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Considering the wide swings in the production of several types of rail cars in recent months and years, the term “fleet management” has become an oxymoron. Although the annual number of carloads for most car types has remained relatively stable, fluctuating no more than plus or minus 5 percent in any year, new-car demand has risen and fallen with a cyclical variability many times that amount. Something is amiss, and tracing the evolution of the fleet management concept offers a few clues.

	Toby Kolstad
	Railroads and leasing companies will have to find a better way to respond to temporary operating inefficiencies if they want to reduce the multiplier effect they produce on new-car demand.

Fleet management became popular around 1980 when the major rail carriers organized and staffed fleet management departments with operating, marketing and IT professionals. Their aim: reduce empty car miles and car hire payments to other railroads and increase fleet utilization rates, as measured in carloads per car, per year.

The burden shift

Reducing the number of empty car miles seemingly has eluded railroad fleet managers, but they were successful in reducing car hire expenses by getting the erstwhile Interstate Commerce Commission (ICC) to scrap the Association of American Railroads’ formulated car hire rate rules for a system in which car owners and individual railroads negotiate rates.

As for improving fleet utilization: Railroads began shifting the burden of car ownership to non-railroad parties, mostly leasing companies and shippers. Before 1980, 16 major railroads owned about 1.5 million cars. Enjoying antitrust immunity, they could discuss among themselves matters relating to car ownership and car service so that they might better serve customers while minimizing costs.

The focus on utilization

Up to that time, car shortages had been more common than surpluses and efforts to increase asset utilization usually involved developing better car handling practices to increase the number of loads carried in each car per year. Today, U.S. railroads own fewer than 500,000 cars.

The other 1 million cars in today’s U.S. fleet are owned by dozens of non-railroad companies, primarily leasing companies. These car owners do not have antitrust immunity, but they are concerned about keeping their utilization rates up. However, lessors measure utilization as the percentage of the time their cars are on lease rather than how many times per year the cars are loaded.

Railroad and lessor utilization rates can increase and decrease at the same time, but in most instances, these ratios move in opposite directions. That’s why car surpluses have been more common in recent years and the car-building cycle has had such wild swings.

When railroad efficiencies decline, utilization rates fall and more cars are needed to handle a fixed volume of traffic. For lessors, this usually means more of their cars are needed and their utilization rates climb. Since operational efficiencies generally decline when railroad traffic increases, there is a multiplier effect on the new-car demand during such times. More cars are needed to handle the additional traffic — and even more are needed to handle the old traffic because of the decrease in operating efficiencies.

The opposite happens when traffic falls and railroad operating efficiencies improve. Fewer cars are needed to meet shipper needs, and improved efficiencies mean that even fewer cars are needed because car cycle times are shortened. Demand for new cars plummets, far more than might have been expected from a traffic decline alone.

To manage the swing, then ...

When railroads owned most of the cars, building new ones wasn’t their only option. They also could repair unserviceable equipment, which sometimes exceeded 10 percent of their fleets, or they could let the shippers complain to the ICC. Usually, they employed a combination of all three options. In today’s market, railroads and shippers turn to leasing companies when they need cars, and these companies, which don’t carry many unserviceable cars in inventory, go right to the car builders for more equipment.

Railroads and leasing companies will have to find a better way to respond to temporary operating inefficiencies if they want to reduce the multiplier effect they produce on new-car demand. Otherwise, the wide demand swings will continue to be a condition of doing business in this cyclical industry.

 

Accentuating the acquisitive ... North American railroads, lessors and shippers were on a veritable acquisition binge last year. The Association of American Railroads’ Policy Economics Department’s preliminary total of 74,729 new cars acquired in 2006 represents an 8.9 percent increase compared with 2005’s total (68,612) and the most since 1998’s 75,685. Lessors and shippers were particularly acquisitive. They acquired 63,818 cars last year, or 85.4 percent of the total. But the order pace has slowed considerably. For the quarter ended March 31, rail-car orders totaled 11,152 units, a 30 percent drop compared with fourth-quarter 2006’s 15,819 units and 69 percent plunge compared with first-quarter 2006’s 35,991 units, according to data compiled by the American Railway Car Institute Committee of the Railway Supply Institute. First-quarter car deliveries totaling 17,148 units fell slightly compared with fourth-quarter 2006’s 17,927 units and decreased 7.5 percent compared with first-quarter 2006’s 18,542 units. Where will deliveries end up at year’s end? Rail Theory Forecasts L.L.C. President (and Progressive Railroading columnist) Toby Kolstad predicts 62,000.

Toby Kolstad has been in the railroad industry for more than 30 years, with stints at Illinois Central Gulf Railroad, Denver & Rio Grande Western Railroad, a car builder and lessor. Currently a consultant on rail-car matters and president of Rail Theory Forecasts L.L.C.