Alternative Purchasing Options

Railroads, suppliers try creative new ways to finance various purchases

by Dennis J. Gilstad
Financial Corporation of Michigan

Will the U.S. railway's revenue growth continue as it has over the last 10 years? Can railways continue to fund the rebuilding and expansion of their infrastructure? Will profits continue to set records? The answers to these questions are difficult to predict.

More yard capacity in the form of larger, more efficient yards is coming on-stream every year. Additional main lines, double tracking and, in some cases, triple tracking main lines are being built around the country. Train density is reaching levels that not only make operations more complicated, but also make maintenance of way an almost impossible task.

Newer, more reliable and higher-capacity roadway work equipment is becoming a necessity as track windows become smaller and smaller. Rising equipment, trackage and maintenance costs are going to take their toll on the bottom line, so the real question is how to manage growth's cost.

Railroads large and small are turning to creative financing to lower costs and provide greater efficiencies.

Current projects include:
  • BNSF tie gang by the tie project
  • CSXT 6700 jackbeam and workhead project
  • UP/Stanley Hydraulic Tools project
  • Short line rail car ownership.

Tie Gang by the Tie

During 1995, prior to the merger with Burlington Northern, the Santa Fe Railway started working with Fairmont Tamper in a new way on a project dubbed Tie Masters. The railroad supplies the experienced tie gang manpower, including equipment operators and equipment maintainers, to Fairmont Tamper, which in turn owns and supplies all of the equipment.

The railroad pays for a service based on performance. Fairmont Tamper profits by controlling equipment hardware and maintenance costs.

The 1995-96 program is scheduled for 250,000 ties and will increase to one million ties per year as the program grows.

Fairmont Tamper plans to introduce the next generation of tie-handling equipment in this program. This will give them a greater profit incentive on the BNSF project, as well as providing the rest of the rail industry with new products.

The current tie gang features 28 machines, including production and chase tampers, ballast regulators, tie inserters / removers, spike pullers / drivers and a track stabilizer.

However, Fairmont Tamper has the flexibility to adjust the number and type of machines they use to reflect improving technology and advanced equipment hardware.

BNSF personnel will perform all of the required labor, with Fairmont Tamper providing supervision and management of the tie-renewal and related surfacing that is required by this project.

Mike Franke, Santa Fe's vice president and chief engineer at the start of this project and now BNSF's vice president-purchasing, material and engineering construction, is clear on his feelings about this project. "It's a win-win for both companies. Each of us has an incentive to make it work. We are locking into a definable cost per tie based on track window size and production capabilities that offers us improved controls over our costs, keeps our highly-experienced personnel in place, which ensures good production, and places the equipment manufacturer in a position that will result in more reliable equipment and technologies that will increase performance."

G. Robert Newman, Fairmont Tamper's president, comments, "We have always stressed with our engineering, manufacturing and service people the need for customer satisfaction, but when its is our own gang that we rely on for a daily profit, all these factors become magnified. The end result is that our customers who purchase our equipment will benefit from our firsthand experience of the Tie Masters."

CSXT Jackbeam, Workhead Program

CSX Transportation's Pandrol Jackson 6700jackbeam and Workhead Replacement Program is designed to make refurbishment projects easier.

CSXT and Pandrol Jackson recently came together to facilitate the railroad's rebuilding program for its Pandrol Jackson 6700 Production and Switch Tampers. This program was designed to take advantage of the resources and capacity of the manufacturer's facilities, using them to facilitate the railroad's own work equipment shops program to rebuild the entire fleet of 6700s in the most timely, efficient and economical way possible. CSXT uses its own work equipment repair staff. The program was completed in the CSXT's Bryan Park work equipment facility in Richmond, Va.

Jon Reilly, vice president in charge of parts and service for Pandrol Jackson, says, "System work equipment shops are being tasked with greater numbers and wider varieties of equipment to overhaul and, as always, are expected to include the latest upgrades and conversions. Scheduling to provide timely return of equipment to the track department is a difficult and complicated task at best. For original equipment manufacturers, it's no longer a matter of simply providing replacement parts. We have to be prepared to fully support remanufacture programs for our equipment in our customers' shops as well as to provide complete machine remanufacture at our own facilities.

"The development of rebuild kits, which provide everything a shop is likely to need for a specific machine, including upgrades, is one way we can support these programs," he points out. "Another way is to provide remanufacture services for major components at our facilities. These components can then be returned to a customer's work equipment shop in perfect sync with a staged re-assembly process.

"An example of this type of partnership is the remanufacture program of CSXT's 6700s," Reilly notes. "The railroad's entire fleet has been remanufactured using a four-stage assembly line. We provided the remanufacture, including upgrades, of all workheads and jackbeams that were sent to our facility during the first stage. These were returned to Richmond just in time for re-assembly in stage three. "

He continues, "Because the program was developed by both parties in a team effort, we were able to assure a smooth flow of components without inventory build-up at either location. More than anything, this team approach was responsible for the success of the program."

Fixed-Price Equipment and Services Contracts

To help place controls on small equipment and services costs for many of the railroad maintenance-of-way power tools, three entities have come together to create an alternative way for the railroad to acquire these tools. Stanley Hydraulic Tools, Western Railroad Products (formerly Western States Supply) and FCM Rail Ltd. combined efforts to offer the rail industry the entire product line of Stanley's railroad hydraulic tools such as rail saws, drills, impact wrenches, spike pullers and drivers and hand-held tampers, to name a few.

The services to be provided include the railroad's tools o choice, timely delivery, repairs, replacement units and overall equipment monitoring for management's budgetary control at an inclusive monthly availability charge.

How the program works is best described by explaining the responsibilities and interaction of the parties involved. Western Railroad Products will determine specific tool needs with the railroad's personnel and place the tool order with Stanley Hydraulic Tool, who will build the tools to the railroad's specifications. Then Western Railroad Products will deliver the tools to the locations necessary and provide in-service safety and user training.

FCM Rail Ltd. will contract with the railroad for the rent of the tools and will also contract with Stanley Hydraulic Tool for an extended warranty that will provide the necessary repair parts for the term of the railroad's rental agreement. Western Railroad Products will perform the repair and rebuilding of the tools as required, and maintain an inventory of replacement tools for timely distribution back to the user.

This program currently is in the definition stage with the Union Pacific Railroad and is expected to start this year.

Frank Gschwandegger had this to say about his expectations of the program: "We have to deploy our trained work force where we get the biggest return and can no longer afford to have our mechanics gather up and repair hydraulic tools. This will assist us in keeping our focus on repairing our production equipment and at the same time will increase the availability of reliable hydraulic tools to our field forces. "

Kevin Flattery of Western Railroad Products says, "We feel this program offers our railroad customers the means to equip their maintenance forces with the safest, most up-to-date and productive tools while reducing capital expenditures. Combining life-cycle maintenance with our Tool Exchange Program ensures a constant supply of well-maintained tools while providing an ongoing incentive to continually improve on product design, maintainability, safety and durability."

Short Line Car Ownership

Short line railroads are trending toward car ownership rather than requesting cars from connecting long-haul railroads. This gives them better car availability at a cost they can afford.

An example of the economics illustrating this might be a 1970 vintage 4,750-cu.ft. covered hopper renting for $16 per day plus 7 cents per mile in a grain movement. The original cost of the car was about $16,200 in 1970, but now the car has a market value of about $25,000. The car should average 15 shipments per year with 85 percent of its 20-day roundtrip on foreign roads. The net car hire alone will produce sufficient cash to pay the entire debt service if the car is off-line only 70 percent of the time. The mileage per them should be enough to pay for repairs. The $25,000 purchase price when amortized over ten years at 10 percent creates a monthly debt service of $328 compared to an average of $340 per month in car hire. Advantages include positive monthly cash flow, accumulation of equity and higher net worth. If structured right, off-balance sheet technique can be used so other debt covenants are not affected.

Upon obsolescence, scrap value can be as high as 20 percent of acquisition cost. Ownership provides better control of car availability, especially in the peak loading season. Buy, rent, lease, pay by the tie, contract out-there are many ways to use money and credit to get the job done.

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