Companies participating in the rail industry each have their own unique relationship with rail equipment.
The decision to lease versus buy a railcar is made by evaluating operational costs and risks, market activity, and an array of other economic factors.
A lease is a contract over a set period of time that allows usage of property in exchange for payment. In the rail industry, those in need of access to railcars may choose to lease, rather than purchase, equipment for a variety of economic factors. Put simply, the purpose of leasing a railcar is to have access to equipment in which to ship a commodity without having costs associated with ownership.
Lease types may vary, but one commonality among leases is that they all dictate conditions regarding when, where, and how the leased railcars may be used. Factors such as liabilities and repair requirements are also explicitly detailed in a lease. Leases are negotiated by the owner of the equipment (lessor) and the renting party (lessee). Failure to abide by the terms of a lease by either party can cause legal or financial consequences. When the lease ends, the parties can choose to renew the lease or not.
Ultimately, the decision to lease rail equipment comes down to cost-effectiveness. Companies with high shipment volumes are likely to lease or own equipment as opposed to relying on railroads to supply railcars. However, there are some car types railroads do not supply, for which the car supply responsibility will fall to the shipper who will have decide whether to lease or own. Railcar lease terms can vary greatly in length, from as little as one year to well over ten. The term of the lease is generally dictated by the type of lease it is. There are two main lease types for railcar, a full-service lease, and a net lease, both of which grant the lessee the use of the equipment. However, various during-lease operating costs and responsibilities, such as maintenance, are included in a full-service lease (FSL), and accrue to the lessor, while under a net lease, these costs and responsibilities are borne by the lessee.
Leases are primarily long-term, multi-year commitments. Despite the potentially long duration of a lease, typically about seven years, it is still a shorter commitment than owning a railcar for its entire lifespan, which could last for decades.
