AERO AND RAIL EQUIPMENT – NAVIGATING MARKET TURBULENCE AT YEAR END

The manufacturing producer price index (“PPI”) climbed 1.3% in September compared to a .4% August increase (September was its largest increase since March of 2022). Over the last twelve months, it’s up 6.4%^[1]. Consumer prices are up 3.7% from a year ago, retail gasoline up 34%, diesel up 70%, and airfares up 22%^[2]. The International Air Transport Association (“IATA”) reported October 16^th weekly average jet fuel price up 113.7% year over year. With the Fed electing to hold interest rates steady at its October meeting, interest rates are expected to rise in December. Pressured by tariffs, energy, and the continuing artificial intelligence buildout, the U.S. economy remains resilient. 

More Middle East oil is now flowing than at the start of the conflict, yet more oil is not producing price relief. Brent settled at $116.72 a barrel on October 23, a six-month high^[3]. U.S. domestic airlines are absorbing the shock unevenly. Strong demand and higher fares have not been enough to offset fuel.  American reported record third-quarter revenue of $16.3 billion, up 19%, but a GAAP net loss of $269 million, and is projecting fourth-quarter fuel near $4.70 a gallon (nearly double last year), while expecting its network growth to slow in 2027. Delta cut its 2026 earnings guidance to $5.10–$5.60 a share from $6.50–$7.50 due to $6 billion of added fuel cost (its Pennsylvania refinery cushioned the blow). With 60% of Delta’s fourth-quarter flights already booked, demand is not the problem; fuel cost is. With higher fuel prices persisting, expect ‘disciplined’ capacity growth, elimination of marginal routes, restructuring, and potential equipment opportunities due to consolidation.

Class One earnings have climbed as diesel pricing shifts truck cargo to rail. The Union Pacific reported 6% volume growth in Q3, and Norfolk Southern 3% growth^[4]. UP is on track to move the most volume since 2018. Intermodal set a new quarterly record. Carload growth is broad. For the first nine months of 2026, total North American carloads are up 2.7% (nearly 342,000 carloads) over last year. North American intermodal volume was up 3.5% (nearly 490,000 units). Third quarter was the highest-volume quarter ever for U.S. intermodal. Freight cars in storage now equal about 17.7% of the North American railcar fleet, the lowest for railcars in storage since April 2023. The AAR Freight Rail Index, a seasonally adjusted gauge of economically sensitive freight traffic (intermodal plus carloads excluding coal and grain), reached its second-highest monthly level ever in September (only January 2021 was higher). The Q3 2026 average was the highest ever. Evaluating the UP/NS merger? Recall Hunter Harrison’s real message: manage the system for the benefit of the economy, use assets effectively, reduce handoffs and dwell, and make the system more competitive against trucks.

For equipment investors, the three-part investment risk framework still applies. Credit risk should be covered by an adequate credit return. With the 10-year above 5% and the Fed signaling more, price in higher-for-longer rates. Favor lessees with fuel protection, liquidity, and pricing power. As the environment changes, evaluating equipment risk comes down to assessing demand and residual valuations. In rail, the pending merger leaves network strategies in flux through at least mid-2027. Near-term supply issues from the on-the-air side are starting to abate, but there are nuances within asset types.

Aircraft delivery delays, rising maintenance, fuel costs, and coming pilot labor contract renewals will continue to challenge air carrier operations. The challenges will create equipment opportunities. Tariffs, energy prices, and interest rates will remain the variables that drive residual values and lease rates. Navigating market turbulence at year-end? Call RESIDCO.            

^[1] Wall Street Journal, October 16, 2026, “Wholesale Inflation Index Climbed 1.3% in September.”

^[2]  Fox Business, “September CPI: Inflation Trended Higher as Energy Prices Hit Consumers,” October 14, 2026.

^[3] Rio Times Online, “Brent Crude Settles at US$116.72, Up 3.1%,” October 23, 2026.

^[4] Wall Street Journal, October 23, “Railroad Earnings Climb…”