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Land Transport Finance – Markets

(Market review as at 30 June 2016) 

The most recent – preliminary – transport statistics for the first half of 2016 indicate a stable situation for the European rail market and a decline for the Australian and North American rail markets. This was the result of several factors: low fuel prices, the increasing move away from coal-fired power plants, China transition from an industrial to a service economy, and a manufacturing recession in the United States. For the rail freight sector, equipment orders were adjusted accordingly. Lease and utilisation rates remained relatively stable in Australia and Europe, but declined further in North America.

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Rail freight – Europe

Although full-year statistics are still lacking for most countries, some preliminary tonne-kilometres (tonne-km) figures do suggest that 2015 was again a modest growth year. The five largest rail freight countries (Germany, Poland, France, Austria, and the United Kingdom) recorded a total growth of 1.2% in rail freight performance – after a small increase of 0.7% in 2014 (reported by the International Transport Forum). In total, rail freight business was still about 4.8% below its 2007 peak.

Recent freight performance figures in Germany, Poland, and the United Kingdom

According to Deutsche Bahn, the 2015 amount of tonne-km increased by 3.6% year-on-year in Germany, which is the largest rail freight market in Europe. The German Office of Statistics (Destatis) indicates a year-on-year growth of 2.8% in tonne-km in Germany in the first quarter of 2016. During the first five months of 2016, total tonne-km decreased by 0.4% in Poland – the second largest market – according to the Polish Office of Rail Transport. In the United Kingdom, the freight performance (in tonne-km) dropped by a considerable 20.0% in the first quarter of 2016. Almost solely, this can be attributed to a decrease of coal transport by 57.9% year-on-year. It resulted from the doubling of the carbon tax and the subsequent closure of some coal-powered stations.

Intermodal transport by rail and road

Although there has been a trend toward more containerisation, Destatis registered a significant traffic decrease of 6.5% in intermodal transport by rail in Germany in 2015. However, the International Union for Road-Rail Combined Transport (UIRR) reported an intermodal growth of 0.8% by number of consignments, and +5.2% by tonne-km in Europe in 2015.

Intercontinental and cross-border unaccompanied combined transport (CT) grew most dynamically at a rate of 3.8% and 7.6% as expressed in number of consignments and tonne-kilometres, respectively. At the same time, domestic relations and accompanied CT (rolling motorway) declined at the rate of about 5%. The UIRR also reported 0.5% less intermodal units were transported by rail year-on-year in the first quarter of 2016, but 1.3% more in the second quarter.

Truck transportation gained market share in Germany due to lower fuel prices and higher cost increases for rail transport. Performance (in tonne-km) on the road grew by 2.2% in 2015 (according to the German Federal Authority for Freight Traffic), thereby reaching its 2008 record volume for the first time after the crisis.

Mergers and acquisitions

On the merger and acquisition front for rail freight companies, there was some activity during the first half of 2016. US-based Compass Partners bought Polish CTL Logistics, one of the largest privately-owned rail freight companies in Eastern Europe. Austrian incumbent Rail Cargo Austria acquired privately-held Private Car Train in Germany in order to expand in the German market. Three small domestic open access railroads were liquidated in Germany, Norway, and Sweden.

Again, some large acquisition transactions showed the attractiveness of the European rolling stock leasing business, also to foreign investors. This time activities focussed on locomotive lessors only. The most noteworthy transactions:

  • Deutsche Bank’s Deutsche Asset Management acquired 50% of French lessor AKIEM, Europe’s second largest locomotive lessor.
  • US- and UK-based Beacon Rail Leasing bought Luxembourgian Ascendos Rail Leasing to become Europe’s fourth largest locomotive lessor.
  • The Singaporean state fund GIC purchased 49% of the shares in Railpool, Europe’s fifth largest locomotive lessor.
  • Deutsche Bahn negotiates the sale of 196 old freight locomotives with Japan-based Toshiba, who wants to build up a locomotive leasing company in Europe.

Freight car deliveries in 2016

The challenging situation of the rail freight market was again reason enough for a sustained and healthy aversion to placing (speculative) orders. Although most of the freight car manufacturers produce near maximum capacity, planned standard-gauge freight car deliveries in 2016 are still around 49% of the replacement need. New planned locomotive deliveries in 2016 stand at 10% above the actual amount of 2015, but are still 28% below replacement need.

Rail freight – North America

Although none of the North American countries was in a recession, it becomes clear that there is an ‘energy depression’ (leading to less transport of crude oil and frac sand), ‘a manufacturing recession’ (due to an inventory overhang), and slow growth from the consumer (due to global economic uncertainty).

The Association of American Railroads (AAR) reported that the number of carloads decreased significantly by 11.5% in the first half of 2016 year-over-year. This was partly caused by an inventory overhang and low oil prices. Even intermodal transport was down by 2.3%. In the first half of 2016, coal transport declined by 4.1% year-on-year and metallic ore and metal transport by rail was down 4.5%. The crude oil boom is definitively over, with petroleum transport by rail reducing by 17.8%. Total rail traffic decreased 7.1%.

In Canada and the US, total carloads were down 25.3% from the record level in the first half of 2006, but the intermodal business achieved 14.6% more shipments.

Canadian Pacific’s plan to acquire Norfolk Southern ultimately succumbed to overwhelming opposition.

In April 2016, appraiser RailSolutions reported that again about 5,000 serviceable locomotives of the Class I railroads (18% of their fleet) were in storage, the same amount as during the recession’s trough in 2009. Locomotive production in 2016 will be on the same level as in 2015 (6% below replacement need), since manufacturers are working through their backlog. However, even some new locomotives were put into storage right after delivery.

Now major locomotive builder Electro-Motive Diesel has time to test its Tier 4 emission-compliant high horsepower diesel freight locomotive. It is expected to compete with General Electric’s Tier 4 model which has been the only one produced in series since January 2015.

Instead of buying more expensive Tier 4 locomotives, the railroads turn to rebuilding their older locomotive models. Understandably, leasing companies did not take delivery of one single new locomotive in the first half of 2016.

Based upon a decreasing backlog of about 95,000 units, Economic Planning Associates Intelligence projected in June 2016 that about 60,300 freight cars and intermodal platforms were planned to be delivered in North America during 2016. One third are tank cars. The AAR reported that as of 1 July 2016 24.1% of freight cars in storage were empty.

US freight car deliveries

Land transport markets: US freight car deliveries as at 30 June 2016

Rail freight – Australia

In Australia, the transport results of the two largest national rail freight operators hint at a standstill situation after 13 years of continuous growth. Pacific National, part of Asciano, gained 5.0% tonne-km in the second half of 2015, whereas Aurizon lost the same amount. Aurizon reported 4% less tonne-km for the first quarter of 2016 year-on-year, especially resulting from less intermodal traffic between Perth and East Australia.

After an initial bidding race for Asciano between Canada-based investment company Brookfield Infrastructure Partners LP and Australian port, logistics and railway company Qube Holdings Ltd (together with investor groups), they jointly proposed dividing Asciano into several pieces. This plan awaits approval from the Australian Competition and Consumer Commission.

Passenger rail – Europe

On the back of strikes and liberalisation of the long-distance public bus services, the German rail passenger sector has recently experienced some headwind: according to the German Association of Traffic Companies, passenger-km figures for its members (who account for 90% of the traffic) decreased 1.3% in 2015, after a reported plus of 0.9% in 2014 (Destatis for all rail companies). However, in the United Kingdom (the second-most important market), the Office of Rail and Road recorded an increase of 3.3% year-on-year in passenger-km for the period 1 January 2015 to 30 September 2015. This reflects the improved economic development in the UK. In Poland, the Office of Rail Transport reported that even 8.7% more passenger-km were achieved in the first eleven months of 2015 year-on-year. This is probably because of the recent major investments in rail infrastructure and rolling stock.

The open-access, commercial passenger train competition expanded in Slovakia, Sweden and the United Kingdom. A major Dutch operator of (car) vacation night trains had to cease its business due to increased costs for infrastructure usage and traction. In Germany, one local railway company ceased its activities, since its franchises expired. One of its shareholders won the retendered franchises on its own. Due to a privatisation in the United Kingdom, 40% of the shares of Eurostar International Limited, the parent company of Eurostar, were sold to a consortium of Canadian pension fund Caisse de dépôt et placement du Québec and British funds manager Hermes Infrastructure. The remaining shares are still in the hands of the State Railway of France and the State of Belgium.

In 2015, 18.8% more new local and regional train set cars were ordered. This is a record since 2007. 34.4% of them have been ordered by true private companies or by leasing companies and public transit authorities for use by true private companies.

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Megatrends in land transport
Wouter Radstake

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Wouter Radstake
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wouter.radstake@dvbbank.com