Black Swan Event Portends Extended Rolling Recovery

As the coronavirus spread across the world, the recession we were unable to predict arrived. Over 140 countries have instituted air travel restrictions, shelter in place orders, and border closures. More timely global communication and a coordinated approach may have been able to limit the virus’ spread and protect the world’s people and economies.  Justin Leverenz of Invesco described the virus as “truly a black swan in the sense of being both unpredictable and an event of massive consequence.”  

It’s impacted passenger air transport in an unprecedented manner.  In the last two weeks of March, commercial air traffic declined 41% as compared to 2019 levels (the decrease was 55% in the final week of March and is expected to continue). More recent data indicates flights are down 70% since February. Anecdotally, the TSA is reporting 95,000 people were screened on a recent April day, down from 2.3 Million screened the same day last year.  The International Air Transport Association (IATA) reports 10,500 aircraft, representing 40% of the global fleet, have been grounded (and it’s expecting the number to increase). Ninety-eight percent of revenue earning routes across the world are now subject to ‘severe’ travel restrictions. 

American is cutting 80-90% of its international schedule (and 60 to 70% of its domestic schedule). United’s April schedule has been cut 60%.  Delta is set to ground 600 aircraft out of its total fleet of 900. As aircraft are parked, the drop in air travel demand appears to be accelerating the retirement of older aircraft. American has decided to retire their 767s, A330-300s as well as their 757s, El90s and some 737s. Delta is accelerating the retirement of its MD88/90s and some 767s.  “People have been asked to put their lives and livelihoods on hold,” said Federal Reserve Chairman Jerome Powell in a Brookings webcast, “at significant economic and personal cost.”  

Expectations drive investment, and global recovery will be extended due to the staggered timing of the outbreak in different regions. In the U.S., expect a ‘rolling’ return to an open economy. With the fall elections seven months away, Washington’s fiscal stimulus and the Fed’s monetary actions are equal to more than a quarter of GDP (longer term, these actions will also work to dampen economic recovery). Once a vaccine is developed and global populations immunized, air travel will return to pre-crisis levels. As this year unfolds, we’ll be witnessing reduced consumer spending and lower corporate earnings. Fall elections may determine if we face increasing levels of taxation and government regulation. As economies reopen, the world will work together to prioritize the health, safety, and wellbeing of air travelers.  

Transportation asset investment successes come from staying invested across multiple business cycles, and from identifying and investing in themes that continue across those cycles. Economics will dictate whether ‘decommissioned’ units will be replaced with newer more fuel-efficient models (the current absence of the 737MAX is a plus). Every part of a decommissioned aircraft has value (engines are highest in demand).

Today’s dynamic, the non-linear global environment has shown analytical problem solving is not always able to identify the unexpected.  It’s the experience across multiple business cycles that provides an ability to identify opportunities and avoid pitfalls. Start thinking about tomorrow. Call RESIDCO.