On April 2, the President signed an Executive Order imposing new tariffs on imports of all articles into the U.S. customs territory subject to certain exceptions. Then, on May 28, the U.S. Court of International Trade ruled imposition of tariffs exceeded the President’s “emergency” powers[1]. The Commerce Department is also pursuing an investigation under the Trade Expansion Act of 1962 to address the impact of imports of commercial aircraft, engines, and parts on our national security. These tariffs and trade shifts are affecting markets everywhere–learn how they’re impacting the aero and rail industries below.
The U.S. aerospace manufacturing industry has maintained the largest positive trade balance of any sector, roughly a $100 billion trade surplus in 2024. It’s the largest manufacturing sector in the U.S. that exports more than it imports. Historically, the 1979 Agreement on Trade in Civil Aircraft eliminated tariffs and established a free trade zone among signatory nations for civil aircraft, engines, and flight simulators, which was meant to encourage global technological development. Because the industry’s supply chain is complex and highly regulated, the Administration’s shifting tariff policies have introduced uncertainty into U.S. Commercial Aviation equipment planning. American aircraft manufacturing is complex, with parts sourced from around the world. The current tariff and trade landscape presents significant challenges. Tariffs not only affect direct costs but also impact market dynamics. U.S. trade policy is central to the aerospace sector’s growth success. In early May, Airbus CEO, Guillaume Faury, called for a return to tariff-free trading for the aerospace sector, and Boeing CEO, Kelly Ortberg, at a Congressional hearing last month testified the plane maker wanted free trade. Understanding this is crucial in the context of global aerospace markets.
Boeing and Airbus delivered 359 aircraft through April 2025, a 17% increase year over year. Both are under pressure to increase deliveries. Boeing delivered 45 commercial jets in April, four more than in March. Airbus delivered 56 in April compared to the 71 they delivered in March. Through the quarter of the year, Boeing has delivered 175 aircraft, including 133 737 MAX, 21 787s, and 11 freighters. At the end of April, Boeing had 6,282 unfilled orders and an official backlog of 5,643 (after adjusting for accounting standards). Comparatively, Airbus’ backlog represents 10.4 years of production based on 2025 production estimates. Boeing’s backlog would last approximately 11 years. Continuing tariff uncertainties and new equipment delivery delays support secondary market values of mid-life aircraft and influence decisions to extend leases (Aercap reported 99% utilization and 84% lease extensions in the first quarter of 2025).
The Bureau of Economic Analysis estimated U.S. GDP fell 0.3% in Q1 2025 from Q4 2024. U.S. rail volumes have remained stable: 1.13 million total carloads were originated in April, up 6.2% over April 2024 (the largest year-over-year percentage gain in 16 months and the third largest in nearly four years). Through the first four months of 2025, total carloads are up 1.8% over the same period last year, with 11 of 20 carload categories seeing gains[2]. The GDP contraction resulted from a surge in U.S. imports in Q1 2025 as businesses front-loaded shipments to beat the anticipated tariffs. Underlying domestic demand rose at a 3.0% annualized rate in Q1, pointing to continued momentum in the domestic economy. The North American railcar fleet and railcars in storage contracted slightly in April, driven by lower industry builds, an aging fleet, and attractive scrap rates. Overall fleet attrition is expected to continue to outpace new builds in 2025 (railcars in storage are below 19%). Pricing for new build rail rolling stock remains elevated due to higher steel prices and input price inflation supporting used rail rolling stock pricing. Above normal temperatures, rising power demands, and higher natural gas prices are driving the near-term outlook for coal (there was a year-over-year increase in carloads of coal in April, up 53,736 carloads, or 23.2%)[3].
The “political” question of whether a “national emergency” exists that allows the tariffs the President has imposed under the 1977 International Emergency Economic Powers Act remains. Steady job growth, consumer spending, and expanding services continue to support economic activity. As markets shift, Rail and Aero equipment play central roles. Perfect information is seldom available. Staying informed is not optional; it’s essential. Explore opportunities. Call RESIDCO.
Glenn Davis 312-635-3161
[1] The tariffs may remain until the Supreme Court Rules.
[2] AAR Policy & Economics Rail Industry Overview, May 2025.
[3] Short-Term Energy Outlook, the U.S. Energy Information Administration.
For the past thirty years global supply chains helped keep U.S. inflation low. Globalization led to offshoring. Aero and Rail transport system efficiencies allowed ‘just in time’ inventory control. The pandemic exposed the over reliance on global supply chains. The U.S. fiscal policy response to the pandemic’s impact included more than $5 trillion of direct cash payments to individuals and businesses in 2020/2021. The Federal Reserve engaged in large scale asset purchase programs and kept interest rates too low for too long. Both have been a part of driving inflation to a forty year high. Supply chains never fully recovered from the pandemic’s shock. Now, Ukraine and geopolitical tensions between Western democracies, Russia, and China, are rising commodity costs (and security risks) even further. In response to the Federal Reserve raising interest rates1 in an attempt to fight inflation and get price growth under control, U.S. private sector business activity is contracting, in August the Composite Purchasing Managers Index to 45 from 47.7 and the Services PMI to 44.1 from 47.3.
Rail service issues are currently driving rail equipment demand. Shippers continue to complain to the Surface Transportation Board about railcar order delays and “unfilled railcar orders.” Each Class One reports “unfilled orders” slightly differently but generally it is the number of railcars a shipper ordered but did not receive. The STB recently issued an emergency service order directing the Union Pacific railroad to meet its common carrier obligations to a large California poultry and feed producer which leases four unit trains from UP as part of its grain-train shuttle program. Union Pacific was forced to add a fifth train set and prioritize both train crews and locomotives to meet its common carrier obligation. System congestion has forced the STB to order the four largest Class One railroads to submit weekly performance data as well as recovery plans.
Rail fleet utilization and lease renewal rates have risen in response. Trinity Industries reported a 97.2% lease fleet utilization, 4,335 new unit and delivery railcar orders, and 2,510 deliveries of units in its second quarter (industry wide railcar deliveries for the full year are expected to be between 40,000 and 50,000 units). The Greenbrier Companies reported new railcar backlogs of $3.6 billion and continued high lease fleet utilization in its rail leasing subsidiary. As rail labor issues persist a shutdown of the nation’s rail network is possible on September 16th, marking thirty days since the release of the Presidential Emergency Board recommendations for voluntary settlement of a 31 month labor dispute over wage, benefits, and work rules. Congressional intervention is all that would prevent a national shutdown.
Boeing resumed deliveries of its widebody 787 in August with American Airlines taking delivery of the first Dreamliner since May of 2021. American Airlines expects to take nine 787/8s this year, four in 2023 and twelve in 2024. Boeing launched the Dreamliner in 2004 and eighty customers have ordered nearly 1500 787s. Global air freight traffic is up and the passenger to freighter conversion backlog is over 550 units. The shift to e-commerce is driving air freight and market fundamentals are expected to remain strong. An example; Atlas Air Worldwide Holdings, Inc is being taken private by Apollo Global Management in an all cash deal valued at $5.2 billion2, a 57% premium over the 30-day average trading price of Atlas’ common stock. On the Rail side, J.P. Morgan’s Global Alternatives’ Global Transportation Group recently announced its acquisition of the InStar Group, LLC., a freight railcar lessor.
Investment strategies, financing, and tax risk management all impact the evaluation of transportation equipment leasing. Near term market disruptions have created opportunities for longer term transportation asset investment. Call RESIDCO.
Glenn Davis, 312-635-3161
[1] Jerome Powell says Fed is resolved to fight inflation even if it brings economic pain
[2] Atlas Air Worldwide to be Acquired by Investor Group Led by Apollo Together With J.F. Lehman & Company And Hill City Capital for $5.2 Billion
The annual inflation rate in the US accelerated to 9.1% in June, the highest since November of 1981, up from 8.6% in May and above market forecasts of 8.8%. Energy prices rose 41.6%, the most since April 1980, boosted by gasoline (59.9%, the largest increase since March 1980), fuel oil (98.5%), electricity (13.7%, the largest increase since April 2006), and natural gas (38.4%, the largest increase since October 2005). Food costs surged 10.4%, the most since February 1981, with food at home jumping 12.2%, the most since April 1979. Prices also increased significantly for housing (5.6%, the most since February 1991), new vehicles (11.4%), and airline fares (34.1%)[1].
The U.S. economy has stalled in the first half of 2022. The Commerce Department reported 2nd Quarter GDP contracted .9% following a 1st Quarter contraction of 1.6%. Yet U.S. labor markets remain strong, consumers appear to be in good financial shape, and the U.S. Dollar is near its highest level in two decades. Post-Covid demand recovery has driven 2ⁿᵈ Quarter profits in both the Aero and Rail transport sectors. American posted 2nd Quarter profits of $476 million, United $329 million, Delta $735 Million, Union Pacific $1.8 billion, CSX $1.2 Billion, Norfolk Southern $819 million, and Kansas City Southern $194 million. Flights are full and domestic Aero leisure travel has surpassed 2019 levels. But rail carload traffic is down 0.1% in the first half of 2022 (only 2020 had fewer first-half carloads): coal down 2.2%, grain down 7.9% and petroleum products, down 10.9%. And operational challenges continue for Commercial Air carriers and Class One Railroads as they struggle to return to pre-Covid service levels. Flights are being canceled and railcar loadings are being limited to alleviate congestion and improve network reliability. Both the Class Ones and Commercial Air carriers are dealing with labor issues. Sourcing pilots is a key challenge (Oliver Wyman forecasts a 29,000-pilot shortage by 2032). Since 2020 the nation’s freight rail unions have been negotiating to secure new labor contracts. The mechanics of the 1926 Railway Labor Act allow a national rail strike as soon as mid-September unless Congress acts.
Aero and Rail equipment markets are active. Boeing left the Farnborough Air Show with more firm orders than Airbus. Delta placed an order for 100 737 MAX 10 aircraft and committed to an additional 20 A220-300s. Airbus went to the Airshow well ahead with 442 gross orders through the end of June compared to Boeing’s 286 gross orders. The Class Ones continue to deal with rail network congestion. It’s driving the rail equipment secondary market. Railcar demand for most car types is robust and lease renewal rates continue to improve[2]. With new equipment becoming more expensive and network congestion driving demand, midlife rail transportation equipment values have increased, and income streams are up.
Since the end of World War II, a recession has never been declared without a loss of employment. With elevated prices the Federal Reserve is committed to restoring price stability. We should expect the Fed to continue to raise its target interest rate to between 3.5% and 3.75% or more if additional government spending is approved[3]. Current mixed economic signals demand transportation investment underwriting be disciplined and based on deep industry experience. No investor can be knowledgeable about all industries and equipment types.
Real assets provide diversification, inflation protection and yield. Evaluating alternatives in this changing market environment? Call RESIDCO.
Glenn P Davis, 312-635-3161
davis@residco.com
[1] Trading Economics report via U.S. Bureau of Labor Statistics
[2] Trinity Industries 2nd Quarter Report
[3] The Inflation Reduction Act
Unlocking Aero & Rail Equipment Values Amidst Surging Inflation
Global growth continues but is expected to slow to 4.1% in 2022 (down from 5.5% in 2021[1]). In the U.S., 2022’s growth is expected to be 3.7% (down from 5.6% in 2021). In the fourth quarter of last year, the U.S. GDP grew at a 6.9% annualized rate. With the domestic economy stronger, inflation has returned and labor markets are much tighter. Unemployment is down to 3.9% (December) from a record 14.7% in April 2020. The Fed is set to raise rates and conclude its purchases of Treasury bonds and mortgage-backed securities[2]. Expect a ‘bumpy’ transition.
Air carrier operations staff shortages and quarantine rules for air crew members complicated flight operations and led to flight cancellations last quarter. Fleet equipment and air crew planning became a challenge, even for freighter operations. In the fourth quarter of 2021, United lost $646 million, American $931 million, and Delta $408 million. Southwest reported net income of $68 million, its first quarterly profit during the pandemic (without the help of government aid). The good news is domestic leisure travel demand is back, and above 2019 levels (business and international travel recovery remains delayed). Carriers are facing steeper costs for labor and fuel. Jet fuel cost is expected to rise to $2.35 to $2.50 a gallon in the first three months of 2022, up from $2.10 a gallon in last year’s fourth quarter. Crude oil pricing is at its highest level since 2014 (West Texas Intermediate, the main grade of U.S. crude was up to $86.61 January 27th). Flight operations are being further disrupted by the 5G rollout, which impacts the reliability of radio altimeters used for low visibility approaches at airports with runways close to 5G C-band network antennas.
Boeing sold more aircraft than Airbus last year, but delivered half as many passenger jets. Boeing won orders for 909 planes (535 net new orders), while delivering 280 (up from 157 delivered in 2020). Airbus delivered 611 jets in 2021 and won orders for 771 (507 net). Backlogs for both airframe competitors extend out over the next several years. Boeing remains hampered by its 737 MAX crisis and production issues with its 787 Dreamliner (100 undelivered Dreamliners wait for regulatory approval). While Airbus’ A321neo family is outselling Boeing units, Boeing’s equipment availability led Allegiant to buy up to 100 MAX jets (new Airbus units could not be delivered until the end of the decade). A 12-year maintenance agreement with the engine provider (CFM International) is expected to lower Allegiant’s operating cost. United’s 777s (Pratt & Whitney engines) are expected to return to service this quarter. Qatar Airways recently agreed to purchase 34 freighter versions of Boeing’s 777X (777-8), which are not expected to be delivered until late 2023 at the earliest. Once the pandemic fades, air carriers are expecting traffic to surge.
Because of infection or Covid exposure, rail operations performance were similarly impacted by lack of operating crews on any given day. CSX is facing staffing shortages, offering $3,000 referral bonuses for recommendations for new hires, and spending $20 Million on initiatives to attract and retain workers. Slower train speeds, higher steel prices and railcar scrapping are helping support the railcar leasing markets.
As the Fed raises rates and global tensions continue (Ukraine, Taiwan) this year’s recovery will be bumpy and characterized by market volatility and inflation. With the improving outlook, inflation in new equipment pricing will favorably impact existing mid-life asset values and lease rates. To identify those investment strategies that unlock air and rail equipment values,
Glenn P. Davis, 312-635-3161
[1] World Bank forecast, January 11, 2022.
[2] The Fed balance sheet is now approaching $9 trillion, $8.3 trillion comprised of Treasuries and mortgage-backed securities.
The announcement of a new Covid variant from South Africa demonstrates how concerned markets are to the impact of renewed travel restrictions[1]. Almost immediately the United States, Canada, the UK, and the EU announced travel bans from South Africa and other southern African nations (Israel has closed its borders to foreign nationals entirely). As long as the world continues to face Covid-19 variants, supply chain and air travel disruptions will remain.
Global extended supply chains have not responded well. Both just in time inventory management and Precision Scheduled Railroading (‘PSR”) have demonstrated an inability to absorb and respond to disruptions, whether caused by weather, politics, tariffs, mercantilist nationalism, or travel restrictions. Add in a shortage of truck drivers, port inefficiencies, passenger air carrier belly space, and multiple waves of government stimuli and the result? Inflation is at a three-decade high (job claims have fallen to historic lows and labor shortages are causing worker compensation to rise at its fastest pace since 2001).
The West Coast’s pandemic associated supply chain problems have highlighted a mismanagement of asset flows. Terminals function smoothly only when outflows make room for new inflows. In implementing PSR, the Class Ones eliminated surge capacity and returned assets. Yet commerce requires speedy delivery, consistent reliability, and resilience in the face of disruptions. The lack of labor and asset availability has created a domino effect compounding supply chain delays (the U.S Rail intermodal traffic drop off now spans 15 consecutive weeks[2]). The rail transportation supply chain needs to support West Coast terminal needs. “If you don’t have additional capacity in your hip pocket, even moderate disruptions will put you in in a world of hurt”[3]. Since speed is not a freight rail trait, the solution requires more inland terminal yard capacity and railcar asset availability.
As Thanksgiving Holiday air travel demonstrated, U.S. domestic air travel has largely recovered from pandemic lockdowns. On Wednesday, November 24th more travelers passed through Transportation Safety Administration checkpoints than on any other day during the pandemic (about 2.3 million). Daily passenger volumes exceeded two million for seven straight days. Earlier staff cuts had resulted in air carriers struggling to keep up as demand returned. A shortage of pilots and equipment led to delayed (or cancelled) flights, long lines, and packed planes. Even with the pandemic lingering, the International Air Transport Association expects total passenger numbers to grow to 3.4 billion in 2022 from 2.3 billion in 2021 (recall the industry carried 4.5 billion passengers in 2019). Air cargo demand is expected to continue above 2019 levels in 2022. It is international air travel that will continue to face traveler uncertainty over the new coronavirus mutations. Supply chain challenges will remain persistent as easy money and excessive government stimulus work their way through the economy. Inflation will remain elevated and will continue to impact equipment values. Manufacturers will face higher transportation costs (as well as continuing labor shortages).
Faced with current market volatility and multiple mid-life equipment opportunities, modeling asset values becomes more complex. The pilot of a 777 monitors more instruments than the pilot of a single engine Cessna. Managing equipment investment under alternative market scenarios requires real options analysis. Be nimble, be alert.
Glenn P. Davis, 312-635-3161
[1] Wall Street Journal, Stocks tumble as WHO Identifies New Covid-19 ‘Variant of Concern’ that Triggers Global travel curbs, November 26, 2021.
[2] Railway Age, November 24, 2021.
[3] Intermodal analyst Larry Gross, July 15, 2021, in Trains.
Finding Value In Midlife Air and Rail Equipment
Not so long ago the typical freight railcar had a new cost below $50,000. Today, a newly built freight railcar is in the $100,000 to $150,000 range. Both rail and aero assets present long-term investment opportunities. Railcars have up to a fifty-year interchange life. The economic useful life of an aircraft or aircraft engine is the period over which it is expected to be physically and economically feasible to operate in its intended role.1
What ends the life of the equipment is economics (when the cost of operating exceeds the cost of replacing). On average, the life of an aircraft, from purchase to retirement is between 20 to 36 years (Boeing and Airbus build their airframes to last 40 years: 51,000 flight hours and 75,000 pressurization cycles).
Today’s oversupplied secondary markets present opportunities to find value in midlife units. Finding those values requires the ability to identify well-maintained units with remaining service life while evaluating expected service alternatives. It’s the current spread between cost delivered new and secondary market cost that presents these investment opportunities.
The Boeing 757 is an example. Eastern Air Lines placed the original 757-200 in service on January 1, 1983. The last 757 was delivered in 2005. The modern narrowbody alternatives are more fuel-efficient, but the 757 is still active. When COVID appeared over 80% of the world’s 757s were grounded. Before COVID more airfreight was carried in the cargo holds of passenger aircraft than in dedicated freighters. With fewer passenger aircraft flying the parked 757s present the optimal narrow body for freighter conversion. To ensure dedicated freighter aircraft capacity, Atlas Air, the largest operator of 747 cargo aircraft in the world, recently announced it purchased three 747-400 aircraft that were previously leased and reached an agreement with lessors to take ownership of five more aircraft at the end of their existing lease terms next year.
Given the useful economic life of existing railcar equipment and the inflation in new railcar pricing (steel prices are up 215% since March 2020), it makes economic sense to evaluate opportunities to pursue existing rail equipment rather than new ones. Freight rail volumes are being influenced by several challenges, overreliance on global supply chains, the lack of microchips for autos, and the Delta variant, which is upending factory production in Asia. Among all rail traffic categories, Class One’s earned $5.97 billion from grain in 2020 (third behind intermodal and chemicals). But grain exports are down. Hurricane Ida flooded and damaged grain terminals along the Gulf Coast just weeks before the start of the Midwest harvest. More than 50 bulk vessels were lined up along the lower Mississippi in early September waiting to dock and load. On August 29th an all-time high of 47 container ships were at anchor off the ports of Los Angeles and Long Beach due to lack of berth space.
The strain on global supply chains is evident and Class Ones are hampered by capacity constraints resulting from COVID and the implementation of Precision Scheduled Railroading. With Thanksgiving and the Holidays expect port congestion and labor and capacity shortages at docks, warehouses, and trucking firms to continue.
The economics of logistics and transport investment are complex, but business cycles repeat. Volatility creates opportunity. Leverage our track record of transitioning equipment to its best and highest use. Times are excellent for midlife equipment investment strategies.
To model the equipment markets and manage risk, Call RESIDCO.
1 That’s the International Society of Transport Aircraft Traders’ (“ISTAT”) definition. ‘Longevity’ depends on market need and maintenance expense. Well cared for aircraft can have an almost unlimited life (but only with respect to safety and airworthiness: think the DC-3 aircraft that were in service in the late 1930’s and still fly today).
Rail and air transportation plays a central role in our nation’s economy. The government’s fiscal decisions, monetary policies, and administrative agency rulings influence the outcomes and the economics of transportation investment opportunities. The Surface Transportation Board’s unanimous ruling that the Canadian National hasn’t demonstrated its use of a voting trust would be consistent with the “public interest” follows the President’s recent Executive Order to “address overconcentration, monopolization, and unfair competition in the American economy.”
Government action and the rules and regulations implemented by its many Administrative Agencies1 have attempted to address both economic and social goals. Traditional ‘economic’ regulation focused on markets and economic variables and dates back to 1887 when Congress created the Interstate Commerce Commission to address the concerns of dissatisfied shippers. Railroads were then required by law to charge rates that were ‘reasonable and just,’ (the ICC was disbanded in 1995 and replaced with the Surface Transportation Board). In 1938 Congress created the Civil Aeronautics Board and directed the Board to place ‘public interest’ ahead of profits.
Regulatory reform (‘deregulation’) began in the 1980s, notably in the air and railroad industries.
Rail was significantly deregulated with the 1980 Staggers Act. That Act reduced federal regulatory controls over the roads who then went on to abandon unproductive routes, reduce labor cost, and increase efficiency by offering freight discounts to ‘bulk’ unit trains (e.g., grain and coal). By 1988 the competition released by deregulation had produced lower prices in most commodity classifications (while not increasing prices in others). The D.C. Circuit has recognized that the statutory language of 49 U.S.C. Section 10101 2 mandates deregulation of the entire railroad industry to the maximum extent possible in conformity with national rail transportation policy.3 Similarly, the Airline Deregulation Act of 1978 (supported by both Democrats and Republicans during the Carter Administration) specified the Civil Aeronautics Board (“CAB”) would be dismantled (eventually completed in January 1985).
After the CAB no longer had the power to price and set routes, competition forced air travel prices to fall, and U.S. airline passenger volumes increased dramatically. Deregulation gave railroads the freedom to negotiate contract rates and make operational improvements. The roads improved the efficiency of their networks, tailored rates to shippers’ traffic, abandoned low-density lines, and (as a result of merger activity) eliminated the duplicate track. Precision Scheduled Railroading is an example of operational freedom that the Roads are implementing today in an attempt to provide faster, more reliable service.
Tension exists between the business of pursuing ‘economic’ goals and the politics of pursuing ‘social’ goals. Governments may set ‘policy’, but business investment is driven by economics. Politicians do not face the same ‘market’ discipline. Other than elections, accountability mechanisms for political decisions are not in place. Markets may not always function perfectly, but unintended consequences often follow government attempts to produce desired ‘social’ results.
Identifying effective investment strategies in this environment requires an ability to integrate today’s politics into your investment thinking. Call RESIDCO.
1 In a 2015 Senate Judiciary Committee hearing, Chairman Chuck Grassley (R-IA) noted: “The Federal Register indicates there are over 430 departments, agencies, and sub-agencies in the federal government.”
2 Title 49 – Transportation – Interstate Commerce – “National Transportation Policy.”
3 Brae Corp. v. United States, 740 F.2d 1023, at 1043 (D.C. Cir. 1984); also Ass’n of Am. R.Rs. v. Surface Transp. Bd., 237 F.3d 676, (D.C. Cir. 2001).
The U.S. economy is opening up. Forty-seven percent of the U.S. population has been fully vaccinated. Most states have lifted restrictions. Over the last year, Congress has passed $4 trillion in fiscal stimulus. The updated Congressional Budget Office forecast expects GDP growth to reach 7.4% in 2021. The recovery is exceeding expectations and may turn out to be the strongest U.S. economic growth since 1951. Boeing’s CEO, David Calhoun has called the recovery “more robust than I ever imagined.” But the snapback in demand is stressing global supply chains, creating bottlenecks, and causing price spikes. Low vaccination rates across Asia are resulting in manufacturing and supply chain disruptions, driving transport, storage, and inventory costs to near-record highs. In June the Fed raised its annual domestic inflation forecast to 3.4% from 2.4% in March.
As China pursues its heavily subsidized Comac C919 the U.S. and European Union have agreed to suspend their seventeen-year trade dispute over government subsidies to Boeing Co. and Airbus SE.1 The tariff elimination follows the U.S. led G7 preliminary effort to overhaul international tax rules to achieve a global minimum tax. With 130 countries in agreement, each country’s government will now seek to pass2 the right to tax profits where customers purchase not where the business has a physical presence.
June TSA traffic climbed above 2.1 million per day, almost double the traffic in March. Road trips and a return of domestic air travel have driven U.S. crude to $75 a barrel (a first since 2018). But U.S. shale producers are unlikely to increase output as they have pledged to hold production flat this year and cap growth in 2022 at 5% using higher prices to strengthen their balance sheets and return capital to investors.
The domestic aviation recovery is driving orders for the newest, fuel-efficient narrow body aircraft (fuel accounts for a third of airline operating expense). United moved to lock in lower pricing with the largest combined aircraft order in its history: 50 Boeing 737 MAX-8, 150 Boeing 737 MAX-10, and 70 Airbus A321neo (the MAX burns around 15% less fuel). While MAX retail pricing is $125 million, large orders are usually sold for half their list price (or lower). Of the worldwide passenger jet fleet, 29% or over 7,000 units remain in storage. Current appraisals by international advisory firm Ishka, show a 15-year-old 737 20% less expensive this April than in January 2020 (a wide-body 777-300ER, 45% less expensive). The availability of these aircraft presents competitive opportunities.
Rail carload and intermodal volumes again saw annual gains for the week ended June 26. Nine of the ten carload commodity groups the AAR tracks posted annual gains, including coal. Efforts to switch to renewables remain in their early stages and many now recognize coal provides ‘base load’ protection critical for maintaining grid reliability.
Midlife assets: economics and an experienced specialist management team drive successful investment results. Get answers to your questions. Think long term. Call RESIDCO.
1. The Boeing-Airbus dispute started in 2004 when the U.S. filed a complaint with the WTO, claiming the EU’s subsidies for Airbus put Boeing at a disadvantage. Both now recognize the Chinese Communist Party threat.
2. 130 Countries. But no agreement with Ireland, Hungary, Estonia, Nigeria, Kenya, Peru and Sri Lanka who argue low tax rates attract foreign investment. The new tax rules are to apply to large global business with profit margins of at least 10% and global sales of at least 20 Billion euros.
It was only fourteen months ago that Covid-19 appeared shutting down economies and disrupting international traffic. Last fall’s elections led to a new Administration and a continuation of tariffs on Chinese products1. First tariffs, then the pandemic. Both have significantly disrupted domestic and global aviation transportation. Those disruptions, and “Precision Scheduled Railroading” have also changed the dynamics of rail equipment investment.
What remains is a recognition that transportation networks form the backbone of trade and economic growth. With one in every three Americans fully vaccinated we are now entering a post-pandemic world. The Fed’s willingness to finance deficit spending is driving a return of domestic demand. U.S. GDP increased at an annualized rate of 6.4% in the first quarter of 2021 compared to the fourth quarter of 2020. At the end of the first quarter of 2021, U.S. GDP ended up less than 1% below its peak reached in late 2019. The April consumer price index rose 4.2% at an annual rate. The Atlanta Fed’s GDPNow prediction for second-quarter growth is 11%. The speed of the recovery is leading to supply chain shortages and increasing commodity and component costs. Bridgewater Associates’ Ray Dalio pointed out the current Administration’s economic agenda risks injecting too much money into the economy which will accelerate price increases as consumers spend to get what they want.
The lack of international passenger traffic ‘belly space’ has increased interest in passenger-to-freighter conversions. Larger passenger aircraft (the widebodies – A380s, A340s, and Boeing 747s) have been retired early. The acceleration of e-commerce, caused by the pandemic, is driving growing air cargo demand even for smaller freighters (from express parcel carriers FedEx, DHL, UPS, and Amazon). Boeing at its biennial World Air Cargo Forecast expects the air cargo market will grow at a 4% annual rate over the next 20 years. That requires a freighter fleet 60% larger than today. Current pricing of these older ‘retired’ ex-passenger jets allow economic cargo conversions. Even aircraft long-retired are returning to service (Georgian start-up Geo-Sky has re-activated a 1987-built 747-200 converted freighter – last operated in 2012).
The rail traffic recovery from the pandemic continues. U.S. carloads of grain, food, lumber, paper, scrap metal, and several other categories were higher in April 2021 than in either April 2020 or April 2019. Total carloads averaged 237,960 per week in April 2021, the most since November 2019. April’s intermodal weekly average loadings are the largest for any month in history. Intermodal is being driven by increased consumer spending triggered by the additional $1.9 trillion fiscal stimulus the ‘American Rescue Plan Act of 2021’ (signed March 11) is injecting into the domestic economy. Consumer spending rose 21.1% in March from February. That is the biggest percentage increase since 1959. As of May 1, 2021 railcars is storage continued to decline (365,379 freight cars down from 409,289 units at the start of this year).
The economies of the world depend on efficient transport. A transportation investor’s challenge is to maximize after-tax returns net of all non-tax costs over an asset’s expected market life. Long-duration assets are influenced by economic uncertainty. Uncertainty breeds opportunity. As demand begins to outstrip supply finding solutions for practical investment is challenging. Work with the professionals. Call RESIDCO.
Glenn P. Davis, 312-635-3161
1 Tariffs began in the first year of the Trump Administration, four years ago.
The March weekly average of total rail carloads (231,232) was up 4.1% over March 2020 (total carloads for the last two weeks of March were up 7.3% over comparable weeks of 2020). Intermodal volume was up 24% over March 2020, that’s the biggest monthly gain ever. Following a 25.6% gain in the fourth quarter of 2020, the first quarter grain carloads were up 22.1%; the last two quarters of grain carloadings are the largest quarterly percentage gains on record. Industrial products (an aggregate of seven rail traffic categories representing the industrial economy) rose 1.1% in March, their first monthly gain since January 2019.
First-quarter U.S. GDP growth (to be released April 29) is expected to be 6% annualized, the fastest growth of any quarter since 2003. Additional ‘infrastructure’ spending is to be proposed by Congress (in addition to the $2 Trillion ‘stimulus’ just passed). A review of regional Federal Reserve Bank data shows manufacturing factory activity reported up. The Purchasing Managers Index (“PMI”) rose to 64.7% in March 2021, its highest level since 1983. Seven of the 10 sub-indexes set modern-day records. The Bureau of Labor Statistics announced on April 2 that a preliminary 916,000 net new jobs were created in March, the most in seven months (the official unemployment rate fell to 6%). The Conference Board’s index of Consumer Confidence rose to 109.7, its highest point since the pandemic began. For the ninth consecutive month railcars in storage continued to decrease (as of April 1st, 378,241 freight cars or 22.9% of the 1.651 million North American freight car fleet remain in storage).
Vaccinations have significantly slowed the spread of the virus, but factors that determine the timing of an aviation recovery are complicated by coronavirus variants and a slow rollout of vaccinations across the European Union. Infections have surged in France and French President Emmanuel Macron announced a nationwide four-week lockdown starting April 3rd. Italy also extended its partial shutdown until April 30th. Last year, air carriers were able to cut operating costs by 45.8%, but revenues dropped 60.9%. The result? The global aviation industry reported $118 Billion in net losses in 2020.
Aviation performance is expected to show improvement this year. Carriers with large domestic markets (North America and Asia) are performing better than other regions. Cargo operations are sustaining the major’s international networks. U.S. domestic demand has been increasing steadily as summer approaches. More than 1 million Americans have been flying each day for nearly a month. United reports Americans are traveling in the greatest numbers in more than a year, “Every day the numbers are better and better.” Delta is ending its block on middle seats. And, as a revenue-building strategy, major carriers are experimenting with point-to-point flights from smaller cities to suddenly popular leisure destinations.
Others are preparing for post-pandemic growth (Canadian Pacific, Kansas City Southern, AerCap/GECAS). As the domestic recovery becomes apparent and interest rates remain low, adapt your rail and aero investment strategies. Today’s decisions will put you in a stronger position for tomorrow. To identify targets and stay ahead of your competition, you will need critical market information. Call RESIDCO.
Glenn P. Davis, 312-635-3161
RESIDCO’s size and wholesale capability is a competitive advantage. We respond quickly and creatively to ever-changing market conditions.
70 W Madison St, Suite 2200
Chicago IL 60602 – 4275
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