KiwiRail investor Mainfreight feels let down by lack of capacity

Mainfreight managing director Don Braid says he will take on more trucks and ships in the lead-up to what he expects to be record pre-Christmas volumes in New Zealand because KiwiRail doesn't have enough rolling stock to deliver services he expected as an investor.

Mainfreight says first-half earnings in New Zealand rose 28% to $37 million as sales increased 6.1% to $288 million.

The company says it is winning market share and volumes are rising in New Zealand. But what's expected to be a record freight load in the run-up to Christmas is "necessitating additional road and coastal shipping resource to offset a lack of rail capacity."

"We have invested in rail service and now we can't get rail services," Mr Braid says. "Rail is struggling with lack of capacity to take the work we want to give it, particularly in regional."

He says there is inadequate capacity on routes south from Hamilton and Tauranga which force Mainfreight to seek alternatives, which is disappointing. "We've invested quite heavily in new facilities with rail, Hamilton being one of them. The fault lies with a lack of rolling stock."

KiwiRail has been funded by the government to build up its fleet and took delivery of its first new rolling stock in decades starting in 2010. In 2016, it invested $254 million in the renewal and upgrade of network, property and rolling stock.

In July, the KiwiRail board approved the purchase of 15 additional DL class locomotives from CRRC Corp subsidiary Dalian Locomotive and Rolling Stock for delivery in 2018.

"It is in the process of trying to rebuild rail," Mr Braid says. "It goes cap in hand for more capital funding to invest both in the network and the rolling stock. I guess we're in a process here where there has been an improvement in its services. We're committed to using rail more often. But it doesn't necessarily have the capacity to help us."

Alan Piper, KiwiRail's group general manager sales and commercial, says New Zealand's freight market is experiencing higher demand this year "which is a reflection of a buoyant local economy.

"Our priority this year has been meeting service and capacity requirements for our customers particularly in Auckland, Palmerston North and Christchurch," Mr Piper says.

"We are, however, also working with our logistics partners such as Mainfreight to create new capacity between Tauranga, Hamilton and the lower North Island and South Island markets, which are key growth areas for KiwiRail."

In April, the government released the December 2014 KiwiRail Commercial Review, which became the basis for its decision to maintain a national rail network, despite it having no prospect of it running profitably.

KiwiRail got a two-year, $400 million funding package in Budget 2016 and said at the time the government's investment in the business had allowed the railway to become "a more efficient and reliable supply chain partner" with a corresponding pickup in freight volumes.

Parts of the commercial review were redacted but among the material that was published, KiwiRail noted that its rail freight customer base "is weighted toward a small number of high-revenue customers.

"Many of these customers have invested alongside rail over recent years in a variety of ways including siding contributions, shed development, capital contributions to rolling stock and 'take or pay' agreements," the review said. "This is particularly true in the domestic freight market where modal options, capacity utilisation, price management and operational performance are critical opportunities (and risks)."

It also said that when KiwiRail started in 2008/2009 it owned "a fleet of rolling stock which was weighted towards the end of its economic life and prone to unreliability" while its locomotive fleet had an average age of 45, "resulting in poor reliability and costly and time-consuming maintenance requirements."

The review also noted average 5% annual growth in domestic freight volumes over the previous five years, which was "a direct result of the investment it has made in rolling stock and improvements to the level of service KiwiRail provides."

Part of its strategy is to reduce the number of classes of rolling stock in its fleet to reap benefits from more standardised equipment.

(BusinessDesk)