Rail Theory Forecasts™ LLC

Annual Publication

North American Rail Car Market

North American
Freight Car Market

Progressive Railroading Magazine http://www.progressiverailroading.com/

Progressive Railroading Magazine, Sept. 2011

Analyzing Railcar Values in an Era of Longer Service Lives

In reviewing railcar leasing companies or evaluating bonds or other debt instruments related to railcars, investment analysts frequently want to know how long these assets last. The answer is both simple and complex; simple in that both the AAR and the Federal Railroad Administration (FRA) limit the revenue service lives of railcars to 50 years, but complex because most railcars in the past were retired for economic reasons long before that age. So how long will the recently built railcars remain in active service?

There are some who have argued that railcar designs have reached a plateau and that the old rule of obsolescence in 25 years is no longer valid. (See Progressive Railroading May, 2006) Moreover, today’s railcars are designed to much higher standards of performance, are better maintained, and are loaded more carefully than those of the past and they could be in much better condition at age 50 than cars built before 1995. Based on these arguments, it can be reasoned that today’s railcars will probably last and be approved for revenue service beyond the current 50 year limit of the AAR and FRA.

Some cars that were built before 1980 have already been approved for a 65 year service life, but the process of gaining that approval was very expensive. However, as more cars approach their 50th anniversary, their physical condition may argue for an upward revision of the current 50 year limit. However, don’t look for this to happen until after the year 2020, and a lot could change before then.

The 65 year service life that was approved for the autorack flatcars was needed to justify the installation of new autorack appurtenances which could last over 25 years (the racks are not considered to be an integral part of the flatcars) on railcars that only had 10-15 years left in their original 50 year service life. A similar argument may one day be advanced for the installation of the electronic brake systems on older cars. If this technology, which has been around since before 1970 but has only recently been installed on a small number of cars in unit train service, is one day a common feature on all new railcars, than there will be a push to make the system mandatory on all railcars by a certain date. That date will either give owners of old cars an incentive to retire their equipment or seek and an extended life to justify the installation of the new braking system. Just as the change in the car hire rules in 1993 prompted the AAR to revise its 40 year service life limit up to the FRA’s 50 year limit, so too might the mandatory installation of electronic brakes prompt the rule making bodies to increase the service lives of existing cars without the expensive fatigue tests or annual inspections that are currently required for extend service.

Car designs may also advance as new materials are adopted and stronger track, roadbed, and bridge structures are designed and installed. It is probable that 315k gross weight railcars will one day make the 286k cars obsolete, just as the 286k cars, introduced in 1995, made the 263k cars that had been around since 1963 technologically but not economically obsolete. The AAR’s 50 year life for cars build after 1974, however, increased their value just as the 286k models made then slightly less attractive.

After AAR’s 50 year ruling, many cars market value at age 25 was increased to 50% or more of their original purchase price. When these cars were built, most investment analysts would have assumed a residual value at that age of around 25% of the original car price. Historically, that has been the scrap value (in current dollars) of most railcars at that age. Although in the past many railcars did not survive beyond their 25th anniversary due to economic obsolescence, it would be difficult to predict which cars in today’s fleet will lose their economic value at an early date. Perhaps most of the cars built since 1995 will still be in service in 2050. If so, one might expect their market values as a percent of original cost at age 25 to be substantially higher than 50%; and that would mean a lot to the investment analysts looking at today’s market.

Rail Theory Forecasts is a consulting company specializing in North American rail freight traffic and freight car demand forecasting. Publisher of the annual North American Freight Car Market

Rail Theory Forecasts (RFT) was founded in 2001 to advance the art and science of predicting future developments and trends in the railroad industry, especially with regard to the demand and supply of railcars. The basic premise which has guided the company’s efforts is that current developments can only be understood and evaluated within an historical context, and that forecasts and projections of future developments must be soundly based on the interplay of the factors that have most influenced past events

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad