In 2019, GATX surpassed earnings expectations. We earned $5.81 per diluted share, or $5.51 per diluted share after deducting the net positive effect of tax adjustments and other items. This exceeded our original expectation of $4.85 to $5.15 per diluted share and was a 5.6% increase over 2018’s adjusted earnings.
Additionally, we earned a 13.5% return on equity excluding tax adjustments and other items, invested more than $1.6 billion across our owned and affiliated businesses, and returned $219.3 million of capital to our shareholders through dividends and share repurchase.
Furthermore, we increased earnings per share in 2019 despite deteriorating railcar leasing market conditions for Rail North America—our largest business. Our ability to offset the declining segment profit in Rail North America was primarily attributable to higher segment profit in Rail International and our Rolls-Royce & Partners Finance affiliates (RRPF). Given this development, I will use this letter to explain the strategic rationale behind taking our asset-focused, service-oriented expertise that we have developed for over 100 years in North America and applying it to higher growth markets around the globe.
We originally invested in our European rail business in 1994. We anticipated key developments in this market that have materialized into favorable trends today. First, relative to North America, the industry fleet in Europe is considerably older. As recently as 2017, approximately 250,000 railcars were over 30 years old in Europe—nearly 100,000 of which were over the age of 40. Our customers realize that these older, smaller, and less efficient railcars need replacement and are looking to GATX Rail Europe (GRE) to help them upgrade their fleets.
Second, there is an increasing desire to move modal share from road to rail in Europe. Compared to highway transport, rail transport results in significantly lower carbon emissions and reduces highway noise and congestion. A recent European rail study by Rail Freight Forward projects land freight transport to grow 30% by 2030. With the current modal split of 75% road/18% rail/7% water, the study predicts this growth would require one million additional trucks, increase carbon emissions by 80 million tons annually, and worsen road congestion. In response, governments across Europe are proposing aggressive actions to increase rail modal share. In December 2019, the European Commission announced the goal of achieving climate neutrality by 2050, noting that to reach the goal, “a 90% reduction in transport emissions is needed by 2050,” and “as a matter of priority, a substantial part of the 75% of inland freight carried today by road should shift onto rail and inland waterways.” Furthermore, in January 2020, the German government and Deutsche Bahn agreed on an €86 billion rail infrastructure program through 2029 to upgrade and modernize the rail network with a goal of “a high-performance and high-quality network as a basis for active climate mitigation in the transport sector.”
As these trends accelerate, GRE is increasing investment in its fleet for both growth and replacement, adding over 1,400 new railcars and investing roughly €130 million in 2019 alone. GRE is also investing in new freight car types that should benefit disproportionately from these trends.
In India, GATX recognized the huge potential for freight rail growth more than a dozen years ago. We saw a country where gross domestic product was poised to grow at a high rate relative to more developed economies, where manufacturing was developing quickly, and where commodities moved long distances. Yet freight rail modal share was stagnant. Even today, it stands at around 30–35% versus almost 60% on roads—despite an inefficient highway system in which 40% of the roads are unpaved. Indian Railways (IR) has a number of initiatives in progress to achieve its objective of 50% freight rail modal share by 2030. The most significant initiative is the high-capacity, high-speed dedicated freight corridors that are under construction to allow freight trains to avoid the congestion of the existing passenger train-dominated rail network. IR has also implemented a number of policies to encourage private investments in rail infrastructure and rolling stock.
After several years of working with IR to create a railcar leasing market, GATX Rail India (GRI) made its first railcar investment in 2012. Since then, GRI has effectively collaborated with key industry stakeholders and supported new railcar designs and IR policies to grow this high-potential market. We are now the largest railcar lessor in India. Our fleet size and total investment increased rapidly over the last three years to almost 3,700 railcars and more than $145 million by the end of 2019. GRI plans to continue growing and diversifying its fleet and service offerings to serve the Indian rail market as these favorable trends further develop.
Rolls-Royce & Partners Finance Affiliates
We first invested in RRPF in 1998. Despite selling our aircraft leasing platform in 2007, we decided to hold and grow the RRPF business. We saw a leasing business that was similar to our traditional railcar leasing franchise, in which service—in the form of engine maintenance provided by Rolls-Royce—is a key related component. The original prospect of robust market growth was also appealing. In the ensuing 22 years, RRPF capitalized on these trends to grow its engine portfolio to 478 engines with $5 billion of net book value at the end of 2019. In each of the last two years alone, RRPF invested over $900 million in aircraft spare engines. The outlook for further growth remains bright, as the projected increase in global air travel and aircraft orders are expected to drive $30 billion of investment in the aircraft spare engine market over the next five years. We plan for RRPF to gain a meaningful share of this market growth while continuing to earn an attractive risk-adjusted return.
It was especially gratifying in 2019 to see our investment in other markets produce increasingly strong financial results while we work our way through a difficult North American railcar leasing market. Nevertheless, our North American rail franchise has been the main driver of a solid return to our shareholders for over 120 years. We expect the continued oversupply of railcars and weaker demand we experienced in 2019 to persist in 2020, and we plan to capitalize on the market weakness to grow our North American investment at an economically-attractive cost—and thus increase the long-term profitability of our core business.
I want to thank GATX’s employees, Board of Directors, and shareholders who each play a vital role in supporting our strategy. It is because of them that we can continue to make investment decisions, like those discussed here, to drive attractive long-term returns. I look forward to partnering with them all for years to come.
Brian A. Kenney
Chairman, President and Chief Executive Officer