As railways try to keep pace with soaring freight volumes, they are facing a shortage of locomotives.
One of the two manufacturers of locomotives is out of the market for two years until it can meet tougher emission standards in the United States. The shortage is hampering efforts of railways to clear congested tracks and move the growing amount of grain, oil and other goods. It's also spurring rail companies to repair and overhaul older equipment and hire new crews, pushing up expenses even as revenues and profits set records.
"Congestion drives up the operating costs for the freight railways, so they have every incentive to remedy the situation as quickly as possible," said Jason Kuehn, a railway consultant with Oliver Wyman Group.
General Electric Co. and Electro-Motive Diesel Inc. are the dominant North American makers of the high-horsepower locomotives railways use to haul freight on main lines. EMD, owned by Illinois-based Caterpillar Inc., has said it will be about two years before its locomotives can meet stricter U.S. emissions regulations that come into effect in 2015, which leaves GE as the sole supplier.
GE has seen locomotive demand rise by 134 per cent in the latest quarter and it has received orders for 1,000 of the lower-emission engines, which will start being shipped on Jan. 1, said Tina Donikowski, who runs GE Transportation's locomotive division.
The soaring demand for and limited supply of locomotives, which cost about $3-million (U.S.) apiece, come as some railroads have seen crude oil shipments double, and agriculture rail-carloads soar by 16 per cent after a large 2013 crop. At the same time, a strong economy has boosted demand for consumer and industrial goods that are increasingly moving by rail, which can be more cost-effective than by truck.
Railways that have tried to cope with the resulting congestion by boosting the size of their locomotive fleets have found suppliers sold out. Florida-based railway CSX Corp. said it has 300 locomotives on order to ensure its fleet of 4,000 locomotives can catch up to the rise in freight volumes. CSX's on-time arrivals slumped to 48 per cent in the latest quarter from 83 per cent a year ago, a decline the company blamed on a shortage of engines. Executives told analysts on a recent conference call the company would take delivery of 100 locomotives early in 2015, but the rest would not arrive until later.
"There is not a single piece of power you can acquire," said Oscar Munoz, chief operating officer of CSX, which operates about 1,350 trains a day in the eastern part of the U.S.
Much of the growth in freight volume at Montreal-based Canadian National Railway Co. has come from grain, oil and sand used in hydraulic fracturing for petroleum extraction, all heavy commodities that require trains pulled by two or more locomotives. In the past two years, the company has bought 141 locomotives, and it plans to add another 120 to its fleet of nearly 3,000 over the next two years.
"I feel very good that we have our base commitments lined up and we have options to get us through well into 2017, 2018, when we will hopefully have two manufacturers back in the market serving Class I railroads," CN's chief executive Claude Mongeau said on a recent call with analysts.
Canadian Pacific Railway Ltd. is taking a different aproach. CEO Hunter Harrison believes more locomotives will worsen congestion, not alleviate it. He has freed up locomotives by retooling operations and expanding some rail yards, among other changes aimed at improving efficiency at the Calgary-based company. The railway has no new locomotives on order, a spokesman said, but has an unspecified number on lease to other railways that will soon be returned to CP's service.
Christian Wetherbee, an equity analyst at Citi Research in New York, said there are no easy solutions to easing bottlenecks in Chicago and other major hubs. The long lead time for locomotive deliveries has forced railways to improve service by hiring crews and trying to turn around trains more quickly. "That's been easier said than done," he said, "given the volume that is on the network right now, and given that there are these interchange congestion issues, meaning you could be fast but if your interchange partner is a little bit slow, it's going to be hard to make a lot of progress."