Railcar Makers Cut Costs as Pandemic Adds to Industry Woes

Finance chiefs at railcar companies have been forced to reduce spending in response to the drop-off in demand, which began before the pandemic amid global trade tensions and was compounded by virus-related shutdowns and energy-price declines.

Trinity Industries Inc.,

a Dallas-based manufacturer and lessor, is looking at ways to outsource the making of railcars so it can reduce labor costs permanently, and protect the company from future fluctuations in demand. Trinity manufactures railcars primarily in Texas and Mexico. Its customers include railroads, leasing companies and shippers. As of Dec. 31, the company employed 10,470 people in its rail products group, which manufactures and services railcars, a 7% increase from a year earlier.

Trinity accelerated some planned cost cuts for the year in response to the drop-off in demand for commercial rail transportation, saying in July that it identified $70 million in savings through layoffs and administrative cuts, the majority of which will be implemented this year. The company reported a $206.9 million loss during the second quarter, largely due to an impairment charge on railcars used in fracking operations.

The company is also conducting a cost-benefit analysis within its manufacturing unit, as part of a strategic review that began before the pandemic, analyzing whether to make or buy the parts it uses in manufacturing, and whether it makes sense to outsource certain tasks, such as welding parts of a covered hopper car, said Eric Marchetto, the company’s chief financial officer.

Other railcar makers, including

Greenbrier Companies Inc.,

also have scaled back staff and operations to slash costs in recent months. Greenbrier, based outside of Portland, Ore., said in July that it eliminated 40% of its North American workforce, or about 5,300 employees, and closed down 11 rail production lines in response to lower demand, during the past nine months. The company had 17,100 employees as of Aug. 31, 2019, and has manufacturing facilities in the U.S., Mexico, Poland, Romania and Turkey.

Among the factors weighing on demand for new railcars are efforts by railroad companies to more efficiently utilize their fleets, analysts said.

An oversupply of railcars is also an issue. Approximately 29% of the railcar industry’s fleet, or 476,572 railcars, are currently in storage, according to Matthew Elkott, an analyst at investment firm Cowen Inc. who covers transportation companies, citing data from the AAR. By comparison, that figure stood below 10% in 2014, when energy companies relied heavily on railcars to transport crude oil, he said. The boom in energy markets spurred investment in railcar manufacturing, analysts said.

“You had this build cycle that wasn’t fully warranted by underlying demand,” Mr. Elkott said.

The pandemic is adding to the pressure the industry faces, as coronavirus-related shutdowns further crimp demand for transporting energy and motor vehicles, Mr. Marchetto said. Still, he said, demand from the agricultural sector has remained strong, and he expects that a return to normal office life and increased economic activity across the country will help drive future growth.

“I think it’s going to be people getting back to work, traveling again, and it’s going to be the North American industrial supply chain,” he said.

Write to Kristin Broughton at Kristin.Broughton@wsj.com