SIC 4741 Rental of Railroad Cars

SIC 4741

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.

NAICS CODE(S)

532411

Commercial Air, Rail, and Water Transportation Equipment Rental and Leasing

488210

Support Activities for Rail Transportation

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 2000s, but was improving as of 2003. New markets for rail shipments, consolidations, and fewer companies in the industry were all contributing factors in the upswing. However, by the mid-2000s, new proposed safety regulations, such as the installation of reflector tape, was expected to cost the industry millions of dollars over a 10-year period.

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...