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Letter From the Chairman

GATX had another record year in 2016, producing earnings per diluted share of $6.29, earning a return on equity of 19.6 percent, paying more than $67 million in dividends, repurchasing more than $120 million of common stock, and investing nearly $621 million in our businesses around the globe. This performance was especially impressive given that we were operating in an industry experiencing reduced railcar loadings, improved railroad efficiency, and declining industry lease rates for the second consecutive year. We positioned ourselves well in the prior strong market to enable us to perform so well in this tougher environment. I congratulate the employees of GATX on their outstanding achievements, but now let’s look ahead.

Value Creation
Economic value in any business is created by growing the amount of capital deployed and earning an attractive risk-adjusted return on that capital. At GATX, we operate in an extremely cyclical railcar leasing market, deploying assets with economic lives of 35 to 50 years or more. Thus, creating economic value requires us to emphasize asset growth and asset return at different points in the cycle, while making these decisions with a very long-term view that matches the lives of our assets. So what are our strategies for growth and return?
Our growth strategies vary across our different markets.
In the mature and extremely cyclical North American railcar leasing market, we stress asset growth in the down cycle, when asset prices generally decline. Historically, fleet acquisitions and new railcar orders have been the most effective way to grow our fleet in these weaker markets. In particular, large fleet acquisition opportunities often arise when lessors who are struggling to compete in a declining market look to exit the railcar leasing business or downsize their fleets. We will strive to grow by taking advantage of these opportunities as they arise. As the market eventually improves, we tend to purchase fewer new railcars at higher prices and look more toward existing railcars that may be out of favor among our competitors, and where we believe we can add value, such as our $340 million boxcar acquisition completed in the stronger market in 2014.
Our European rail business has historically operated in a much less volatile market relative to our North American rail business. Also, the European industry fleet is much older on average, creating more replacement opportunities as those cars retire. Thus, although we are cognizant of European railcar leasing cycles, we are more focused on consistent investment in new cars in order to increase the efficiency of our customers’ fleets. We have invested more than $1 billion to modernize and grow our fleet over the last decade and will continue this strategy in 2017 and beyond.
In our emerging rail markets, we are applying our railcar leasing model, which has been successful for over 100 years in North America, to rail markets with higher growth rates. We have established a good foundation for expansion in the growing rail markets in India and Russia. We are very aware of the higher risks in these markets, and GATX India and GATX Russia are not yet significant contributors to GATX’s assets and earnings. However, consistent with our long-term view, we see these markets as very high potential and we will be patient and diligent in our effort to grow them into businesses that produce an attractive risk-adjusted return.
Lastly, we look for growth where we think there is a good fit with GATX’s core strengths – the leasing of long-lived, widely used assets in which service is a critical component. The best example of this is GATX’s investment with Rolls-Royce plc in a business that involves the operating leasing of long-lived aircraft spare engines. Service, in the form of the Rolls-Royce Total Care® program, is critical to the customers of this business. Since its formation in 1998, this business has grown steadily to a $3.3 billion portfolio and produces outstanding risk-adjusted returns. We intend to continue the attractive growth of this business. 
Our strategy to earn an attractive return on our capital employed is consistent across our businesses. In strong markets, we focus our team on aggressively capturing rising lease rates. Equally important, we attempt to increase the length of our lease terms to lock in those attractive rates for as long as possible. We also monitor rising asset prices in strong markets, and we are quick to sell railcars if we think the economics of a sale are more attractive than continuing to own and operate the asset.
In weak markets, we strive to act as the price leader, lowering lease rates as quickly as necessary to keep our railcars on lease. At the same time, we try to shorten the length of our lease terms so that we have the opportunity to more quickly capture value as the market recovers.
Regardless of where GATX is in the business cycle, we focus on return from a shareholder perspective. For instance, 2017 will mark the 99th consecutive year that GATX has paid a dividend. In addition, we have returned $870 million of capital to our shareholders since 2006 through the repurchase of our common stock. We invested more than $7.8 billion in assets over the same period, while maintaining our access to capital and investment-grade credit ratings. This reinforces GATX’s belief that the amount of committed lease revenue in our business allows us to consistently return capital to our shareholders while simultaneously growing our capital employed.
Like any business, GATX faces myriad challenges, from increasing regulation to volatile emerging markets to changing employee demographics. Given our strategy, the largest challenge we currently face is the growth of competitors with lower costs of capital, especially those in the banking business, who seem determined to aggressively grow their railcar fleets at high prices despite the questionable economics these actions produce. This trend could make it harder for GATX to compete for opportunities to acquire existing railcar fleets, especially if this behavior continues as the market weakens. Our strategy to deal with these competitors is two-fold. First, we will continue to win commercially against these competitors through our superior service, experience, and customer relationships – and we will seize every opportunity to displace them from customers. It is one thing to purchase a railcar; it is another to keep that railcar attractively deployed over its long economic life. Second, we may partner with other long-term investors with lower costs of capital that are interested in investing in the railcar leasing business with a company like GATX. We will find creative ways to grow our capital employed, but we will not lose sight of the need to earn an attractive return.
GATX Board of Directors
GATX has an extraordinary Board of Directors, with diverse leadership experience in rail, finance, steel, operations, emerging markets, customer viewpoints – among other capabilities essential to GATX’s business. They regularly review and frequently challenge our strategy, including a more intense, multi-day annual review of the strategic issues most important to GATX. They understand and endorse our current strategic approach. They will not hesitate to take action if they believe our strategy is not sound. I believe our shareholders should take comfort in the diligence of our Board.
Before I close, I have to discuss the employees of GATX. They are a phenomenal group of knowledgeable and dedicated employees, deeply passionate about our business and the communities in which they live. They are also changing quickly – nearly 50 percent of GATX employees have been hired since 2010. They are more comfortable with new technology, which I view as critical to our future success. GATX has invested heavily in new systems over the last few years, and most of these systems are geared toward improving the quality of service and information for our customers. To continue to be successful with our customers, we need to keep these employees engaged. We will do so by constantly offering them opportunities to learn, by allowing them to make a positive impact on GATX, and by supporting them in their efforts to give back to their communities.
Our promise
GATX has been a successful railcar leasing company for almost 120 years. But we realize that this is no guarantee of future success. We promise to our shareholders that while we will always adapt and change to stay ahead of changing market conditions, two key philosophies will never change. First, we will always have a long-term focus on investing that matches the long lives of our assets; second, when we do not honestly believe that we can earn an attractive risk-adjusted return on capital, we will return that excess capital to its owners. I am confident that the employees of GATX will continue delivering superior returns.

Brian A. Kenney
Chairman, President and Chief Executive Officer
GATX Corporation