Weak international trade is hurting international airfreight. Global airfreight volume has fallen for 10 consecutive months year over year (the longest losing streak since 2008). In the three months ended August, North American airlines’ U.S. dollar revenue from air-cargo between China and the U.S. fell 26% relative to the same period in 2018. While transportation equipment investors cope with the ongoing economic and trade uncertainties, no catalyst for growth has appeared. The International Monetary Fund (“IMF”) has said the world’s three largest economies, the U.S., China, and Japan are likely to slow further. Even so, the U.S. economy, which is growing slowly, is performing better [1] than the eurozone, the U.K., and Japan (the S&P 500 closed at an all-time high October 28, 2019, the 103rd record close since the 2016 Presidential Election).
Your equipment investment portfolio’s balance sheet is configured based on the thousands of past investment decisions you’ve made. You can change direction, but results won’t appear overnight. As transportation equipment investors see the continued softening of air and rail freight, business strategies are being adjusted. A typical response is to cut variable expenses and reduce capital expenditures. Others manage fixed costs down to develop an adequate ‘margin of safety’. Southwest Airlines updates its revenue forecast daily and its fuel forecast weekly. The Class 1 railroads are implementing Precision Scheduled Railroading (“PSR”), running faster, longer trains, more efficiently. Greenbrier has acquired ARI. Trinity Industries has shifted a portion of its new railcar production from 2019 into the first half of 2020 to facilitate the transition to lower railcar production next year. With a focus on lowering their cost of capital and streamlining manufacturing operations, their lease fleet’s remaining lease term provides the cash flow to bridge current economic uncertainties and declining new car orders. With PSR, rail shipping times are becoming more reliable, but the oversupply of truck capacity is preventing the Class Ones from growing modal market share.
Running an organization ‘by the numbers’ is not enough. Boeing’s 737MAX design challenges are an example of misplaced strategic decision making. Emphasis on cost-cutting and hitting financial targets have resulted in the grounding of the 737 MAX. Even with volume weakening [2], the Class Ones remain insistent on maintaining pricing. It’s alienating shippers [3]. Their focus on operating ratio improvement risks Shippers shifting their business to other modes. In a world where global economic growth is its slowest since 2009, operations management should create opportunities, use different time horizons for different investment decisions, risk adjust expected cash flows, develop alternatives where the additional value generated is commensurate with the risk undertaken, and maintain a ‘Margin of Safety’ and an on-going evaluation of the effectiveness of choices. Cost structures with higher levels of fixed costs are riskier, just as firms with higher levels of debt in their capital structure are risky. With the ten year Treasury yielding 1.77%, Central Banks have only managed to drive asset prices up and investment yields down. The risk remains, and the longer your investment horizon the greater the risk.
Adapting to declining traffic requires understanding customer needs, identifying current opportunities, and managing transaction structure. We have solutions at RESIDCO.
[1] The National Association for Business Economics expects the U.S. economy will slow to 2.3% growth this year from 2.9% in 2018. The OECD downgraded its global economic outlook for 2019 to 2.9% (its weakest since the financial crises). Third Quarter growth was 1.9% as business investment fell.
[2] See Railway Age, October 23, 2019, “We Are in A Freight Recession”.
[3] The Surface Transportation Board has requested the Union Pacific establish weekly calls with the Board’s Rail Customer and Public Assistance office, during their implementation of operating changes, September 28, 2018.
[4] Legacy carriers began offering super low fares as a way to fend off increasing competition from low-cost carriers. Lower cost fills seats and keeps load factors high.
A new leasing standard
The Financial Accounting Standards Board (FASB) issued its new leasing standard, Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842), in February 2016. It’s bringing $2 trillion of operating leases onto public company balance sheets, affecting the entities that enter into lease arrangements or sign contracts containing service agreements that support business operations. This was the FASB’s effort to require reporting of operating leases on balance sheets, in order to ‘increase transparency’ for investors and lenders.
The effective date
But on the heels of the FASB receiving a letter from the AICPA’s Technical Issues Committee requesting a delay, the FASB voted unanimously July 17th to propose delaying the effective date until January 2021 for this group (many lack the resources to effectively handle
The FASB is considering allowing two years between the effective date for SEC filers and all other groups for future complex accounting updates. Before finalizing the new effective dates, the FASB issued a formal proposal for public comment with a 30-day comment period window ending September 16th. Once finalized, the new lease standard is expected to be effective for private companies for annual reporting periods beginning after December 15, 2020. This is a one-year deferral to the existing effective date.
A FASB board member said moving back the standard’s effective date for private and small reporting companies was about more than compliance. “They don’t have the resources, and if companies want to integrate the information into their business and use it for making business decisions in the future, they need more time.” There is difficulty in tracking down lease agreements and contracts across offices, in identifying embedded leases, and in putting together a transition strategy. The time and resources it takes to determine the impact on financial ratios and covenant compliance can easily be underestimated. Lease-versus-buy decisions may be impacted, and implementation may affect financial results.
Both aviation and rail equipment operators lease significant portions of their equipment under operating leases and related service agreements. They rely on operating lessors and often return equipment to the lessor at the end of the lease term with no residual value risk or exposure. The operating lessor, who retains the risks and rewards of ownership, then depends on equipment expertise and industry contacts to release, reconfigure, and/or trade equipment positions in order to cover their cost of capital and generate investment returns.
The AICPA has called lease accounting ‘significant and complex’. Similarly, maintaining a performing portfolio in today’s market faces unexpected hurdles. For solutions, call RESIDCO.
Mounting Trade Concerns Slow Supply Chains
Brace for slower economic growth. Freight volumes in the United States and around the World are falling due to escalating trade tensions and an uncertain future. Most recessions have been brought on by mistakes in some combination of fiscal, monetary or financial supervision.
Former Fed Chairman Ben Bernanke once quipped that expansions do not die of old age, they are murdered, most often because of policy mistakes. Our current problems stem from trade policy, which has turned protectionist and is attempting to remake global supply chains. Trade disagreements have heightened business uncertainty and disrupted investment plans in the U.S., Europe, and Asia.
Falling Supply Chain Traffic
Most cyclical indicators are indicating business activity flat or falling. U.S. carload Rail Freight fell 4.8% and Intermodal traffic fell 6.1% in July versus July 2018. Port of Long Beach Containerized traffic was down 9.7%. Seasonally adjusted Truck Tonnage was up 3.3% June 2019 versus June 2018 while Air Freight was down 3.62% May year over year.
Business investment is based on an ability to predict the future environment. Tariffs and investment restrictions have put the expansion in jeopardy. Policymakers have taken growth for granted but are reluctant to announce the possibility of a recession for fear of harming business and consumer confidence. It’s elevated uncertainty which is curtailing economic activity.
China’s Impact on the U.S.
China’s efforts to boost the development of indigenous innovation and technology has resulted in greater intervention by the Chinese Communist Party (subsidies, trade and investment barriers, and discriminatory policies) which negatively impact U.S. intellectual property and technology intensive firms.
China’s goal? To turn Chinese enterprises into world-class globally competitive firms.
The problem? A lack of a relative rule of law in China, widespread government corruption, financial speculation, and misallocation of investment funds. Government connections, not market forces are the main determinant of successful firms in China.
In China, rules and regulations are not consistent or transparent, contracts are not easily enforced, and intellectual property rights are not protected (due to the lack of an independent judicial system).
The Resolve of the American Economy
Before their August recess, Congress passed a major budget bill that suspended the debt limit through July 31, 2021. Government debt takes dollars out of the economy, reducing private investment and slowing economic growth. The larger the debt the more likely you’ll question the Government’s ability to pay back borrowed funds.
Cutting spending would reduce GDP. Raising taxes would slow growth. Our Political Parties are conflicted. Yet America remains the safest economy in the world. It has the largest free-market economy and its currency is the World’s reserve currency. As investors purchase U.S. Treasuries in a flight to safety, they bid up the price, causing interest rates to decrease and the yield curve to invert. A question is how will the administration respond as the 2020 presidential election nears?
Despite the risk, transportation equipment investors need to build for the future, develop talent, and grow their investment business. Weaker demand will reduce asset prices. To navigate uncertain markets the best defense is to be as well informed as possible.
Visit RESIDCO for more information on the latest air and rail investment news.
Signs are evident in politics and trade negotiations that economic and geopolitical rivalries are creating global uncertainties. Avoiding turbulent weather is a combination of art and science. With cues from weather charts, radar returns, and real time reports from other aircraft, Pilots are trained to avoid thunderstorms and slow to ‘turbulence penetration speed’ to avoid airframe damage when unexpected turbulence is encountered.
International Relations Affect Demand
A reversal of ‘globalization’ is leading to slower growth. Both Air and Rail operators face growing freight traffic demand disruptions due to China, Brexit, and continuing Middle East (Iranian) tensions. The impact was evident at this year’s Paris Air Show where there was a decrease in orders and commitments. Boeing received a 200 plane letter of intent from International Airlines Group which included the 737 Max 8, (which still remains grounded) and the larger 737 Max 10. American Airlines agreed to buy 50 long-range single aisle jets from Airbus (A321XLR) with delivery starting in 2023. Overall Airbus managed to secure 410 orders, Boeing 283. With demand growth for air travel averaging 6.7% during the past five years Boeing’s current commercial outlook forecasts new airplane demand to top 44,000 deliveries through 2038 driven by lower air fares, higher living standards and a growing middle class in China and India. Both Airbus and Boeing agree long-term demand for jets remains healthy.
‘Precision Scheduled Railroading’ and the decrease in general freight and intermodal loadings are impacting rail equipment lease rates and asset values. Brent crude and jet fuel are trending upward as prices remain under pressure from fears of a supply disruption amid heightened tensions in the Middle East. The U.S. Energy Information Administration (EIA) estimates U.S. oil output will average 12.1 million barrels a day this year, up 1.2 million barrels a day from an average of 10.9 million barrels a day in 2018. While shale crude production continues to drive current tank car demand, there are concerns. As the industry matures and more pipelines are brought online tank car demand is likely to moderate.
Long Term Endeavors
Financing and managing aviation and rail transportation assets is a long term endeavor. Both Aircraft and Rail Equipment are durable and can remain in service until the cost to maintain exceeds the revenue the markets offer. Railcars are scrapped because they are in poor physical condition and repair or modifications are not economic. For aircraft the decision is driven by flight hours, pressurization cycles and the availability and pricing of newer units which save operating cost through lower fuel consumption, and improved range and payload.
Midyear market concerns? Some are unmistakable. China, populism, demographics, technology, climate change. For financial markets, a flatter curve is thought to be troubling for future market performance and a stronger dollar makes it harder to export U.S. products. In the current environment equipment specific knowledge increases the opportunity to intelligently unlock portfolio values. Call RESIDCO.
In an environment where uncertainty is commonplace, investment in transportation equipment is often driven by residual value estimates as lenders and lessors compete for market share. Many factors influence the future value of equipment. Most are not very predictable. All require an active aftermarket for the asset under consideration. Physical factors include wear and tear and useful life estimates. Technical factors impact value when newer (more efficient) designs appear causing demand factors to change. Regulatory factors occur from time to time as government imposes new requirements. The FAA’s current review of the 737 Max MCAS and safety procedures for earlier 737 models is an example. Additional flight crew training is expected (even on the 737NG models) including emergency procedures, maintenance training, and an evaluation of pilot response times. Macroeconomics, tax regimes, and global trade impact pricing. In both expanding and contracting markets, investors and their advisors track the behavior of sale prices purchased new, when returned from lease and sold into the secondary market, and similarly track lease rates for short, mid, and longer term leases. In these different environments releasing at lease end, prior to sale, adds value and reduces investment risk.
Residual valuation estimates future equipment value by establishing a relationship between the historical price of equipment and the most appropriate relevant factors. It is particularly useful when making long term investment decisions for both aviation or rail assets. Once you identify factor relationships you have access to a wide body of knowledge about basic economic variables such as GDP, interest rates, commodity pricing, and the impact of international politics on global trade. This is important simply because there are more experts with reasoned views on these topics than there are on the future pricing of air and rail assets.
A key component in this process involves estimating correlation between the various factors. Estimates of value are described in terms of a distribution rather than a point estimate. Standard deviation is a measure of risk and variability of returns. The higher the standard deviation, the higher the ‘riskiness’ of an investment. In simple terms, the standard deviation measures how much variance exists around the average. The coefficient of variation is useful in determining which investments have more relative risk when investments have different average returns. The coefficient of variation tells us the probability of experiencing a return close to the ‘average’ return. The higher the coefficient of variation, the riskier an investment per unit of return. Covariance is a measure of how price movements between investments are related to one another. Correlation is a scaled version of covariance that takes on values between -1 and +1. A correlation of +1 denotes that two assets are positively correlated. A correlation of zero denotes that assets are completely uncorrelated. A correlation of -1 denotes a perfectly negative correlation.
Investors are rational. Markets are efficient. Managing portfolio risk in an uncertain environment recognizes values can increase as well as decrease. Your tools should incorporate disciplined analysis combined with optimal use of available information. Uncertainty requires understanding there are factors which cannot be quantified.
Forethought, diligence, statistical analysis, confidence in equipment alternatives. Sound decision making in real time. Looking for Alpha? Call RESIDCO.
The Chinese government has deployed strategies that help its state owned companies acquire state-of-the-art technologies in order to break into global markets. By leveraging the country’s low labor cost China exports more than $2 Trillion of goods a year (in 2018 the U.S. imported over $419 billion more goods from China than it exported to China). The Chinese government ‘tolerates’ foreign organizations only if they bring value to the country. Local goals and culture will always act to circumscribe the freedom of foreign operations. It’s a ‘CHINA FIRST’ mentality. In the past, State owned enterprises, such as aerospace and defense conglomerates Aviation Industry Corporation of China (AVIC), Commercial Aircraft Corporation of China, Ltd. (COMAC), and rail rolling stock manufacturer CRRC were unable to compete technologically in Western markets. Multinationals who wanted access to the Chinese market were forced to form joint ventures with China’s state owned ‘national champions’ and transfer the latest technology in exchange for current and possible future business opportunities. It’s remarkable how aggressively China applied these policies, how many of its agencies are involved, how quickly and radically it changes the rules, how many unique technology and product standards it tries to impose, and how subtly its regulations violate the spirit, if not the letter of Western multilateral cooperation and agreements. Companies that resist are simply excluded. China’s goal is clear. To induce foreign organizations to transfer technologies that state-owned enterprises need to catch up with the West.
The result? China and the U.S. are structurally prone to economic conflict. Because of China’s history, economic and political system and Government policies, the country differs radically from the U.S. in its beliefs, expectations, and objectives. China regards the management of trade and investment flows as a legitimate path to global leadership. The U.S. believes otherwise. Attempts to connect these two very different systems have exposed and reinforced imbalances rather than brought equilibrium. Access to U.S. markets and technology has built the Chinese economy. Until now China has cajoled, co-opted, coerced, and taken Western technology with the intent of enabling it to supplant the U.S. as the world’s most advanced economy.
Together the U.S. and Chinese economies account for 40% of global GDP. The goal of tariffs (on both sides) is to apply pressure to exporters who will turn this ‘economic’ pressure into ‘political’ pressure. Tariffs are a short term approach that will cause traffic flows to change and prices to reset in the U.S., China and elsewhere. Long term a centrally planned economy has an invisible cost – government inefficiency. Without the profit motive there is no incentive to carve out niches, to differentiate products, to search for continual improvement in the production process, or to dream up new ideas. In the short run China’s approach has worked to advance its interests. But now conflicting national interests are working to overwhelm the benefits of cooperation. In the current environment of growing strategic competition, it would be useful to recognize we cannot expect an economically compatible relationship with China. Clarifying and understanding China’s strategy will brighten the lines we simply should not allow China to continue to cross.
Similarly, investment management demands a clear understanding of goals and objectives. In Air and Rail, play the long game. Call RESIDCO.
Transportation equipment investment serves as an engine for economic development and job creation. It enables people and goods to access markets and services more efficiently and ‘induces’ demand growth. Available, reliable, and competitively priced alternatives allow business and consumers to shift their focus to business development and new consumption. Infrastructure investment works in a similar manner. It can be private (e.g. Rail right of way) or public (Government spending supported with user fees, e.g. Highway, Air and Water ports, Inland and Coastal Waterways). This investment directly impacts the economy by enabling efficient movement of goods on highways, railways, and through air and maritime ports. Significant spending is planned. Properly managed, it can work to create jobs and demand for the movement of raw material. Such investment can maintain or expand existing capacity or develop completely new solutions. Changes in global economies are shifting economic conditions and impacting demand. An infrastructure spending package and a successful China trade agreement will act to continue U.S. economic growth.
Precision Scheduled Railroading (‘PSR’) and ‘congestion pricing’ are working to further facilitate traffic. Major North American railroads are at various stages of implementing the PSR operating philosophy which is designed to improve rail efficiency by doing more with fewer resources. This solution suggests flat demand for new rail equipment. Overall U.S. rail traffic has softened on a year to date basis (down 1.8%: carloads down 2.8%, intermodal down .8%), but the AAR has reported rail traffic ‘significantly’ improved in April over March. Will it continue? Improving traffic would be consistent with early 2019 FTR freight-rail traffic growth projections, including new car deliveries jumping to 60,000 cars. Advance estimates of first quarter U.S. GDP growth have been reported to have increased at an annual rate of 3.2%, much stronger than anticipated.
Official statistics have at times been misleading or politically motivated. Economics and finance can be subjective as the Fed has demonstrated by leaving interest rates alone. But hard asset investors understand what the Fed is doing. By maintaining liquidity the Fed is driving asset investors to acquire assets with the specific purpose of maintaining and pushing pricing up.
History demonstrates public policy makers have consistently struggled to efficiently deliver long term economic and social benefits. Investment solutions may come and go but ‘Government funded’ infrastructure investment is best if privately managed. A disciplined approach based on robust research and implementation is the most reliable path. Profitable economic growth, improved transport efficiency, and jobs are created by private investors. The current low interest rate, low inflation, and growth environment, if maintained, will act to continue to drive investment in transportation assets and infrastructure improvement. Where are the ‘right’ deals? Commercial Air and Rail equipment. For smart investment management call RESIDCO.
Total carloads were down 8.9% in March while carloads for the first quarter were down 3.1%. Year-to-date coal is down 8.1%, grain down 5.2%, chemicals down 1.2%, and intermodal down 1.8%. Excluding coal and grain U.S. carloads were down 2.8% in March 2019 (from March 2018). The U.S. Energy Information Administration (EIA) reported 12.9 gigawatts of coal-fired utility scale electricity generating capacity was retired in 2018 (Texas, Ohio, Florida, and Wisconsin). Grain traffic has softened, but China imported 180.8 million bushels of soybeans in March, up 10.5% from their February totals. Much of that grain was sourced from the U.S. and Brazil (China is the world’s No. 1 soybean importer).
With softening traffic and with the Roads focused on improving network operations, equipment and locomotives are being taken out of service. Fewer, longer trains are running in scheduled service. Customer loads are spending less time in classification yards. Less congestion improves on-time delivery and less equipment improves operating ratios and shareholder value. If ‘economic uncertainties’ continue and if the Roads are successful in implementing ‘scheduled’ railroading, expect an overall reduced demand for equipment. Yet cars in storage have remained essentially unchanged from a year ago. There were 313,456 cars in storage this April 1 compared to 315,188 railcars in storage a year ago (approximately 19% of the total fleet).
Why? Shippers still demand equipment be available to respond to changing market conditions in their markets. In order to ensure equipment is available for loads when needed Shippers will adjust by increasing investment in railcars. Rail Portfolio Managers will assist by maintaining their focus on keeping existing fleets in service.
With the global economy weakening and the Trump Administration and China locked in trade negotiations many analysts were concerned growth was stalling. The Fed’s reaction was to leave interest rates alone as inflation is near their 2% goal. The Wall Street Journal forecasts the probability of a recession at 25% in the next 12 months, rising to 49% in 2020. But the purchasing manager index doesn’t indicate any current signs of contraction (having risen to 55.3 in March from 54.2 in February). Job growth rebounded last month after a February slowdown. Unemployment is historically low. While traffic has been affected by trade disputes, slower growth in Europe, and weaker consumer spending, most analysts predict continued moderate growth during 2019. Economic uncertainties?
A recession does not appear on the horizon and the U.S. economy remains resilient in its 10th year of expansion. Softening traffic, stored equipment, improving network operations, Shipper demands, and the need to keep equipment in service will change how the Industry manages investment. Returns accrue to those with experience, diligence and integrity.
Successful portfolio management is a difficult thing to imitate. For air and rail alternatives call RESIDCO.
Until Hunter Harrison, there was a lack of focus on how efficiently rail assets could be employed. Customers demanded service and the railroads invested. More equipment was better. The result was a consistent inability of the roads to cover their cost of capital. Herb Kelleher founded Southwest Airlines as a low cost no-frills regional. It first took off in 1971 and changed the nature of air transportation for millions of Americans. Both Hunter and Herb focused on transforming operations. Hunter’s message? Here’s what really matters: “Precision Scheduled Railroading”. Sales and customer service focus on driving top line growth while operations and investment measures focus on asset turnover and margin improvement (e.g. lowering the ‘operating ratio’ for railroads). In both the Air and Rail industry the challenge is to design, invest in, and manage network capacity so that it best meets customer demands while managing pricing, maximizing profitability, and meeting society’s goals. As Matt Rose, the retiring Executive Chairman of the BNSF recently stated, “It’s a three legged stool”. Customers, Capital, People (and politics).
What’s the key metric? Return on invested capital (ROIC) is the one metric that captures both operating margins as well as the capital required to generate it. It tells us how much a firm earns for each dollar invested. When ROIC is greater than your weighted average cost of capital you are creating “investment” value. Identifying the components of ROIC and acting on those components is what creates value. But ROIC is a Wall Street investment analyst measure and discussions are generally confined to finance departments. The genius of both Hunter and Herb is that they understood the components of ROIC. They inspired, motivated, and challenged their people to focus on constantly improving performance. Net operating profit after tax (‘NOPAT’) as a percent of Invested Capital is used to generate ROIC. The main components of invested capital include equipment, spare parts inventory, operational facilities, and the ‘working’ capital needed to run operations. But the formula doesn’t identify how to influence the value drivers. The ‘DuPont’ analysis disaggregates ROIC into its key parts: return on sales (NOPAT/Sales) and asset turnover, or capital productivity (Sales/invested capital). Both return on sales and capital productivity measures can be further broken down. It’s these components that managers must act upon. Understanding this allows operations to identify the causes of differences in performance over time and among competitors. Activities can then be designed to increase both return on sales and capital productivity, thus maximizing value. Strategies that improve capital asset productivity are the focus of precision scheduling railroading. Eliminating excess equipment from the system and increasing the productivity of remaining equipment. For Southwest Airlines it’s a commitment to their people and to operating a single type of plane (the Boeing 737). The other component of capital productivity is sales. So, finding ways to expand offerings that drive revenue growth using existing equipment is key.
The BNSF’s focus is on long term investment results. Charlie Munger, Buffet’s right-hand man, says “We don’t have to make the last dollar”. And, as Southwest’s Herb Kelleher once said, “We have a strategic plan. It’s called doing things.” With a focus on the mechanics of Air and Rail equipment finance, industry conditions, competition, customers, investment returns required to deliver capacity, and the people and politics of service delivery, we’ve designed a platform for sustainable Aviation and Rail investment. If you are interested, call us. Call RESIDCO.
“The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger, the other for opportunity. In a crisis be aware of the danger but recognize the opportunity.” – John F. Kennedy
2019 will create opportunities for those who are prepared. The reasons? Politics, the continued strength of the U.S. economy, and the economic challenges facing Europe and China.
China’s Economic State
In China, the economy is slowing. It’s burdened by excessive debt and dependent on government subsidies. Recognizing its low labor cost advantage, China has advanced its country interests by forced transfer of intellectual property so that products can be manufactured in China without the need to pay research and development cost. The result? Firms (and countries) that initially designed products can be out-priced and killed off. If you can see the future, you’ll recognize that Trump’s 90-day reprieve from increased U.S. tariffs (which expires March 1) is not likely to change the Chinese Communist Party’s basic industrial policy. In Europe, economies are slowing, and the United Kingdom faces a March 29 deadline to officially exit the European Union.
Transportation Investment Landscape
Since both aviation and rail transport assets are long term investments, it’s best to gather and analyze information that is available about trends taking place, and then adjust your investment tactics based on current investor behavior playing out around you. The Aviation and Rail investment markets are competitive. FlightAscend has identified 100 new names that have entered the commercial aircraft operating lease sector over the past 10 years. The competition has pushed lease rate factors on some deals to sub-0.5 levels with relaxed maintenance reserves and less stringent return requirements. Airline operators are pushing for shorter lease terms due to ASC 842 and IFRS 16. Sale-leaseback financing valuing aircraft at more than original airline capital cost is being supported by aggressive residual value estimates (on NEO and MAX aircraft).
The landscape for transportation investment has always been non-linear, turbulent, and in a state of flux. If you accept that the industry cycle has peaked and is heading on a slow downward trajectory, you’ll see today’s environment as providing a greater opportunity for value acquisitions. Strategy is done above the shoulders (tactics below) and a challenging market reduces competition. Interest rates, crude oil, and labor cost all affect the psychology of the market and influence the availability of capital and level of risk-adjusted returns available. Strategy recognizes the structural risks of financial and operating leverage which magnify the impact on profits of rising and falling revenues. The aviation industry is global (and its hard dollar assets are liquid). Since no one knows what the macro future holds, successful secondary market transport investment is created by developing opportunities that create current value. Superior investment results do not require the purchase of newly built equipment. Rather they come from buying existing equipment when the deal is good, the price low, the potential substantial, and the downside limited.
Value investing. For insight, experience, and confidence in judgment, call RESIDCO.
RESIDCO’s size and wholesale capability is a competitive advantage. We respond quickly and creatively to ever-changing market conditions.
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