We have increased conviction that railcar leasing fundamentals will remain exceptional through 2025, while rising economic and tariff uncertainty suggest lower for longer railcar orders with downside risks to nearer-term new car builds. Diesel locomotives have a long runway. The locomotive industry stakeholder consensus is that North America has decades of further investment in diesel-electric locomotives ahead. Our condensed takeaways from several days spent with railcar and locomotive lessors, builders, buyers, consultants and market participants follows.
RAILCARS
Railcar Leasing Outlook Remains Fantastic. Operating lessors of all sizes and strategies were consistently constructive. Simply put, lease rate renewals remain considerably higher vs. expired lease rates. Importantly, this favorable existing railcar supply/demand dynamic continues without meaningful rail volume growth, and railcar investors don’t require the railroads to “pivot to growth” in this supply-side supported market. On lease rates, private lessors said their renewal experiences were consistent with GATX’s and TRN’s recent ~25% markups.
Railcar Leasing Secondary Market Shows No Sign of Slowing. We spoke to many contacts at lessors, industrial shippers and consultancies, and not a single one reported cracks in the secondary market for lease-attached railcars. Rather, investor demand for lease-attached existing railcars continues to exceed supply, elevating the value of existing railcars in secondary markets. While we acknowledge the risk of this bullish complacency if lease rates take an unexpected turn lower, stickily high new car prices (tied to labor, components and steel price inflation) and limited new car builds should support secondary markets through at least 2025. Like last year, we see more upside risk than downside risk to publicly traded railcar lessors’ 2025 outlooks for gains on sale.
Extreme Railcar Manufacturing Uncertainty in 1H25. Contrasting with the broadly constructive outlook for railcar lessors, our conversations around new railcar builds suggest a market paralyzed by uncertainty. We did confirm inquiry levels were consistently healthier than firm orders in 2H24 and so far in 2025, but we expect the “wait and see” order approach to continue deeper into 2025. Simply put, new railcar prices remain elevated in an historical context, and uncertainty around the duration of cross-border tariffs, their direct impact on new car prices (which could alter return profiles of 30- to 50-year assets), and their indirect impact on rail commodity shipments have thrown cold water on all but the most urgent new car needs. There was broad agreement on the ~35K starting point for 2025 new car builds shared by OEMs in recent months, but we frankly heard far more concern about downside risk than upside risk to new car orders for this year.
Railcar Manufacturing Selective Mid-Term Bullishness. The majority of presenters parroted third party forecasts for 35-45K annual railcar builds over the next several years (roughly replacement rate), but we spoke to several well-placed industry participants who see a more meaningful deferred replacement need emerging mid-term to push new railcar demand back toward the consolidated industry’s ~50-55K capacity. This would only be exacerbated by nearer-term reticence to build new cars from the points of uncertainty we noted directly above. To be clear, we agree that near-term risk for new car production remains lower, not higher. But we believe that fear may produce attractive mid-term entry points for investors in railcar-related names as 2025’s uncertainty gets priced into shares.
LOCOMOTIVES
Diesel Locomotive Long Runway. Locomotive industry stakeholder consensus is that North America has decades of further investment in diesel-electric locomotives ahead. No, this is not a new view, but this year we felt it was shared with higher conviction than in recent years. This bodes well for WAB as the overwhelming leader in diesel electric locomotives in North America, with potentially a full generation of locomotive replacement ahead, as well as the aftermarket service contracts and parts revenue tied to that install base, before next-generation power takes the lead.
Hydrogen Still Favored, But Path Forward Murky. Today, hydrogen remains the favorite for next-generation locomotive propulsion, but our sense was stakeholder enthusiasm and the level of investment in this transition hasn’t escalated over the past 12 to 18 months. To be clear, there are exceptions, including CPKC and CSX’s joint hydrogen fuel cell project as a key Class I example. But our conversations suggest little conviction that this next-generation uncertainty changes until either the government mandates the path forward, or a rail-driven coalition voluntarily pools resources, research and development, and intention in a single direction for the industry.
Battery Electric as a Complimentary Technology. Consultants at Oliver Wyman shared their view that railroads should look at battery electric hybrid technology less as a next-generation solution and more as a complementary technology that would be supportive of higher fuel efficiency and emissions improvement, regardless of what ultimate next-generation propulsion technologies are adopted. We find this view interesting, though we acknowledge a sense of limited current interest from the Class I rails in high-horsepower road locomotive battery solutions except in highly specific closed-loop applications.
No Signs of Progress at Progress Rail. Our conversations with industry stakeholders suggest no incremental traction in North America from WAB’s competitor Progress Rail (owned by CAT), either in new locomotive sales (Tier 4), hybrid technologies or its rebuild/modification program that has been commercially launched but with very little success relative to WAB’s highly successful program. Said another way, the North American diesel locomotive market continues to be a duopoly in name only, with WAB in the driver’s seat for modifications, new locomotives, services and parts.
Can We See North American Locomotive Growth Again in 2026? We’ve been vocal around our concern that WAB’s North American locomotive growth could look more like a plateau than a step higher into 2026 and got no real incremental detail on this concern from the REF 2025 meetings (WAB did not present this year). Ultimately, we’ll likely have to wait for public announcements of contract extensions from key modification customers UNP and NSC, which are due to renew their multi-year deals set to expire at the end of 2025.
The 5-to-10-Year View: North American Locomotive Replacement Takes a Step Higher. Mid-term, the opportunity for growth is clear, with diesel-electric Class I locomotive replacement needs rising fairly substantially in 2029 and beyond. Why? It’s based on the age of the locomotive fleet, with the number of original and modified locomotives at the end of their useful life taking a stair-step higher into the next decade.
OCS Electrification? This is not in the mid-term picture at this time in early 2025. No initiatives identified as of this time. The University of Texas study and feasibility report is recognized as an available tool. While not ruled out for some corridors, there is no private sector OCS initiative underway at this time according to reliable public sources.
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