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Transportation Industry

Effective lessee strategies in today's marketplace - 2002 Guide to Equipment Leasing - railroad equipment

Railway Age, June, 2002 by Tony Kruglinski

If you're a rail equipment lessee and you've been a good reader and have attacked this guide in the order it was printed, you will doubtless now be contemplating your opportunities to take advantage of a favorable market. True, if your name ends with "Railroad" or if you are an industrial user of railcars, this is likely the best of times as almost universal surpluses of equipment put you, at last, in the driver's seat in lease negotiations (assuming your lease contract calls for lease negotiations at this time). But even if it does not, there are a variety of intelligent moves you can make today that will likely have long term, positive implications for your railcar or locomotive leasing situation.

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Here are a few we thoughts we'd share:

* Rule #1: Remember nothing stays the same forever. Put another way, remember the cross to which you nail your lessor today could be your cross at some point in the future when the market reverses itself. And don't kid yourself--it will. Now, this is not to say that lessees with market leverage today should not exert it. You've got it--flaunt it. But remember that the damage that this adverse lessor marketplace is doing to the flesh and blood of railcar and locomotive lessors will, ultimately, leave fewer players to lease you railcars and locomotives in the future. Remember also that leasing professionals have a habit of finding a way to stay in the industry, one way or another. And they have long memories, both for those in the lessee community who have been reasonable in their demands and those who have sought to crucify lessors.

Our advice is, therefore, to play the leasing game as fairly as possible. Take the winnings that the marketplace is willing to grant those who have a use for a commodity in surplus, but don't gloat. Don't attempt to drain the last drop of blood from your operating leasing partner.

* Rule #2: Build equity whenever you can. Assuming you have chosen to participate in the leasing marketplace as a lessee in the first place, you have clearly made the decision to rent, not own. Good for you. There may be a number of things that have caused you to make this choice: Lack of cash to buy and own; lack of a long term, certain need for the equipment; or, perhaps, lack of the tax capacity to benefit from the tax depreciation attendant in equipment ownership. Whatever the reason, remember the invocation of Rule #1.

For this reason, our advice is to obtain--now when you have the market leverage--whatever future rights you can get in the equipment you choose to lease in this marketplace. Perhaps, as a result of your present market leverage, you can negotiate a fixed purchase price at lease end. Or, if not, perhaps the lessor will be willing to give you a stated renewal period with rent at some percentage of today's depressed railcar or locomotive rents. You never know. Even if all you can achieve is a fair market renewal right, that's much better than having to return equipment that you have maintained for your service, to benefit another.

* Rule #3: Go "long" whenever possible. Anyone who has been in a lease negotiation in the last year or so will have come away from the experience with two distinct memories. First, the absolute flexibility as to price that the lessors consider "market" today; second, the absolute inability of lessees to get those bargain basement rents for longer than a couple of years. Now, the reason for this anomaly is obvious: Lessors may be up against it today, but hope springs eternal, and there's always tomorrow. For this reason, getting the deal you want on rents for more than a year or two will be decidedly difficult. On the other hand, your lessor may be amenable to a long term--say 10 year--commitment on your part, rather than the three to five years you have been asking for and not getting. Why? On the theory that if he ties up equipment for eight or ten years or more, his long term re-rental risk is thereby mitigated. (Remember, he has been kicking himself for the last two years that he didn't go longer on a seg ment of his fleet during the last good lessee's market.) If you think your need is long term and the rate you can achieve is a reasonable percentage (it will probably be somewhat higher than the short terms offered by the lessor), say 110% to 125% of the short term rates, consider it seriously!

* Rule #4: Go for the full service option whenever it makes sense. Remember, operating lessors aren't the only ones hurting in this depressed marketplace. Shops, from large corporate to Mom and Pop (not to mention Class 'I shops seeking third party work), are also short of business and can be expected to be providing lessors with significant discounts which will, of necessity, be passed on to lessees who opt for full service lease contracts offered to them. Negotiate your best deal, and take it.

* Rule #5: Even if your leases are not up for renewal or renegotiation--make a call! For all of our readers who are not lucky enough to be in the driver's seat on lease renegotiations or able to issue requests for lease proposals to deal with new needs, don't despair. You may be the answer to your lessor's prayers if you are willing to step up today and commit for a lease extension or alteration. Equipment needs rebuilding? Your continued need beyond your existing lease term may be just the ticket for lessors who are just as concerned with rebuilding the cars or locos, but doesn't know where they will find a user.

Transportation Industry

Effective lessee strategies in today's marketplace - 2002 Guide to Equipment Leasing - railroad equipment

Railway Age, June, 2002 by Tony Kruglinski

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