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Land Transport Finance – Markets

(Market review as at 31 December 2016) 

The most recent – preliminary – rail freight market statistics indicate a moderate decline for Europe and Australia as well as a significant decline for North America. This was the result of several factors: low fuel prices, stagnating road tolls, the increasing move away from coal-fired power plants and the cooling of the Chinese economy. For the rail freight sector, equipment orders were adjusted accordingly during 2016. Across the board, leasing companies focused on improving their utilisation rates. In Australia and Europe lease rates stayed relatively flat, but they declined significantly in North America. Intermodal transport by rail increased modestly in Australia, stayed flat in Europe, and declined moderately in North America. A bright star was European rail passenger transport, which grew significantly, not in the least thanks to new train deliveries.

Asian and Russian rolling stock manufacturers and railway companies have been looking to gain more foothold in Europe by acquiring their peers and by winning publicly tendered franchises. Chinese manufacturer CRRC (the largest rail equipment manufacturer in the world) has already delivered six train sets to Macedonia in 2015, followed by one electric locomotive to Serbia in 2016 (and another planned for 2017). Czech Leo Express has ordered three train sets from CRRC for delivery in 2018 with an option for 30 more. Their price/quality outcome will be decisive for a surge in Chinese-built rolling stock and components, similar to the observed shift in production for Australian freight cars and North American container road chassis.

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Rail freight – Europe

Although full-year statistics are still lacking, country results from Germany, the United Kingdom and Poland (42.5% of the total performance in Europe) do suggest that 2016 brought a moderate decline of rail freight measured in tonne-kilometres (tonne-km) after modest growth of 1.2% in 2015. In total, rail freight business was still about 6.1% below its 2007 peak.

Again, some large acquisition transactions showed the attractiveness of the European rolling stock leasing business, also to foreign investors. The most noteworthy transactions:

  • sale of VTG (Europe’s largest freight car lessor) shares to various parties (29% to US-based Morgan Stanley Infrastructure, 25% to Swiss Kühne Holding, 10% to Joachim Herz Stiftung, and 5% to M.M. Warburg & Co);
  • Singaporean state fund GIC acquired 49% of locomotive lessor Railpool;
  • Deutsche Asset Management purchased 50% of locomotive lessor AKIEM;
  • Beacon Rail Leasing bought Ascendos Rail Leasing;
  • Investment company Aves ONE acquired freight car lessor European Rail Rent; and
  • Stadler Rail bought locomotive manufacturer Vossloh Rail Vehicles in Spain.

In 2016 there was quite some noteworthy merger and acquisition activity:

  • Swiss-based major shipping line Mediterranean Shipping Company bought the majority of shares of the Portuguese incumbent CP Carga.
  • The State Railways of Austria bought German privately-owned Private Car Train.
  • The majority of shares of large privately-owned Polish CTL Logistics were sold to US-based Compass Partners.
  • Swedish EQT Infrastructure II via an indirectly-owned company within its Hector Rail group bought GB Railfreight in the UK.

Three German and two Scandinavian railway companies had to cease their activities because of losses. Their rolling stock was handed back to the lessors or could be sold to other railway companies. Transport contracts were taken over by competitors. Once approved by the antitrust authorities, the announced merger of Greenbrier Europe and Astra Rail would overtake Tatravagónka Poprad’s position as the largest freight car manufacturer in Europe.

Goods transport by train from China into Europe increased again. DB Cargo – with its international partners – moved more than 40,000 containers this way. The 11,000-kilometre trip usually takes twelve to 16 days, which is twice the speed of shipborne goods.

The amount of new locomotives delivered reached 72.3% of the replacement need. For standard-gauge freight cars the figure was only 57.2%.

Rail freight – North America

2016 was characterised by a decline in carloads resulting from three factors: firstly, despite rising diesel fuel prices, natural gas prices went down, thereby decreasing the demand for coal. This led to 19.5% less coal transports mainly due to reduced demand from coal-fired power plants following more stringent environmental regulations. Secondly, transportation of petroleum and petroleum products also fell 18.9%, since new pipeline connections were installed to transport crude oil. Thirdly, destocking of goods contributed negatively as well. The only two significant upward factors were an increase in grain transport (3.9%) and of motor vehicles and parts (2.1%), though these developments alone were not able to counter the downward trend.

The number of carloads in North America decreased significantly by 7.2% year-on-year according to the Association of American Railroads. For Canada and the US, this level was still 21.3% down from the 2006 record and even 1.4% below the 2009 recession trough. (Disregarding the dwindling coal volumes, the number of carloads was down only 9.8% from the 2006 record, but 23.2% above the 2009 trough level.)

Despite an uptick in the amount of domestic and maritime containers in use in the transport market, intermodal transport by rail came down 1.5% on the previous year. Nevertheless, this segment still achieved 13.3% more shipments compared to the pre-recession record of 2006. In the US, the number of containers and trailers transported by intermodal rail for the first time overtook the number of other car types transported by rail.

The main M&A topic in a remarkable quiet M&A market was the acquisition of the non-tank car fleet of GE Rail Services by Wells Fargo Rail, thereby becoming the fourth-largest freight car lessor in North America. In December 2016, SMBC Rail Services, a subsidiary of Sumitomo Mitsui Banking Corporation, has agreed to acquire American Railcar Leasing, the seventh-largest wagon leasing company in the United States.

In the wake of falling transport volumes, the average train speed during the year went up and terminal dwell times went down, which led to a situation in which less freight cars were needed. Accordingly, locomotive manufacturers built 23.7% fewer new locomotives than needed for replacement. There was also a very limited amount of rebuilt lower-horsepower locomotives. Based upon a decreasing backlog of about 77,000 units, FTR Transportation Intelligence projected in December 2016 that about 59,100 freight cars and intermodal platforms had been delivered in North America during the year.

US freight car deliveries

Bar chart on land transport markets: US freight car deliveries as at 31 Dec 2016

Rail freight – Australia

In December 2016, the Bureau of Resource & Energy Economics in Australia reported that between 1 July 2015 and 30 June 2016 Australia’s iron ore production had increased by 7.9% and coal production had decreased by 1.2%. For their reporting year 2015/2016 (ending on 30 June 2016), Australia’s two largest nationwide operating rail freight companies – Asciano and Aurizon – reported an average year-on-year decline of 2.8% in moved tonnage, despite a 2.5% increase of the number of containers moved. Aurizon’s preliminary figures for the second half of 2016 showed that 0.8% less tonnes-km were performed year-on-year (mostly due to the reduction in coal transport), although intermodal volumes were up by 10.0% TEU, or by 3.1% tonne-km. Major iron ore miner Rio Tinto shipped 3% more iron ore in 2016.

The two bidders for transport, ports and logistics group Asciano joined forces and divided the company in August 2016. Freight railroad Pacific National ended up with the Canada Pension Plan Investment Board (33%), Global Infrastructure Management (27%), CIC Capital (16%), GIC Private Limited (12%) and British Columbia Investment Corporation (12%). In December funds managed by Macquarie Infrastructure and Real Assets took a 49% stake in Genesee & Wyoming Australia, which enabled to latter to buy coal railroad Glencore Rail.

New locomotives covered 75.0% of the replacement need, whereas hardly any freight cars have been delivered.

Passenger rail – Europe

Preliminary statistics from Germany, the United Kingdom and Poland (accounting for 42.3% of the total performance in Europe) show that passenger transport by rail measured in passenger-kilometres could register a total growth of 3.5% year-on-year in the first nine (D and UK) and twelve (PL) months of 2016, respectively. This was achieved against headwinds from low fuel prices and the further development of low-cost airlines, long-distance bus services, car sharing and digitalisation of other transport modes.

The open-access, commercial passenger train competition intensified in the Czech Republic, Germany, Poland, Slovakia and the United Kingdom. In Germany, Locomore started the world’s first crowd-funded train service between Stuttgart and Berlin. Deutsche Bahn left the night train market, but the Austrian State Railways and two German private operators (BahnTouristikExpress and Euro-Express) could take over a large part of the night train market. US-based Rail Development Corporation through its German subsidiary bought 50% of BahnTouristikExpress who already provided the traction for its Hamburg-Köln-Express (HKX) venture between Cologne and Hamburg.

The European Commission liberalised the purely national commercial rail passenger markets in its Fourth Railway Package as from December 2020, while competitive tendering will become the general rule for new subsidised public service contracts from December 2023, albeit with many exceptions.

Some noteworthy M&A deals were driven by restructuring due to poor operating results. French-state owned financial institute Caisse des Dépôts increased its share in major public transport company Transdev to 70% through purchase of 20% from Veolia Environnement, who mentioned it would like to sell its remaining 30% as well. Italian State Railways won the bid to take over the Greek State Railways and bought regional rail and bus company Ferrovie del Sud Est e Servizi Automobilistici. The Hungarian State Railways bought Budapest suburban railroad HÉV.

In April 2016, Alpha Trains Luxembourg bought a portfolio of 89 train sets from Société Générale, thereby strengthening Alpha Train’s position as the largest rail passenger equipment lessors in Europe. With the sale of Ascendos Rail Leasing to Beacon Rail Leasing also 35 train sets and 67 double-deck coaches changed ownership.

11.5% more train sets were delivered than the replacement need. The amount of coaches delivered is very low, due to the fact that coaches are often replaced by train sets. Alstom completed the world’s first hydrogen fuel cells powered train set, made possible by the use of batteries and energy storage systems.

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Megatrends in land transport
Wouter Radstake

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Wouter Radstake
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wouter.radstake@dvbbank.com