Container manufacturers’ prices are up about 40 percent, so why are container lessors boosting their rates for new boxes by 60 percent? The explanation lies in a container’s unique life cycle.
A box’s typical life of 13 to 15 years is divided into three stages: the initial lease, usually five to eight years; a second lease; and the container’s disposition, usually for storage or scrapping.
Lessors say a box generates about 55 percent of its total return in the initial lease, about 30 percent in the midlife stage and about 15 percent in the final stage.
Brian Sondey, chief executive of TAL International, said his company seeks to recover the full impact of manufacturers’ price increases in the initial lease, because that’s the only phase where costs can be determined with accuracy.
On the initial lease, he said, “We know the duration of the lease, we know the rate, we know the logistics of that lease, which drives how expensive it’s going to be to re-lease it a second time. And we modeled our whole first phase based upon the known actual,” he said.
Estimates of second leases and disposals are based on long-term averages. Those numbers are high now, but there’s no guarantee they’ll still be high in several years.
As box manufacturers change prices, TAL adjusts pricing on its initial leases “but we don’t adjust the re-leasing assumptions or the disposal assumptions,” Sondey said. “That’s why the lease rates are up a larger percentage than the container prices, because we’re not spreading that increase in price over the full 13- or 14-year life of the asset. We’re recapturing the whole thing during the five- to eight-year duration of the initial lease.”