The stability of European rolling stock lessors’ business models could be negatively affected by the phasing-out of extraordinary pandemic-related government support, as passenger volumes recover across European rail markets, Fitch Ratings says.

However, we expect the reduction in support for train operating companies, the lessors’ key client base, to be gradual and accompanied by a further recovery in passenger volumes and net benefits from higher inflation.

In the longer term, government subsidies and infrastructure investment to support green passenger and freight mobility could benefit the sector.

Rolling stock lessors

Rolling stock lessors typically have more stable business models than other lessors – a key factor underpinning their credit profiles and Fitch’s tolerance for their leverage ratios, which is materially higher than for most other leasing sectors.

Fitch has a ‘neutral’ sector outlook for European rolling stock lessors.

Extraordinary government support for train operators and a strong recovery in passenger volumes have enabled lessors to maintain utilisation rates at, or close to, 100% for passenger fleets, protecting cash flows and supporting revenue stability relative to other leasing subsectors.

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Business model stability for passenger lessors is further underpinned by the relatively long passenger fleet leasing contracts of five to seven years, helping lessors to withstand the challenging operating environment.

European passenger volumes have recovered considerably since the pandemic, although the recovery has been uneven between markets.

The recovery in the UK has been one of the weakest, with passenger volumes still only at about 70% of pre-pandemic levels in 3Q 2022.

Other major markets have performed better, with 3Q 2022 passenger volumes reaching about 90% of the pre-pandemic level in Germany and fully recovering in France. Much of the recovery has been largely due to extensive government support, notably in Germany.

Railway freight leasing

Freight volumes have generally been less affected than passenger volumes, with decreases largely due to weakened economic activity and supply-chain disruptions.

Again, recoveries in the second half of 2021 and the first half of 2022 were stronger in France and Germany, reaching pre-pandemic levels by 3Q 2022, while UK volumes were still lagging at about 90% of pre-pandemic volumes in 3Q22.

Freight leasing performance, particularly in the locomotive segment, was boosted by demand recovery as the operating environment normalised, and lease rates were further supported by shortages in rolling stock production.

Performance is likely to weaken in 2023 due to the economic slowdown, but secular growth in the longer term will continue to be supported by growth in intermodal fleets, new infrastructure projects and government spending to facilitate the shift from road to rail.

Also See: Who owns the trains? ROSCOs and repatriated profits