It was only fourteen months ago that Covid-19 appeared shutting down economies and disrupting international traffic. Last fall’s elections led to a new Administration and a continuation of tariffs on Chinese products1. First tariffs, then the pandemic. Both have significantly disrupted domestic and global aviation transportation. Those disruptions, and “Precision Scheduled Railroading” have also changed the dynamics of rail equipment investment. 

What remains is a recognition that transportation networks form the backbone of trade and economic growth. With one in every three Americans fully vaccinated we are now entering a post-pandemic world. The Fed’s willingness to finance deficit spending is driving a return of domestic demand. U.S. GDP increased at an annualized rate of 6.4% in the first quarter of 2021 compared to the fourth quarter of 2020. At the end of the first quarter of 2021, U.S. GDP ended up less than 1% below its peak reached in late 2019. The April consumer price index rose 4.2% at an annual rate. The Atlanta Fed’s GDPNow prediction for second-quarter growth is 11%. The speed of the recovery is leading to supply chain shortages and increasing commodity and component costs. Bridgewater Associates’ Ray Dalio pointed out the current Administration’s economic agenda risks injecting too much money into the economy which will accelerate price increases as consumers spend to get what they want.  

The lack of international passenger traffic ‘belly space’ has increased interest in passenger-to-freighter conversions. Larger passenger aircraft (the widebodies – A380s, A340s, and Boeing 747s) have been retired early. The acceleration of e-commerce, caused by the pandemic, is driving growing air cargo demand even for smaller freighters (from express parcel carriers FedEx, DHL, UPS, and Amazon). Boeing at its biennial World Air Cargo Forecast expects the air cargo market will grow at a 4% annual rate over the next 20 years. That requires a freighter fleet 60% larger than today.  Current pricing of these older ‘retired’ ex-passenger jets allow economic cargo conversions. Even aircraft long-retired are returning to service (Georgian start-up Geo-Sky has re-activated a 1987-built 747-200 converted freighter – last operated in 2012).  

The rail traffic recovery from the pandemic continues. U.S. carloads of grain, food, lumber, paper, scrap metal, and several other categories were higher in April 2021 than in either April 2020 or April 2019. Total carloads averaged 237,960 per week in April 2021, the most since November 2019. April’s intermodal weekly average loadings are the largest for any month in history.  Intermodal is being driven by increased consumer spending triggered by the additional $1.9 trillion fiscal stimulus the ‘American Rescue Plan Act of 2021’ (signed March 11) is injecting into the domestic economy. Consumer spending rose 21.1% in March from February. That is the biggest percentage increase since 1959. As of May 1, 2021 railcars is storage continued to decline (365,379 freight cars down from 409,289 units at the start of this year).    

The economies of the world depend on efficient transport. A transportation investor’s challenge is to maximize after-tax returns net of all non-tax costs over an asset’s expected market life. Long-duration assets are influenced by economic uncertainty. Uncertainty breeds opportunity. As demand begins to outstrip supply finding solutions for practical investment is challenging. Work with the professionals.  Call RESIDCO.     

Glenn P. Davis, 312-635-3161 

davis@residco.com  

1 Tariffs began in the first year of the Trump Administration, four years ago.

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