What Goes Up…Must Come Down

We are anticipating a sharp drop-off in U.S. heavy truck sales this year. New orders have come back down to earth after exhibiting considerable strength during the first half of 2006 as pre-buying to beat the 2007 EPA diesel engine regulations bloomed. The payback for the 2006 pre-buy will most certainly dampen heavy truck sales this year. Big fleets, both for-hire and private, who led the pre-buy drive last year are not expected to be launching aggressive equipment acquisition programs this year. Beyond the impact of the payback for 2006 pre-buying, the demand for new equipment will be held down by less-than- robust economic and end-market conditions. Lastly, with heavy truck surging ahead in recent years, pent up demand is no longer a factor in determining where the truck market will end up in 2007. Sales of class 8 trucks averaged 142,500 units per year from 2001-03, and then exploded to 203,197 units in 2004,;252,792 units in 2005; and 284,008 units in 2006. Sales of class 8 trucks are now slated to decline 34.5% this year to 186,000 units.

U.S. trailer sales have boomed over the past few years, suggesting there is little in the way of pent-up demand left in the system. Domestic fleets have been well upgraded since we emerged from the last recession, and capacity expanded where needed. With trailer traffic growth slowing to a crawl this year, we expect little in the way of additional carrying capacity to be added to the trailer fleet this year. Truck trailer shipments dropped from 250,752 units in 2000 to 143,152 units in 2001—a decline of 43%—and then slipped further to 135,234 units in 2002. With the U.S. economy back on track, complete trailer shipments rose to 175,977 units in 2003, and then exploded to 232,879 units in 2004, 256,554 units in 2005, and an estimated 288,000 units in 2006. Slower growth in the economy and industrial output this year will translate into slower growth in truck trailer tonnage and vehicle miles traveled. Consequently, there will be little incentive to continue to aggressively invest in new equipment. We are currently projecting shipments of 225,000 units this year, a decline of 22%.

At the outset of this year, there was certainly enough business on the books (an 85,826 car backlog) to make 2007 another very good year for U.S. freight car builders. However, the devil, as they say, is in the details, and the details suggest that 2007 will be another up year for covered hoppers and tank cars, but not for the rest of the field, where new orders faltered during 2006 and order backlogs have come down --in some cases, dramatically.

Volatility has always been the hallmark of the freight car business. Freight car demand has always been moved in one direction or another by economic conditions, which determine traffic flows and, by extension, the need to add capacity and the ability and willingness to replace the older/smaller units in the fleet. Rough times for the economy has meant rough times for rail traffic and freight car builders. Adding insult to injury, in the past, the freight car market has also been plagued by over-buying during the upside of buying cycles (triggered by a whole host of factors), which was followed by an inevitable market collapse when the economy fell on hard times. Between 1999 and 2002, freight car deliveries tumbled 76%. Even more dramatic, those of us who have been around for a long time remember the 93% drop in new car deliveries that took place between 1979 and 1983. There is no doubt that the current freight car buying cycle has past its peak. The economy is slowing and we expect rail traffic to exhibit some weakness this year. We now expect a total of 67,325 new freight cars to be delivered this year, compared to 74,729 units in 2006, a decline of about 10%.