Oct 1, 2019
The major capital projects (MCP) review preparation for railroad capital activity for the year 2020 has begun.It is that point of the cycle when team members in different major capital project departments within each Class 1 railroad firm lay out their expectations for next year's estimates.
The vital issue might be, "What's the forecast in a period of traffic uncertainty?"
My theory implies lower major capital project expenditures (cap-ex) for 2020 than in 2019.
Unlike truckers, railroad administrators face multi-faceted budget challenges. Rail executives have a complicated infrastructure to both support as well as make better.
Railways are comprehensive real estate institutions. They don't pay into a trust fund to keep their "ways" in a configuration as with freeways.
Local engineers have determined their "wish list" of projects based upon this year's out-in-the-field operating activity.
Those localized track, structure, signals and bridge "needs estimates" will then be distributed at headquarters against other system-wide data.
The proof includes evaluations of ultrasonic inspection lines of steel rails as well as evaluations of geometry and surface cracks that at some circumstances require managed repairs.
All these hard data engineering estimates must be prioritized against the other overall industry needs that marketing staff, as well as locomotive and freight car manufacturing units, are accumulating.
Into October and November, there will be a vetting of these competing cap-ex demands.
However, not all MCPs are going to be supported moving forward.
Most major capital projects need an assessed cost/benefit estimate that provides these senior managers to grade projects by the expected percentage of return. Those returns are then reviewed by the finance office according to recommended templates.
Three right-of-way divisions require continuous preservation – plus intermittent heavy-duty support. They are:
Beyond that are transferable assets like locomotives and freight cars.
And there are common and organizational major capital assets such as workstations.
When one thinks about the railroad track composition, they probably think first of the actual railroad tracks themselves. In doing so, they might neglect the actual configuration of the railway paths that dissipate vertical forces from train passages down through the different tiers of the construction.
A study of many railroads' investor statements and SEC filings shows that the average allocation of a major capital expenditure plan by kind of plan includes:
Remember that these ratios describe long-term models. In any given year or set of years, a division can have a significantly greater or weaker split portion of the resources. Track and roadbed percentages might fall to 38 percent or less in some cycles.
Major capital project investment in Positive Train Control (PTC), for example, has been using a fairly considerable share of all major railroad capital dollars over the previous five years or more.
After prioritization, the major capital budget moves to the Board of Directors for review and ultimate judgment.
A reasonable possibility into the year 2020 implies that less than 500 trains will be requested. This is in contrast to orders which, in a good year, number around 900 new locomotives being purchased.
It is likely that the U.S. railways' may reduce their 2020 major capital project (MCP) budgets by as much as 4 to 6% under the value approved for 2019.
As you read this market view, the planning for year 2020 railroad capital work is well underway.
It is that time of the year when staff members in different major departments within each Class 1 railroad company lay out their expectations for next year's budgets.
The strategic question might be, "What's the outlook in a period of traffic uncertainty?"
My hypothesis suggests lower capital expenditures (cap ex) for 2020 than in 2019.