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2025 Core Themes for Aero and Rail Investment

Strong GDP growth, sticky inflation, and a soft landing–core themes for aero and rail investment. The economy’s performance in 2025 will drive the Fed’s future interest rate decisions. Higher ticket revenues and lower energy prices (jet fuel is expected to be less expensive in 2025) will benefit air carriers. The International Air Transport Association estimates the average cost of jet fuel during the year will be about $87/bbl, or $2.0714/gal, well under 2024’s lows. IATA also expects the cumulative cost of jet fuel in 2025 to be $248 billion, nearly 5% below 2024. Boeing delivered 17 737MAX last December and is not expected to turn cash-flow positive until it can ramp up 737 production to 38 per month. GE Aerospace’s commercial engines service segment reported 19% growth in fourth-quarter revenue.  Engine availability is an issue. Pratt & Whitney’s Geared Turbofans (‘GTF’) continue to ground aircraft, resulting in operational disruptions, particularly affecting the Airbus A320neo fleet. Rail volumes are up and boosted by intermodal shipments. Coal carloads continue to decline. Grain carloads were 1.07 million up 8.5% (83,906) over 2023 (at 8.4 million carloads they were the most since 2019). For farmers, the Commodity Futures Trading Commission reports long positions in corn are their highest since May 2022. Efforts to reduce the burden of Federal Government regulations will reduce costs and free businesses to invest. Even though the Fed has reduced short-term interest rates by 1% in 2024, long-term interest rates are up, reflecting the market’s concern surrounding tariffs, tax, and Federal budget deficit uncertainties. 

In 2024 rail carloads excluding coal rose 1.4%, or 117,264 carloads, over 2023 (their third year-over-year gain in the past four years[1]). The 2.94 million carloads of coal that originated in 2024 were the fewest in AAR records that go back to 1988 (coal carload volumes peaked in 2008 at 7.44 million). The drive to restore manufacturing will increase rail activity. GATX reported railcar demand ‘steady’ with railcar leases extended at attractive rates, high fleet utilization, and strong renewal success[2].  Excluding their boxcar fleet, GATX’s fourth quarter U.S. railcar fleet renewal lease rates were up 26.7% with average renewal terms of 60 months and a renewal success rate of 89.1%.  Union Pacific’s fourth quarter included carload growth, improvements in velocity, employee productivity, operating income, and operating ratio.

There are about 17,000 single-aisle passenger aircraft in service globally. Approximately 11,600[3] ‘prior generation’ single-aisle aircraft are currently in service (6,055 A320ceo and 5,562 737NG). Single-aisle aircraft supply remains tight and new aircraft production remains low. At 2024 delivery rates, the aerospace industry will need almost 14 years to clear current outstanding orders.[4] As a result, markets are supporting mid-life aircraft values, lease rates, and longer lease terms.[5]

2024 performed much better than many economists thought. A core theme for 2025? The U.S. economy will continue to grow faster than other advanced economies. At 4% unemployment remains low. Expected tax relief and deregulation will drive investment in 2025. With a focus on business, not bureaucracy, the outlook for opportunities in Aero and Rail assets is up. Work with those who know where current Aero and Rail investment opportunities exist. Call RESIDCO.

Glenn Davis 312-635-3161

davis@residco.com

[1] Rail Time Indicators, Association of American Railroads, January 15, 2025.

[2] Railway Age, January 23, 2025, Fourth-quarter and full year 2024 financial report.

[3] Ibid. 694 PW1000G powered aircraft are currently parked.

[4] CAPA Aviation Analyst, January 19, 2025.

[5] Cirium Ascend, 2025 – What’s Next?: single and twin aisle values and lease rates are up by 10-15% over January 2024.

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How The Tax Cuts and Jobs Act Will Affect The Transportation Marketplace

Changing Tax Consequences

Whether you are an investor or a service provider, the Tax Cuts and Jobs Act (the “TCJA”) has changed the tax consequences for entities that compete in the transportation equipment lease finance marketplace. Investment stands on the marginal revenues and cost (including tax) it generates. The great news: TCJA reduces the after-tax cost of capital in our capital-intensive transportation sector.

The foundation of the TCJA was a reduction in the C-Corp tax rate from 35% to 21%. But such a one-sided decrease caused the competitive business playing field to severely tilt. For Equipment Leasing firms and service providers organized as Partnerships, Trusts, S Corporations, or Sole Proprietorships who are considered Pass-Through Entities (“PTEs”) TCJA created new complications with marginal benefit and an adverse tilt of the playing field.

You may recall prior to the subject TCJA and before considering capital gains tax, PTEs were subject to a 39.6% rate or an additional 4.6% over the 35% C-Corp rate. Therefore on $100 of income, the highest bracket PTE was subject to an additional $4.60 or a premium of 14% over the $35 a C-Corp would pay on identically derived income. Under the new TCJA, PTEs are subject to a reduced 37% rate or 16% over the new 21% rate for C-Corps.

Now on $100 of income, PTEs would pay an additional $16 or a premium which is 76% over the $21 a C-Corp will pay on identically derived income. PTEs would have lost the significant advantage over their C-Corp competitors if no additional relief was provided.

Section 199A

In the TCJA, Congress created a deduction for Qualified Business Income (“QBI”) of PTEs enacted under Section 199A and it is among the TCJA’s most complex components. On its surface, Section 199A allows owners of PTEs a deduction of 20% against income from their business. The intent was to reduce the effective top rate for PTEs from 39.6% under the old law to 29.6% under the new law (a new 37% top rate * a 20% deduction = 29.6%). With the 20% QBI deduction, PTEs might lessen their competitive disadvantage over C corporations ignoring capital gains.

But controversy and grey areas remain. The new Section 199A QBI deduction is not fully available to all PTEs. It is subject to both W2 and investment caps. Yet PTEs compete head to head in the leasing marketplace with C-Corps who are not subject to such limitations. PTEs now find themselves at a competitive disadvantage against their C-Corp counterparts who manage investment decisions to maximize after-tax cash to the corporation, not the individual investor. Individuals who have built successful businesses and created jobs as PTEs are faced with competing against this lower C-Corp tax rate without full access to the Section 199A deduction.

Aftermath

The TCJA has created competitive disadvantages. Air and rail investment alternatives have economic consequences and the tradeoffs between C-Corp and PTE equipment investment require clarification. Investors and service providers need clarity in order to make informed decisions regarding cash flow, entity structuring, and investment planning alternatives.

The significant wealth of private equity is invested through PTEs and into transportation equipment. These PTE investors must compete for capital. ‘Grey’ areas in the TCJA are subject to interpretation. There is a need to develop a solid understanding of decision alternatives that give rise to planning opportunities while understanding how to integrate that knowledge into the larger picture of after-tax investment decision making.

This is a call to action. If you are interested in the developing consequences of the TCJA on transportation equipment investment, please contact us. RESIDCO is leading an effort to gain regulatory clarifications, technical corrections and devising optimal entity structures to enhance the impact of the TCJA for transportation equipment investment.

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