The Group intends to increase the size of its railcar fleet when management believes that conditions are favorable to do so; in particular, during periods when future demand for rail transportation by particular types of railcars is expected to be favorable and when those railcars can be acquired at reasonable prices. The Group believes that opportunities are likely to exist to create shareholder value through capital expenditure or acquisitions, given the expected dynamics of the Russian railway transportation market and the railcar markets, and, in addition, that scale brings certain benefits to the Group’s operations in terms of higher efficiency through increased ability to optimise routes and railcar utilisation as well as reduced overhead per railcar. The Group will continue to monitor conditions in order to identify specific opportunities, using, among other methods, analysis of expected return on capital employed.
During recent years, different segments of the Russian rail transportation market have been driven by various dynamics. Whereas the oil products and oil transportation market has been very stable, the market for goods carried in gondola (open top) cars has shown strong growth but also some cyclicality.
Management believes that, while the Group has historically been able to adjust the operations of the Group’s gondola fleet by migrating to other cargo segments in order to mitigate much of the impact of change in demand for the transportation of particular cargoes, the Group’s balanced railcar fleet of rail tank cars and gondola (open top) cars provides crucial diversification and, as such, protection against market downturns. In addition, management believes that diversification will improve the Group’s ability to obtain debt financing on attractive terms.
Based on these beliefs, the Group intends both to expand its presence in the more stable oil products and oil transportation segment, and to position itself to benefit from an economic rebound by increasing its fleet of gondola (open top) cars.
The Group intends to continue its current policy of leasing a portion of its rolling stock out to third parties, in order to benefit from the lower volatility and typically longer contract terms of the leasing business, as well as to lease in wagons as appropriate to meet specific demand opportunities.
The Group is currently focused on increasing the operational efficiency of its rolling stock fleet, which the Group believes to be a major driver of its profitability. In particular, the Group intends to continue to apply and enhance its existing route optimisation techniques, to increase the use of “block trains”, and take measures to reduce ‘‘dwell time’’ and optimise the maintenance and repair of its rolling stock, with the aim of further improving efficiency.
Destination management and route optimisation will remain at the forefront of the Group’s measures to promote efficiency. The Group plans to achieve this by encouraging ongoing development and improvement in the use of its route optimisation software and by creating new efficient ‘‘route loops’’.
In addition, the Group intends to work with its existing customers with a view to increasing the use of ‘‘block trains’’ on high-cargo volume routes. Management believes that operation of ‘‘block trains’’ offers benefits in terms of higher utilisation of railcars and also allows the Group to provide faster transportation services to customers at a lower price.
The Group intends to optimise repair and maintenance of its rolling stock fleet by repairing and maintaining the Group’s fleet based on mileage travelled (not on fleet age), which the Group believes could reduce the amount of repair and maintenance works required by the Group’s fleet.
Expansion of the Group’s rolling stock fleet also has the potential to improve operational efficiency, as an expansion of the Group’s fleet does not entail a significant increase in overheard costs, allowing the Group’s overhead to be divided between a larger number of railcars and, while this will not be a key driver of the Group’s strategy of fleet expansion, it will continue to provide the Group with a cost advantage over smaller competitors.
