Identifying Midyear Opportunities

Aviation and rail equipment lease rates and equipment values are stressed as operators adjust equipment capacity to meet current levels of demand (and adjust to the Class One Roads implementation of Precision-scheduled railroading “PSR”). In the near term, lessees are focused on ensuring the sustainability of their business by attempting to defer new delivery commitments and restructure existing lease terms. OEMs are doing the same as they adjust production schedules in recognition market demand will be lower until the virus clears.  

The unknown duration of the path back to where the economy was before the pandemic adds complexity to evaluating equipment opportunities, whether under lease or currently stored.  Secondary market values are often impacted by new equipment pricing and specific lease maintenance and return conditions if under a lease. 

Technical factors also impact values.  Standard configurations and deep markets mean units are easier to place. Special features can help equipment retain value. An example: a higher maximum takeoff weight enhances an aircraft’s utility and consequently its value.  If it’s part of a family (e.g. A320/A321, or B737-800/900/MAX) equipment will retain value as operators benefit from lower investment in parts, equipment, and pilot training. Lower fuel prices improve demand for older aircraft.  If fuel prices advance, demand for older units will be depressed, shifting operators’ preferences toward newer, more efficient aircraft. Lease rates for the single-aisle Boeing 737-800, the 900ER, and Airbus A321s remain “relatively unscathed” with fleet weighted average declines of around 5% or less since January 30^th.  And data shows the more fuel-efficient A320neos are being favored over the older A320ceos (54% of the A320ceo remain in storage, compared to only 30% of the A320neo).  

Older equipment may appear less attractive due to operating economics or functional obsolescence. But a lot of planes parked in the desert could offer better returns than new equipment. Fifteen percent fuel savings on new aircraft may not justify their capital cost.  As demand reappears some of these surplus units might be economically leased to second or third-tier operators or sold to another lessor or operator.

For Air, more than half of the world’s passenger jets are now in service.  In Rail, the combination of lower rail freight volumes and the Class Ones’ implementation of PSR has placed 31% of the 1.67 million-unit North American rail freight fleet in storage (520,729 freight cars). Maintaining customer relationships is the key to today’s markets. Rail ‘relationships’ are being tested as rail shippers are being required to transition their operations to comply with the Class One’s PSR schedules. Rail modal share will grow only if the Roads better integrate intermodal and trucking to give rail shippers an ‘end-to-end’ solution. 

The U.S. entered the recession as the strongest world economy. Now, “The big picture is the economy is on the road to recovery and we have passed the worst”. With fall elections approaching and an expectation of additional government spending on infrastructure, the recovery will continue.  A return to moderate growth means the outlook is becoming brighter.  Identifying opportunities is constant in portfolio management. Call RESIDCO.