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.
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