In May, Moody’s Investors Services released a recent report, “Where Is the Bottom? Rail Freight Drops as Coal Carloads Plunge,” in which the rating agency predicted the current weak conditions plaguing the rail industry to persist through the third quarter of 2016. Concurrent with the release of the report, Moody’s lowered its industry outlook from stable to negative.

In an effort to better understand the immediate implications this negative outlook signifies for rail lessors, Equipment Finance Advisor spent time with Barbara Wilson, President of Wells Fargo Rail. In the following interview, Wilson discusses a number of topics, ranging from the negative impact of the strong U.S. dollar on commodities exports to Wells Fargo’s recent acquisition of GE Rail.

And while there seems to be little light at the end of the tunnel as far as the rail industry is concerned, Wilson, who heads the largest railcar-operating leasing company in North America, is clearly in it for the long haul.

Equipment Finance Advisor:  According to the Association of American Railroads, freight traffic was markedly down for the first quarter of 2016. What economic factors have contributed to this setback? We understand that the energy sector and coal have impacted freight traffic adversely and we’d welcome your observations there along with any other less obvious negative factors.

Barbara Wilson:  The strong U.S. dollar has negatively impacted virtually all exported commodities. We see weakness in the shipment volumes of those commodities -- steel, scrap, grain, etc. -- leading to reduced demand for railcars to transport them. Weak demand in China also has impacted many of those commodities.

As you note, traffic volumes in the energy business are down very meaningfully. Coal volumes were down more than 30 percent in the first quarter, and crude oil and sand shipment volumes are down significantly due to the reduced drilling for oil and natural gas. The result of the volume decreases is higher velocity on the rail system overall, leading to reduced demand for railcars as the cars on the system are moving more quickly.

Equipment Finance Advisor:  As you look to the various rail equipment types, which do you find are in greater demand in the current environment and what’s your expectation for that demand continuing in the near term? In other words, have there been any bright spots in freight that have helped to soften the decline in freight traffic?

Wilson:  It is hard to point to many bright spots on the rail equipment demand spectrum today. The U.S. plastics industry benefits from cheap, abundant natural gas supply. Natural gas is the feedstock to produce plastics, and that industry is investing billions in new manufacturing facilities on the Gulf Coast. Many of these facilities will be served by rail. Increased demand for plastic pellet cars to move the increased plastic pellet production has begun and is expected to continue over the next several years as these new units come on line.

Presently, demand is weak for coal and sand cars, due to the weakness in the energy business. We expect supply for these two car types to remain weak for the near future.

Equipment Finance Advisor:  Are there any governmental/legislative issues either impeding investment or supporting investment in rail equipment, either at play now or approaching in the future?

Wilson:  Accelerated “bonus” tax depreciation is in place in 2016 and is always an incentive to invest in equipment. However, demand in the market for equipment remains weak, so that tax incentive alone is not enough to drive new equipment orders. At this time, the industry expects new railcar production to decrease for the next several years as the industry adjusts to lower freight volume and the overhang of extra coal, sand and crude cars is absorbed. In 2015, new regulations were published for the design of railcars that move flammable liquids. Those new regulations will be phased in over the next seven years and will stimulate some new tank car orders. Given the long phase-in period, the incremental stimulus is minimal.

Equipment Finance Advisor:  Let’s discuss the GE Railcar Services acquisition that closed January 1 of this year. Please share where this acquisition positions Wells Fargo Rail in terms of other railcar lessors as well as the composition of the rail portfolio post acquisition.

Wilson:  Let me first say that we were delighted to close on this acquisition. The acquisition allowed us to expand our available fleet of rail equipment by more than 77,000 railcars and 1,000 locomotives. In addition, we rebranded the company to Wells Fargo Rail and we are very proud to take on our parent company name. Wells Fargo’s fleet of equipment available for lease now totals more than 174,000 railcars and 1,800 locomotives, making us the largest railcar-operating lease company in North America.

Our present railcar fleet diversification largely mirrors the diversification of the North American railcar fleet, but our fleet is heavily focused on freight cars. At this time, Wells Fargo owns less than 10,000 tank cars, but we look forward to growing that portion of our fleet to continue to support the needs of our customers. In addition, we manage more than 20,000 railcars on operating leases for other owners. Our locomotive operating lease fleet consists primarily of high-quality four-axle locomotives and switchers.

Most importantly, Wells Fargo believes that our acquisition of the GE Rail fleet allows us to better serve our customers. With a significantly larger inventory of assets, we are much better positioned to have the railcars and locomotives needed by our customers, allowing Wells Fargo to be a better strategic partner to them.

Equipment Finance Advisor:  To what extent did Wells Fargo Rail retain GE Capital’s staff and how did the acquisition alter the structure of the unit in terms of personnel and their locations?

Wilson:  Wells Fargo’s GE Rail acquisition did not include the GE Rail employees. We have hired more than 50 new team members, including many former GE Rail employees, with the majority of the new positions located in our Chicago and Rosemont offices.