Rental of Railroad Cars

SIC 4741

Industry report:

This category includes establishments primarily engaged in renting railroad cars, whether or not also performing services connected with the use thereof, or in performing services connected with the rental of railroad cars. Establishments, such as banks and insurance companies, which purchase and lease railroad cars as investments are classified based on their primary activity.

Industry Snapshot

Railcar leasing companies are intermediaries in the transportation industry--they do not solicit or transport freight. Rather, they support the movement of products through the services they offer. Shippers and railroads are the primary customers of railcar leasing companies. Because the anticipated usage time of railcars is relatively short, shippers and railroads tend to lease equipment in order to preserve capital and avoid the prohibitive costs of purchasing and maintaining the specialized equipment.

Rail transportation suffered a decline into the early 2000s but improved in the middle of the decade. New markets for rail shipments, consolidations, and fewer companies in the industry were all contributing factors in the upswing. The U.S. recession of the late 2000s, however, had a negative impact on the industry, as freight shipments dropped. Many industry experts predicted a slow recovery as the second decade of the twenty-first century neared a close.

Organization and Structure

Leasing companies offer two basic leasing options: capital leases and operating leases. A capital lease bestows all the economic benefits and risks of the leased property on the lessee. These contracts usually cannot be canceled and the lessee is responsible for the upkeep of the equipment. Capital leases usually amortize the value of the equipment over the life of the lease. An operating lease, also called a service lease, is written for less than the life of the equipment and the lessor handles all the maintenance and service. The operating lease usually can be canceled if the equipment becomes obsolete or unnecessary. Most railcar leasing companies are either operating or capital leasing companies, though some of the larger companies have separate operations offering both types of leases.

Railcar leasing companies are further categorized by their areas of specialization. The largest lessors have the resources to offer diversified fleets, although more often than not they are best known for their expertise in a few railcar markets. The average-sized leasing company is decidedly niche-oriented. There are many types of railcars, including boxcars, tank cars, and covered hoppers. These cars are designed to carry specific cargos and have different maintenance needs. Leasing companies with average-sized fleets tend to specialize in one or two specific railcar types.

Financial Structure.
Several elements affect the earnings of railcar leasing companies: new car purchases; the number of cars leased (called the utilization rate and expressed as a percentage of the total fleet); and leasing rates. New cars are purchased during, or in anticipation of, strong economic periods and when tax laws favor investment. Utilization rates usually reflect the overall health of the economy. Though long-term leases sustain utilization rates during recessionary periods, it is difficult to maintain utilization rates above 90 percent during a weak economy. From 1920 through 1994, leasing rates were regulated by the Interstate Commerce Commission (ICC); freight car rates were subsequently determined by free-market forces.

Background and Development

The railcar renting industry emerged in the late nineteenth century in response to a growing demand for specialty freight cars. By the late 1800s, rail tracks had stretched across the nation; shippers of perishables, such as fruit, and liquids, such as oil, were anxious to take advantage of distant yet rail-accessible markets. Without refrigerator cars or liquid carrying (tank) cars, these shippers were restricted to local markets. Since the railroads were unwilling to provide these cars because of their high cost and seasonal or otherwise uneven demand, the shippers built and maintained private car fleets themselves. The larger shippers rented their cars to smaller shippers who could not afford to maintain their own fleets.

Although the early private freight car companies often were regarded as negative additions to the railroad family, these companies were essential to the development of a number of American industries. For example, Midwestern meat packers who were forced to ship only during the cold winter months could operate 12 months a year when refrigerated cars were introduced. Similarly, fruit growers in California could ship perishables all the way to the east coast in refrigerated cars.

Moreover, the mobility of the private railcar fleet suited the shorter seasons of other fruit growing regions. These fleets could follow harvests around the country; peach growers in Georgia, whose crops were harvested in June, had access to refrigerated cars until the end of their summer season, at which point the growers from Michigan could rent the cars for their fall harvest. Since the railroads operated in a specific region, these short demand cycles discouraged railroads from purchasing the refrigerated cars. The private railcar fleets were more flexible than individual railroad fleets.

Although the private car industry originally focused on the short-term needs of shippers and railroads, the advent of the long-term lease enhanced the industry's strength and size. Throughout railroad history, leases were negotiated between shippers or railroads and banks; however, these leases were financing instruments. The notion of long-term leasing specialty cars was not introduced until 1902, when Max Epstein, the founder of the large lessor GATC, began leasing tank cars. The long-term lease has provided a buffer against economic slumps, allowing some companies to coast through difficult periods on the income from old leases.

The financial arrangements between private car companies and railroads were numerous and varied during the railroad boom. However, the Transportation Act of 1920 empowered the ICC to set maximum and minimum car-hiring rates. Since the availability of specialty cars was vital to the health of both the shippers and the growing industrial economy, particularly because oil was transported in specialty cars, every effort was made to eliminate discriminatory pricing even before the Transportation Act was passed. Nevertheless, despite the efforts of the ICC and other regulatory agencies, discriminatory practices did exist. In fact, Standard Oil Co., which controlled the Union Tank Car Co., was repeatedly accused of manipulating the supply of tank cars to its advantage.

One particularly unpopular practice, used often by Armour Car Lines, a refrigerated car specialist, was the exclusive contract. In this arrangement, the railroads agreed to use only one private car company for all of a particular type of traffic. The car line was obligated to provide enough equipment to handle all the shipments and to bear the icing costs associated with refrigeration. These contracts were considered discriminatory and monopolistic.

As a result of these types of practices, the industry was highly regulated for more than 70 years. However, in 1992 the ICC voted to eliminate the rate prescription policy in an effort to promote competition and efficiency. Under this deprescription plan, freight cars ordered or put into service on or after January 1, 1991, became subject to free-market rates. Car hire rates for equipment ordered or in service prior to that date were frozen at 1990 levels. The ICC voted to implement the deprescription plan gradually, beginning on January 1, 1994, with complete free market rates prevailing after December 31, 2000. This legislation represented a significant break from traditional railroad-related policy.

More than anything, the costs associated with specialty cars continued to motivate shippers and railroads to lease. In fact, in the interest of streamlining, some shippers who owned small specialty fleets chose to enter sale-leaseback agreements. By selling their cars to an operating lessor and leasing them back under an operating lease, the shipper transferred all maintenance responsibility to the lessor and shed a business that was usually cumbersome to manage and unrelated to the principal revenue-generating operation. This type of arrangement was typical of the emphasis on cost cutting and efficiency.

The 1990s brought competition from banks searching for financing activities, and weakness in the airline industry created a financial lease vacuum. The relative health of the railroad industry provided an attractive alternative for bankers looking for finance leasing opportunities. This available financing, coupled with low rates, made buying railcars an attractive alternative to leasing.

One novel way for securing business was for the lessors to lease railcars themselves. For example, industry leader GATX Corp. added 6,100 new railcars to its fleet between 1997 and 1999. However, it did not purchase the railcars; it leased them from investors who put up the purchase money in return for a stake in the rent when GATX re-leases them to customers.

The 1998 domestic market was slightly depressed because of international economic slumps, particularly in the steel and grains markets. Because of the uncertainty of the market's future, railcar lessors were offering longer-term leases at low rates to accommodate the shippers and keep their business.

However, 1998 and 1999 were good years to become more competitive and upgrade the fleets. New construction of railcars was close to 70,000 units in 1998. Larger (more than 5,000 cubic feet) grain cars and aluminum coal cars were two of the upgrades most in demand. By 1999, lessors owned more than 50 percent of the North American railcar fleet.

The early 2000s saw a continued decline in freight car demand. By 2002, the industry saw its worst year in a decade and a half. That year, the industry had only 17,714 freight cars delivered, down from the 74,223 cars delivered just three years prior. The American Railway Car Institute accurately predicted an upswing, and in 2003, some 32,184 cars were delivered.

By 2003, intermodal rail transportation had exceeded transportation of coal as the largest segment of the industry, increasing demand for double stacked trailer- and container-on-flat cars to accommodate the increased traffic.

In 2005, the Federal Railroad Administration initiated a new safety requirement that all freight cars have reflector tape installed in order to heighten visibility and prevent accidents with autos and other vehicles. The railcar industry had a decade to become compliant. The ruling specified guidelines for type, color, size, and spacing of the reflective tape. The price tag for tape installation was about $100 per car. In addition, because the tape must be installed in temperatures exceeding 50 degrees Fahrenheit, rail cars in the northern states had only portions of the year to complete the installation process.

Current Conditions

In the early 2010s the industry was trying to recover from the economic recession of the late 2000s, which had brought railcar traffic down to its lowest level since records started to be kept in 1988, according to the Association of American Railroads. In 2009, U.S. railroads originated 13.8 million carloads of freight, down 16.1 percent from 2008 and 18.2 percent as compared to 2007. Medill News Service of Northwestern University reported in January 2010 that "if recent trends continue, carloadings will not return to the past mid-decade levels until the middle of the new decade,"

According to Dun & Bradstreet's Industry Reports, the railroad rental car industry was worth approximately $1.3 billion in 2010. Chicago, as the nation's railroad hub, accounted for nearly all of the revenues. Although almost 200 small businesses operated in the industry, about 83 percent of total sales came from the three firms that employed more than 250 people.

Industry Leaders

For the most part, the railcar leasing industry is a niche-oriented business comprising small to medium-sized firms that specialize in one or two specific types of railcars. However, a few large and diversified leasing companies traditionally have dominated the industry.

One of the industry leaders in 2010 was Chicago-based General Electric Railcar Services Corp., a wholly owned subsidiary of GE Capital. A merger with Itel in 1992 left GE Railcar with the largest and most diversified fleet in the industry. The company also had the most extensive repair network in the United States and Canada. Despite the size and diversification of its fleet, GE was best known for its boxcars. The company registered annual revenues were more than $1 billion in the 2000s.

Other industry leaders included TTX Company, also of Chicago. Specializing in intermodal cars, the firm had annual sales of around $580 million in the 2000s. GATX Corp. of Chicago was the largest lessor in the specialized market of tank cars and had sales of more than $1.1 billion in 2009. Finally, Union Tank Car Co. of Chicago built and leased tank cars with capacities of between 13,000 gallons and 33,000 gallons.

Research and Technology

Since its inception, the railcar leasing industry has capitalized on the fact that specialized cars are expensive to purchase and maintain. These specialized cars were developed in response to the specific needs of shippers and railroads. As cargo became more specialized, so did the cars in which the cargo was transported, and technology and innovation continued to enhance the industry. Railcars evolved from refrigerated cars to ultra-modern designs such as GATC's Arcticar, a cryogenically cooled railcar for frozen food transport.

Oftentimes, a new railcar design created a niche market. This type of opportunity occurred when Greenbrier/Gunderson introduced the Autostack car. The development of this car addressed the surge in intermodal traffic. The railroads, and the transportation industry overall, saw an increase in intermodalism in the 1990s and 2000s. Intermodal transportation is the use of two or more modes of transportation to move cargo. Greenbrier/Gunderson's Autostack car is a technologically advanced design used to transport automobiles via sea and land. The Autostack was such a successful innovation that a separate leasing company called Autostack began operations in 1992. This new car virtually created its own market.

The 1990s, however, added a twist to the specialization effort. The search for streamlining and cost savings encouraged the development of designs that made operations more efficient. General Electric, for example, redesigned the boxcars used by paper shippers to reduce cargo damage. These changes, such as watertight seals and the elimination of protrusions inside the boxcar that could damage the cargo, reflected the emphasis on quality and efficiency.

Advances in railcar designs and increased confidence in rail transportation continued to bolster the industry. Technology and specialization were critical factors contributing to the success of the railcar leasing industry. One area of design development at the end of the decade was in grain and plastic pellet cars, which then ranged in size from 5,100 cubic feet to the giant 5,300-cubic-foot covered hopper. The 286-cubic-foot, rapid-discharge aluminum coal car also was considered a good investment.

In 2010, Union Pacific (UP) introduced the Autoflex multilevel railroad car for transporting vehicles. As of September of that year, UP held 15 different patents on the new car, which could be adjusted to bilevel or trilevel. Julie Krehbiel of UP told Railway Age, "This is a newly engineered railcar, not a converted bilevel car."

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