Suppliers speak out on new-car building - railroad cars - Column

Railway Age, Sept, 1992 by Anthony Kruglinski

Last month we talked about the possibility that the railroad industry was finally ready to begin a long-overdue drive to reequip itself with new freight cars in numbers in excess of the 25,000 or so that have been built each year for the last few years. The next questions are: How is the new-car industry going to cope with an increase in orders? How is the component-supply industry going to meet the needs of the car-builders?

We spoke to a number of car-builders, customers, and component suppliers, and came up with a picture that reflects a cautious optimism that the railcar industry is slowly turning a corner on its average new-build rate.

Order books are filling. Some of the equipment that was sought for delivery in 1992 has already shifted to 1993 due to full order books at midyear 1992. The year 1993 is shaping up as one of the strongest in recent years for orders and inquiries.

Suppliers say they can cope with any bulge in orders. Bill Kassling, WABCO's chief executive officer, puts it this way:

"We've seen a recent increase in inquiries related to new-car building but expect 1992 numbers to be much like 1991 with additional strength in the rebuilding marketplace. If there is an increase in need, the capacity is there to meet it with modest adjustment by the suppliers."

Tom Engle, general manager of New York Air Brake's Iron Highway Division, says: "We're seeing the leading edge of a possible trend. It's 'if we do this, would you do that?' After 26 years it's my experience that this kind of pattern of inquiries generally precedes an actual request for quotation and a new order."

We asked Engle if he thought the rail supply industry could cope with an increase in new-car orders of perhaps 5,000 over current levels. He responded that there would be few problems in handling such an increase, but he pointed out that there would be some "pinches." However, since there is a lot of sunk cost in mothballed plant and equipment, and it doesn't cost all that much to bring it out of mothballs, the ability to get the job done was there. He closed by giving me some supplier words to live by:

"We all fear too things. No orders. And too many orders!"

Finally, we talked with Bill Peters, YSD Industries' vice president of marketing. Here is his view:

"There's most definitely a trend developing not only in the new-car area, but also significant strength in the rebuilding marketplace."

YSD, which builds freight car doors, roofs, and car side and end extension materials, would have no problem with an increase in new orders of the magnitude described above. He points out, however, that there is a negative side to hiring new people if you can't be sure that you're going to be able to give them long term employment. In other words, is this a long-term trend or a short-term aberration?

Is there a dark side to all of this? We mentioned that some new-car purchasers had their 1992 needs shifted to 1993 deliveries simply because order books filled up faster than expected. While this can mean increased financing costs for purchasers who finance their acquisition via tax oriented leasing in the first calendar quarter of a new year rather than in the last calendar quarter of the preceding year (1/2% to 1% in additional cost over the life of the lease) the purchasers are taking it in stride. They need the equipment and will take it at the right price as soon as it is available to them.

However, one rail industry supply source who chose not to be named ventured the view that railcar purchasers have gotten used to being able to purchase new cars almost at will without the need to fit their orders into longer term acquisition structures that would give new-car builders the ability to plan for increases in carbuilding within the context of a backlog of orders. This, he thought, might have to change.

And what about prices? We doubt that there are many kinds of capital equipment that cost about the same price it did ten years ago without inflation adjustments! Are prices likely to increase when the marginal capacity that the railcar industry currently has is fully utilized? Perhaps. We certainly know a few folks that would say that the ability to raise prices is long overdue.

Prices won't go up, however, if the excess capacity that is currently in mothballs is to serve the needs of an uptick in car orders. Here we'd hark back to Bill Peters' concern that the "people" costs of adding to capacity can often militate against otherwise logical increases in capacity.

What that means is that we may see overtime before we see new hires. American industry has learned a new way of operation during this recession, and the style it has adopted will be just as visible in railcar building as in automobile construction.

What to do? If you're in the market for new freight cars, you might give your carbuilder a call about availability in 1993. We'll guess you will find things a little tighter than they were a year ago. If you are a freight-car user and haven't actually considered a new-car order, you might also be well served by contacting the same folks to ask about tack-on orders and the price concessions that are generally available as another purchaser's order is completed. Good luck!