How are supply chain disruptions and economic shifts shaping freight demand and leasing rates? What strategies are MRC following to navigate obstacles and stay adaptable in a dynamic market?
In Episode 8 of FTR’s Conference Series podcast, Bryan Vaughan, MRC’s VP of Sales, Marketing & Business Development, sits down with FTR Chairman of the Board Eric Starks to give insightful answers on the current state of freight.
STARKS: What’s new with MRC?
VAUGHAN: We’ve been growing at a breakneck speed during this kind of boom. We’ve added a lot of cars. It’s been really exciting. It’s a great time to be in rail leasing for the last 18-24 months.
How many cars does MRC have?
Just under 9,000. We’ve got some lofty goals. We’re rebalancing the mix of our assets. We’re diversifying more than we have in the past.
What’s MRC’s current mix on cars?
We’re about 60% freight car, 40% tank. But we were heavily weighted in small cubes as many car owners have been and coal cars. We’ve seen a little resurgence in those cars and the demand for those cars.
It’s been a good run, but we’re still continuing to rebalance, add other cars to our fleet. It’s exciting. We’ve added new cars. We’ve added secondary market cars. We’ve had a lot of car sales. It’s been really robust for us.
And getting those cars out to lease has been going well for MRC?
It’s really good. It’s been probably consecutively, since I’ve been around, about 97% to at one point 100% leased.
I’ve been around for a long time. And it has not been this good. I watch all the data and we’re steady eddy right now.
Why does MRC sponsor the FTR event?
There’s a lot of reasons. First of all, it’s great working with your team. You’ve got a great team. So that makes it easy. But we really support FTR. FTR supports our business and our principal shareholders in Tokyo, Japan.
Data is king for us. It’s quan- and qualitative. The data that you provide for us is invaluable to enable our business. We trust your data. You’re always responsive when we need more info or a deep dive. The “closer looks” are awesome for us. We subscribe. And we’ll always support FTR, you and your team, and the conference. It’s one of our bellwether conferences for the year.
How are you feeling about the general economy and its effect on the freight market?
We look from a high level. What are the big drivers? What are the big rocks? We see inflation. We notice employment. We look at those two counter-balancing. Inflation is coming down. Unemployment is coming up, unfortunately. Those things we can’t control. But we can react to them in a way that we basically look at in future investments.
We look at consumer spending, which is to me somewhat concerning just because it’s a high part percentage of our GDP. I look at debt balances, as to what our current consumer debt is, and basically, failures in debt spending, as well as manufacturing growth.
(Housing Market)
We see the housing market has been tepid for the reasons we’d expect. Supply has been short because people aren’t building in higher interest-rate environments. An interest rate cut could hopefully turn housing back on pretty quickly. We’re hopeful for that.
We’ve waited for the shoe to drop on the economy that hasn’t dropped yet. Still hoping for the soft landing. But there’s a lot of signals right now that are screaming or signaling these recessionary type of things to come in the future.
(Consumer Spending)
Consumer spending has held up with an interest rate drop that in time may help stabilize us in the big picture. We’re still building cars. We’re still buying cars. And we’re going to grow right through it, the up and the down of it. It’s our plan. It’s a little worrisome on utilization. We’re seeing a slight drop a little. So, we do monitor that. As far as demand, we’re seeing less inquiries across the board.
(Commodities)
There are increases in big commodities like grain. But grain increase year over year was pretty tepid in 2023. I compare it to pre-pandemic levels. And I look at that. Coal has been coal. It’s no surprise from a volume perspective. I see exports of coal increase for both thermal and metallurgical, but the volume we’re talking about is a drip in the bucket of overall volume.
(Stability)
We really want to see stability in railroads. So that stability in growth for rail is important to us. So, we watch that metric. We talk with, we work with, we lease cars with railroads. So, we look at those signals to see the railroad, where are they, what are they doing, how are they reacting with the employment and locomotive power?
But so far, it’s steady, good growth right now. We’ll see what the next quarter brings and how we look for year-end outlook and into next year. We’re still bullish but with concern.
Railroads are talking about growth, instead of only ROI or operating ratio. Does that make you feel better about where the industry is heading?
I started my career in railroading. I was with several Class I railroads, and I realized the headwinds that they face. When you see volumes of coal pull back, you have to replace that. The economy of scale alone. So, when you grow with assets or people, post-pandemic, you really have to have that sustained demand for your service.
With coal’s demise (no surprise as we’ve talked about), it’s a bet. You’re making a big bet to say that you’re going to rebound. It raises costs, your pre-unit costs, when you have less volume.
We’ve seen rebounds in chemical. We’ve seen rebounds in grain. Intermodal has been really robust compared to where it was. Is that a post-pandemic bounce? Maybe. But those are drivers that we can’t control, but we watch. We’re working with railroads right now to add some new cars for them in the steel sector.
Interest rates are relatively high compared to where they were. How do you make those numbers work when you’re going out and buying a very expensive car?
We’re in the automotive sector as well, with some new Multi-Max Plus cars that we just purchased. They’re new to us. They’re new to our fleet. So, we watch that sector. It’s a challenge. I expect that we more than likely be a quarter-point adjustment, which is already built into most markets. We’ve been expecting it. So, I don’t see that’s going to move the needle much.
What I see is manufacturers I watch are probably more aggressive in their financing. In other words, they’re offering deals as we see in October and typically toward the end of the year. But it’s a challenge for automotive growth. It’s a challenge for any lending area, like mortgages, etc.
But I see that with consecutives, maybe small drips of a quarter point, maybe half a point, that we’ll start to hopefully get that soft landing. But right now, based on velocities with railroads and volumes overall, it’s been steady. You know, it hasn’t been rock solid. I haven’t seen volume growth essentially, but velocity is holding up, and we’ll see what this next quarter brings.
Want to listen to the entire 13-minute interview?
Click here to check out Episode 8 of the FTR State of Freight Conference Series podcast.
