Leasing companies order and/or buy railcars, not railroad companies; and therein lays the problem

Implications: The in Forbes article about the large number of surplus railcars, the author incorrectly blames the railroad companies for stocking up on ethanol cars until the “ethanol bubble burst” and they realized they had built too many cars. In truth, railcar leasing companies ordered the cars after hearing requests and projections by ethanol companies about the need for more equipment to handle future production from new capacity that was either planned or already under construction. That new capacity is still coming online, albeit at a pace much slower than originally expected, and there may be a few thousand “surplus” cars until production catches up with car supply in 2009.  The ethanol phenomenon has mitigated some of the other problems faced by the railcar industry that can be more correctly blamed on the railroads.

Analysis:  When rail traffic surged in 2004, railroad companies found they did not have sufficient locomotive power to handle the increased number of carloads very efficiently. Railcars waited in terminals for power to arrive and trains ran slower due to low horsepower to ton ratios. With their cars taking longer to cycle back to loading stations, shippers ordered more new cars to add to the supply chain so that they could maintain production and satisfy their customers’ needs in a timely manner. Leasing companies were more than happy to build and lease these new railcars.   Three years and three thousand new locomotives later, the railroad train operation are once again running more efficiently and all of the new cars that were added to the fleet to meet the artificial demand caused by the slow trains are no longer necessary. Thousands of coal cars and grain covered hopper cars sit idle even as coal traffic is up 4% and grain traffic is up 18% in 2008 over the moderately depressed 2007 levels. If orders and deliveries of new cars remain low for the rest of this year and traffic keeps growing, the surplus cars should be back in service by early next year.   The surplus cars in some of the other fleets are less easily explained. The large number of surplus lumber flats can be attributed to both the collapse of the housing market and to a builder/lessor who refused to recognize the signs of impending trouble before it was too late. The large number of surplus intermodal cars is due to the improved train speeds, the decrease in imported containers, and to a major railroad buying cars for its own fleet and returning/storing cars that belonged to the national fleet owner and pool operator, TTX Corp.   If a recession occurs, it will delay the recovery of the railcar industry which now is unlikely to happen before late next year