MAY CLOSER LOOK SERIES: Box Cars SAMPLE

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2 MAY 217 1

3 MAY 217 Box car traffic totaled x carloads shipped in 216, a decline of about y/y, a drop led by a reduction in forest product traffic. Box car loadings are tied very closely to the state of the economy, as much of the commodity base is related to consumer spending and housing. One of the advantages of a box car is its versatility in that it can be used for a wide variety of products. The forest products sector is the largest user of box cars accounting for of all carloads in 216. Within this sector, paper and related products account for, whereas wood and timber products make up the remaining. Agriculture traffic follows forest products with of all carloads. The broad agriculture segment includes a diverse array of commodities, including frozen foods, packaged food, beverages, and grain products. The agricultural industry uses both box cars and refrigerated box cars, which account for and of this segment s traffic base, respectively. The transportation segment is the final segment of measurable size, making up of box car loads. This group is primarily shipments of auto parts moving from parts manufacturing and stamping plants to auto assembly plants located throughout North America. The remaining box car traffic is grouped into the Other segment and has a diverse commodity traffic base, including household appliances, baled synthetic rubber, clay bricks, ingots of aluminum or copper, etc. The size of the North American box car fleet has dwindled over the years and continues to see attrition. In January 217, the fleet totaled x cars, including x refrigerated box cars. The total fleet fell by about during the ten-year period since 28. The primary reason for the fleet decline is the lack of new car investment. High new car costs, the lack of railroad freight pricing power to recover new equipment investment costs, and the uncertainty over some of the markets served by box cars, have all contributed to the lack of new car investment. A heavy retirement rate of older equipment in this fleet has kept the average age of this fleet at x years, a slight improvement from previous years. Nevertheless, significant consolidation in the paper industry among both producers (shippers) and consumers (receivers) has contributed to the reduced use of box cars. A box car can be very economical and provide a much greater shipment capacity over a truck, with a truck-to- Carloads () Plate B C 5', 7T, Rigid Box Car Traffic by Equipment Type Source: STB Waybill, FTR, AllTranstek; x carloads Demographics Box Car Plate C/E Source: Umler, AllTranstek, x cars Plate B Refrigerated Plate F/G C 5', 7T, C 5',1T C 6' F 5' F 6' F 86' Mech Non-Mech Cush Reefer Reefer Refrigerated cars also known as "reefer" cars. 2

4 MAY 217 rail ratio of between x to 1., depending on the dimensional specifics of the commodity being shipped. Apart from the influence of the economy, box car shipments have been trending down for some time, as this car type continues to face heavy modal competition, primarily from over-the-road truck but also intermodal for some commodity types. While box cars provide a lower cost per ton advantage over truck, the lack of transit time consistency and reliability has made the use of box cars a second choice for many shippers. The box car fleet is segmented based on loading capacity, interior length and height dimensions, and a number of other features, including door type and width, draft gear, and tonnage capacity. In addition, of the fleet are refrigerated box cars, which are insulated and equipped with temperature control units to handle fresh and frozen food. The three most important features to box car shippers are all capacity and dimension related: interior length; interior height or plate size; and tonnage capacity. The 5, 7 ton, Plate C box cars are still preferred by many shippers due to loading/unloading constraints that can limit the use of a larger Plate F car or a 6 box cars. However, since 2, all of the new box car investment has been for the larger, Plate F, 1 ton, 286k Grl equipment, either 5 or 6, and with plug doors. The Class I railroads have relied on TTX as their source of new equipment, a practice that is expected to continue. Until very recently, the leasing companies had not acquired any new box cars for over five years due to the high cost of new box cars and the difficulty in securing adequate lease rates. However, the recent new car deliveries that a couple of leasing companies have taken have been for relatively small quantities. Future new box car purchases by leasing companies are unlikely to be repeated anytime soon, leaving TTX as the main, or only, purchaser of new box cars going forward. New car additions to the box car fleet had been minimal in the four years leading up to 216, averaging just x cars per year. Plate F cars accounted for of all new box cars, of which were 6 cars, and the other were 5 cars. Of the remaining new car deliveries, about were mechanical refrigerated box cars, and the final consisted of non-mechanical refrigerated box cars. In 216, however, the number of new box car deliveries jumped to nearly x. Over the next five years, new box car builds are forecast to average 2,1 cars a year. Plate F 6 cars are Carloads () 2, 1,5 1, 5 Box Car Traffic by Industry Segment Plate B C 5', 7T, Rigid C 5', 7T, Cush C 5',1T C 6' F 5' F 6' F 86' Plate F/G Box Total Mech Reefer Non-Mech Reefer Forest Products Agriculture Transportation Other Source: STB Waybill, FTR, AllTranstek; x carloads Railroads Shippers Source: Umler, AllTranstek; x cars 16, 14, 12, 1, 8, 6, 4, 2, Jan '13 Ownership Box Car Other Lessors Large Lessors Growth Box Car Source: FTR, AllTranstek New Cars Jan '17 New Cars Jan '22 projected to average x new cars a year. Deliveries of Plate F 5 cars will average about x cars per year and mechanical refrigerated cars will average nearly x. Box car ownership is split mainly between the railroads at, and the leasing companies, including TTX, at. Shippers own of the fleet. 3

5 MAY 217 CHARACTERISTICS. The plate B box car fleet is the oldest and one of the smallest fleets, with only x cars remaining in service. The fleet is predominantly composed of 5, 7 ton cars, which total about x cars. These are split between rigid draft gear cars, at, and cushioned draft gear cars, at. There are also a few hundred other plate B cars with different lengths and tonnage configurations, most of which are 5, 1 ton cars. Source: Umler, AllTranstek, x cars Demographics B, 5', 7t, rigid B, 5', 7t, cushion B, other However, the large percentage of cars that have rigid draft gears make them sub-optimal for many services. The rigid draft gear configuration, combined with poor age and capacity limitations in this fleet, indicates that these cars are more frequently used out of necessity rather than by shipper choice. AGE. This fleet has an average age of x years and a median car that was built in 19xx and is x years old. Only of these cars are less than x years old. OWNERSHIP. Railroads own the largest number of plate B box cars and control of the fleet. These two railroads, combined with the rest of the Class 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 Age Profile Source: Umler, AllTranstek; x cars 4

6 MAY 217 Ownership Profile Shippers Other Lessors SMBC R ail Trinity Ind. Wells Fargo R ail CIT Rail GATX Rail TTX Class II/III R ailroads CP Rai l Kansas City Southern BNSF CSXT Canadian National Union Pacific 1, 2, 3, 4, Source: Umler, AllTranstek; x cars Class I railroads own or x cars. PL 2/3 railroads, own of plate B boxcars. Leasing companies control of the plate B cars. The lessor with the largest share is GATX Rail with. The rest of the lessors combined own of the plate B fleet. SA M Shippers own only of all plate B boxcars. E Norfolk Southern Plate B carloads totaled about x in 216, down from 215. This represented of the 216 total box car traffic. Shipment volumes have dropped dramatically for this fleet since 27, from x carloads, a AAGR over the 1 year period. From a size perspective, this car is very similar to the plate C box car, with less than one foot difference between the respective interior heights of the two segments. This makes them somewhat interchangeable for many commodities. The main commodities shipped in Ownership Commodity Traffic Railroads Paperboard Other Large Lessors Shippers Source: Umler, AllTranstek; x cars Other Lessors Copper Ingots Pulp Printing Paper Scrap Paper Beer Sugar, Granulated or Powdered Source: STB Waybill, FTR, AllTranstek; x carloads 5

7 MAY 217 Carloads () Traffic by Industry Forest Products Agriculture Other AAGR Source: STB Waybill, FTR, AllTranstek plate B box cars are paper products, with paper packaging accounting for of traffic. Pulp represents of shipments, while printing and scrap paper account for and, respectively. During the recession, trips per year fell from x to x. It jumped back up to x in 21 after the recession ended, and has since increased to an average of x in 216. At the same time, traffic fell from x carloads in 27 to x carloads in 29. Despite an increase in trips per year following the recession, utilization continued to decrease, and carloads totaled x in 21. There was a slight increase in 211 but traffic has since declined again, totaling x in 216. These cars, like all box cars, are capable of generating more trips per year. However, the low actual usage of plate B cars is indicative of the lack of interest on the part of the shipper base to use them. Almost of this traffic moved in single car shipments. Shipment Size 5% % -5% -1% -15% -2% -25% -3% -35% -4% -45% Plate B box cars are the least desirable of all box car types, and as such are the first cars idled during a market downturn, and the last cars the return to service during a recovery. One the other hand, it s commodity base is a little more diverse than the newer cars and plate B s do find niches to operate in where their value proposition is appreciated. However, this aspect can be of little consequence since plate B cars do not receive much maintenance attention given their age and lack of strategic importance to a fleet owner. Also, no matter how much a niche user may want the car, at some point poor car condition will force a decision to repair or retire, and retirement will usually win out. About x cars in this fleet were retired over the period, decreasing the fleet from a total of x in January 213 to x in January 217. Moving forward, this fleet is forecast to retire an additional x cars over the period, pushing the fleet size down to x cars by the end of 221. No new deliveries of plate B cars are forecast. This decline represents a reduction in overall fleet size at a AAGR. Due to the fact that no new cars will be delivered, the build-to-retirement ratio will be zero. New Delivery Ownership Profile Unit train (5 + cars) Shuttle train (25-49 cars) No New Deliveries Multiple Car (2-24 cars) Single Car 1, 2, 3, 4, 5, 6, Source: STB Waybill, FTR, AllTranstek, x carloads Source: Umler, AllTranstek 6

8 MAY New Car Deliveries 1,4 7 1, , 1, 8, 6, Source: FTR, AllTranstek No New Builds The plate B box car is a very basic car that was used for many packaged or palletized products, including even finished automobiles back in the 195 s. As rail equipment innovations were made over time, box cars got bigger in terms of interior dimensions, plate size, cubic capacity and tonnage capacity. This trend to larger equipment has obsoleted the plate B box car, which as recently as 1998 totaled over 5, cars. Since then the plate B fleet has shrunk by over 85% and currently has an average age of 39.7 years, which leaves very little life left in this declining fleet.8 This fleet s current traffic base is somewhat diverse, but not because of any special feature or utility it has, but rather because it is a cheap car that may be the only box Growth , car a railroad has available for a particular service, or is willing to place in that particular service. This view of the value of a plate B box car will continue until the fleet is fully retired, which is expected to happen within the next ten years, or less even. No new plate B box cars are expected to be built ever again, except maybe for a very specialized application, and that is highly unlikely since whomever had the need would probably opt for a larger plate C or F car anyway since the new car cost difference would be so minimal. In the meantime, the plate B box car will continue to be used for those niche traffic segments that remain available, for as long as they the cars can be minimally maintained by their owners before they are retired. Index % 6% 5% 4% 3% 2% Source: FTR, AllTranstek Car Demand Pressure Index Size and Carloads Indexed to Trips Per Year 4, 2, 1% % Trips Per Year Size Source: Umler, STB Waybill, AllTranstek Carloads 2 Jan '13 Source: FTR, AllTranstek New Cars Jan '17 New Cars Jan '22 The Plate B box car fleet decline was accelerated over the recession period, and has slowed since then. Shipment volumes and car supply have been in relative equilibrium for this fleet but going forward advanced retirements will increase the pressure on the fleet once again. However, since new car additions to the fleet are not an option this freight will migrate to other box car types. 7