Rail Theory Forecasts™ LLC

Annual Publication

North American Rail Car Market

Recent Magazine Articles

February 2010, Progressive Railroading

Who'll fund the next railcar investment wave

About 20 years ago, I gave a speech in Denver to the members of the Leasing Group of the Railway Supply Institute that posed the question, “Where would the railroads find the next group of suckers to fund their new railcars?” The derisive term was not a slap at the audience but rather my characterization of the railroads’ dismissive attitude toward the many small investors, alleged to be doctors and lawyers, who had lost millions of dollars from investments in new boxcars and covered hopper cars in the ICC’s Car Hire Incentive Program of the 1970s. More...

December 2009, Progressive Railroading

Spirit of relative optimism prompts a 15k deliviery forecast for '10

The annual forecasts for next year’s new railcar deliveries are a function of many factors, the most important of which are the production trends and backlogs in the current year and the GDP forecast for the next. Last year, the estimate of the negative GDP growth was right on target, but the cancellation in the fourth quarter of 11,000 backlogged orders for railcars related to the ethanol industry was an unpleasant surprise. The revised forecast of 22,000 cars that was issued in late February appears to have been right on target. This year, no major surprises are expected from the railcar builders, but guessing the GDP growth in 2010 proved to be problematic. More..

September 2009, Progressive Railroading

Touichstone, guidance, and Guesswork in Troubled Times

In distressing times, it is often helpful to seek out some touchstones of truth, both for guidance in navigating through the troubles and for confidence and patience in waiting for the problems to end and prosperity to return. Two such touchstones for the transportation and railcar industries are that the economy, as measure by the Gross Domestic Product, will inevitably begin to rise again and that railroad ton miles will inextricably rise with it. The reasons for optimism are rather simple. Population growth and increases in labor productivity are two of the strongest drivers of U.S. GDP growth. Since the recession began, the population has increased by almost six million new citizens and almost one million new households have been formed. Moreover, non-farm business productivity, even during this economic contraction, increased 2.8% in 2008 and 1.6% during first quarter of 2009. More...

June 2009, Progressive Railroading

The risk of not properly managing risk when recession rules

There is a proverb in my home state which says “when you’re up to your ass in alligators, it’s hard to remember that your prime objective is to drain the swamp.” The Chief Financial Officers at railcar leasing companies must think that they are in much the same predicament today as the hapless fellow in the swamp, with cash flow problems caused by terminating leases diverting attention from the need to properly manage risk. More...

February 2009, Progressive Railroading

Inauspicious beginnings, uncertain endings, and the prospects for a new lease on lease life

The year 2008 began inauspiciously for railcar lessors. There were surplus quantities of most car types, market lease rates for railcars were well below the levels required to finance new cars with borrowed money, and rail shipments were under traffic totals recorded 12 months earlier. Most lessors would have preferred not to add many new cars to the fleets and to wait for demand to catch up to supply. This was the tactic they had employed in similar circumstances in 2002, the year they allowed railcar production to fall to 18,000 cars. The railcar builders bore most of the suffering for the oversupply of cars in the late 1990s and the recession of 2002; all builders suffered huge losses and struggled to stay in business during that period. More...

December 2008, Progressive Railroading

With the economy in limbo, how low can railcar deliveries go in 2009: try 31,500

While presenting my initial projections for next year’s railcar deliveries at the RailTrends conference in New York on September 30, the unfolding drama on Wall Street forced me to warn the audience that the 42,000 car forecast which had been assembled in early September already looked too optimistic and that the credit and banking crisis might bring deliveries down to 37,000. During the past several weeks, the situation has further deteriorated, with a probable and very deep worldwide recession expected in 2009; as a result, the railcar forecasts have moved even lower, totaling just 31,500 cars. That total represents a 50% cut in production from the 2007 deliveries. More ...

September 2008, Progressive Railroading

Why it’s a good time to sell ... or buy ... rail-car fleets

When two of the largest leasing companies decide to sell their fleets and exit the rail-car leasing industry, is this a good business in which to invest? Are these two companies seeing problems on the horizon before everyone else? It would not be the first time that an industry leader cashed out before the market turned sour. More...

May 2008 , Progressive Railroading

It’s the same old (and cyclical) song: Car surpluses to plague builders, lessors at least through ‘09

Currently, there is one characteristic that is common to all rail-car fleets: surplus inventory. From intermodal wells to coal cars and ethanol tanks, excess cars are stressing the leasing industry and dampening new-equipment demand. Since last fall, industry pundits have been trying to assess the magnitude of the problem and determine when a turnaround might occur. At the start of the year, it looked as if increasing coal and grain shipments might bring better fortune to at least some of the fleets -- even if the economy went into recession. However, when railroads began to run their trains faster during the winter months, all the intermodal, grain and coal cars that had been added since 2004 either will handle new traffic or exacerbate the surpluses. More...

February 2008 , Progressive Railroading

A Half-Full Forecast

In a review of the leasing industry two years ago, I mentioned the Trojan priestess Cassandra as an example on why it is sometimes wise to just make positive forecasts. The leasing prospects for 2006 were not good but something positive was said about almost every car type. It didn’t help. Things got progressively bad and the downward trends continued into 2007. Last February I thought that it was better to say nothing rather than to spotlight all of the problems. Throughout the year there has been very little demand for almost every type of railcar, and lease rates have been falling.  But 2008 should be better for at least a few car fleets, and things shouldn’t get any worse for the others. More...

December 2007, Progressive Railroading

What goes up must come down; they’ll be 48,000 deliveries in 2008

I am asked at least three times per week what is the normal rate of production for the railcar industry and what is the normal rate of replacement of old cars. While I usually provide an estimate of what might be considered normal, I always qualify my reply to the effect that the industry never has a normal year. Production is either going up or going down, and normal is only found in a twenty year average. As for old cars, replacement schedules change more often than railroad traffic levels. However, there is one apparent constant for this industry; what goes up eventually comes down. After increasing production from 18,000 cars in 2002 to over 74,000 cars in 2006, railcar manufacturer reduced their output this year to around 62,800 cars. Moreover, they are expected to cut back even further in 2008 to around 48,000 cars. More..

September 2007, Progressive Railroading

No doubt about it: Ethanol is engrained in the economic fabric

Last September, we reported that ethanol production was increasing so fast that the 2012 goal for an annual production rate of 7.5 billion gallons was likely to be met in 2009. We also said that if there were enough corn to produce 12 billion gallons of ethanol, U.S. railroad traffic might exceed 400,000 ethanol carloads per year — a volume large enough to rival more established traffic segments like paper and lumber. These forecasts were based on a three-year ethanol production trend in which annual volumes had increased by an average of 20 percent each year. However, with the frequently heard complaints over subsidies for ethanol producers and questions about the energy required to make ethanol, we thought there was only a small chance the ethanol industry could reach 12 billion gallons per year. More...

May 2007, Progressive Railroading

Fleet Management, from working concept to oxymoron

Considering the wide swings in the production of several types of railcars in recent months and years, the term Fleet Management has become an oxymoron. While the annual number of carloads for most types of railcars has remained relatively stable, changing no more than +/-5% in any year, the demand for new cars of has risen and fallen with a cyclical variability many times that amount. Something seems to be amiss. More....

February 2007, Progressive Railroading

Lease or Buy,For fleet managers, the answer might be less than obvious

For the past 30 years, most railroads have decided the question of whether to buy or lease new railcars in favor of leasing. Some might argue that it was a moot question since railroads had neither enough money nor the inclination to spend scarce capital on these depreciable assets. But if they had decided the question based on economic factors, they made a wise choice. Hindsight is always 20/20, and it is doubtful that anyone could have foreseen in 1975 that interest rates would peak in 1982 and then begin a 25 year decline, or that railcar surpluses would be more common than shortages after 1975. More...

December 2006, Progressive Railroading

A qualified QED: 65,000 deliveries in ’07

When my partner David Burns and I founded Rail Theory Forecasts L.L.C. (RTF) in 2001, we bench-tested our statistical models, which took months to develop, with historical data. We then field-tested the models for two years before publishing our first rail-car predictions in 2003. The tests indicated that the models were dead-on accurate, and we had expected to mimic Caesar and proclaim“Veni!, Vidi!, Vici!”  in year-end reviews of our results. Instead, each December we have had to whisper “Mea culpa, mea culpa” as we explained why we missed our targets. More....

September 2006, Progressive Railroading

The Ethanol Effect

The most important development in decades to significantly affect railroad traffic is the recent growth of the ethanol industry. Just three years ago ethanol looked just like another expensive government sponsored program for farmers. More...

May, 2006 Progressive Railroading

Has railcar Design has gone as far as it can go?

While contemplating the current state of affairs of the North American railcar fleet, the lyrics from Oscar Hammerstein’s musical “Oklahoma” kept playing in my mind: “Everything’s up-to-date in Kansas City, they’ve gone about as far as they can go!”  Like the cowboy in the play who was awed by the progress he had seen during a visit to the big city, one cannot but be unimpressed by the number of freight cars currently moving over the rails that were designed and introduced during just the last twenty years. More....

February, 2006 Progressive Railroading

Accentuating the positive

Around 2000 BC there lived a Trojan priestess named Cassandra who was blessed with the gift of prophesy but cursed with the lack of credibility. Although she correctly predicted the sack of Troy by the Greeks, her words were cursed by her countrymen who did not heed her prophesy. Since Cassandra, Rule No. 1 for soothsayers, prophets, and modern day economic forecasters offering free advice has been to emphasis the positive. That said; let’s look at the current state of affairs in the railcar leasing business....More

December, 2005 Progressive Railroading

Taking Stock: 63,500 cars in 2006

Wall Street seems to have rediscovered the rail industry and rail-car suppliers, in particular. In lieu of a crystal ball, one might look at the railcar builder’s stocks to see what investors think about next year’s profits for these companies. More....

September, 2005 Progressive Railroading

For rail-car builders, the price is right

The rapid increase in steel prices during the second half of last year caught everyone by surprise, including the railcar builders who had not included appropriate escalator clauses in the sales contracts they had signed many months earlier. Some builders tried to renegotiate the car prices with their buyers, but most were told that financial agreements had already been signed at rates reflecting the old prices. In the end, many cars were sold at margins much thinner than originally anticipated....More

May, 2005 Progressive Railroading

60,000 cars does not an overheated market make

On Jan. 21, the ARCI reported that 14,400 freight cars had been delivered during fourth-quarter 2004; Rail Theory Forecasts previously had estimated that only 12,500 would be delivered, and our 2005 statistical model predicted 52,300 deliveries. Once we had the actual fourth-quarter delivery count, we raised our ’05 forecast to 60,500 cars – which, for some, could beg the question:

“Are we headed for another boom/bust cycle at this rate?”

The short answer is: “No, but …” I’ll explain the “but” at the end of this article. More...

February, 2005 Progressive Railroading
Let the good times roll
Regarding the current state of railcar leasing, some folks in my hometown of New Orleans would say “Laissez le bon temps roulette” (“Let the good times roll” to us English speakers). Demand for both new and used railcars is strong and supplies are almost adequate, putting a high floor under the market based lease rates for used cars. Interest rates are still low, but new car prices have been raised enough to keep the ceiling on the lease rates for new cars high enough to meet the investment requirements of owners of both new and used equipment. Will this state of affairs last, or is change in the wind? More…….

December, 2004 Progressive Railroading
Another healthy year: 52,300 rail cars in 2005
Here we go again! To quote my hero Yogi Berra, “I'm getting that De Ja Vu feeling all over again”. Although carload traffic has only climbed back to 2001 levels, and in spite of record high new car prices, orders of almost 60,000 new cars have been reported through the third quarter. Not since 1997 have we witnessed such buying. This year is like 1997 in another way; the railroads were having operational problems involving car congestion then as well as now. For all those involved in the railcar supply industry, from the bankers to builders, may the railroad problems persist a little longer this time! But I fear they won't; new locomotives are already on the way. More…….

September, 2004 Progressive Railroading
TTX order could prompt lessors to think outside of the box car
The most important recent development with respect to railcar leasing is not the current economic recovery, not the recent rise in interest rates, and not the increase in steel prices. These events are part of a normal business cycle and have been expected if not eagerly awaited by a few for some time. What was not expected, however, and what will have a profound effect on leasing business in the future is the recent purchase by TTX Corporation of several thousand new boxcars. This development is important for two reasons. More…….

May, 2004 Progressive Railroading
Volatile Utilization Rates = Volatile Lease Rates
In the early 1980s, the interchange of electronic car movement and billing information made it possible for the railroads to create rail car scheduling and automated car directive and car order systems. “Car Management” became the new buzzword in the rail industry and new departments were organized and staffed with executives with titles that denoted the new management focus on improving rail car activities and reducing equipment costs. More…….

February, 2004 Progressive Railroading
At any rate, a healthier market
Last summer railcar lessors were experiencing one of their bleakest years and there were just two signs of a turnaround on the horizon: the casting shortages and the USDA prediction of a bumper grain harvest. The casting shortage, while cursed by the builders, actually put an end to their cut throat pricing and allowed some discipline to return to their new-car pricing. Following the USDA forecasts, concerned shippers and railroads leased all the stored grain cars. More…….

December, 2003 Progressive Railroading
A reasoned railcar forecasts: 38,000 in 2004
Each fall there is an annual exercise of predicting the coming year's new rail-car production. Status quo projections are disseminated by car builders and component suppliers, and economists and financial consultants who serve the rail-car building/leasing industry offer optimistic forecasts. But when the market collapsed in 2001, most guessed wrong - the best guesser was off by more than 100 percent. In 2002, forecasters did a little better, erring by only 20 percent to 30 percent on 2003 projections. More…….

September, 2003 Progressive Railroading
Lease-case scenario: Rates don’t reflect risk
To paraphrase Charles Dickens, the past year has represented the best of times and the worst of times for rail-car leasing; and, like the characters and events in the 18th century described by Mr. Dickens, your experience all depended on your perspective.

For operating lessors, the troubles just didn't stop; for lessees, meanwhile, rates just kept getting better. Falling interest rates was lessors' main problem: Lower interest rates mean lease rates on new cars have been below rates on similar cars built just three years ago -- good for lessees but bad for lessors that must reduce older-car renewal rates to levels that for some are below their cost of capital. More…….

May, 2003 Progressive Railroading
Will there be another boom (and bust) cycle for rail-car suppliers?
It's a question that has been repeatedly asked during the past year as new car deliveries plummeted from the 70,000 car levels of the late 1990s to only 18,000 in 2002. The current depression has been compared to the last one which began in 1981 for the private car builders and the boom that preceded it looks very similar to the delivery curve of the 1990s. Will there be another cycle? Your bet! And there is little that can be done to prevent it, no matter what we think we we've learned from history. More…….

February, 2003 Progressive Railroading
The relevance of rail-car ownership
Who owns the railcar fleet and why does it matter? Twenty years ago, the answer to the first question would have been obvious: the railroads owned the cars. Today however, things are different; railcar ownership has shifted from railroad to private hands, and farther than most people realize. And it matters because renters act differently than owners. More…….