Our current environment is the result of external market shocks. Nearly every air and rail transportation asset now is faced with an unexpected demand profile. The pandemic’s lockdowns and stay at home orders have caused the largest global recession in history, impacting hotels, restaurants, commercial aviation, theaters, and live entertainment. Class One Railroad PSR business models are reshaping needs for locomotives and rail rolling stock. Business and consumer behaviors, habits, and preferences are shifting. McKinsey and Co. estimate that e-commerce penetration has achieved ten years’ growth in the last 90 days. Some of these changes may be permanent, others may not*.
In September rail intermodal originations were 284,777 units, the fourth most for any month in history, up 7.1% over September 2019, and the biggest monthly percentage gain since December 2016. The intermodal surge reflects an improving economy as firms restock and prepare for the holiday season. August 2020 was the highest volume month ever at the Port of Los Angeles. Consumer confidence has rebounded. Auto sales are strong. The housing market is solid and home sales are now above pre-pandemic levels. The “HMI” (Housing Market Index), which measures builder confidence in the market for newly-built single-family homes, rose to 83 in September, matching the highest it has been in its 35-year history. The purchasing managers’ index (“PMI”) has been above 50 for five straight months (greater than 50 indicates expansion). “Manufacturing performed well … with demand,” said Timothy Fiore, Chair of the Institute for Supply Management, “consumption and inputs registering growth indicative of a normal expansion cycle… the manufacturing community as a whole has learned to conduct business effectively and deal with the variables imposed by the COVID-19 pandemic.” Excess capacity remains: 27.1% of the North American Rail Fleet is in storage, and an estimated 1/3 of the worldwide aircraft fleet remains parked.
The global aviation passenger market and its related equipment demand will return once consistent international protocols that eliminate quarantine requirements are developed. The 737MAX recertification is in its “home stretch” as the FAA administrator Steve Dickson said after piloting the plane himself September 30th. Carriers are expected to resume taking deliveries early in 2021. By 2027 over 2,000 current-generation Boeing 737NG and Airbus A320ceos will have reached 25+ years of age and are expected to be retired. The MAX, with its improved aerodynamics, redesigned cabin interior, and more powerful and fuel-efficient CFM International LEAP-1B engines will replace these older units.
With the Fed expected to hold interest rates near zero for an extended period, core transportation assets provide attractive yield alternatives. If Democrats sweep in November, expect the undoing of Republican tax reform, more fiscal stimulus, and an attempt at ‘packing’ the Supreme Court. Shifting production back to the U.S. has broad bipartisan support so structural changes might be made to restore what has been lost to countries that have lower labor cost, lower environmental standards, bigger subsidies for domestic businesses, and cheaper currencies than the U.S. dollar. Air Carriers and Class One Railroads are reshaping their fleets.
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*Microsoft is going to permit some staff to work from home on a regular basis, even after the pandemic fades.
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