Air cargo represents less than one percent of global trade by tonnage but amounts to $6 trillion worth of goods moved every year – more than 36 percent of global trade by value. Globally, half of that airfreight cargo has been carried on passenger jets rather than dedicated freighters. The rapid shutdown of passenger flights has eliminated passenger jet freight capacity, and air freight rates have responded, increasing significantly.
With the cascading passenger flight cancellations (and flight restrictions), air carriers are moving idle passenger planes to freight in high-demand routes, taking advantage of the very high air cargo market rates at a time when fuel prices have plummeted (American Airlines Group Inc. is flying its first scheduled cargo service since 1984 between Dallas and Frankfurt). As Asian manufacturing capacity comes back online, moving goods to the U.S. will further increase demand for airfreight. Equipment maker, John Deere & Co., is budgeting an extra $40 million in expedited freight cost for the second quarter to help ensure parts from Chinese suppliers can reach its facilities in Moline, Illinois.
Markets are telegraphing their uncertainty over how long the coronavirus will impact the domestic consumer activity which has driven our recent eleven-year bull market run. The sell-off that’s occurring is being amplified by a constant media blitz of event cancellations, corporate travel bans, ‘shelter in place,’ school closings, and election-year ‘coronavirus politics’. To stop the pandemic, we are forcing a recession. Near-term, the impact will reduce second-quarter economic growth. However, the politics of the fall election (and a $2 Trillion Stimulus package) will lead to a rebound in the second half.
While commercial passenger air travel has been turned on its head, U.S. rail freight continues to move the essential goods we need to survive. The slowing of the global and U.S. economies will delay domestic rail traffic improvement.
But, as the summer appears, and the virus abates, domestic manufacturers and retailers will need to play inventory catch-up. Companies will face such a need to restock there will be the potential for a significant freight traffic recovery in the second half of this year. Longer-term, rail equipment demand uncertainty has been created due to the industry’s adoption of precision scheduled railroading (“PSR”). PSR (and trade) are driving the market dynamics, impacting rail equipment values and lease rates.
Rail traffic (excluding coal and grain) is down year over year (still up from January lows). First-quarter container volumes through the Port of Los Angeles, the largest U.S. gateway for inbound seaborne container shipments from China, are expected to be down 15% year-over-year. Spring flooding will impact traffic along the Mississippi. Oil’s slide will negatively impact the demand for crude oil tank cars and the frac sand cars that serve the shale oil industry.
Air and Rail equipment values and lease rates are stressed. But consider what the markets allow. Volatility creates opportunities. Now is the time to look for those gaps, weaknesses, and areas of growth; ask “Where are the most productive assets available?”
We have some answers. Call RESIDCO.
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