Rail Stakeholders Consider Pressing For Tax Subsidies To Scrap Railcars

Industry stakeholders are considering options to relieve the railcar supply glut amid the continued downward trend in U.S. carload volumes.

Those options include discussions on whether to push for federal tax incentives that would allow companies to receive tax subsidies for scrapping older and idled railcars, according to a July 29 research note from investment firm Cowen.

"A resuscitation of a long-futile push for railcar scrappage tax subsidies may be underway. While the effort is in its infancy, and the outcome remains speculative, we see success as less of a long shot than it has been at any time in the past," Cowen's research note said. The note quoted the Association of American Railroads' (AAR) estimate of 526,000 railcars in storage, which represents about 31.5% of the North American fleet.

While it may be still too early to see what – if any – legislation gets introduced, language on scrapping railcars could be part of a broader bill, Cowen said.

Indeed, railcar manufacturer and lessor The Greenbrier Companies, Inc. GBX hinted earlier this month that such discussions were taking place.

"We have an industry coalition that is promoting and working with Congress on a railcar act. It would be an incentive and future stimulus to scrap and take out the inefficient cars in the storage statistics as just tons of frictional cars could be taken out. That would be a very attractive program. We've got wide parties of support for that," said Greenbrier President and CEO Bill Furman during his company's fiscal third-quarter earnings call on July 10.

He continued, "Whether that will get through this Congress in that form, hard to say, but we do expect the infrastructure build to come in. That will be a boost and if we could do something to help shippers and railroads address their obsolete cars – the stored cars – it would make the railroads and the shippers more efficient. It would help the economy, it would be green. It would be a socially good thing to do."

The economic recession and the COVID-19 pandemic not only reduced freight rail traffic but also contributed to the number of railcars in storage as shippers and rail companies tucked away railcars amid slower market demand. The railroads' implementation of precision scheduled railroading also resulted in the railroads seeking to maximize their existing railcar fleets.

Weekly U.S. rail volumes at-a-glance

A 29% drop in coal carloads, coupled with a 36% decline in metals and metallic ores carloads, contributed to U.S. weekly carloads falling nearly 18% last week, according to the AAR.

U.S. freight railroads originated 215,171 carloads for the week ending July 25, which is 17.8% lower than the same period in 2019. 

Among the commodities seeing the steepest declines were coal traffic, which totaled 57,769 carloads and represented nearly 27% of overall weekly U.S. carloads, and metals and metallic ores traffic, which totaled 15,464 carloads and represented 7% of overall weekly U.S. carloads.

A SONAR chart comparing coal carloads (in blue; RTOCO.USA) and metallic ores carloads (in green; RTOMO.USA). The y-axis on the left is for metallic ores carloads, and the y-axis on the right is for coal carloads. (SONAR)

While U.S. weekly carload volumes continue to be significantly lower than a year ago, intermodal volume was only slightly lower in contrast.

U.S. weekly intermodal volumes totaled 266,160 intermodal containers and trailers, which is 2.4% lower than the same period in 2019.

Meanwhile, weekly U.S. carload and intermodal traffic combined totaled 481,331 carloads and intermodal units, down 9.9% from a year ago. 

On a year-to-date basis, U.S. rail traffic totaled 13.5 million carloads and intermodal units, a 12.7% drop from the same period last year. 

U.S. rail volumes over the past year. Carloads are in blue (RTOTC.USA), while intermodal trailers is the orange line (RTOIT.CLASSI) and intermodal containers are the green line (RTOIC.CLASSI). (SONAR)

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