This is the last instalment in our series of articles lifting the veil on the process of buying trains: a pretty essential prelude to founding a train company. To help you get to know the subject, previous editions of Midnight Weekly have explained the pros and cons of purchasing used and new carriages. And whatever your preference in the matter, we’ve now come to what is probably the juiciest subject of the lot: how do you finance all this stuff? When you’re a newcomer in the rail sector, there are two possibilities.
The first consists of providing funding for the purchase of trains yourself. Essentially, the operator buys the asset directly and so becomes the owner. This means of funding requires existing capital that new operators don’t necessarily have when if getting started. In general, only established operators with a lot of history and easy access to funds can even envisage this option.
That means many in fact end up opting for a second method: leasing. This consists of renting carriages (new or old), ideally purchased by a firm that specialises in the acquisition of rail-sector material. These companies are often known by the acronym ROSCO (rolling stock company).
This way of doing business brings plenty of advantages: the operator doesn’t have to splash loads of cash on the initial purchase, nor on renovation and fixing equipment (in the case of old carriages), nor on the production of equipment (in the case of new carriages). The ROSCO is charged with paying for all that, and so also becomes the owner and introduces a rental agreement with the operator specifying the monthly rental payments and the length of the contract.
In this scenario, the ROSCO goes ahead with an initial report into the carriages and other equipment it needs to buy, taking into account many crucial factors: the quality of the material, the cost of purchase and production, the reputation of the manufacturer or renovation firm, and the potential to rent it all to another rail operator if the first renter can no long stump up the fees. Nothing is left to chance.
And that’s not the only thing the ROSCO must weigh up with each new venture. Another essential point to consider, which isn’t necessarily obvious to anyone with no financial grounding, is the lifespan of a given asset. This can have a significant impact on the ROSCO and, as a result, on rents.
Let’s take a simple example, to help you understand this a little better. All other things being equal, something that costs 10X and lasts ten years will require much higher rents than something costing 20X that lasts 40 years. That’s why even if used trains can be less expensive at the point of purchase than new trains, the rent for the operator can end up much higher.
So to conclude this final instalment, leasing is the financing option that seems most appropriate for a new operator that doesn’t necessarily have the means to buy its own trains outright. However, when you take into account the lifespan of the asset, this solution ends up more expensive than buying outright, because the ROSCO will be taking a risk (and understandably aims to make a profit out of it). And that means another thing to consider at the start of negotiations is definitely the predicted lifespan, especially if choosing between new and used material, as this can have a big impact on rents.
We hope this short guide of ours has helped you understand a bit more about the decisions we at Midnight Trains will be making over the coming months. At a time when trains have found new favour among many travellers, it seems pretty essential to us to be transparent about our dealings from the off. This, we think, will help us succeed in the long run. In future editions of Midnight Weekly, we’ll be able to let you in on the actual decisions we’ve made too.
P.S. Railway experts, we’re very aware we’ve described the buying process in very broad terms and can confirm that many other important factors are involved.