A locomotive and car leasing renaissance? - financial edge - Column

Railway Age, Nov, 2003 by Anthony Kruglinski

Well readers, as we put this month's column to bed, we--the the rail industry--are seeing a bit of a renaissance in leasing railcars and locomotives. While the locos are most likely "surge" power for the grain season and the coming winter, the pickup in railcar leasing seems real. There are a number of things behind this increase, and we thought we'd share a few with you (in no particular order of importance):

* Increased new car prices, leading to modest increases in rental rates, leading to activity, on the part of lessees seeing to "get into" the market for rental cars (which they feel they will need as the economy heats up) sooner rather than later.

* A good grain season with enough "oomph" to it to get most jumbo and non-jumbo cars that were in storage out working. (Exceptions are bad orders that would cost too much to put into service.)

* A bump up in steel industry activity that has put most of North America's remaining parked steel coal cars into service moving foundry coke and taconite.

* A continuing hot housing marker that, together with exports, has seen the price of plywood jump mad the availability of center beams off lease shrink, to nonexistence.

* A pickup in coal moving on CSXT and NS that has them in the short-term coal market at the present time.

Now as stimulating as all of this increased economic activity is, what really piques our interest are reports of slowdowns in cycle times for various moves on some of the Class I's. These reports include reasons such as crew problems and other people and equipment management issues as causes for reduced railroad velocity and decreased equipment utilization. Readers who attend Railroad Financial Corp.'s Annual Rail Equipment Finance Conference have been "vaccinated" with the mantra of cycle times controlling shortages and surpluses of cars and locomotives. Speakers at this conference in past years have pointed out that an increase of only one or two "turns" a year in some car types can result in a material surplus. Conversely, a reduction in turns quickly results in a shortage. Economic conditions often notwithstanding.

Think, of all of this as a stew simmering on our North American rail stove. We may have all the economic and commodity reasons for a tightened railcar leasing market place (identified above), exacerbated by conditions at one or more railroads that are coping with atypical (or typical, if you're a cynic) people and equipment management issues.

With all of that in focus, imagine having the investment-planning job at one of our major operating lessors, or the job of planning for rail equipment use (and acquisition) at a Class I. Those are jobs that this writer wouldn't want wished upon him at this point.

But because we feel for such equipment professionals, we'll share some of the market intelligence that we've picked up on various car types. Who knows, there may be a fact or two that has escaped you:

Graincars. Full-service rents for older graincars, which had been in the $125 per car, per month range, have scaled up to average $200 for one year leases.

Aluminum rotary gons. $420 per car, per month on one year leases--up $100 or more per car, per month.

Centerbeams. Scarce as hen's teeth. $550-plus per car, per month on full-service leases.

Mill gons. Still a little soft. Rent on full-service leases seems to be between $275 and $325 for 263's. (Lower rents quoted in specific cases.)

Boxcars. A mixed bag here. Significant numbers of new Plate F cars are still reaching the market, including 3,000 new TTX units. We are told, however, that the boxcar surplus of a year ago is down significantly.

Locomotives. The equipment velocity issue referred to above also impacts locomotive utilization. Parked trains are normally led by locomotives that--if parked--are similarly inefficient. Add to this the fact that most of the older six-axle locos in the lease fleet are deployed for the winter and you have--if not a shortage--a tightness. Rental rates for SD40-2 units: ranging from $120 per unit, per day on a triple-net basis for three to six months to $240 per day for the same period, but with some major component warranties. These rents are still on the low side of historic locomotive short-term rental rates and probably reflect a situation of continued normal surplus due to--among other things--the EMD/ UP SD70M program.

A skeptics view: One of our good friends in the industry points out that, with the exception of paper loadings, most reported stats on traffic reflect reductions in year-to-year loadings (including grain and lumber as of the end of August). This seems, he feels, to buttress either significant fourth-quarter expectations of increased need or the equipment velocity issues discussed earlier. "The alleged shortage in certain car types is mystifying," he says emphatically. (We'll call him our "Resident Mystic" in future columns.)

Tony Kruglinski is president of Railroad Financial Corp., a Chicago investment banking concern that facilitates railroad and rail equipment transactions. Contact him at: tkruglinski@railfin.com.