Navigating Transportation Investment

Factors to Consider for Transportation Investment

Transportation asset finance is a growth business.  Both the Aviation and Rail markets are healthy and long term investment trends remain favorable.  With recent market volatility comes higher ranges of uncertainty. While investment risk may or may not increase over time, uncertainty grows at the square root of time.  The more time, the harder it becomes to predict the future. The investment models you choose provide investment decision support. But the investment decision itself is a marriage between the decision model results and your level of personal experience.  What drives the flow of capital into transportation investment alternatives?

What are the strategic alternatives?  What contributes to value? What are you expecting?  Traditional tools include income, cost, tax benefits, and market value analysis.  Upside is an ally to be capitalized on while downside exposure should be limited. The future value of aircraft, aircraft engines, railroad rolling stock, their condition, and remarketability are a critical component of investment returns.  Estimates of the future value of aircraft and railroad rolling stock can be described in terms of a distribution at any point during the investment term. Recognize that inflation will increase the price you can sell equipment for in the future.  Inflation’s effects are fairly powerful. A 2.5% inflation rate over 20 years increases prices 64%, a 3% rate over the same period increase price 81%.  It’s your risk tolerance that affects the future value you are willing to incorporate in your investment return calculations.  

But risk also exists during the term of any lease and every lessor expects some percentage of its lessees will default.  Supporting that investment is your transaction structure. Equipment values act as a backstop. Many things can happen while equipment is in the hands of a lessee; physical wear and tear, mandated regulatory changes, technological improvements, the price of market inputs (fuel, steel, monetary policy [credit]), and the stage of an ever-changing business cycle.

How the Economy Affects Company Decisions

The U.S. economy grew 2.9% last year (2.6% in the fourth quarter) driven by deregulation and tax reform efforts.  The Federal Reserve predicts 2.3% growth for 2019. Recent months have brought crosscurrents and conflicting signals.  Issues on the horizon include weaker growth in China and Europe, the Politics of trade negotiations, and the impact of the U.K.’s decision to leave the European Union.  Reality is multidimensional and dynamic.

Examples?  The three major U.S. Air Carriers are negotiating pilot contracts this year.  Wages and scope clauses are on the table. Frontier Airline pilots recently overwhelmingly approved a new contract with a 53% pay increase.  NetJets Pilot’s union signed an interim agreement that improved compensation for both long-term and new-hire pilots.  The Rails are focused on improving operating ratios using Hunter Harrison’s precision scheduled railroading principles in order to better manage investment.  Airlines and Class One Railroads are capital intensive businesses, tying up significant amounts of capital in their equipment and facilities. Both industries are using the current upcycle to strengthen their financial position as they prepare for a choppier environment.

To navigate successfully you’ll need access to market intelligence, relationships, technology and the practical experience gained from real life lessons.  Call RESIDCO.