Despite concerns over the Fed’s interest rate hikes air travel remains resilient. United expects continuing demand will drive profits through the end of this year. JetBlue expects strong demand for leisure travel through the fall and struck a deal in July to buy Spirit Airlines in a $3.8 billion deal to create the fifth-largest U.S. airline. Delta reported record third-quarter revenue of $14 billion, with domestic revenue exceeding pre-pandemic levels by 2%, “The demand for air travel remains very strong,” Ed Bastian, Delta’s chief executive, said on a call with analysts. More international travel is expected with the reopening of Japan to international tourists and the easing of hotel quarantines for arriving passengers in Taiwan. More passenger traffic will lead to more airfreight belly capacity. New aircraft deliveries remain delayed: Boeing’s 737 MAX 7 and 10 continue to wait for FAA certification. The MAX 7 is the shortest in Boeing’s family of single aisle jets, the MAX 10 the longest version. The MAX 10 was developed to compete with the Airbus 321 NEO and fill the gap left by the 757. The MAX 10 offers the same capacity as the A321neo but is 2.8 tons lighter, has lower fuel consumption and a slightly greater range. Both the MAX 7 and MAX 10 must be certified by the FAA prior to December 27, 2022 or will require flight crew alerting systems to be installed.1

Class One Railroads are reporting rising profits. Lumber and industrial materials traffic are down but coal continues to see strong demand. Rising interest rates will impact investment. Reductions in the level of the Mississippi River are diverting grain from barges to the railroads. The threat of a freight railroad strike is back. The Brotherhood of Maintenance of Way Employees Division voted to oppose the proposed five-year contract reached September 15th. The rails and rail unions have agreed to continue negotiations until November 19th, five days after Congress reconvenes in mid-November, after the midterm elections. To prevent a national strike, all 12 unions representing a total of 115,000 workers must vote to ratify the contract or Congress must act.

Jerome Powell started talking like a pilot when he said he would try to “land the plane softly.” That plane is the U.S. economy with 329 million passengers. Two years of COVID created ‘pent-up’ demand. Early in the pandemic people were saving up to 33 percent of their income. Now they are spending it aggressively, saving only 4%. For the 12 months ended September 2022 the annual inflation rate for the United States was 8.2% according to the U.S. Labor Department data published October 12. Jet fuel pricing reached $4.12 per gallon in June 2022. While it has come down since then, the OPEC+ countries production cuts creates a potential for higher prices.

The September core Consumer Price Index (CPI), which strips out food and energy prices, grew by 6.6% over the prior 12 months (the next update is scheduled for release November 10th). Employers added 263,000 jobs in September. Wages were up 5% over the past year. Cooling inflation may require the Fed to raise rates to 5.25% or higher next year.

The U.S. economy grew in the third quarter (+2.6% quarter over quarter), yet many expect a recession.2 After the midterms Aero and Rail investment opportunities will have to deal with a divided government, the likelihood of a nationwide rail work stoppage, continuing deglobalization, rising energy costs, Russia’s invasion of Ukraine, and China’s Xi. Remain agile. Identify and invest in pockets of opportunity. Call RESIDCO

Glenn Davis, 312-635-3161

[1] The MAX 8 and MAX 9 are already certificated.

[2] October 17, 2022, The Conference Board Economic Forecast for the US Economy

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