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Rail News Home Mechanical

November 2009



Rail News: Mechanical

Freight-car repair business will ramp up when the economy does, repair-shop execs say



By Desiree J. Hanford

With the U.S. economy in a recession for nearly two years and freight-rail traffic remaining weak, work at rail-car repair shops practically has ground to a halt, a sampling of repair-shop reps said during interviews last month. And while many of the trend lines suggest the worst is over, rail-traffic totals continued to lag through October, compared with year-ago totals.

For the year's first 42 weeks, U.S. carloads tumbled 18 percent and Canadian carloads 21.4 percent compared with the same 2008 period, according to Association of American Railroads data. U.S. rail intermodal traffic fell 16.4 percent during the same span. In Canada, intermodal traffic dropped 15.9 percent.

Facing those dismal numbers, railroads have put thousands of rail cars in storage, and they've been reluctant to spend thousands of dollars repairing cars they don't foresee using any time soon, repair-shop officials said.

Nevertheless, there are signs that repair business could improve, albeit slightly, in 2010. More than 15,000 cars came out of storage in September and railroads appear to be setting aside at least some money for general maintenance, shop officials said. And the U.S. economy, by many accounts, appears to have bottomed out. For now, though, strategists at a range of rail-car repair firms — several of whom declined to be interviewed for this story — are making do with the marketplace as it is.

"Until consumer demand and manufacturing increases, there's not much need for maintenance," says Robert Nelson, president of Transco Railway Products Inc., which offers repair, modification and rebuilding services at facilities in the Great Lakes region, Iowa, Montana and Georgia. "And if I knew when that would happen, I'd be smarter than most economists."

Last year was "very robust" for the entire rail industry, including repair shops, but there were signs beginning in late November 2008 that the upcoming year would be a different ball game, given what railroads were implying about their soon-to-be-announced capital budgets, Nelson says. Many contracts Transco typically had in place going into a new year weren't being renewed, so it became clear that the 2009 workload would be lighter, he says.

Business has been slower during the recession as rail-car owners have stored their cars due to reduced demand by shippers, says Bill Plavsic, director of repair services for Hoosier Railcar Inc.

"And those that are staying out are at reduced lease rates, so owners are less willing to spend a lot on preventive maintenance or other programs," he said in an email.

The East Chicago, Ind., company repairs covered hopper, open top hopper, box, bulkhead flat, gondola, ballast and pressure differential covered hopper cars. It also provides exterior painting, interior lining and rail-car customization services.

Repairs Deferred

Even so, the first quarter wasn't too bad because Transco had some work left over from 2008, but the company saw a drop in business in the second and third quarters that Nelson says corresponded to the traffic decline and increased number of cars stored.

"So, railroads have deferred maintenance, not at the expense of safety but, logically, by putting some cars in storage and allowing the cars that didn't need repairs to continue," he says.

"Remember where we are on the food chain," adds Lee Jebb, vice president of railway operations for short line Central Manitoba Railway, which stores and repairs cars and locomotives, and offers track maintenance and transloading services. "The Class Is and big lessors have some car repair capacity of their own, so we'll pick up the crumbs that they leave. And everyone's hungry and there's not many crumbs left over."

That said, Central Manitoba's receiving nourishment from other business units. "We're not a one-trick pony, so we're in pretty good shape," Jebb says. "The car repair side is struggling, but car storage and fleet intelligence are doing very well."

'Virtually Nonexistent'

Diversification also is paying dividends for The Andersons Inc., which, in addition to providing repair services, manages rail cars, distributes fertilizer and operates grain elevators. The company's rail group repairs, sells, manages and leases nearly 23,800 cars and locomotives. This year, the group's business was slow through August and program work — extensive refurbishment or reconfiguration work on a large number of cars — was "virtually nonexistent," says Rasesh Shah, rail group president for The Andersons, which owns and operates repair shops in Maumee, Ohio; Darlington and Rains, S.C.; and Bay St. Louis, Miss. The rail group's operating income for the year's first six months was $1.5 million, down from $11.3 million in first-half 2008. "I've seen a slight pick-up in program work but not any major program work," Shah says.

How much work a repair firm has can depend on where it's located and the type of work it does. There's been a greater decline in rail traffic east of the Mississippi River, notes Transco's Nelson, adding that the company's three facilities that serve the two big western Class Is are doing better than the ones that serve the two eastern Class Is.

"Our eastern shops did more with steel and auto-type traffic, versus our western shops where two are for tank cars and one is for general freight car," Nelson says.

Meanwhile, Transco's tank-car work has remained "considerably stronger" than other business segments given the recertification and requalification mandated by the Federal Railroad Administration, Nelson says. Tank-car owners continue to requalify their assets under the FRA's HM-201 rule, which mandates the qualification of tank cars carrying hazardous commodities.

Two of Transco's nine rail-car repair facilities do certified work. Transco's services include modifications, repairs, tank car cleaning and repairs, and AAR Rule 88 rebuilds. Rule 88 covers the mechanical requirements for acceptance of the interchange of freight cars.

The Worst May Be Over

The potentially good news for repair shops? The worst could be behind them by year's end, several said. For clues, The Andersons' Shah planned to review publicly traded companies' third-quarter earnings results. If they come out "reasonably well," there's a chance the worst is over, he says.

The latest traffic data may indicate that "better things are on the horizon," said John Gray, the Association of American Railroads senior vice president of policy and economics, in a statement issued Oct. 14. Railroads, he noted, took more than 15,000 cars out of storage between Sept. 1 and Oct. 1.

Transco's Nelson believes business is at rock bottom, but he also expects it to stay there a bit longer. He hopes railroads will have a bit more money for maintenance at the beginning of 2010. From what he's heard, there will be at least some money for general maintenance. "But I also believe it's going to be well into 2010 — maybe the third or fourth quarter — before we see any appreciable improvement [in business]," he says. "So much will be tied to the general economy."

In the meantime, repair-shop execs will track and trace the economic indicators of their choice. For The Andersons' Shah, one to watch is scrap steel prices — they're a good indication of whether companies plan to keep their rail cars. Many cars are getting older and some may be scrapped if scrap steel prices are reasonable, he says. And like everyone else, Shah is keeping tabs on rail traffic.

A Guessing Game

In the meantime, shop execs said they've tried to keep as many skilled workers on the payroll as possible. Although Transco furloughed a number of employees and cut a day off of the five-day work week when business slowed, the company has kept employees busy by having them work on projects designed to keep the operation running efficiently, such as working on ways to reduce energy consumption and improving the company's carbon footprint, Nelson says.

"We look at retaining our core employees and improving our processes and efficiencies as an investment, and we're positioning ourselves to be prepared when business does improve," he says.

At Hoosier Railcar, preparing for recovery has meant expanding capabilities at the company's Mississippi Railcar affiliate, and adding a new steel grit blast building and new interior lining capabilities. It's also meant spending additional time with sales and marketing, and ramping up personnel and capabilities to accommodate future demand.

"We believe the repair industry will go from famine to feast relatively quickly," Plavsic says.

Others are less willing to project too far out in this still-evolving economic order.

"The question is whether [the economy] will bounce back nicely or bump along near the bottom," Central Manitoba's Jebb says. "Your guess is as good as mine."

Desiree J. Hanford is a Chicago-based free-lance writer. Email comments or questions to prograil@tradepress.com.

 



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