Summary
Finding good news for railcar builders and lessors is getting harder with each new crisis in the economy. Railroad traffic has declined to levels not seen in many years and surplus railcars are clogging sidings and branch lines and annoying local residents across the nation. Railcar builders are seeing little new demand for their products and are hoping that backlogged orders will not be cancelled by distressed buyers. It is true that much of the fleet is old and will have to be replaced, but the start of that process could be delayed another few years and could be spread out over more than a dozen years into the future. It will take time before the recovery begins, and the recovery of railcar builder will trail the recovery in the overall economy.
Analysis
The Economic Stimulus Package of 2008 did have at least one significant impact; it raised demand for new railcars last year from around 50,000 cars to almost 60,000 new units. Unfortunately, some of those railcars might have been built in 2009 even with the financial crisis last fall, and some would have been orders during the early stages of the next recovery. Now those new cars are only adding to the glut of railcars plaguing the storage capacity of the US rail network and delaying the start of the recovery for this industry by several months.
The beginning of a general economic recovery is still not in sight. Consumer demand is low for everything: from automobiles to houses and from restaurant meals to tissue paper. Consumers are saving more even as their disposable income falls, partly out of fear, and partly to offset the loss in wealth that was stored in their 401k’s and homes. Eventually these savers and frugal spenders will “feel” better about their prospects and begin to spend more freely. When that happens, the economic recovery will begin and railcar builders can start watching for signs of increased railcar traffic. Several months if not a couple of years after that, railcar builders may see orders for new railcars coming their way.
Between now and when the recovery begins for the railcar industry, there may be some significant changes in the industry lineup. During the last major contraction of this industry in the early 1980s, over half of the railcar builders and almost 75% of the railcar lessors went out of business. The manufacturing plants and railcar fleets of the failed companies were absorbed by survivors and a stronger industry was reborn. The lessons learned in the past will mean that there should be relatively few casualties in this crisis, but there will be casualties. Builders will combine, fleets will change hands, and a stronger industry will be reborn.
Can the winners be picked yet? Probably and Mr. Fox gives some good clues as to who they are; but he does not say and nor can it be said when it might be a good time to start betting on the outcome.
