Do the railroads need to buy more locomotives?

Implications: Will the railroad rennaisance result in a bright future for locomotive manufacturing companies? Does the recent upturn in railroad volumes mean more locomotives are required?

Analysis: Locomotives are very expensive assets; a typical new unit has six axles, produces 4,400 horsepower, and costs about $2 Million each.  Typically locomotives spend about 60% of their life cycle pulling trains.  The balance of the time they are being serviced and maintained at shop locations or they are queued up at a terminal waiting for another train to pull.  About one third of the U.S. locomotive fleet is older, lower horsepower units that are assigned to yard and local service with the remaining two thirds of the fleet used in mainline service.  

Railroad capacity is limited by the number of locomotives available to pull the trains.  Even if there is plenty of terminal space, available main line tracks, rested crews and cars loaded ready to go, trains will not depart without sufficient horsepower to pull them.  It is often the case that trains are made-up and ready to depart and there are no locomotives ready to couple onto the train at that terminal.  In these cases, the train is delayed until locomotives arrive on other trains and can be processes through the service center and prepped for departure. 

The railroads measure these train delays daily and report the number of trains and the amount of delay as “cut for power”.  The amount of delay caused by trains “cut for power” is one measure that is often used to see if there is sufficient locomotive capacity available at a particular company.  Presumably, by pumping more locomotives into the system, the number of trains delayed due to lack of power will be reduced.  

Historical data suggests that “cut for power” is not a good measure of locomotive needs or capacity.  In the late 1990’s, first the Western Railroads, then the Eastern railroads experienced severe operational problems as they integrated their post-merger networks.  Many trains were delayed, velocity slowed, and railcars and locomotives would get lost in grid-locked terminals.  One symptom of this operational morass was that “cut for power” statistics went sky high.  Managers reacted by buying and leasing as many locomotives as they could. 

However, it turns out that the root cause of the problems was not too few locomotives, but rather other issues such as too few train crews, too little line capacity, and/or infeasible service design schedules.  When any one of these critical resources is missing, trains cannot operate on time.  So, trains are often sitting in terminals waiting to depart with locomotives attached to them.  Or, trains are stranded on the line of road, waiting to get into a congested terminal or waiting on a relief crew to rescue them.  In these cases, the locomotives are sitting idle and unproductive. Throwing more locomotives at the network, increased the amount of locomotive idle time rather than having the desired effect of speeding up the network. 

Consequently, locomotive productivity has declined from an average of 5.3 Gross Ton Miles per Horsepower Hour (GTM/HPHr) to 4.8 GTM/HPHr, a 10% reduction.  In effect, this measure indicates that the railroads currently have 10% MORE locomotive capacity available per unit of work output than what they used to operate their networks in 1996.  These extra locomotives have NOT resulted in better service, as average velocity FELL from 22 mph to 18 mph during that same time period.            

Given that the current locomotive fleet is about 10% larger than required (based on historical productivity measures) and given that we expect locomotive productivity to continue to improve into the future as velocity picks up, we believe that the North American demand for new freight locomotives will remain relatively depressed for at least the next several years, even in the face of increased traffic volumes.