If surplus cars were sufficient to drive up demand, boxcar traffic would not have fallen over the past decades. Government action to raise car-hire rates would be counterproductive by directly raising the cost of using rail. No one would benefit from a surplus of high-cost, empty boxcars except the companies that lease those railcars.
TTX has been in the boxcar business a long time. We agree with Mr. Corthell’s assessment that the current fleet is about the right size today, and with Mr. Titterton’s observations to investors that conditions should continue to justify investment. We take both statements as confirmation of our own belief that the current market-based approach is working.
The Car-Hire System Needs Reform, by Patricia Long, President, Railway Supply Institute
On behalf of the Railway Supply Institute (RSI) and its members, thank you for this opportunity to share our views on the North American boxcar fleet.
We believe that the car-hire system needs to be reformed to create a level playing field for all boxcar investors and have asked the Surface Transportation Board to encourage the Association of American Railroads (AAR) to work with us on a solution.
RSI members build and own more than 50% of the 1.6 million railcars used in North America. Boxcars are essential for the transportation of many important commodities, including agricultural, forest, and industrial products and are often the only practical option for certain commodities and routes.
Private boxcar investors predominantly lease railcars to railroads in return for car-hire payments that the cars earn when other railroads use them throughout the rail network. Unfortunately, the complex rules that govern the car-hire system unfairly favor railroad users, which suppresses car-hire rates below effective market levels.
Understanding the current car-hire system is important. The car-hire system effectively forces investors to negotiate car-hire rates from a formulaic “default rate” as low as 17 cents per hour for boxcars costing as much as $160,000. For a large portion of a boxcar’s use, the investor is stuck with the default rate because negotiating individualized rates makes little economic or practical sense. Even where negotiation or arbitration is a viable option, the car-hire system lacks demand-based pricing signals necessary to drive to a market rate. Further, negotiation and arbitration costs are high compared to the potential revenue that they can generate. As a result, the car-hire system forces car owners to accept low negotiated rates, which discourages investment in boxcars.
To further illustrate the unfairness of the current car-hire system, one only needs to look at TTX that provides boxcars outside of the car-hire system. TTX’s rates are up to 40% greater than the average negotiated rate for a boxcar in the car-hire system. Despite these higher rates, TTX’s share of the boxcar market has risen to more than 30% and is expected to grow to 50% or more in the next ten years. This demonstrates that the car-hire system is suppressing rates well below what TTX can charge in an unrestricted pricing market and, thus, impairing continued private investment in boxcars. If the car-hire system is not reformed, this ownership trend will continue, reducing competition and resulting in higher rates for shippers.
By increasing boxcar costs and concentrating the boxcar market in a single supplier, the car-hire system encourages shippers to shift freight from rail to trucks, which is not in the public interest. More trucks on the highways mean more accidents, congestion, and greater wear and tear on already deficient taxpayer-funded highways and bridges. Boxcar freight is generally the easiest freight to shift modes (one boxcar generally hauls the equivalent of three truckloads). Despite these tailwinds, boxcar traffic and fleet are both shrinking. The boxcar fleet in North America had more than half a million cars at the time of railroad deregulation in 1980, and now sits at just over 100,000 boxcars. Without change, we expect this decline to continue as roughly one-third of currently existing boxcars face regulatory retirement by 2031. If we are going to meet our society’s demand for green transportation, solve highway overcrowding, and address a long-term truck driver shortage, the boxcar will be critical.
The time to reform the car-hire system is now. RSI and its members spent four years asking the AAR to voluntarily negotiate with us on this matter, and we were repeatedly rebuffed. During this time, the boxcar market has become more concentrated, and the rail industry has moved closer to a shortage. Continuing on this path will have negative impacts on all rail stakeholders, from short lines to shippers, and the American public.
To be clear, RSI is not calling for review of any rules that apply to TTX, whose boxcars fall outside the car-hire system. Instead, RSI merely seeks a more level playing field when it comes to establishing car-hire. We want the same thing: fewer products on trucks and more on rail, which is safer, greener and more efficient. We insist that free and fair competition is the surest way to grow rail traffic. We respectfully urge the STB to act now and grant our petition, which would encourage AAR to negotiate a solution.
