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Rail and Aero Investment Strategy As Traffic Returns

The March weekly average of total rail carloads (231,232) was up 4.1% over March 2020 (total carloads for the last two weeks of March were up 7.3% over comparable weeks of 2020).  Intermodal volume was up 24% over March 2020, that’s the biggest monthly gain ever. Following a 25.6% gain in the fourth quarter of 2020, the first quarter grain carloads were up 22.1%; the last two quarters of grain carloadings are the largest quarterly percentage gains on record. Industrial products (an aggregate of seven rail traffic categories representing the industrial economy) rose 1.1% in March, their first monthly gain since January 2019.  

First-quarter U.S. GDP growth (to be released April 29) is expected to be 6% annualized, the fastest growth of any quarter since 2003. Additional ‘infrastructure’ spending is to be proposed by Congress (in addition to the $2 Trillion ‘stimulus’ just passed). A review of regional Federal Reserve Bank data shows manufacturing factory activity reported up.  The Purchasing Managers Index (“PMI”) rose to 64.7% in March 2021, its highest level since 1983. Seven of the 10 sub-indexes set modern-day records. The Bureau of Labor Statistics announced on April 2 that a preliminary 916,000 net new jobs were created in March, the most in seven months (the official unemployment rate fell to 6%). The Conference Board’s index of Consumer Confidence rose to 109.7, its highest point since the pandemic began.  For the ninth consecutive month railcars in storage continued to decrease (as of April 1st, 378,241 freight cars or 22.9% of the 1.651 million North American freight car fleet remain in storage).  

Vaccinations have significantly slowed the spread of the virus, but factors that determine the timing of an aviation recovery are complicated by coronavirus variants and a slow rollout of vaccinations across the European Union. Infections have surged in France and French President Emmanuel Macron announced a nationwide four-week lockdown starting April 3rd.  Italy also extended its partial shutdown until April 30th. Last year, air carriers were able to cut operating costs by 45.8%, but revenues dropped 60.9%. The result?  The global aviation industry reported $118 Billion in net losses in 2020.

Aviation performance is expected to show improvement this year. Carriers with large domestic markets (North America and Asia) are performing better than other regions. Cargo operations are sustaining the major’s international networks. U.S. domestic demand has been increasing steadily as summer approaches. More than 1 million Americans have been flying each day for nearly a month. United reports Americans are traveling in the greatest numbers in more than a year, “Every day the numbers are better and better.”  Delta is ending its block on middle seats.  And, as a revenue-building strategy, major carriers are experimenting with point-to-point flights from smaller cities to suddenly popular leisure destinations.    

Others are preparing for post-pandemic growth (Canadian Pacific, Kansas City Southern, AerCap/GECAS). As the domestic recovery becomes apparent and interest rates remain low, adapt your rail and aero investment strategies.  Today’s decisions will put you in a stronger position for tomorrow. To identify targets and stay ahead of your competition, you will need critical market information. Call RESIDCO.   

Glenn P. Davis, 312-635-3161 

davis@residco.com  

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CPKC Positioning For Post Pandemic Rail Growth

Once approved by the Surface Transportation Board, the combination of the Canadian Pacific and Kansas City Southern (the two smallest Class One Railroads by revenues1) can be expected to drive a modal shift from truck to rail. The combined “Canadian Pacific Kansas City”, or CPKC, will remain the smallest Class One.  After the combination, a single rail transportation network will stretch across the North American continent and deep into Mexico. 

The KCS connects the Gulf Coast Mexican ports of Veracruz and Tampico and the Pacific port of Lazaro Cardenas to Laredo, Texas. KCS has lines running north from Texas through Kansas City to Illinois and southeast to the U.S. Gulf Coast ports of Brownsville, Corpus Christi, Port Arthur, New Orleans, Gulfport, and Mobile. On a revenue growth basis, the CP and Kansas City Southern have been the two best performing Class One railroads for the past three years. After the new U.S.-Mexico-Canada (“USMCA”) trade agreement came into force last year (July 1, 2020), KCS, with its operations in Mexico, (the “Kansas City Southern de Mexico”) became a natural acquisition target. That July, the Blackstone Group Inc. and Global Infrastructure Partners considered a takeover bid for the KCS, which when made, was rejected. It was a strong indication of the upside growth any subsequent consolidation would offer.  

The current combination has no route overlap and will create direct competition with the trucking industry (and other Class Ones) in the U.S. Midwest (the Dallas to Chicago corridor) and into the South. “The combination will provide a transportation solution for manufacturers seeking to bring factories back to North America after the pandemic exposed the risks of relying on overseas supply chains.” Mexico is a crucial supplier of vehicles, auto parts, electronics and food, and a major customer of grain, fuel, and consumer goods. Trade across the three nations is expected to grow, and the CPKC is targeting $800 Million in revenue gains by 2025 from the following sources: intermodal, automotive, and dry bulk (cement and grain carload traffic). The combination does not reduce choice for rail shippers, rather it expands their market reach and opens alternative shipping lanes.  The benefits of single-line service will shift trucks off U.S. highways, reducing truck congestion and carbon emissions in the Chicago to Dallas corridor. “Rail is four times more fuel-efficient than trucking. One train can keep more than 300 trucks off public roads and produce 75% less greenhouse gas”.

The question for rail equipment investors: “Will the combination results in reduced or increased rail equipment demand?” 

Pro: The combination will create rail traffic growth by expanding rail shipper market reach, taking truck traffic off highways, and improving rail transportation alternatives for grain, autos, and auto parts, energy, and intermodal shipments. It will eliminate the need for interchange between two systems, allow a bypass of Chicago congestion via the CP route through Iowa and reduce carbon emissions in the City of Chicago. It may also reduce the need for public investment in highways and bridge repair. 

Con: Securing approval from the Surface Transportation Board (industry concerns remain over a loss of competition from previous rail mergers). The CPKC is positioning for post-pandemic rail growth. How to identify the impact on rail equipment demand from this combination?  

Call RESIDCO.                               

 1Kansas City revenues in 2020 were $2.6 Billion, CP revenues in 2020 $5.756 Billion. 

Glenn P. Davis, 312-635-3161 

davis@residco.com  

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