In a siding off a branch line, eleven three-car units are stabled in a row with the grass grown up to the rails. They are twenty-two years old, in the livery of an operator that no longer exists, and they are entirely serviceable. Nobody wants them.
They still cost money. Storage, insurance, and enough maintenance to keep them in a condition from which they could return to service if somebody did.
That siding is the whole of the rolling stock leasing business in one photograph. The company owns trains and never runs one. What it sells is the use of an asset, and what it worries about is the day a lease ends.
The trade exists because of what happened in 1994
There is no leasing business before privatisation, because before it the trains belonged to the railway that ran them. When British Rail was broken up, the passenger fleet was placed into three leasing companies in 1994, and those companies were sold into the private sector in 1996. Operators would run the services under contract and lease the trains rather than own them.
The logic was straightforward. A train works for decades and a contract to run services does not, so the asset and the operation were separated, and whoever holds the asset takes the long risk.
The result is one of the few genuinely capital-gated trades in Britain. Entry runs between £50,000,000 and £400,000,000, because there is no small version of it. The office is a handful of fleet engineers and finance people, at something like £58,000 for an engineer, which makes it a business with almost no employees and an enormous balance sheet. There are on the order of a dozen lessors in the country, between them taking roughly £2.8 billion a year in lease charges from operators. Those are estimates of the scale rather than a published count.
The asset outlives the lease by twenty years or more
Here is the structural problem the trade is built around. A modern multiple unit can be expected to work for thirty-five years. The lease it was bought against runs for a fraction of that, because the operator's own contract runs for a fraction of that.
So the return is not really in the lease payments. It is in what happens afterwards, and there are three outcomes.
- A re-lease, usually at a lower rate, because the fleet is no longer new and the operator knows it.
- A cascade: the fleet moves to a quieter route where it is more than good enough, often after a refurbishment you pay for.
- Store. The siding, the grass and the insurance premium.
Everything in the accounts rests on a residual value, which is a number written down twenty years in advance for an asset whose usefulness depends on decisions nobody has taken yet: electrification, platform lengths, the shape of the next contract, whether the successor operator wants longer trains.
The lease payments themselves are dull in the best way, at something like £31,000 a month per vehicle, flat across the year. A lease payment does not know what month it is. That is why the trade is valued more like a financing business than an operating one, and why it can carry debt that an operating business could not.
What matters is how much of the fleet is on lease
Utilisation is everything here, and it is harsher than it sounds.
A vehicle on lease pays. A vehicle off lease does not pay and does not stop costing. It has to be stored somewhere, insured, and kept in a condition that allows it to be returned to service without a programme of work costing more than the next lease is worth. The maintenance obligation does not lapse because the income has.
And utilisation does not fall one vehicle at a time. It falls by fleets. When a contract changes hands, the incoming operator plans its service around the trains it wants, not the trains that happen to be there. A decision taken in an office about train lengths can put thirty vehicles into store on a single date, and thirty vehicles all looking for a home at once is not thirty separate conversations. It is one very weak negotiating position.
Gross margin near fifty-five per cent is the shape of a business whose principal cost is the asset itself, depreciating against a number somebody guessed.
The regulator sits on the asset, not on the operation
The Office of Rail and Road is the regulator that matters. Vehicles must be authorised before they are placed in service, and the maintenance of every vehicle has to sit with a certified entity in charge of maintenance. Both are conditions of the asset being usable at all, which makes them the lessor's exposure rather than the operator's. An authorisation withdrawn from a vehicle type turns an asset into scrap without anything having happened to the business that owns it.
The VAT is the sort of detail that looks like nothing and is not. Leasing rolling stock to an operator is standard rated. The operator's own fares are zero rated, because passenger transport in a vehicle carrying ten or more passengers is zero rated.
Zero rated is not exempt, so the operator does recover the VAT it pays you. But it charges almost no VAT on its own sales, which means it sits permanently in a repayment position, and the VAT on your invoice is money it lays out and reclaims rather than money it nets off. On a fleet costing hundreds of thousands of pounds a month, that is a working capital line on the other side of the table, and it turns up in the negotiation.
The failure is the one every lessor is built to survive and some do not. A contract change puts a whole fleet off lease on one date. Nobody wants twenty-five-year-old units. The residual value carried in the accounts turns out not to exist at that age and in that configuration. And the debt secured against the asset falls due against a valuation that has just moved.
It is the only specialist trade in the catalogue with no operations at all. No timetable, no queue, no inspection of a service, nobody in the street. There is an asset book, and the only event that really matters is a lease ending.
Where this shows up in the game
Business Baron plays rolling stock leasing as an asset book rather than an operation. The monthly decision is what to do with the fleet coming off lease: re-lease it at a lower rate, spend real money refurbishing it for a different route, or accept that it goes into store and carries on costing. None of the three is obviously right, which is the point of it.
The number is the share of the fleet on lease. Every off-lease vehicle earns nothing and still runs up storage, insurance and maintenance. The Office of Rail and Road sits behind the assets rather than the trading, through vehicle authorisation and the maintenance entity, and a withdrawal aimed at a vehicle type does more damage than any trading month could. The end, when it comes, is a fleet off lease all at once, a residual value that was always a guess, and debt secured on it.
It is one of the specialist trades, and the full game has to be underneath it, which is truer here than anywhere: a lessor with nobody to lease to is not a business. The Rolling Stock Leasing page sets out the lease behaviour, the capital gate and the year from which the trade is possible at all.