As vaccinations increase and COVID cases fall, a stronger domestic economy is coming. With the $1.9 trillion fiscal stimulus bill becoming law (the ‘American Rescue Plan Act’), the Organization for Economic Cooperation and Development has said the U.S. economy will accelerate twice as fast as expected this year. Congress has now authorized six major ‘stimulus’ bills totaling $5.3 trillion1. The world economy is expected to grow 6% this year, the fastest rate in almost half a century. For the first time since 2005, the U.S. is expected to make a bigger contribution to global growth than China. Europe’s growth will lag as vaccine rollout has been slower there, and Eurozone governments are not contemplating additional fiscal spending on the scale of the U.S. due to concerns about over-borrowing.
As demand recovers, commercial air carriers and rail operators will increase their use of lease financing in fleeting decisions. On March 2nd, during the company’s fourth-quarter earnings call, AerCap Chief Executive Aengus Kelly said he expects airlines will shift more toward leasing as they rebuild their balance sheets. Leasing companies currently own half the world’s commercial aircraft fleet. Over 70% of railcars are privately owned. If AerCap’s recent deal with GECAS is approved, the combined aviation leasing company will control more than 2,000 aircraft (with an additional 500 on order). Lease financing provides the needed flexibility for both air carriers and Class One railroads. And, for unencumbered assets, it provides cash through Sale-Leaseback financing.
As the outlook for domestic travel improves, U.S. airlines are asking the Biden Administration to develop credentials to allow travelers to show they have been tested and vaccinated for COVID-19. It has been done in Iceland (the first country to issue vaccination certificates to citizens who have had both vaccine doses), and in Poland. The International Air Transport Association (IATA) has developed a ‘Travel Pass’ health passport app (a ‘digital health passport’) as a solution. European countries are putting support behind this initiative.
With the size of the U.S. domestic fiscal stimulus, the roll-out of vaccines, and pent-up demand, rail freight and domestic air travel will pick up. Net job gains in February 2021 were a preliminary 379,000, much more than most economists expected. The Purchasing Managers Index rose to 60.8% in February 2021 matching the highest it has been, an indication domestic manufacturing can expect continued growth. China is once again a major customer for U.S. agricultural goods. In the first eight weeks of this year China has purchased nearly triple the amount of U.S. soybeans as compared to 2020 (grain accounted for nearly all rail carload gains in February, up 15.7% compared to February 2020). With continued near-zero interest rates, housing market activity is driving growth in carloads of lumber and wood products (combined U.S. and Canadian carloads were up 3.2% in February, their sixth straight year-over-year gain).
In the post pandemic recovery, “We see the demand for leasing increasing.” Maximize your air and rail portfolio after-tax returns. Call RESIDCO.
Glenn P. Davis, 312-635-3161
1 The size of the stimulus ($5.3 trillion) is a quarter of 2020 current dollar 2020 GDP of $21.5 trillion.
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