Rail Theory Forecasts™ LLC

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North American Rail Car Market

North American
Freight Car Market

Progressive Railroading Magazine http://www.progressiverailroading.com/

Progressive Railroading Magazine, May 2010

What’s in store on the surplus and storage fronts

The dramatic decrease in railroad traffic during 2009 caused a large portion of the national rail-car fleet to be put into storage. As storage space disappeared and storage fees skyrocketed, car owners questioned how long the surplus would last. Lease rates, lease terms and decisions to store or scrap equipment all depend on the answer to this question.

In recent months, there have been several attempts — including one by the American Association of Railroads (AAR) — to determine how many cars were in storage. At a recent railroad finance conference, many speakers and commentators estimated the total to be around 500,000 out of a fleet of 1.6M US railcars, with 10 percent more in mid-2009 and 10 percent less in early 2010. One presenter estimated that the number was even much higher because not all surplus cars were actually stored.

The AAR measurement was based on a comparison of all car movement records since mid-2009. All cars that were not shown on a train or switch movement in 60 days were deemed to be in storage, including plastic pellet cars and coal cars in maintenance reserve fleets that frequently sit idle for many weeks. Unfortunately, the AAR did not run a baseline analysis for prior years, and the estimate might be a bit high.

Meanwhile, carload traffic declined almost 20 percent during the first half of the 2009 but recovered during the second half; the final ’09 traffic total represented a 16 decline compared with 2008’s level. It would have been a neat trick if a 16 percent traffic decline idled 30 percent of the national fleet. However, there are only two scenarios that might explain this situation:

Neither scenario appears plausible. Although there was a slight equipment surplus in late 2007, it was not large enough to discourage buyers from ordering 60,000 new cars for delivery in 2008. As for the improved operating performance of Class I carriers: The increased car fluidity did make redundant all the extra cars that were built to compensate for the slow trains after 2002, but the total was estimated to be less than 36,000 cars before train speeds began to increase in 2006. Moreover, the weekly train performance reports from the AAR now show train speeds to be decreasing again as traffic levels rise and some of the idled cars caused by 2009’s faster trains may be needed again soon.

Fleet managers use standard utilization rates to estimate how many cars are needed for a given traffic level, and the standard rates reflect past fleet and railroad performance when rail-car supply and demand were in balance. Unusually low utilization rates recorded when traffic was low and exceptionally high utilization rates when car shortages were common are not used to determine fleet sizes. Using this approach to measure the actual car needs during the recent traffic downturn, it is possible to determine a theoretical number of surplus rail cars by subtracting the cars needed from the actual cars in the various fleets. The key: setting standard utilization rates for each car type. Using data from 2004 — when traffic had recovered from the last recession — as a baseline for determining standard utilization rates, there were at most 350,000 surplus cars in 2009. At the end of the first quarter, the number is closer to 240,000; by the end of the year, I expect it will be closer to 150,000. And of the latter total, fewer than 100,000 are expected to be actually stored.

The storage situation should begin to improve and, more important, the surplus cars in certain car fleets should begin to disappear before the end of the year — particularly for cars that serve the agriculture and chemical sectors. Unfortunately, the surplus cars in other fleets will stay “surplus” well beyond 2010. The good news: At least now, the end is in sight, however long it may take to get there.

Rail Theory Forecasts is a consulting company specializing in North American rail freight traffic and freight car demand forecasting. Publisher of the annual North American Freight Car Market

Rail Theory Forecasts (RFT) was founded in 2001 to advance the art and science of predicting future developments and trends in the railroad industry, especially with regard to the demand and supply of railcars. The basic premise which has guided the company’s efforts is that current developments can only be understood and evaluated within an historical context, and that forecasts and projections of future developments must be soundly based on the interplay of the factors that have most influenced past events

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