Are your railcar management activities on auto pilot or are you proactively managing to a plan?
Most companies attempt to manage their rail equipment by transferring the responsibility of doing so to their lessor. Many railcar lessors in turn are happy to take on this responsibility by offering a “full-service lease” where the lessor will be responsible for Association of American Railroads (AAR) and Federal Railway Administration (FRA) maintenance responsibilities. These items are also considered the “running repairs”. The Lessors advocates that they will manage those items that require a railcar to go to a railcar repair facility which is supposed to take another management requirement off the lessee.
So far it all sounds good, right? Lease the railcar and quit paying attention to it right away because its someone else headache? Unfortunately, this is not the case.
Lessee’s look at the verbiage “full-service lease” and assume that means they are no longer responsible for any maintenance or management of the rail equipment. Unless you’re familiar with the exclusions from the lessor in regards to their maintenance and repair management, this is a huge oversight and is most often quite costly. There is really no such thing as a “full-service lease” because in the scenario above, you as the lessee are still responsible for all non-running repair damage.
The Reality
In reality, no matter what language you use, maintenance and repairs are always the lessee’s headache. What you’re really signing up for is a “modified full-service lease” because even under a “full-service lease” the Lessee is responsible for items such as maintenance and repair of the body of the railcar, linings, gates, doors, hatches and pneumatic devices if so equipped. There may also be additional items such as corrosion, cleaning and any Rule 95 damage and/or damage which may be caused by side swipes, unloading or loading devices, shaker damage, etc.
Reflect that the number one purpose of leasing a railcar is to transport some type of goods or commodities. The focus of the railcar should be to supply a reliable, consistent transportation vehicle. The “up-time” of the railcar is paramount in providing consistent reliable transportation. When you sign up for a full-service lease, you’re essentially signing up for someone else to manage (or not manage) your railcars at their discretion and all too often, what’s important to you as a lessee/shipper is not the same as what’s important to the lessor/railcar owner. If maintenance and repairs are not properly managed, the issue can go on too long until there is a bigger problem or, at the end of the lease, you find yourself fighting with the lessor at a railcar shop about maintenance and repair issues you never knew existed. This costs all parties time, money and that critical railcar “up-time”.
Railcar Maintenance By Triage…
Consider the fact that “full-service leases” are generally offered and provided by companies that have thousands of railcars. There is nothing wrong with this. The concept is fantastic: as a lessee you load, ship and unload your railcars and the “problems” are taken care of. The reality though is typically different. Albeit these large leasing companies typically have some operational support management staff on board, they are generally focused on getting railcars into service and getting railcars out of service. With the sheer volume of rail equipment they must support, there just aren’t enough hours in the day to manage anything but the bigger issues. The fires if you will. As a matter of course then, repairs may be triaged in the “must get done”, “should get done”, “would be nice to get done” and then issues that don’t meet a higher criteria are pushed off for a later date. Simply put, there isn’t anyone proactively managing your rail equipment. There often times becomes a tendency to allow bad orders to occur via AAR / FRA repairs (DDCT events) versus having someone take a look at a car and say “we can fix this here and now” or “this car needs heavy repair and should go to a shop”.
Sorry, the Warranty Doesn’t Cover That
Consider this: Operating lessors don’t usually lose money on full-service leases. The maintenance spread is often substantial. It’s like buying an extended warranty on an automobile or appliance. The fine print is that “this warranty doesn’t cover that repair…” and in the instance of railcar leasing, the fine print generally only applies to AAR/FRA repairs and usually exclude larger items like customer damage that assigns responsibility of large cost items to the Lessee (possibly with the exception of wheels), and transfers responsibility to the lessee making them responsible for numerous items (corrosion, loading/unloading damage which in some industries are just part of how the operators treat the car, body damage, etc.) that fall outside of these parameters. Instead,While it takes more effort, we find the short and long term outcome of managing your rail fleet with a proactive plan to be worth it’s weight in gold. Proactive items such as designing and putting an equipment health program into place, implementing preventative maintenance programs which may utilize mobile repair units or even your in-house operators when they’re qualified to do more basic yet effective repairs can have tremendous outcomes. We see benefits in keeping down out of route transportation costs to and from a repair shop while providing a higher rate of railcar availability and supporting that important “up-time”.
The Proactive Approach: Strongly Recommended
While it takes more effort, we find the short and long term outcome of managing your rail fleet with a proactive plan to be worth it’s weight in gold. Proactive items such as designing and putting an equipment health program into place, implementing preventative maintenance programs which may utilize mobile repair units or even your in-house operators when they’re qualified to do more basic yet effective repairs can have tremendous outcomes. We see benefits in keeping down out of route transportation costs to and from a repair shop while providing a higher rate of railcar availability and supporting that important “up-time”.
Consider “Managed Net Leases”
As an alternative, consider a managed net lease. Under a managed net lease, the lessor provides a managed maintenance program that focuses on equipment health, design and implementation of proactive repair programs, reduction of out of route charges to repair shops, utilization of mobile repair units that are AAR certified to ensure quality repairs in the field, focus on keeping rail equipment available a high percentage of the time increasing shipment options and / or decreasing the number of railcars required and overall keeping that railcar “up-time” as high as possible. The evidence is clear by years of effective programs and research we’ve conducted: managed net leases are generally more cost effective and less expensive on a monthly, quarterly, yearly and especially at the end of the lease during lease turnback than a “full-service lease”.
Managed maintenance should also include a method to manage the payments for maintenance so they are consistent over time. CFOs appreciate this approach as they can budget on a consistent monthly basis for railcar repair and management while recouping the savings anticipated on the spread between net and full-service leases.
How Can Tealinc Help?
To support this lessee need, Tealinc offers managed net leases on all of our railcars offered for lease. At the lessee’s option, Tealinc will also provide a managed net lease program coupled with an escrow account service whereby railcar maintenance and management funds are held in a separate account specifically for lessee repairs. Looking to include the rest of the cycle? We do that as well, in essence providing outsourced transportation and railcar repair management for the entire fleet. The value is in keeping the fleet availability for loading at a high percentage of the time while decreasing operating costs for the Lessee.
Case In Point
Tealinc provides managed maintenance under a net lease versus a full-service lease. One client in particular has been partnering with Tealinc now for ten (10) straight years. Under Tealinc managed maintenance and transportation management, Tealinc manages over 3 trainsets for this car (more than 300 railcars!) Under the managed net lease plus maintenance account, the lessee pays an allocated monthly fee into an escrow account which Tealinc maintains and manages. By Lessee choice, the amount escrowed has been $100 per rail car per month. Of course lessee’s can put more or less into that escrow account depending on their exact cash and operating expenses monthly budget. Over the course of the 10-year lease and contract with this customer, the amount spent on average has been $65 per railcar per month (including management fees). Tealinc managed the railcars into service under a continued preventative maintenance program led by Tealinc and repair program when repairs were required.
The Results
The results? Railcar availability was consistently kept at 97% or higher and allowed the customer a tremendous “up-time” for their private railcar fleet. Additionally, this up-time allowed the customer to reduce their need for extra railcars. Tealinc partnered with the customer to ensure that they were planning ahead. The customer has a quiet period each summer where they have railcars seasonally surplus. Tealinc was able to calendar out this down-time and set time aside of preventative maintenance. Additionally, because preventative maintenance was always practiced even during the main and busy season, during 30% of this down time over 10 years allowed another customer to use the railcars which earned the customer a payment on the railcars and thus even further reduced their lease payments and thus providing a 25% reduction in lease costs for those years. When it came time for lease turnback due to changes in the Lessee plant facilities, Lessee turned back 105 railcars with turnback costs averaging 60% of what others were paying for like type equipment.
Let’s Create Value Together.
Tealinc is a railcar lessor, railcar management and consulting firm. Contact us for an evaluation of your rail transportation situation. We’re always engaged and care about generating positive results be it a railcar lease, management of your rail assets or providing exemplary consulting results. We’re looking forward to creating true value with you!