New Equipment Quality Control Issue, Bolsters Demand for Midlife Aircraft

Moving pieces. Third Quarter U.S. GDP growth was revised down to 4.9% from November’s 5.2% second estimate. The National Association for Business Economics is expecting 2024 GDP growth to slow to 1% with a recession risk in the next 12 months under 50%. As inflation slows and with a “soft landing” in sight, the Fed is leaving interest rates unchanged. The federal funds rate is expected to be 4.6% at the end of 2024 down from its current 5.5%, which implies three quarter-point cuts in 2024. Those rate reductions are dependent on the impact current rates have on economic activity and whether inflation is sufficiently close to the Fed’s 2% target (the Fed’s personal consumption expenditures index is expected to approach
2.4% by the end of 2024). The Bureau of Labor Statistics reported 2.7 million net new jobs created in 2023; 672,000 in government, 654,000 in health care, 298,000 in food services, 266,000 in social services, 197,000 in construction, and 12,000 in manufacturing. Transportation and warehousing lost 63,000 jobs^[1]. The Index of Consumer Confidence rose to 110.7, in December up from 101.0 in November, reflecting more favorable consumer views of inflation, levels of personal income, and job availability.

U.S. Rail carload traffic for 2023 was 11,701,875, up .7%, the most for a full year since 2019. Carloads were up in 10 of the 20 AAR categories led by motor vehicles and parts, petroleum products, and crushed stone and sand. Intermodal at 12,667,354 units (containers and trailers) was down 4.9% for 2023 but up 5.5% in the fourth quarter over the fourth quarter of 2022, its biggest quarterly percentage gain since the second quarter of 2021. Coal remains the largest U.S. rail carload commodity accounting for 29.2% of total originated carloads. Lease fleet utilization and renewal rates remain favorable.

Boeing’s manufacturing quality control challenges continue as a door plug of a recently delivered 737 Max 9 blew out on January 6th shortly after takeoff. The next day, the FAA issued an emergency airworthiness directive, temporarily grounding 170 of the type to allow investigation and immediate inspection. The door plug involved in the incident was manufactured in Malaysia, and installed by Spirit AeroSystems in Kansas (Boeing’s fuselage supplier), and then apparently removed and reinstalled by Boeing at its Renton, Washington assembly facility^[2]. The grounded jets are being allowed to resume flying after mandated inspections are completed. But there are now broader concerns regarding Boeing’s manufacturing assembly, supply chain, and inspection compliance as demonstrated by the FAA Administrator Mike Whitaker’s announcement, “We will not agree to any request from Boeing for an expansion in production or approve additional production lines for the 737 MAX until we are satisfied the quality control issues uncovered are resolved”^[3]. As oversight increases Max 9 deliveries will be delayed, further delaying certification of the Max 7 and Max 10 and impacting 2024 air carrier fleeting plans as they consider alternatives^[4]. New aircraft may have the latest technology, but OEM airframe and geared turbofan engine quality controls and supplier oversight issues are making air carriers and the flying public more comfortable with the reliability of existing midlife equipment. Identifying placement opportunities for Aero and Rail equipment investment requires expert market insight. Call RESIDCO.

Glenn Davis 312-635-3161
davis@residco.com

[1] The Employment Situation, January 10, 2024, Rail Time Indicators, American Association of Railroads.
[2] Wall Street Journal, “FAA Clears Path for MAX 9”, January 25, 2024.
[3] Federal Aviation Administration, January 24, 2024.
[4] United, Boeing’s biggest customer, is considering fleeting alternatives that do not include the Max 10 which is five years behind its original delivery date.