Out of hibernation: after hitting bottom in 2002, freight car orders are on an upswing that's expected to last through at least 2009. Builders also are offering new models to supplant older technology

Railway Age, Sept, 2004 by Marybeth Luczak

Rebounding retail business, soaring housing starts, and climbing automotive sales: all sings of a long-awaited economic recovery, one that helped boost railroad carloadings to a record 25.5 million in 2003 and will continue to increase traffic this year, according to the Association of American Railroads and Economic Planning Associates, Inc. Expected to pick up steam are: coal (from 6.6 million carloadings in 2003 to 7.5 million in 2009), grain (1.1 million to 1.23 million), chemicals (1.5 million to 1.72 million), and motor vehicles and spare parts (1.23 million to 1.34 million). In addition, domestic and import intermodal traffic has surged over the previous nine quarters, with growth averaging 8.1% for the last three, reports the Intermodal Association of North America. Container and trailer loadings are predicted to move from 10 million in 2003 to 12.2 million in 2009.

Bur with capacity tightening, railroads are feeling the pinch. All 1.3 million-plus railcars in the U.S. fleet are being pressed into service, and won't quickly relieve the crunch. Their average age is closing in on 20 years. "You cannot continue to improve with a fleet this old," EPA President Peter Toja told attendees of the American Railway Car Institute's summer conference. Broad-based car replacements are in order, he said, and additional cars will be required to meet rising demand.

ARCI/EPA estimates put deliveries at 42,500 by year-end and nearly 60,000 by 2009, far surpassing 2003's 32,184 and 2002's meager 17,714. Through the end of second-quarter 2004, orders had reached 37,732--just 20% fewer than full-year 2003 (47,249). Deliveries came in at 20,083--nearly 44% higher than first-half 2003 (13,979). And backlogs hit 51,446--a figure not seen since 1999's first quarter, when backlogs were 55,680.

This is certainly good news for railcar builders. They've come out of hibernation since production levels bottomed out in 2002. "We will produce twice the number of cars in 2004 than last year," says Martin Graham, president of Trinity Rail Operations. Following the cyclical nature of the market, the Company is seeing the greatest demand now in refrigerated boxcars and 6,351-cubic-foot hopper cars (pictured top, p. 63). "Just six months ago, the doublestack well cars were clearly dominant as were boxcars, based largely on the impact of TTX buying in support of intermodal growth and boxcar replenishment," Graham says. "This continues, but we've seen grain cars coming to the forefront in the last three months. Autoracks also are coming back strong in 2004."

About half of Trinity's second-quarter 2004 revenues ($548.7 million) came from its Rail Group, up sharply from a year ago. Trinity's Noah American railcar backlog grew to 17,500 units by the end of the second quarter, an increase of 65% over the comparable 2003 period. According to Trinity Industries, Inc., Chairman, President, and CEO Timothy Wallace, the turnaround started in third-quarter 2003, when "our railcar group made its first operating profit in nine quarters."

Greenbrier is seeing a similar uptick. By the end of May, orders were at 3,600, rising from 1,600 during the same period last year, and deliveries reached 7,800 vs. 4,400 in the 2003 period. Worth an estimated $840 million, backlog topped 14,300 at the end of June.

While Union Tank Car averages 3,000 to 4,000 new cars annually, production will be up nearly 60% this year, ranging from 5,000 to 6,000, says William Snelgrove, vice president sales and customer service. Why? "There is a lot of growth in the chemical sector, which represents 55% of the U.S. tank car fleet," he says. "And the existing fleet that used to have a surplus is now being fully utilized."

The car and locomotive component market is experiencing considerable growth, as well. For instance, after three "very depressed years of build-up demand," Wabtec's Freight Group sales rose 14% in the second quarter from year earlier levels, according to Jim Pontious, vice president-special projects.

Rolling with the punches

There are complicating factors to the turnaround:

* Backlogs will likely be higher than deliveries for a while, as builders and component suppliers ramp up. "The industry produced some 70,000 cars in 1998, but there was a long, steady buildup to get us there," Trinity's Graham points out. "Now, we have to meet growth at break-neck speed, while coming out of a slump."

To keep up the pace, some are adding capacity. Trinity is bring ing online two existing Texas plants this year; Union Tank broke ground last month on a new plant in Alexandria, La., which will begin production in 2005 and be flatly operational in 2006.

* A more pressing challenge is material supply--castings and steel, said Frank Lester, president of Union Tank Car at the ARCI meeting. Limited steel availability, is causing a spike in steel prices and scrap surcharges.

Union Tank's Snelgrove estimates that steel prices have risen 10%. "For tank cars, 70% of the cost is for materials, so 10% is substantial," he stresses. "We are effectively at capacity at our plant in Sheldon, Tex., and we are not producing at capacity, at our East Chicago, Ind., plant because we can't get steel to get cars built. Our backlog is growing and orders are outstripping production."