The keys to rational fleet growth - CIT Group Senior Vice President-Rail Resources Victoria McManus - Brief Article - Interview

Railway Age, Dec, 1998

Recently, we had a chance to chat with CIT Group Senior Vice President-Rail Resources Victoria McManus, who is no stranger to sizable new car orders (5,000 cars in the past 12 months alone). We feel her ideas on avoiding some of the hyperinflated car orders that generally precipitated new building recessions are of some value, and we'd like to share them with our readers.

Kruglinski: To what do you attribute the sometimes dramatic shifts in new railcar building numbers in the U.S. and Canada?

McManus: To crr on the side of oversimplification, sometimes, as an industry, we just build too many cars too soon. Or too many of the wrong types of cars at the wrong time. It could also be said that we sometimes don't build enough of a car type in rational increments, which would be one way to explain the shortages we often experience.

Kruglinski: Can this be avoided?

McManus: Since we are in the business of transporting commodities that have their own market fluctuations, I'm not sure we can ever match supply and demand perfectly. I do think we could avoid dangerous peaks and valleys. But first I think I should give you my views on some of the events that drive new-car building.

My background is in aircraft finance, not rail. When I became involved in rail finance and rail equipment leasing four years ago, I began with a clean slate as far as opinions as to why some things happened the way they did. When I first became familiar with the economic equation that underpinned the acquisition of new railcars for lease to railroads and shippers, I noticed that it often had nothing to do with long-term, planned equipment acquisition. In a word, it often seemed reactive to temporary circumstances.

I like to point to the relationship with the entrance of TTX into the new-car marketplace--or its exit--as an example of a market "driver" that is broader than just one car type. For instance, when TTX in its own good judgment goes into the new-car building marketplace with an order materially larger than its prior-year order, it takes up significant building capacity that becomes unavailable to purchasers of other car types.

Kruglinski: Are you saying that if TTX is in the market for a large number of cars, that could cut down, for example, on the number of mill gons that can be built, causing mill gon purchasing to become superheated?

McManus: Not exactly. What I am saying is that, from my point of view, a market that is artificially tight due to unusually large orders placed by someone can become arbitrarily overheated if it is coupled with a perceived (unplanned for) shortage in another car type. For instance, I believe that much of the bulge in new mill gon building can be attributed to shippers and railroads turning to the leasing companies for mill gons when they determined current supply would not meet near term demand. Now when the leasing community got these requirements--probably later than necessary--they also knew that North American new-car building capacity was already filled for 1998 into 1999.

I won't say it was a panic, but one of the reasons leasing companies are committing to new-build space with railcar builders- CIT included--is that we feel we must have the ability to have the cars we are asking for built if we do not already have them in inventory. In the case of mill gons, we had the foresight to order them for 1998 delivery and no one else was building much. Suddenly, builders are scrambling to make capacity anywhere they can in 1998 and 1999.

Kruglinski: Isn't new capacity and competition among builders good?

McManus: It's good if it keeps prices in realistic check and everyone gets to purchase--within 12 months or so, rather than two or three years--what they need for their business. Overbuilding leads to component shortages and price increases that affect all car types. But if this situation results in the boom and bust in car building that we as an industry have had to live with for the last 20 years, that's not good.

Kruglinski: Do you have any ideas for the future?

McManus: I do. We have all the ingredients for a healthy and efficient market. We have a good selection of manufacturers and leasing companies and a mature industry focused on making strides in efficiency. For one thing the communication among shippers, railroads, manufacturers, and the leasing community needs to be better. Much better.

I know that the annual budgetary processes that both shippers and railroads go through do not easily lend themselves to multi-year equipment acquisition programs. But, if CIT, as a lessor, is willing to listen to realistic prognostications from my customers in order to make its plan for new equipment acquisition, I'd hope that our customers would be willing to share their thoughts with us.

This is something that I really believe in and to which CIT and all of its rail leasing professionals are committed. These conversations need to cover a lot of ground and we should concern ourselves not just with short-term demand but quality and efficiency of the North American railcar fleet.