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June 2009
Fleet Stats '09CONTENTS
Preface by Pat Foran, Editor
This recession continues to take a toll on freight-rail traffic totals. For the year’s first 20 weeks, which ended May 23, U.S. railroads recorded cumulative carloads of 5,295,843 units, a 19.3 percent decline compared with the same 2008 period, and 3,720,454 trailers or containers, a 16.8 drop-off compared with 2008’s first 20 weeks, according to the Association of American Railroads.
No industry segments have been hit harder than rail-car and locomotive builders, and the component-makers that serve them, and rail-car and locomotive lessors. Class Is won’t be ordering any — that’s 0 — locomotives this year, and they’ll take delivery of 500 or so units. That’d be about half of what they received in each of the past five years.
As for freight cars: There were 2,374 cars ordered during the first quarter, the lowest quarterly total since “the recession-impacted period of 1982-83,” according to Economic Planning Associates Inc.’s (EPA) quarterly rail-car outlook report. With Q1 assemblies clocking in at 7,657 cars, Q1 backlogs dropped to 6,171 — the lowest since 2003’s Q1, EPA reported. Meanwhile, Class Is had stored about 219,500 rail cars, or 25 percent to 30 percent of their fleets, as of last month.
“The outlook for rail-car deliveries this year and next continues to be dim,” EPA concluded.
How dim? EPA anticipates deliveries of 25,600 rail cars this year and 16,500 in 2010.
Toby Kolstad’s even less sanguine about the next couple of years.
“Next year, I see car production in the teens,” as in the 10,000s, says Kolstad, president of Rail Theory Forecasts L.L.C. (RTF) and a Progressive Railroading columnist. “I’m looking at each car type and having trouble finding any rays of hope. I don’t see a recovery out of the trough bottom for several years. Maybe we’ll see 20-30,000 cars in three or four years.”
But for Kolstad — and a few others that we talked with during the information-gathering for the 2009 edition of “Fleet Stats” — there’s a bigger-picture concern.
“The question I keep asking is, ‘Have we had an economic reset, and established a lower baseline for railroad traffic and rail-car demand?’” Kolstad says.
The “reset” question will remain a rhetorical one for a while. But some believe this recession’s definitely going to be a game-changer, and that the car-builder and lessor landscapes will look a little bit different, post-recovery — whenever that is. As of late May, the consensus belief/hope was that the economy had hit bottom.
That belief/hope also constituted something of a silver lining.
“The narrative you read is that we’re there, that the rate of decline has slowed to that point,” says Patrick Casey, vice president of fleet management for TTX Co., which manages a free-running pool of 208,000 freight cars and is owned by North America’s nine largest railroads.
Regardless of whether builders, lessors and would-be orderers actually are able to reach out and touch that bottom, they’re essentially in the same boat, so to speak, as the traffic-starved railroads they serve. They, too, must circle the internal wagons, search their strategic souls, seek efficiencies and do whatever they can to ensure they’re prepared once the economy recovers.
At TTX, that means upgrading fleet management systems and exploring alternative uses for cars in the pool.
“The wind power market — ‘green’ energy — is pretty strong right now,” Casey says. “We are working on converting old intermodal cars to carry old windmill towers and power blades.”
With uncertainty comes the search for stability. For some of Chicago Freight Car Leasing Co.’s customers, it means familiarity.
“There are just so many changes out there, and with more in store, folks who intend to be in it for the long haul want to be with companies that do, too,” says Paul Deasy, the lessor’s director of sales and business development. “The fact that we have been around for 80 years means something to them, especially in this environment.”
And like other lessors, Chicago Freight Car is taking care of its assets during this recessionary stretch.
“We continue to run cars through shops so they’ll be in good shape when the market returns,” Deasy says.
“When the market returns” is a half-full phrase we heard frequently last month, especially from builders, who know the up-and-down swings of the rail-car realm as well as anyone. As one exec put it: “They told me when I signed up for this industry that it was a cyclical business. We just have to be smarter as we ride it out.”
That’s certainly the plan at Union Tank Car Co.
“The compound effects of worldwide financial distress and the dramatic fall-off in the price for petroleum products has, without question, for the near term, negatively affected the supply demand balance for leased rail equipment of all forms,” noted Leasing Business Unit Manager William Constantino via email. “New car manufacturing activity is at historic lows, maintenance and storage costs are excessive and rising, and demand for all car types is generally vacant.”
Yes, the rail equipment industry is “cyclical by nature,” Constantino said. But this “cyclical bottom is only marginally different than past events. The trick is keeping your organization focused on the long term.”
To that end, Union Tank Car is “well positioned to benefit” once rail-car demand returns.
“We continue to expand our capabilities, have secure access to investment capital, and believe that high-quality equipment backed up by a superior service network will differentiate [Union Tank Car] from its competitors going forward,” Constantino said.
Many just hope the back-pedaling’s over. It could be, according to forecast firm FTR Associates. The U.S. economy will stabilize during the third quarter, and there’ll be “a modest recovery in 2010,” according to a May 28 FTR press release headlined “Recent Data Suggests the Worst of Recession May Be Over.”
Not that the pain won’t linger. And it could linger for some time.
“Normally after a recession, you’d look for a pretty good bounce back, but I don’t see it this time,” RTF’s Kolstad says.
Optimists, too, acknowledge that hard times aren’t anywhere near over.
“The anticipated slow improvement in the economy means that difficult conditions will persist for some time for commercial vehicle suppliers,” FTR prognosticators acknowledged.
Whatever the degree of difficulty — and whatever the extent to which there’s an economic reset or other ramifications of this game-changer of a recession — the majority of marketplace observers say they haven’t wavered: Rail remains the solution to what ails the North American transportation system.
“There’s nothing that I can see that has changed the fundamentals,” TTX’s Casey says. “We’re still bullish.”
EPA is, too.
“We look for rail-car deliveries to rebound moderately to 29,000 in 2011 and then expand annually to the level of 58,000 in 2014,” according to the firm’s April report.
In the meantime, builders, lessors and market observers will keep on plugging, clinging to that “We’re at the bottom/The only place to go is up” sentiment as they search for clues to the new direction.
“It’s definitely an interesting time,” says Chicago Freight Car’s Deasy. “This is a whole new ball game that we’re in.”
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