A tough job that won't get any easier - 2002 Guide to Equipment Leasing - leasing railroad equipment - Brief Article

Railway Age, June, 2002 by Tony Kruglinski

If we were playing the popular TV game "Jeopardy," the question would be: "What's one job not for the weak of heart?" The answer would be: "Rail operating lessor equipment acquisition professional."

There are several individuals who had the responsibility for purchasing new railcars in the period 1999-2000 at prices that are today as much as $10,000 higher than the present prices for identical newly manufactured cars. What's worse, given the lengthy period (30 to 35 years) that operating lessors take to depreciate their assets, it's likely that the book values of these existing railcars are equal to or higher than the cost of new ones.

And since many of the individuals who purchased railcars a couple of years ago are among the best and the brightest in our industry, it might seem that doing the right thing in connection with accumulating rail equipment for lease is really as much lucky timing as anything else. On the other hand, what was purchased and how it was initially deployed will often prove the lie to the argument that some lessors are just lucky or unlucky.

For instance, most modern aluminum coal cars purchased by either operators or lessors for lease to operators, will, despite peaks and valleys in the coal car marketplace, stand the test of time as good investments with a variety of applications open to them for decades to come. On the other hand, operating lessors who invested heavily in new mill gons just before the advent of the recent steel industry downturn may still have cars sitting in the weeds or on short to medium term leases at rents significantly below those likely to have been suggested in their original investment justifications to management. The salvation for these steel-industry-tied investments is about as easy to predict as the steel industry itself.

Ditto for those who invested in new Plate F, 100-ton boxcars, which though seemingly in absolute need by shippers, are also the subject of regular downward pricing pressure through the per diem car-hire system that underpins this car type's economic returns. Simply put, the Class I carriers have, with some justification, pointed out that the present railcar surplus has caused many car types to be leased at rental rates significantly below those in effect just a few years ago. Ergo, they argue, the per diem compensation amounts that they pay on loaded or empty railroad market cars on their roads should be adjusted downward.

Now, if you are an operating lessor and you have rented your new Plate F boxcars to a railroad for a stated monthly rent, you may be indifferent (assuming your lease term is a multi-year one) as to railroad pressure to push down per diem compensation rates. That's your railroad lessee's problem--not yours. On the other hand, if you are being compensated by the per diem rates paid and not a set monthly rent--the problem is yours and it's a big one. Even worse, many boxcar lessors will suggest that the types of deals on which they are being asked to bid by railroads are predominantly per diem rental deals. These lessors feel, with some justification, that the deck is being somewhat stacked against them in the railroad system in which they rent cars.

What's worse is that these arguments between per diem lessors and railroads are becoming increasingly strident, with customer and supplier each becoming more entrenched in their positions.

Strategic planning skills, timing, market knowledge, and yes, luck, in a constantly shifting marketplace will each have their role to play in the rail operating leasing game in 2002.

On second thought, forget about what we said in the beginning about the rail operating lessor equipment acquisition professional being the toughest job in leasing. On reflection the toughest job is really lessor management and owners!