The International Air Travel Association expects the global aero industry to earn a $4.7 billion profit in 2023. U.S. and major European air carriers are better off than Asian (particularly China) carriers. Coming out of the pandemic, pent up air travel demand increased domestic load factors. Equipment and labor became operational challenges. As capital costs increased lease rates climbed. Both major airframers, Boeing and Airbus, continue to deal with supply chain issues1 and are unable to ramp up production as much as they would like. Inflation continues to drive increasing labor costs. Delta pilots reached an agreement (after three and a half years of negotiations) for an immediate 18% pay raise and a cumulative raise of 34% after three years. To deal with the pilot shortage, single pilot commercial aircraft operations are being explored. Over 40 countries including Germany and the United Kingdom have asked the United Nations body that sets aviation standards to help enable single-pilot flights. In November, Congressional action blocked a rail strike with a 24% pay increase over five years through 2024. 

The $1.65 trillion Omnibus Appropriations bill funds the government through September 30, 2023. More spending will drive inflation down and continue job market strength. The Services PMI strengthened in November and is firmly in “expansion” mode. According to the “third” estimate released by the Bureau of Economic Analysis, the real gross domestic product (GDP) increased at an annual rate of 3.2% in the third quarter. The U.S. Bureau of Labor Statistics reports over the last 12 months the Consumer Price Index for all urban consumers increased 7.1% before seasonal adjustment2. At its December 14, 2022 meeting, the Federal Reserve raised its benchmark rate a half-point to a range of 4.25% to 4.5% (its highest level in 15 years). All indications point to higher rates in 2023.

Exemptions for the 737 Max 7 and 10 were included in the Omnibus Appropriations bill. Requirements include retrofitting with a synthetic enhanced angle-of-attack system and the ability to shut off stall warning and overspeed alerts. The retrofit work is to be completed (at Boeing’s expense) within three years from the time the 737 MAX 10 is certified and will be required on all 737 MAX jets.

Forecast farm net income is expected to surge to $160.5 billion this year3, the highest since 1973 when adjusted for inflation. Prices for corn and wheat have soared since Russia’s invasion of Ukraine. Reduced grain stock and continued pressure on Black Sea exports mean pricing strength will continue. Carloads of chemicals and grain are the second and third highest volume carload commodities for railroads. Carloads of coal are the single highest volume carload commodity4 at 28.4%, twice as much as chemicals at 14.2%, and three times as much as grain 9.6%. The International Energy Agency has stated, “Coal will continue to be the global energy system’s largest single source.” In Europe, coal use has returned with coal plants brought back online. In the first two weeks of December, Germany generated 49% more power with coal than in the same period a year ago as Russian coal has been banned as a result of sanctions on Moscow’s invasion of Ukraine.

Despite current macroeconomic conditions, lessors and equipment producers are seeing higher lease rates and equipment demand. We’re optimistic about 2023 opportunities. Call RESIDCO.

Glenn Davis, 312-635-3161

[1] Boeing suspends Russian titanium as Airbus keeps buying, Mar. 2022

[2] CPI Up 7.1% over the year ended November 2022, Dec. 2022

[3] High Commodity Prices Feed a Boom in the U.S. Farm Belt, Dec. 2022

[4] Rail Traffic for December and the Week Ending December 31, 2022, Dec. 2022

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