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12/10/2009


Rail News: Mechanical
Locomotive rebuilds - a market update



— by Pat Foran

That the mechanical segment of the North American rail industry has been in the throes of a depression for the past year-plus has been ... well, well documented. Freight railroads and industrial customers simply haven't been buying locomotive power, and they haven't been doing much major repair or rebuild work, either.

So, when asked last month to recap the year that was and discuss 2010's prospects, officials representing several locomotive builders, rebuilders and remanufacturers weren't entirely eager to weigh in. A few either declined to comment or offered up sentiments that were short and bittersweet. A GE Transportation official — speaking on behalf of GE's locomotive and service groups — put it thusly via email: "Times remain challenging" and "we continue to invest in the future."

Others offered similar, slightly more detailed observations. The good news: Routine locomotive work has been relatively steady for some rebuilders. The less-good news: Large-scale refurbishment projects that were shelved earlier this year are still on the shelf, and they may remain there for a while.

"All of it has made us hesitant to forecast growth in 2010," says Doug Bachman, chief administrative officer for Relco Locomotives Inc., which rebuilds, remanufactures and leases locomotives.

Enthusiasm Parked

The hesitancy to think beyond the next quarter has been creeping into all corners of the corporate psyche for some time now, but it began in earnest in the locomotive realm at about this time last year.

"In the last year or so, a lot of locomotives have just been parked," says Carlisle Jones, co-owner of Birmingham Rail & Locomotive Co. Inc., whose locomotive division provides rebuilt locomotives and locomotive replacement parts, as well as mobile repair services and scheduled maintenance. "There's no demand for power."

As a result, customers began putting off major rebuild/remanufacturing projects right out of the 2009 chute.

"For the most part, they've pushed out the start date of projects," says Bachman. "That push out was partially a reaction to the demand [drop-off], but it's also an emotional response to the overwhelming bad news they've been hearing for the past year and a half."

Adds Jones: "When times get tough, people really cut back on discretionary spending, which is understandable. Locomotives are a necessity ... but customers sometimes overlook scheduled maintenance or preventative maintenance."

Some customers didn't. At Relco, the routine maintenance side of the business has remained "solid," Bachman says. Ditto for Birmingham Rail & Locomotive.

"The repair part of our business is probably where most of the action has been the last few years," Jones says, adding that recent work has included retrofitting power units with emissions and fuel-use controls.

Planning Vs. Guessing

At Electro-Motive Diesel Inc., which doesn't perform rebuild-in-kind of its locomotives, the focus has been on "repowering older low- and medium-horsepower locomotives with the latest engine and control system technology," said Kevin Bahnline, product manager, North American aftermarket, in an email. EMD's 710ECOª Repower locomotives feature microprocessor-controlled locomotive engines to reduce emissions, increase fuel economy and reliability, and cut maintenance costs.

The Repower package can "leverage a railroad's fleet investment by extending the life of the locomotive up to 20 years," Bahnline said, adding that "there has been strong interest in this product line," with about 40 units either in service or under construction since the first demo unit was rolled out in 2008.

Ultimately, though, "strong interest" in any locomotive-related product, equipment or service didn't translate into revenue at anywhere near the pace builders and rebuilders hoped it would in 2009. And if anecdotal evidence is any indication, the pace might not be all that quick in 2010, either.

"The sales life cycle has increased," Relco's Bachman says. "From the time we sign the deal to when the capital actually gets expended, the whole transaction is taking much longer than we have ever seen — we're talking the past 50 years."

And that puts "downward pressure on growth projections," Bachman adds.

Further muddying the growth-projection waters further is the lingering lack of demand for locomotives. It has led some lessors to dump units on the marketplace, creating a large inventory of low-cost power. It also could create a mind-set that power, new or otherwise rebuilt, will be available on the cheap for the foreseeable future, a few observers suggest.

"How do you plan? It's certainly a challenge," Bachman says.

Will Wishing Make It So?

The somewhat encouraging sentiment on the economic front — the recession's over, we've hit bottom, a modest recovery is coming — they've heard from economists and freight-rail execs alike in recent weeks gives rebuilders reason to feel better about 2010.

"We do see the mood in the world changing about the economy although, again, it's an emotional reaction to business issues," Bachman says. "But there seems to be a greater receptiveness to speed up the projects they've put on hold."

Whether that reception results in rebuild business remains to be seen. And that, of course, is life in the post-recession planning lane — and, perhaps, a harbinger of the new normal to come, some suggest.

In the meantime, locomotive builders and rebuilders will press ahead. In addition to investing in the future, GE's been busy making inroads overseas, as recent service agreements with, orders from and deliveries to rail operators in China, the United Kingdom, Mongolia and Kazakhstan indicate.

An official at Brookville Equipment Corp., which supplies rebuilt parts and offers repair services for a range of locomotive types, said the firm has been "focusing on our new locomotive projects," including its CoGenerationª locomotive.

Other builders and rebuilders simply plan to keep on keepin' on.

"As far as 2010 goes, we'll try to take care of our customers, we'll try to be competitive, we'll explore new opportunities — we'll do all the things we've always done," says Birmingham Rail & Locomotive's Jones. "Beyond that, there's just a lot that we can't control."

Future Looks Healthier

But they can lean — and, ultimately, seem willing to bet — on the promise of the Rail Renaissance.

Officials at Graham-White Mfg. Co. certainly have been. Earlier this year, Graham-White acquired The Vista Corp., which operates a remanufacturing facility for severe-duty locomotive-engine components in Roanoke, Va. The acquisition, which enables Graham-White to offer a wider range of remanufactured components from four nationwide locations, positions the company nicely for the recovery to come, officials believe.

And then there's The Oracle of Omaha's big-time bet on rail's future, which definitely helped to validate more than a few industry players' own convictions, Birmingham Rail & Locomotive's Jones says.

"Mr. Buffett's play with the BN, I think, is a positive sign," he says. "The industry, as a whole, is pretty doggone healthy."

The toast at year-end holiday parties across the rebuild realm, then: "Here's to a healthier 2010."

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