How will Republican lawmakers reshape tax policy? Will the “Department of Government Efficiency” recommendations result in reductions of regulatory red tape, cost, and Federal Government Agency restructuring? Are Tariffs a solution that will drive manufacturing growth when the real problem is the high cost of U.S. Labor?[1] Would a Domestic Manufacturing corporate tax reduction spur improvement in domestic manufacturing and result in improved railcar freight volumes and commercial aircraft production? Can the Fed manage inflation after the inauguration? How important is domestic supply chain self-sufficiency in a world fraught with geopolitical risk?
The Tax Cuts and Jobs Act (“TCJA”) was passed during Trump’s first term in 2017. It is set to expire at the end of 2025. With Republicans in control of both chambers of Congress, a tax bill can be passed along party lines (similar to how Democrats passed the Inflation Reduction Act, e.g., using budget reconciliation, with a simple majority vote). In the most recent fiscal year (October 2023 to September 2024), the US federal government spent $6.75 trillion. The nonpartisan Congressional Budget Office estimated extending the TCJA in total would cost $4.6 trillion. Some Republicans are asking for a full extension, others ask tax policy be selectively balanced with the federal deficit in mind. Regardless, it’s unlikely significant new taxes will be imposed which is leading to an improved outlook for business activity.
Commercial air traffic has grown nearly twice the rate of domestic GDP over the last 50 years. Through October this year, Boeing and Airbus delivered 305 and 559 aircraft respectively compared to 405 and 559 respectively during the first ten months of 2023.[2] At the end of October, Airbus reported a backlog of 8,769 jets (89% A220 and A320 narrowbodies). Boeing’s backlog (total unfilled orders before their Accounting Standards Codification “ASC” 606 adjustment) was 6,246 aircraft, of which 77 percent were 737 family narrowbody jets. Both companies are receiving over two new firm orders for every aircraft delivered. Supply chain management and labor issues continue to impact new aircraft deliveries driving investment in existing mid-life, in-service aircraft.
The AAR’s “Freight Rail Index” which tracks the volume of rail traffic in the U.S. (both traditional carload commodities and intermodal containers) showed a 3.5% increase for October, year over year. [3] The U.S. Department of Transportation expects total freight demand to grow 27% by 2040.[4] Railcar lessors are experiencing improved lease pricing and secondary market activity. [5]
Commercial aircraft and freight railcars have demonstrated their ability to capture economic growth. Equipment portfolios deliver current cash, and ownership provides tax benefits and residual value appreciation. But it’s an investment firm’s talent, technology, and deep market networks that will drive profitable portfolio growth. Ready for 2025? For current investment opportunities in Aero and Rail assets, Call RESIDCO.
Glenn Davis 312-635-3161
[1] The average hourly wage in China is significantly lower than in the United States, with estimates placing the Chinese average around $5.50 per hour compared to the US average of roughly $28 per hour (meaning a US worker earns roughly five times more per hour than a Chinese worker on average).
[2] Due to the machinist’s strike Boeing delivered just 14 commercial jets in October.
[3] Association of American Railroads (“AAR”), Rail Industry Overview, November 7, 2024.
The IMF expects the U.S. economy to grow 2.5% in the fourth quarter. Business investment, ample energy supplies, and consumer spending have led to increased productivity. After the Fed cut interest rates by half a percentage point in September economists are generally positive. The Conference Board’s leading economic index indicates continued moderate growth for the balance of this year and into early 2025. The Fed is committed to maintaining the economy’s strength. But with September’s surprising job growth[1] most now expect the Fed to be hesitant on future rate moves. The personal consumption expenditures index peaked in June 2022 at 7.1% and in August was down to 2.2%. With the manufacturing PMI below 50% manufacturing employment fell by 28,000 jobs in the third quarter. Consumer spending continues to support the economy. Housing starts remain challenged (year to date through August down 4% from last year). Homeowners with low mortgage rates are not moving resulting in limited secondary market opportunities.
Sixty-four percent of Boeing’s machinists rejected Boeing’s last contract offer. Negotiations continue but production of 737s, 767s, and 777s remain stalled. Consumer inflation is the problem. Even with a 35% wage increase wages have not kept pace with the cost of living. The shortage of new equipment deliveries is keeping mid-life generation models in the air. The strike is also impacting the supply chain and parts shortages will slow production once the strike is settled. But the outlook for Boeing’s best-selling 737 remains strong. Originally introduced in 1968 the type has four generations with several variants. The 737 MAX has improved fuel efficiency, and its aerodynamic design allows it to fly up to 3,800 nautical miles compared to the 737-800’s 3,500 nautical miles. The MAX also allows higher seating capacity which has allowed American, Delta, and United to configure aircraft seating to fit their route pattern business strategies. Its main competitor? The Airbus A320neo fleet.
Total railcar loads (excluding coal) were 86,782 or 1.4% higher in the first nine months of 2024 than in 2023. Intermodal in the same period was up 9.5% (882,064 units). “Economically sensitive” rail traffic which excludes grain and coal but includes intermodal has grown. Third quarter of 2024 U.S. carloads of chemicals were up 3.8% over the third quarter of 2023. At 1.27 million (50,588 carloads year to date through September) they were the highest January to September period on record. More than half of chemical carloads consist of a variety of industrial chemicals, including soda ash, caustic soda, urea, sulfuric acid, and anhydrous ammonia. Plastic and synthetic resins account for close to a quarter (agricultural chemicals make up the balance). Coal accounts for 15% of U.S. electricity generation and the IEA does not expect coal-fired capacity to be replaced fast enough in the near term. GATX reported 3rd Quarter rail fleet utilization of 99.3%, a renewal success rate of over 80% with renewal rates up 26.6% during the quarter with an average renewal term of 59 months[2]. OPEC trimmed its forecast for oil demand growth and the markets expect Brent to be averaging $74 in the fourth quarter and $65 a barrel in the first quarter of 2025.
Market fundamentals drive Aero and Rail results but don’t explain everything. Firm management is key. Invest with professionals trained to measure risk, estimate probabilities, and make decisions based on current and future equipment values. Call RESIDCO.
Glenn Davis 312-635-3161
[2] Railway Age, GATX 3Q24: ‘Consistent With Expectations’, October 22, 2024.
For the third quarter of 2024, the Federal Reserve Bank of Atlanta’s “GDPNow” model is estimating real U.S. GDP growth of 2% (a seasonally adjusted annual rate)[1]. July’s World Economic Outlook Update expects the U.S. GDP to grow by 1.9% in 2025[2]. The Bureau of Labor Statistics (“BLS”) Consumer Price Index for all urban consumers, (CPI-U) increased by 0.2 percent during July (on a seasonally adjusted basis) after declining 0.1 percent in June. Other than housing, which was up .4% from the prior month, deflationary readings appeared in certain categories such as used autos and airfares. The July 2024 BLS jobs report shows the labor market cooling but stable. Unemployment ticked up to 4.3% in July from 4.1% in June. Over the last 12 months, the ‘all items’ index increased 2.9 percent before seasonal adjustment[3]. Given this data markets expect the Fed will reduce interest rates during the second half of this year starting in September. What remains is for the Fed to determine what ‘neutral’ rate will neither spur nor slow economic activity.
Strong passenger demand continues to support existing aircraft valuations and market lease rates. Despite the CrowdStrike IT disruption, passenger demand hit an all-time high in July. Airlines would like to expand their fleets, but supply chain issues continue to impact the ability of airframers to deliver new equipment. Operators are compensating by increasing load factors (89.4% in July[4]) and using existing aircraft more hours per day. Retirements from the existing passenger fleet are slowing. Airframer’s backlogs aren’t helping. At the end of July, backlogs extended beyond 2030. Airbus reported a backlog of 8,565 Jets, 7,655, or 89% were A220 and A320ceo-neo family narrowbodies (a 9.9-year backlog at 2019 production levels). Boeing’s backlog was 6,184, 77 percent of which were 737 NG/MAX narrowbody jets[5]. Current generation existing single-aisle aircraft are expected to remain over two-thirds of the fleet by 2042. The average fleet age is rising with single-aisle passenger aircraft now 11.3 years old, widebody passenger aircraft, 11.2 years old, and widebody freighters, 17.9 years old[6].
For the second quarter ended June 30, 2024, Trinity Industries reported continued strength in lease renewal rates. Their “future lease rate differential” is a positive 28.3%, fleet utilization 96.9%, and their lease renewal success rate was 72%[7]. Trinity said their rail fleet investment is generating their highest returns. “Railcars are sustainable long-term investments, providing stable and predictable cash flows. The rail lease portfolio provides a natural interest rate hedge with tax, inflation, and hard asset value benefits.”
Transportation, travel, trade, and economic growth drive equipment demand. Labor disruptions can cause uncertainties. The recent lockout and forced binding arbitration of more than 9000 unionized Canadian rail workers at the CN and CPKC, and Air Canada’s 5400 pilots voting to strike by mid-September are examples.
Relative to acquisition cost, mid-life aero, and rail equipment deliver higher yields. Opportunities exist. Make informed decisions. Balance your risk-reward. Call RESIDCO.
Glenn Davis 312-635-3161
[1] Federal Reserve Bank of Atlanta, Center for Quantitative Economic Research, August 16, 2024.
[2] World Economic Outlook Update, July 2024.
[3] Bureau of Labor Statistics News Release, August 14, 2024.
[4] Travel Pulse, August 29, 2024.
[5] Flight Plan, Airbus, and Boeing Report July 2024 Commercial Aircraft Orders and Deliveries, August 19, 2024.
[6] Boeing Commercial Market Outlook, July 16, 2024.
[7] Trinity Industries, 2024 Q2 Investor Presentation, August 1, 2024.
1600 Pennsylvania Avenue. What are markets anticipating? Interest rates, Inflation risk, Global unrest, Trade barriers, Government spending, a new Democratic nominee, or a second Trump presidency? Will there be a pro-business climate after the election, less regulation, more drilling, continued tax cuts, and lower interest rates? Recall the 2017 Tax Cuts and Jobs Act cut the corporate tax rate to 21%. It sunsets at the end of 2025. What about tariffs or immigration? With less than three months remaining prior to this fall’s presidential election, uncertainties have increased[1].
Prior to the air travel disruptions caused by CrowdStrike both Delta and United reported second-quarter profits of more than$1.3 billion; a 23% improvement for United, and a 29% decrease for Delta. Delta’s revenue of $15.41 Billion for the quarter was up 5.4% (excluding sales from its refinery). United reported $15.0 billion (up 5.7%). 2nd Quarter revenue per available seat mile: DL $0.22, UA $0.19; cost per available seat mile: DL $0.19[2], UA $0.16. Both American and Southwest reported record 2nd Quarter revenues but earnings for both were down more than 46% from a year earlier. Even with U.S. domestic air travel setting records an oversupply of capacity has forced carriers to discount fares. United’s Scott Kirby expects the industry will reduce seating capacity[3] by mid-August which should lead to higher fares. Southwest announced a plan to end its single-class open-seating model in an attempt to improve seating revenues and margins.
Commercial aircraft deliveries in the first six months of this year were 15% lower than in 2023. New aircraft deliveries for the year are now expected to be 1,260 aircraft after Airbus revised its full-year shipment target from 800 to 770 aircraft (supply-chain issues and Boeing delivery delays continue). Engine values are increasing more rapidly than aircraft values. The Pratt & Whitney geared turbofan situation is expected to continue through 2026 with 2% of the global single-aisle fleet parked on a rolling average basis.
Rail carload traffic is classified into 20 major commodity groups. Intermodal rail traffic, shipping containers and truck trailers are reported separately. For the week ended June 29th North American carload traffic was up 2.1% compared to the same week in the prior year. Due to the ongoing long-term decline in coal shipments, year-to-date carload traffic is down 4.5% (263,003 carloads), but total rail traffic was up 2% (intermodal volume is up 7.8%). Commodity groups posting year-over-year growth include petroleum and petroleum products (up 8.6%), chemicals (up 4.1%), grain (up 2.1%), and motor vehicles and parts (up 1.9%). The American Association of Railroads (“AAR”) maintains the AAR Freight Rail Index (“FRI”) which tracks combined intermodal shipments and carload traffic (excluding coal and grain). The FRI and GDP tend to rise and fall in tandem as the transportation of goods reflects economic activity as goods are transported due to increased production and personal consumption. In June the FRI increased 1.5% from the prior month and 5.4% from the same month in the prior year. As of July 1, 2024, 19.6% of the 1.64 million North American rail car fleet were in storage (below the historical average).
The U.S. GDP rose 2.8% in the second quarter (double the first quarter’s 1.4%). Regardless of the Fall Election, continued economic expansion and the prospect for rate cuts will drive 2nd Half investment. For macro insight and current equipment opportunities, Call RESIDCO.
Glenn Davis 312-635-3161
[1] World Economic Outlook discussion “Significant swings, increased uncertainties”, July 2024.
[2] Delta’s net dropped to due to operating expenses increasing 10% from last year (personnel salaries). United has yet to settle with its Flight Attendants. The CrowdStrike IT outage impacted Delta’s crew scheduling more than United.
[3] Published schedule changes show an approximately 3 point decline in industry capacity growth.
The Federal Aviation Administration (“FAA”) grants authority to operate scheduled air service in the form of Federal Aviation Regulations (“FAR”). Air carriers authorized to operate under Part 121 are generally large, U.S.-based airlines, regional air carriers, and all cargo operators. Most would consider the General Aviation (“GA”) category to include only light, small-engine private aircraft but even a jet or cargo aircraft that are operated under Federal Aviation Regulations may be considered GA aircraft. General aviation typically encompasses Part 91 and Part 135 operations. Part 91 operations fall into the category of a private pilot flying with friends or family. Part 135 operations detail the regulations for commuter operations and on-demand air charter operators. Part 135 only applies to aircraft with 30 or fewer seats or a maximum payload capacity of 7,500 pounds (including private jets). General aviation aircraft account for 92% of all aircraft in the U.S. and more than 65% of flight hours flown. More than 5,000 local and community airports are exclusively built to service general aviation aircraft. Flight training is governed under one of two parts: Part 141 pilot schools offer structured training suiting full-time students with an aviation career in mind. Part 61 schools provide the flexibility to train at your own pace with a personalized program.
On May 16, 2024, the President signed legislation reauthorizing the FAA through Fiscal Year (“FY”) 2028 stating; “It will expand critical protections for air travelers, strengthen safety standards, and support pilots, flight attendants, and air traffic controllers.” The reauthorization includes aviation workforce development grants to help flight schools prepare students to become aircraft pilots which can also be used to support the professional development of teachers delivering eligible aviation curriculum. It authorizes more than $105 billion in funding for the FAA as well as $738 Million for the National Transportation Safety Board for fiscal years 2024 through 2028. It left in place the requirement of a minimum of 1,500 hours of flight time as a Pilot in Command before receiving a commercial airline pilot certification (the Airline Transport Pilot, “ATP” certificate is the highest pilot license the FAA issues). Older commercial airline pilots continue to face a mandatory retirement age of 65 which was put in place in 2007 when it was raised to be consistent with international rules that prevent pilots older than 65 from flying internationally.
As new Boeing aircraft deliveries have been scaled back commercial air carriers are slowing or pausing pilot hiring. Flight schools are exploring alternatives that will get students on a flight deck sooner[1]. The Aircraft Owners and Pilots Association (“AOPA”) reports commercial airline pilot hiring softened in the first months of 2024. As a result, the outlook for pilot supply looks better than a year ago. But it’s the regional carriers who are short pilots in Command Captains. The Regional Airline Association reports FAA pilot certifications of 11,225 in 2023 while major airlines hired 12,193; in 2022 the majors hired 13,128 pilots while only 9,491 new pilots qualified[2]. The majors are hiring away regional airline Captains (Pilots in Command). Compounding the pilot challenge is the fact that over the next 15 years, 50% of commercial airline pilots will be forced to retire at age 65.
With the recent acquisition of the assets of Brown Aviation Lease, RESIDCO plans to actively support aircraft lease financing for flight school and university aviation training programs. To investigate other General Aviation investment[3] opportunities, Call RESIDCO.
Glenn Davis 312-635-3161
[1] Pilots operating a Part 135 (Private Charter) aircraft need at least 500 total flight hours, 100 cross-country, and 25 hours at night.
[2] Regional Airline Association statement released February 7, 2024.
[3] For 2023, the General Aviation Manufacturers Association (“GAMA”) reported new deliveries of 1,682 single-engine piston aircraft, 638 turboprops, and 730 business jets. At the end of 2022, the FAA reported a total of 164,567 fixed-wing GA aircraft in service.
Year to date Rail carloads through the end of April totaled 3.63 million, down 4.8% from last year. Total carloads have fallen year over year in each of the first four months of this year. Excluding coal however, total carloads are up 2% over April 2023 and have risen year over year in each of the last three months. April coal averaged 46,303 carloads per week, down 28% from April 2023. Coal accounted for 21.8% of non-intermodal U.S. rail volume in April, coal’s smallest share for any month as reported by the AAR Policy and Economics Department. Unseasonably early warm weather resulted in record low natural gas prices which resulted in a significant decline in coal demand. However, low natural gas prices benefit plastic producers who use natural gas as a feedstock and/or an energy source (rail carloads of plastic are up this year). Rail Labor issues loom as Teamsters Canada may simultaneously strike both of Canada’s large railroads (CN, CPKC). Under Canadian labor law, the unions cannot begin a strike until the Canadian Industrial Relations Board issues a decision regarding whether the two roads must continue to transport essential goods during a strike.
At his May 1 press conference, Fed Chairman Jerome Powell said, “While the economic outlook is ‘uncertain’ growth to date has been solid,” citing robust consumer spending, improving supply conditions, and a labor market that remains relatively tight. Interest rates were held steady at that meeting and the Fed is expected to hold rates steady at their next meeting June 11-12. Average hourly earnings for non-supervisory and production workers were 4% higher in April than a year earlier. With consumer inflation not yet under control the Conference Board’s Index fell to 97.0 from 103.1 in March, the third consecutive decline and its lowest level since July 2022.
Records were broken at U.S. airports over the Memorial Day weekend. The Transportation Security Administration said they screened nearly 3 million people on Friday alone, breaking a single-day record. U.S. airlines expect to carry a record number of passengers this summer, 271 million between June 1 and August 31, which would break the 255 million record set last summer. Airfares are down 6% from a year ago so there has been no slowdown at airports. American is offering its most ambitious summer schedule ever – 690,000 flights between May 17 and September 3rd. United had expected nearly 10% more Memorial Day passengers than last year, Delta expected 5% more. Delta is scheduling its heaviest summer international flight schedule ever (London, Paris, Rome). New aircraft delivery delays continue as Boeing continues to slow production to resolve production quality issues, delivering only 67 737 Max in the first quarter and 16 in April. Boeing’s total aircraft deliveries (24) in April were the lowest in a month since February 2022, which of course tightened demand for existing aircraft.
Summer uncertainties create market opportunities. Turn those uncertainties into opportunities by obtaining more information, measuring probabilities, using models to look for patterns, seeking to diversify exposure, stress testing, ensuring you are getting paid for the risk you are taking, and that the investment risk you take remains within tolerances set by the firm’s stakeholders.
This summer, Aero and Rail opportunities that deliver excess returns per unit of risk exist. For additional details Call RESIDCO.
Glenn Davis 312-635-3161
The U.S. economy expanded 2.5% in 2023 (3.4% in Q4). While growth slowed to 1.6% in 2024’s Q1[1] the International Monetary Fund expects U.S. GDP to expand 2.7% in 2024, up from their October forecast of 1.5%. Global economic output (in the face of geopolitical strife) is expected to expand by 3.2% in 2024 (up from an October 2.9% forecast). With air travel rebounding, Domestic Aviation’s Spring 2024 Air Travel forecast 167.1 million passengers between March 1 and April 30 (2.7 million per day)[2]. Delta expects strong summer demand. Overall IATA forecasts a 2024 record year of 4.7 billion passengers. Air carriers would like delivery of newer more fuel-efficient aircraft but both Boeing and Airbus deliveries are months late. The average age of airline-owned passenger aircraft was 16 years in 2024 (up from 14 in 2019). Planes typically are used for 25 years and many fly longer with proper maintenance. To keep up with the recovery of air travel air carriers are extending the service lives of existing mid-life equipment. Delta has not retired any aircraft in 2022 or 2023[3]. Lufthansa is bulk buying parts and developing their own in-house repair solutions. Delta’s maintenance and repair operations business (Delta TechOps) is currently focused on maintaining the in-service reliability of their existing Boeing 717s, 757s, and 767s. Industry-wide, a little under 200 Boeing 757s remained in service in 2023, and slightly over 200 767s are in service in 2024.
Newer aircraft are grounded due to the ongoing Pratt & Whitney engine issues. Cirium data shows 637 GTF-powered aircraft parked as of April 1. Repair capacity limitations and parts shortages are constraining supply. Manufacturers’ higher prices on new engines have reduced the incentive to switch to newer equipment. The resulting undersupply of aircraft and engines has led to increased values and increasing lease rates. Typical lease rates for a 10-year-old Boeing 737-800 (which preceded the MAX), were around $220K per month in January 2024, up from $183K in January 2023 and $156K in 2022. In a recent KPMG Aviation Industry Leaders Report, Avolon CEO Andy Cronin stated “2024 markets are positive and likely to drive lease rates and residual values higher”. Some carriers are buying aircraft they have been leasing rather than negotiating lease extensions. Per Cronin, the industry is some 3,000 planes short (15% of global capacity) of what was expected pre-Covid due to pandemic disruptions and OEM equipment delivery delays. With the added 737 MAX delivery slowdown existing mid-life aircraft equipment will remain in service.
Trinity Industries[4] reports improving railcar lease fundamentals (their future lease rate differential is +23.7% and fleet utilization is 97.5%. Full-year average renewal lease rates were approximately 30% higher than expiring rates with average lease renewal terms of 54 months. GATX[5] similarly reports 99.4% fleet utilization, lease renewal rates 33% higher, and average renewal terms of 64 months. High steel prices have elevated the pricing of new railcars and led to increased scrapping of idle equipment.
Even with economic, political, and trade uncertainties, higher lease rates and strong secondary markets are creating opportunities. Call RESIDCO.
Glenn Davis 312-635-3161
[1] U.S. Bureau of Economic Analytics, March 28, 2024.
[2] Airlines for America, Spring 2024 Air Travel Forecast.
[3] Aviation Week, April 22, 2024, Delta Eager to Grow Third-Party MRO Business.
New Equipment Quality Control Issue, Bolsters Demand for Midlife Aircraft
Moving pieces. Third Quarter U.S. GDP growth was revised down to 4.9% from November’s 5.2% second estimate. The National Association for Business Economics is expecting 2024 GDP growth to slow to 1% with a recession risk in the next 12 months under 50%. As inflation slows and with a “soft landing” in sight, the Fed is leaving interest rates unchanged. The federal funds rate is expected to be 4.6% at the end of 2024 down from its current 5.5%, which implies three quarter-point cuts in 2024. Those rate reductions are dependent on the impact current rates have on economic activity and whether inflation is sufficiently close to the Fed’s 2% target (the Fed’s personal consumption expenditures index is expected to approach
2.4% by the end of 2024). The Bureau of Labor Statistics reported 2.7 million net new jobs created in 2023; 672,000 in government, 654,000 in health care, 298,000 in food services, 266,000 in social services, 197,000 in construction, and 12,000 in manufacturing. Transportation and warehousing lost 63,000 jobs[1]. The Index of Consumer Confidence rose to 110.7, in December up from 101.0 in November, reflecting more favorable consumer views of inflation, levels of personal income, and job availability.
U.S. Rail carload traffic for 2023 was 11,701,875, up .7%, the most for a full year since 2019. Carloads were up in 10 of the 20 AAR categories led by motor vehicles and parts, petroleum products, and crushed stone and sand. Intermodal at 12,667,354 units (containers and trailers) was down 4.9% for 2023 but up 5.5% in the fourth quarter over the fourth quarter of 2022, its biggest quarterly percentage gain since the second quarter of 2021. Coal remains the largest U.S. rail carload commodity accounting for 29.2% of total originated carloads. Lease fleet utilization and renewal rates remain favorable.
Boeing’s manufacturing quality control challenges continue as a door plug of a recently delivered 737 Max 9 blew out on January 6th shortly after takeoff. The next day, the FAA issued an emergency airworthiness directive, temporarily grounding 170 of the type to allow investigation and immediate inspection. The door plug involved in the incident was manufactured in Malaysia, and installed by Spirit AeroSystems in Kansas (Boeing’s fuselage supplier), and then apparently removed and reinstalled by Boeing at its Renton, Washington assembly facility[2]. The grounded jets are being allowed to resume flying after mandated inspections are completed. But there are now broader concerns regarding Boeing’s manufacturing assembly, supply chain, and inspection compliance as demonstrated by the FAA Administrator Mike Whitaker’s announcement, “We will not agree to any request from Boeing for an expansion in production or approve additional production lines for the 737 MAX until we are satisfied the quality control issues uncovered are resolved”[3]. As oversight increases Max 9 deliveries will be delayed, further delaying certification of the Max 7 and Max 10 and impacting 2024 air carrier fleeting plans as they consider alternatives[4]. New aircraft may have the latest technology, but OEM airframe and geared turbofan engine quality controls and supplier oversight issues are making air carriers and the flying public more comfortable with the reliability of existing midlife equipment. Identifying placement opportunities for Aero and Rail equipment investment requires expert market insight. Call RESIDCO.
Glenn Davis 312-635-3161
davis@residco.com
[1] The Employment Situation, January 10, 2024, Rail Time Indicators, American Association of Railroads.
[2] Wall Street Journal, “FAA Clears Path for MAX 9”, January 25, 2024.
[3] Federal Aviation Administration, January 24, 2024.
[4] United, Boeing’s biggest customer, is considering fleeting alternatives that do not include the Max 10 which is five years behind its original delivery date.
The Fed’s preferred inflation measure, the core personal consumption expenditures price index (“PCE”) fell to 1.9% in November. This latest data confirms inflation is slowing. On a year-over-year basis, the PCE was 2.6%, the lowest since February 2021. With the full impact of interest rates yet to be felt (housing is struggling, and the Conference Board’s index of leading economic indicators is down 3.3% in the past six months) the Fed remains concerned. “It’s far too early to declare victory and there are certainly risks“[1]. The Fed held rates steady at its December meeting but is now anticipating three rate cuts in 2024. The pivot makes a recession less likely. December projections see the federal funds rate ending 2024 between 4.5% and 4.75%, down from the current range of 5.25% to 5.5% (.75% lower than today). The markets have responded. The S&P is up 14% over the last two months, the 10-year Treasury yield has fallen nearly a percentage point (to 4.03%), and the dollar has dropped 3% against major currencies[2]. The Fed’s estimate of the long-term “neutral” policy rate remains unchanged at 2.5%. That implies that a lower interest rate environment will return even though the Fed is continuing to allow $95 billion a month in proceeds from maturing bonds to roll off its balance sheet (with no indication of stopping).
Aviation capacity issues continue. Airbus and Boeing will have delivered around 1,400 aircraft in 2023 (a 27% increase over 2022). However, the Aero industry continues to grapple with costly and time-consuming quality control issues. Regulators require close monitoring of parts for authenticity and quality. Dealing with manufacturing defects, the certification of aircraft engine components, and airframe maintenance is leading to the grounding of delivered aircraft as well as delays in new equipment deliveries. The resulting shortage of capacity leads to better returns on existing mid-life equipment. Out-of-production single-aisle aircraft have shown meaningful increases in lease rates as the lessor idle fleet returned to service (and there’s not a lot of existing equipment left). New equipment supply remains constrained, underpinning existing equipment values & lease rates. The result is mid-life single-aisle equipment remains in high demand (current OEM backlogs mean the first available delivery slots for new equipment will be in the 2030s).
Even with flat loadings, railcar prices up 12% to 15%. Scrap rates remain elevated. In the last twelve months, railcar lease rates are up 26% to 33%, with lease terms extending to five years[3]. Both GATX’s Lease Price Indicator and TrinityRail’s Forward Lease Rate Differential continue their upward trend. “Forward-looking metrics continue to point toward consistent strength in lease rates[4]. ”Key commodity market demand across all railcar types is driving substantial new equipment order backlogs at both Trinity and Greenbrier. The eleven North American railcar assembly plants have an estimated industry build capacity of up to 55,000 cars annually (FreightCar America’s new production facility in Mexico is expected to deliver 3,150 to 3,300 railcars in 2023). With a soft landing in sight for the U.S. Economy, concerns surrounding inflation and interest rates are subsiding. But, elevated geopolitical risk and 2024 election year dynamics require expert Aero and Rail equipment investment insight. Call RESIDCO.
Glenn Davis 312-635-3161
[1] Fed Chief Powell’s Post Meeting Press Conference, December 13, 2023.
[2] The Wall Street Journal, December 14, 2023 “Capital Account”.
[3] Railway Age, Sea Change in Railcar Supply, December 5, 2023. Higher new railcar prices drive higher lease rates on existing equipment.
[4] Trinity Industries, third-quarter 2023 earnings statement.
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
[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.
[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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