While headed back from the east side of town along the Limon Sub this weekend, I passed a quartet of locomotives used for switch duties along Smith Rd. 3 of the 4 were lease units. It made me realize that I’m seeing more and more lease units while railfanning these days. I’ve been wondering what the advantage is, though.
If a railroad owns it’s own power, it has to take care of the maintenance costs for that power. If it leases, the lessor has to cover those costs and make a profit at the same time, so I would guess that it would be more expensive in the long run for the railroads. I understand where it would be advantageous for railroads to use leased power during upswings in traffic, but why does it seem like there’s a lot of leased stuff right now during a lull?
Leasing does a couple of things for a company. It provides an asset which it doesnt have to carry on it’s balance sheet. In other words, you dont own the equipment, so you dont have up front money on the books. Granted you have a monthly expense, often in the form of a legal obligation for a number of months (or years), but the actual capital used by the railroad (which are capital intensive) are used elsewhere.
A second benefit for leasing is you can enter into various term lengths, thus matching your needs to the requirements.
In downturns, more equipment is available for leasing and thus the monthly terms and conditions become favorable. For instance, a major grain processor found the lease rates for cars to be extremely attractive the past two years. Thus, instead of purchasing new cars, they leased. Within the past month, the new rates for leased cars have jumped dramatically; the result is that new cars may be purchased.
Leasing offers other benefits, but those are the primary ones.
Some of those rascals will be turning Armour Yellow shortly as UP has worked hard at purging the 567 powered fleet and now has need of 645 powered roadswitchers (for tractive effort, that can be eco-upgraded as opposed to end cab switchers)…BNSF doing something similar with rebuilt “GP-39” units in GP30 & 35 carbodies)
What models or sizes/ no. of axles/ HP ? Were they smaller HP units that had been sold off by the Class I’s some years ago - and are now being leased back to fill the niche and need for small road units and switchers, that the recent GE and EMD production doesn’t ?
The degree to which the lessor vs. the railroad is responsible for maintenance is negotiable - most likely the long-term overhauls are the lessor’s responsibility, but the day-to-day fuel, lube oil, sand, water, and misc. running repairs such as filter changes, traction motor shorts, etc. are likely the leasing railroad’s responsibility, the same as for their own units. So the ‘out-of-pocket’ operating costs to the railroad may not be all that different - and the lease costs may not be all that much more than the railroad’s own cost of capital.
They are a collection of GP-38’s, derated GP40’s and GP49X’s …almost all EMD leasers plus a smattering of Helm units. Very common at both UP(DRGW) North Yard and also BNSF(CB&Q) Globeville/38th Street Yard. In jointline areas, it’s tough to figure where and who’s railroad they belong to. There also are a few LLPX wandering around too.
Gotta wonder if the rack setting on the leassers has been modified for altitudes above 4000 feet. On old Santa Fe, normally aspirated GP-7s, GP 38s et al were almost never seen in Colorado. Turboed GP20 and GP39-2s were common, plus the errant GP30/35 unit escaping from Kansas or Texas were mor common.
In Pueblo, we had a slug set (1312/119) that was normally aspirated with a different rack setting so the thing could breathe under load on the Pueblo Hump.(Elev 4650’ +/-)
What about “Equipment Trusts”. Was that a type of lease? I remember most power and cars had plates on them, something like “Subject to Equipment Trust of the First Shyster Bank of Allentown…”. I haven’t noticed any of these plates lately. Guess computers took care of that.
Well, for one the railroad can get rid of the power when the lease expires. Instead of having to try and sell/scrap the locomotives. I imagine that sometimes railroads need power for a pre-determined amount of time, so instead of buying new power they just lease power from a leasing corporation.
I think that Ed (MP173) hit the big reason – leasing may be, in many cases, a more efficient use of capital overall. As he noted, railroads are wickedly capital intensive industries, no matter how you look at it. If it is possible to spin off the need for raising capital to someone else for something, it may make a great deal of sense, in that one of the major things folks look at when they look at balance sheets is the return on capital investment. Makes the railroad’s books look more attractive. Further, the leasing companies don’t just lease engines. They may also own and lease aircraft, barges, ships, heavy equipment… almost anything. By spreading out the nature of the stuff they own, they reduce the volatility of their capital needs, which can significantly reduce the cost of acquiring that capital.
Origonally there were Equipment Trusts or Equipment Leases. These were like you buying your car on time or leasing a car. As time moved on, locomotives and equipment got more and more expensive, then leasing was a big time money decision…you were using one company’s money and another company’s locomotive. Next came leasing locomotive by locomotive by day, week, month, year, or longer. With that locomotive fleet owners whose sole business is leasing by the unit or the fleet.
All sorts of financing arrangements are possible and in use. For railroad equipment, a central lien recording mechanism is provided for at the STB. If one were really interested, obtaining a copy of the agreement between the lienholder/lessor and the operating railroad is possible:
The first one is a biggie for the railroads. When you have a hard time scraping up enough capital to keep the ROW in good shape, you sometimes have to turn to operating leases for thing like cars and locomotives.
They cost more that way, generally. If a company buys a locomotive and leases it out, it has to make enough to cover the cost to purchase PLUS make a profit. If the RR buys the locomotive, it has to cover the cost to purchase only, so leasing is generally more expensive than owning. But, if you can’t raise the capital, you sometimes are forced to “pay as you go”.
If you are doing short term leasing to cover some peak or seasonality in your business, it only pays to lease if your peak matches someone else’s valley. If the leasing company owns a locomotive but only finds a taker 6 months a year, they have to cover their cost and profit margin in that six months. Since RR seasonality tends to b
Alexander Hamilton set up the finances of the United States Government as a Credit and Debt cyclical system. So has American business: operating with other’s money betting that the future will pay it off. We buy cars and houses that way in private. Corporate America does the same. Leasing locomotives and cars has been the way railroads have used credit to pay as they go for the equipment, free money for other expenses, and keep dividends in the pockets of shareholders. Other businesses have similar plans in operation. This is why the stock market is important: this is the money to be used to paydown the lease and debt payments that have accrude. When such debt becomes too large, trouble appears as stock prices dip.
This is a good description of the typical, long term closed or open ended, capital leases that RRs use to “purchase” locomotives. It’s a different animal than the operating leases (think short term rentals) that started this thread.
There was some famously similar arrangement regarding early Geeps or road-switchers between either the PRR and/ or the N&W on the one side, and one of the New England potato-hauling roads on the other - either MEC or BAR, maybe B&M, as best as I can recall.
The early ‘finance’ methods and documents for rail rolling stock were ‘equipment trusts’, which were also formatted as ‘conditional sales’, long-term leases, and other variations - pretty much the same as your buying/ leasing a new car. Starting in the 1970’s - especially with the ‘per diem’ freight car ownership, leasing, and rental ‘bubble’ - those esoteric and peculiar forms were gradually replaced by the more generic ‘security interest’. And instead of naming the specific bank as in BNSFwatcher’
In some industries, there is an advantage to leasing newer equipment, in order to keep up with the newest technology, without being stuck with the older technology stuff for a long time. Does that scenario play out at all in the railroad industry?
What models or sizes/ no. of axles/ HP ? Were they smaller HP units that had been sold off by the Class I’s some years ago - and are now being leased back to fill the niche and need for small road units and switchers, that the recent GE and EMD production doesn’t ?
The degree to which the lessor vs. the railroad is responsible for maintenance is negotiable - most likely the long-term overhauls are the lessor’s responsibility, but the day-to-day fuel, lube oil, sand, water, and misc. running repairs such as filter changes, traction motor shorts, etc. are likely the leasing railroad’s responsibility, the same as for their own units. So the ‘out-of-pocket’ operating costs to the railroad may not be all that different - and the lease costs may not be all that much more than the railroad’s own cost of capital.
I think someone should repeat a remark made earlier…so I guess it is me. We are talking, and misinterpreting remarks because of two different “leasing” concepts and eras. Initial “leasing” was large purchases of cars and locomotives through “lease” and “trusts” in which the huge sum of money was borrowed or otherwise negotiated through banks, insurance companies, and other lending and financial institutions. Today’s leasing arrangements seem to be a bit different in two ways. One the manufacturer or his representitive will do the lease arrangement so that the one leasing the equipment deals with only the manufacturer for both the equipment and the money; often it involves manufacturer warrenty work and mainenance agreements. Second is the more common today, and the one I think the question was framed under, whereby the railroad will “lease” units on an as needed basis with no intent on purchase. Thus if a railroad is suddenly short of power, it can turn to a leasing company for the needed power. Or if there is a short time need for the power for a particular contract, power is leased just for that contract period. There are probably other scenerios, too. But the point is the different lease programs and needs being discussed here.
It should be noted that EMD no longer has any affiliation with GMAC, and the financial meltdown turned GE Capital into a millstone around General Electric’s neck when they got into CDOs and other dodgy financial instruments.
Depends on how you define lease… almost all of the new big units are leased. they will run the tar out of them for 20 years, then pitch them back to the lessor; and start the cycle over again.
I agree. GE made some really bad moves: GE Capital, NBC, and MSNBC, and caving in to Eliot Spitzer/Andrew Cuomo on the Hudson River PCB “clean-up”, among them. Maybe “Uncle Jack” wasn’t that smart after all. Seems like the new fellow isn’t doing any better. Disclaimer: I don’t own any GE stock, but love their locomotives!
