Rail traffic volumes remain challenged while Air Carriers face capacity constraints as they attempt to meet the rebound in domestic and international flights. United reported solid domestic and record-breaking international performance with third-quarter revenues up 12.5% year over year. The company set a record for the highest-ever daily average of revenue passengers carried in a quarter  (more than 482,000 passengers)1. Delta reported record September quarter revenue ($15.5 billion), a  double-digit operating margin (12.8%), and pre-tax income of $1.5 billion. American Airlines reported a third-quarter loss2 resulting from higher costs and a new pilot union contract. Higher labor and maintenance costs and delayed delivery of new aircraft are impacting available capacity and profitability for all three carriers. While fuel costs per available seat mile are lower3 than last year Air Carriers expect oil prices will be volatile over concerns the Israel-Hamas war might escalate.  

Airframer delivery delays are being caused by supply chain and new engine reliability issues. In  August, Boeing discovered manufacturing defects in the rear of 737 fuselages (mis-drilled fastener holes in a key structural part). That followed an earlier April production disruption caused by incorrectly installed brackets that connect the MAX’s aft fuselage with its vertical tail. As a result, Boeing’s September deliveries of their 737Max jets fell to their lowest level4 in more than two years.  The delivery delays and durability problems with the Geared Turbofan and LEAP engines are increasing the values and lease rates of existing mid-life Aero equipment and engines (in August the value of an Airbus A320-200 rose 10% and lease rates for the jet were up 6%).5  

On the rail side, total U.S. carloads were down .3% in the third quarter. Union Pacific reported declining freight rail volumes and revenue across their key commodity groups6. UP’s revenue from coal, metals, industrial chemicals, and energy products fell. Carloads of forest products fell 13% as rising mortgage rates impacted home sales (thirty-year mortgage rates are 7.5%, the highest in 23  years). U.S. carloads of grain through the third quarter were down 12.7% from last year, the lowest for the first nine months since 2013 (due to lower exports). Levels of freight rail traffic imply a risk of an economic slowdown (the Manufacturing PMI remains in negative territory for the 11th straight month), but consumer spending isn’t collapsing. Third quarter U.S. GDP grew 4.9% compared to  2.1% in the second quarter. In September, motor vehicles and parts had the biggest carload gains.  Consumer sentiment remains stable supported by a strong labor market (a preliminary 336,000 net new jobs were created in September). The Services PMI remains in expansion territory while spending on services is rising faster than spending on merchandise. 

More than 300 suppliers are needed to build a Boeing 737 Max. Parts come from more than 50  countries. Geopolitical conflicts are not helping. To better understand and deal with current and expected values and lease rates for Aero and Rail assets, Call RESIDCO.  

Glenn Davis 312-635-3161


[1] In the first nine months of 2023, TSA Checkpoint volumes exceeded 2019 levels, Airlines for America, October 2023.

[2] American lost $545 Million in the third quarter. Revenue was flat with last summer and costs rose. United reported $814 million of expenses during the nine months ended September 30, 2023, associated with agreements with their Pilots Union and other Aerospace Work groups.

[3] Fuel cost per available seat mile (“CASM”) is down 14.3% from 1H23 vs. 1H22. Airlines for America, October 2023.

[4] Boeing reported 15 new 737 jets, 10 787s, and two 777s for a total of 27 deliveries for the month of September. Reuters, October 2023.

[5] Wall Street Journal, Heard on the Street, October 2023.

[6] Union Pacific Profit Declined as Freight Demand Weakens, Wall Street Journal, October 2023.

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