There are four sequential components that comprise the fleet order-to-delivery (OTD) cycle. These components are:
The fourth component of the OTD cycle – delivery – tends to be out of the control of the automotive industry, especially when vehicles need to be transported by rail.
For the past 20 years, the nationwide railcar shortage has been a key factor causing fleet delivery delays. Not only is there a shortage of railcars that can transport vehicles, fleet OTD is also exacerbated by rail congestion, rail line bottlenecks, and crew constraints, all of which, combined together, have contributed to creating backlogs of vehicles needing to be shipped for most model-years during the past two decades.
“The industry-wide rail constraints often referred to as an ‘industry-wide railcar shortage,’ hit the OEMs particularly hard in 2019,” said Jessica Krams, manager, vehicle order management for Wheels Inc. “As in previous years, truck and van assembly plants saw the greatest delays due to the more complex logistics of getting vehicles to and from upfitters and then back into OEM traffic for shipment by rail.”
Ongoing Rail Constraints
Railroads are the primary long-distance transporter of finished automobiles. New vehicles are transported in specially designed, fully enclosed railcars that have either two or three levels within them. Called bi-level and tri-level autoracks, these enclosed railcars protect vehicles from being damage while in transit, such as damage caused by falling or thrown rocks, bullets (trains are frequent targets for amateur marksmen), and vandalism in general. In addition, the enclosed autorack railcars also curtail auto parts theft and prevents vagrants from living inside the automobiles while in transit. During economic downturns, many of these specialized railcars are removed from service as railroads right-sized railcar capacity to match the vehicle order volumes of the time.
“Large capacity bi-level railcars that are required for full-size truck and van transport still seem to be in very high demand across all OEMs and the entire network. Ford has stated that they have made a concentrated effort to allocate these specific type of railcar units that are exclusive for their own use. We did see the ship times decrease for them in the Kansas City, Mo., and in Louisville, Ky., areas for a short time,” said Matt Miller, vehicle status specialist for Donlen. “Unfortunately, it seems that it is taking longer than anticipated for those specific railcars to return to the surrounding areas of the plants to be reloaded and redistributed.”
In addition, the ever-increasing volume of trucks sold in both the retail and fleet markets have compounded the railcar shortage because fewer numbers of trucks, due to their larger size, can be loaded on a railcar vis-a-vis passenger cars. This is an important factor contributing to the shortage of railcars – vehicles are getting longer, higher, and bigger, which reduces the number of vehicles a railcar can transport.
In prior years, tri-level autoracks were more common, transporting passenger cars on three levels within a single railcar, but with the increased volume of trucks and high-roof vans, they required roomier bi-level autoracks, which carried fewer total vehicles.
“The average asset life of a railcar is approximately 40 years. The older railcars were produced during a time when car sales far exceeded truck sales. These railcars are three-tiers. As the older railcar assets come close to retirement, the railroad industry is not necessarily replacing all of them,” said Eric Miller, CAFM, director of ordering fulfillment for Element Fleet Management. “Since trucks and SUVs are higher volumes, railways will be building more two-tier railcars to accommodate these vehicles.”
In the early 1990s, approximately two-thirds of the rail fleet was tri-levels. The industry shifted to two-thirds bi-level and one-third tri-level because of the swing to larger SUVs, minivans, and pickup trucks.
“This issue has been experienced more prevalently over the past five years; one reason is due to the arrival of the larger European style vans and lack of railcars that could accommodate them,” said Rick Smith, director of operations for LeasePlan USA. “The delays, however, are lessened each year as OEMs continue to work with the rail companies to secure more allocation for these unique railcars.”
This observation was reinforced by Jim Tangney, VP of vehicle acquisitions for Emkay, who also cited increasing vehicle sizes as limiting the number of vehicles that can be carried by a single railcar.
“This was a factor in 2019-MY OTD times being longer, though not as substantially as in previous years. The shortage of railcars capable of carrying SUVs was addressed at the end of the 2018 model-year and those actions seemed to have helped the timeline. The jammed rail lines also cause delays, as only so many trains can run at a given time and competition for access to the railway results in increased OTD timelines,” said Tangney of Emkay.
Despite the ongoing issues caused by railcar shortages, the fleet industry has adopted strategies that are helping to minimize these delays and, perhaps most important, provide better forecasting of anticipated OTD times to end-users.
“Unfortunately, the ongoing railcar shortage once again hampered a good portion of the automotive industry for the 2019 model-year, resulting in some rather significant delays at times. However, the industry as a whole continues to adjust accordingly to account for the logjam on the rails,” said Ted Davis, vice president, North American supply chain for ARI. “At ARI, we communicate regularly with our supply chain partners to closely monitor potential delays to ensure we have visibility to any issues on the horizon. This ongoing dialogue helps us stay ahead of possible disruptions in the supply chain and allows us to proactively work with our customers to address any challenges to minimize the impact to their business.”
Another issue is that not only are OEMs competing for constrained rail resources, but so are other much larger users who use the rail to move their products to market, such as the surge in coal shipments destined for export markets and ongoing crude oil shipments.
“While it’s true that the demand for trucks, SUVs, and vans results in fewer vehicles being moved at one time as they require bi-level or single level railcars, the OEMs are also competing against other industries to move product and natural resources, such as crude oil across the country. Auto manufacturers make up less than 5% of all rail traffic; however, they are working with the railroads to increase priority for shipments. Recent rule changes related to switching and routing of railcars also impacted rail traffic,” said Krams of Wheels Inc.
In addition, the senior management of railroads seek to increase their cost-efficiencies and to minimize “asset creep.”
“With any business, the railways are looking for better and more economic ways to transport goods. That means doing things smarter instead of more railcars or more workforce,” said Miller of Element Fleet Management.
This is an important point. As with any industry, railroads look to control costs within disciplined operating parameters focused on cost-efficient precision scheduling versus solving a problem by buying more assets, which buffers them during economic downturns that result in decreased rail activity.
Ramp Congestion and Backlogs
Across the U.S., railyards and tracks have become congested as the economy has improved, leading to increased rail volumes. This congestion is a major contributory factor to fleet OTD delays.
“Transit delays persist due to vehicles sitting at ramps, plants, and vehicles distribution centers waiting on railcars. In the past, railcar shortages started in the winter and cleared in the mid-spring. Unfortunately, that is no longer the case,” said Miller of Element Fleet Management. “To mitigate this, GM and Ford are allowing dealers close to ramps and distribution center to do local pickups.”
While most rail issues were similar to those faced in the 2018 model-year, for the most part rail-related issues in the 2019 model-year were more challenging, especially for truck and van deliveries.
“We did notice shipping challenges that started at the end of last model-year and ran well into the early summer months. In addition, OEMs reported that their transportation network was operating at maximum capacity going into the late winter months of the 2019 model-year,” said Mary Jo Welch, assistant vice president of new vehicle acquisition for Enterprise Fleet Management.
The shortage of railcars creates backlogs and congestion at ramps, stranding many units there to await rail shipment.
“Major rail carriers were forced to embargo many of their ramps and lots. As a result, rail carriers closely managed and limited the flow of new vehicles going in and out of the system. OEMs also restricted special requests for units going out. This caused vehicles to remain idle at ramps and railyards longer than in the past,” added Welch.
One beneficiary of the rail congestion is the auto carrier industry. While there is an additional cost to move finished vehicles long distances by truck, it is less expensive than having vehicles sit stranded waiting for rail pickup.
“Some OEMs allowed FMCs and dealers to arrange and pay to pick up their delayed vehicles from ramps and lots. However, it was challenging to identify the vehicles that could be picked up and then execute the transaction,” said Welch of Enterprise Fleet Management.
An auto carrier, also known variously as a car-carrying trailer, car hauler, or auto transport trailer, is a type of trailer or semi-trailer designed to transport vehicles via truck. Auto carrier trailers can be open or enclosed. Most commercial trailers have built-in ramps for loading and off-loading vehicles, as well as power hydraulics to raise and lower ramps for stand-alone accessibility.
“There are never enough car haulers, order-to-delivery timeframes are showing there is an improvement year-over-year though. We can attribute this to the non-traditional changes a handful of OEMs are trying to clear congestion and get vehicles moving for final delivery,” said Charles Mathew, fleet operations manager for Merchants Fleet.
Just as there are constraints in transporting vehicles by rail so too are there constraints in using auto carriers and car haulers. In particular, there continues to be a shortage of drivers who have a commercial driver’s license (CDL) needed to operate an auto carrier.
“Rail-related and car/truck hauler issues definitively impacted getting new models to market as timely as possible in 2019. These delays/issues occurred earlier in the year than in years past and were prolonged. We experienced issues with bypassing OEM approved ship-thru processes leading to vehicles being delivered to incorrect suppliers/upfitters, and extensive backhaul causing major delays in vehicle delivery to customers,” said Miller of Element Fleet Management.
Some fleets are resorting to buying replacement vehicles out of dealer inventory to eliminate the rail delays. “Rail-related and truck carrier issues continue to be a struggle when factory ordering. Vehicles in high-demand sat at railyards for weeks, costing the end-user money and pushing many to buy from dealer inventory. This was specifically an issue with trucks this year, as it has been over the last few years,” said Carly Prather, director of vehicle purchasing and fleet titles for Mike Albert Fleet Solutions. “In some cases, these vehicles can make enough money in one or two days to cover the difference in cost from factory ordering to buying from dealer inventory, making the latter a much more attractive option.”
Expanded Production in Mexico
Another factor contributing to rail congestion is the increasing automotive production capacity in Mexico. With seven new plants that came online in Mexico between 2013 to present, exports of finished vehicles and components to the U.S. rose substantially. Rail-based vehicle exports from Mexico to the U.S. and Canada increased from 1.67 million units in 2013 to 2.81 million by 2018, the most recent full year of data. From January to July 2019, approximately 1.59 million light vehicles were exported from Mexico to the U.S., which puts 2019 on track to exceed 2018 volume, which at the time was a record.
A growing challenge is the infrastructure constraints in Mexico, which is delaying the export of finished vehicles assembled there to the U.S. market. The infrastructure limitations include both rail assets and port facilities. “Like last year, we saw increased OTD with vehicles coming out of Mexico. This was due to a reduction in southbound railcars, which impacted OEMs’ ability to ship finished vehicles north,” said Welch of Enterprise Fleet Management.
The United States-Mexico-Canada agreement (USMCA), which replaced the prior NAFTA agreement will help facilitate the movement of automotive products in and out of Mexico and Canada, allowing all three countries to operate as a North American integrated supply chain.
Increased Production & Exports
Over the past four decades, most global OEMs have built new-vehicle assembly plants in North America. There are currently 19 transplant (foreign-owned) assembly plants in the U.S., with the majority of them located in states where, traditionally, there has not been domestic automotive assembly plants. These 19 plants now represent a growing share of automotive rail shipments.
Lastly, many people are unaware that the U.S. has become a significant exporter of American-assembled vehicles and automotive parts. In 2018, the U.S. exported 1.8 million new light vehicles and 131,200 medium and heavy trucks (valued at over $60 billion) to more than 200 markets around the world, with additional exports of automotive parts valued at $88.5 billion. For the most part, these exports are transported by rail to Canada and Mexico or to ports for shipment to other overseas markets, all of which add to the rail congestion that impacts fleet deliveries. However, while fleet is important, in the larger scheme of things, fleet vehicle shipments only represent a tiny percentage of overall rail shipments. Fleet represents less than 20% of overall automotive shipments, which, in turn, only represents 5-9% of total rail freight.
Allocating Railcar Resources
The operation of the industry-wide autorack railcar fleet is managed by the Reload Division of the TTX Company, which is wholly owned by the largest North American railways. TTX provides railcars to railroads on a usage basis to allow them to conserve capital for infrastructure needs. TTX’s railcar fleet consists mainly of flatcars, autoracks, boxcars, and gondolas. Half of the fleet is dedicated to flatcars and intermodal wells, with a quarter dedicated to autoracks for hauling finished vehicles.
Authorized by the Interstate Commerce Commission (ICC) in 1981, the Reload Pool permits railroads to pool their autorack fleets for the transportation of finished vehicles. TTX manages Reload, which functions as a cooperative venture between the railroads, TTX, and auto manufacturers. Railways contribute railcars to a pool proportionate to their volume of automotive shipments. Under the Reload Pool system, the automotive OEMs provide their loading demand requirements directly to TTX, which schedules railcar disposition.
Rail Congestion & Choke Points
In the U.S., railroads are designated as Class I, Class II, and Class III based on size criteria established by the Interstate Commerce Commission. The largest are Class 1 railroads and there are six Class I freight railroad companies in the U.S. In addition, there are two Class I railroads in Canada and one in Mexico, all of which have trackage in the U.S.
Based on interviews I’ve read with the CEOs of Class 1 railroads, they are optimistic about the national economy and tight truck capacity, which favor many of their business segments.
However, as all fleet managers are painfully aware, this strong demand to haul freight has created widespread railway congestion, with the worst situations occurring at rail choke points, which are comparable to freeway choke points that exacerbate rush-hour congestion. Two examples are Houston and Richmond, Va. When train traffic backs up, it causes a ripple effect of delays. For instance, approximately 40 freight trains, on average, move through Richmond each day, creating chokes since three different railroads intersect within the municipal confines. These choke points occur in areas where multiple railroad right-of-way converge or where trains are frequently handed off from one railroad to another.
The most congested choke point for train traffic in North America is in Chicago. One-quarter of all rail freight passes through Chicago since six of the biggest North American railroad company networks intersect there. This represents, on average, 1,300 trains a day. Almost all rail freight traveling from coast to coast comes through Chicago, earning it the reputation that it takes trains three days to get from Los Angeles to Chicago and another three more days to move through the greater Chicago metro area. For example, it can take 24 hours to move 20 miles in Chicago due to congested rail traffic and time-consuming coordination of numerous inter-railroad train moves.
Another issue has been manpower constraints in operating trains. As the national economy remains strong, railroads are ramping up to hire new employees, in particular engineers. The railroad industry says it takes five years for a new-hire to become fully qualified in most jobs. In addition, federal work rules contribute to freight delays. Freight trains sometimes must stop mid-track to relieve crews who have reached the federal maximum hours they are not permitted to work longer than a 12-hour shift. Trains will sit until new crews take over.
One strategy, among many, has been lengthening trains to boost productivity, gain more efficiencies, and cut costs. Transporting more freight on one train helps to maximize locomotives, crews, fuel, and other resources, while trimming labor and diesel expenses. It also enables the railroads to reduce the number of trains on their networks, creating more space on certain route segments for additional traffic.
In addition, there is a seasonal peak in freight volume, which extends from mid-July to autumn. The peak season is triggered by the fall grain harvest, the high-volume shipment of retail merchandise for Christmas, and transporting new vehicles to dealers at the start of the new model-year. The degree of congestion within the rail network is also influenced by the strength of the economy, the volume of new-vehicle sales, and the bountifulness of the annual harvest, which has been increasing. American farmers have successfully increased the harvest volume per acre, which increases rail volume to move this product to market.
In summary, without dramatic upgrades to the national rail freight system, rail congestion will continue to impact fleet OTD in future years, especially during times of strong economic activity. Today’s rail congestion is a symptom of a broader systemic infrastructure weakness of the rail network throughout North America.