An air finance specialist looks at locomotives - Mike Marlin - column

Railway Age, Nov, 1990 by Anthony Kruglinski

Warning! This is a think piece. Don't read it unless you're in a contemplative mood. Every once in a while it's good for the view what you're doing from the perceptive of an outsider. I'm blessed to have such an outsider in my friend of many years, Mike Marlin. Mike is a top air finance specialist at one of America's leading finance companies. I was fortunate recently to meet him in Newark Airport as we both queued up to board a DC 10 for Chicago. Exhibiting the 61an of a man who regularly hops continents, rather than states, to see customers, his first words were, "So, you in First Class?"

Fortunately, I had used a precious upgrade to get a first class seat and was able to answer in the affirmative. Not wanting to give him an advantage, I asked just as matter of fact, "How about you?"

He responded "What else is there?", and we trundled on past those doomed to steerage seats.

i later found out he'd used an upgrade certificate earned when he rented a car on a weekend during a full moon.)

In any case, once seated comfortably, we began to compare notes on our view of business prospects and the future of the economy. Progressing to happier topics, he began to pick my brain about the world of railroad finance. The conversation went something like this:

Marlin: So how's it going?

Me: Well, the credit markets are tight but we're getting deals done one way or another.

Marlin: Are you doing any deals with Japanese cross border leases? Me: No, most of our financings are used or rebuilt railcars and locomotives which apparently don't qualify for such programs. What's more, our Class II or Class III railroad clients are generally unrated (by Moody's or Standard & Poor's) and wouldn't easily attract Japanese funders.

Marlin: No problem ! Me: Say what?

Marlin: Simply find a domestic bank who likes railroad equipment as collateral to guarantee the equity portion of the lease and you're home free. For instance, how much does a new locomotive cost?

Me: $1,300,000 to $1,400,000. [Readers Note: Here!3 where we digress and get to the point of the column.]

Marlin: That's all?

Me: That's a lot, especially for a regional railroad.

Marlin: How many regionals have acquired new locomotives?

Me: Just one that I know of (NYSW).

Marlin: Just one? if you use my concept you'll control the market ! Me: It's not that easy.

Marlin: Say what?

Me: Even if I could arrange a Japanese cross border tax lease for one of my regional railroad customers he would still balk at the price. Look [at this point I pull out my HP12C financial calculator and Marlin and I do numbers], the best my customers could do would be somewhere north of $400 a day for a six axle high horsepower unit.

Marlin: So what's wrong with that? Your customers would be getting a top rate ! Me: But by using good quality rebuilt equipment and financing it for 10 to 15 years they can get the job done for $150 to $250 a day ! Marlin: But that's for old equipment ! Me: Yes, but properly rebuilt, it can provide 85% to 95% of the service of new units.

Marlin: Wait a minute. Let me get this straight-a rebuilt locomotive can provide that level of service at half or less of the cost of a new one?

Me: Yup.

Marlin: Then why would anyone buy a new one? [We warned you it was a think piece!]

Marlin's amazement isn't all that surprising coming from someone in the aircraft financial industry For instance, he's used to a constant flow of new units in domestic service as older units are sold off to the Third World. And there's the reality among carriers that having an unusual number of aircraft breaking down in service (and subsequently falling out of the sky) could affect the overall health of their business. While Class I railroads are constantly setting new reliability standards for locomotives, it's not quite the same thing.

How else is the aircraft business different from the new locomotive business? Well, for starters, one of the principal players is Europe's Airbus industrie (currently in a dispute with American manufacturers over direct and indirect subsidies). While both United States and Canadian built locomotives sales benefit from government export programs, domestic business is largely unaffected by government subsidies.

And then there's the way that aircraft manufacturers have been forced by competition to range far afield in their deal structuring to sell airplanes. For instance, Boeing has invested millions in United Airlines and Airbus recently announced a $500 million loan from the manufacturers and GE's European jet engine joint venture to Northwest. The money may be used to help Northwest retire more expensive funding undertaken during its recent LBO.

Are there railroad situations where a manufacturer's investment or lending assistance could be of help? Probably. Would such non-traditional assistance and partnership be possible? Difficult to say. We can hypothesize however, that it's unlikely that our OEM's would be eager to do so. No manufacturer of any product would. However, it is clear that fewer locomotives are being manufactured than would seem to be needed for the regular upgrades of the fleet via the new unit route. We hope that it's not for want of some creative thinking from all parties.