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Rail News Home Mechanical

May 2011



Rail News: Mechanical

Inside the complexities of rail-car fleet renewal — by Toby Kolstad



— by Toby Kolstad

It is often thought that managers of rail-car fleets periodically decide to scrap old cars and buy new ones to replace them. In actual practice, these two decisions are rarely related; moreover, different companies sometimes do the buying and scrapping of similar car types.

The point: The process of fleet renewal and reconfiguration is complicated and ongoing.

Rail cars are scrapped because they are in poor physical condition (hard to quantify), obsolete (difficult to economically measure, but easier to describe) or have become surplus with little chance of being used again.

Although car age is a potential factor in each decision to scrap, statistical analyses show little correlation between age and retirement dates either for the fleet in general or for specific rail-car types. It's better to project rail-car retirements for a 10- to 15-year period rather than on a yearly basis, or even a five- to 10-year period.

Orders Up For Three Car Types

Customers buy new cars when their needs cannot be met with existing equipment, which might be in poor condition, obsolete or in short supply. Occasionally, government tax incentives provide a reason for a company to buy new equipment, but purchases are made only when current car demand or expected demand warrants new orders.

The current situation facing many fleet managers offers some good examples of the complexities of the market for new rail cars. There has been a significant rise in orders for three types of rail cars, even though there are thousands of surplus cars of each type and traffic levels are still below historic levels. For each car type, special circumstances are driving the renewal and reconfiguration of the car fleet in question.

Box cars: Thousands of old 70-ton cars sit idle, but demand is high for newer 110-ton cars, which are in short supply. Railroads and lessors that own the former are scrapping their aging cars to minimize storage costs and take advantage of high scrap prices. Replacement demand for new cars is probably being stymied by the car-hire rates the Class Is set.

However, the federal tax incentive program has made it possible for TTX Co., which is wholly owned by 10 major carriers, to keep daily use rates within the bounds set by its owners for the new 110-ton box cars it recently ordered. It is questionable whether these orders will continue when the tax program ends and car hire limits remain in effect.

Eastern coal cars: Although there are thousands of relatively new surplus aluminum coal cars, they cannot be used for the type of transportation service that requires steel equipment. More than half of the steel coal cars in the eastern rail carriers' fleets have car bodies that are well beyond their expected service lives of 15 to 20 years; they are in fragile condition. Norfolk Southern Railway and CSX Transportation have ordered replacements for those cars, which are being scrapped.

The combined NS-CSXT fleets exceed 50,000 cars, and more than 35,000 are more than 30 years old. At the current build rate, it will take more than 10 years just to replace the cars that are in bad shape.

Intermodal cars: There are thousands of surplus 40-foot well cars, as declines in containerized imports and changes in operations have made many of these cars temporarily obsolete. Because these cars are relatively new and imports are expected to continue to rise in the coming years, they are expected to return to service. Railroads now are emphasizing the economics of 53-foot well cars, and supplies are tight enough to prompt TTX and some individual railroads to order thousands of new double-stack cars.

With the Association of American Railroads reporting hundreds of thousands of surplus rail cars and railroads' weekly traffic totals still below pre-recession levels, it is easy to understand why the logically minded in the investment community question why anyone would buy new rail cars. The answer can be found in the specific factors driving the demand for each car type, and these special factors are providing the greatest rebound in orders in many years. Hopefully, the rest of the economy will catch up with the rail-car industry and provide a basis for continued growth in new car production in 2012.

Toby Kolstad has been in the railroad industry for more than 30 years, with stints at the 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., he can be emailed at Tkolstad@aol.com.

 



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