Union Tank Car Company Firm and Industry background: Union Tank Car Company (UTC) is one of the leader companies in the manufacturing and leasing of railway tank cars in north America, having the second largest fleet of privately owned tank cars in the world (55,920 cars). Throughout the years UTC was strong financially with high Revenues and profits as shown in the company’s financial statements.
The tank cars industry is too specialized, requires high capital investments and a special maintenance budget. Shippers found themselves unable to realize high maintenance economies of scale, which made leasing an extremely attractive option, providing companies like UTC the opportunity to enter the market and realize profits. UTC offered all type of leases to shippers but mainly gave full-service operating leases and offered both renewal contracts on old cars and new contracts on new cars.
Market Analysis: There are 4 major competitors in the tank leasing market, with GATX having the biggest car fleet (53,295 cars) and UTC having the second biggest fleet (46,240 cars). However, in terms of market share based on revenue; ACF industries have 38% of the market share while UTC comes in third place with 15% of the market share. The industry is considered relatively stable as far as there are only 4 main leasing competitors.
Entry is considered difficult because of high capital requirements, significant technological risks, economies of scale and difficult safety and environmental industry regulations. Richmond tank and Trinity were two new companies who entered the market, however, they only sell tank cars and therefore they are not a real threat as long as leasing is concerned. In order to sustain high competition standards, UTC should be mainly focused on quick delivery time, quality of their vehicles, prices and their service. Current problem:
UTC is now facing a problem in restructuring the company’s leasing contracts due to recent changes in the industry regulations, mainly in the mileage allowance given to shippers leasing the tank cars. Under those changes, there are new preferences for shippers in leasing new cars to attain the greatest possible mileage allowance, which presents a problem to UTC concerning the renewal of old existing leases and another problem concerning the reduction in the residual value of their tank cars held under short-term leases.
These problems leave UTC with different possibilities in which we will evaluate and present in our case recommending the best possible solution. Possible solutions and alternatives: 1. Continuing to offer full-service operating leases but to increase the rental rate in the first 10 years before renewal 2. Shift to another type of leasing contract 3. Switch from leasing tank cars to selling them