Transportation equipment investment is a long-term play. While the Conference Board’s index of leading economic indicators suggests the U.S. economy will enjoy solid growth through the end of this year, there are areas where headwinds and complexity exist.

China and America’s Trade

The Trump Administration imposed 25% tariffs on $50 billion of Chinese goods “that contain industrially significant technologies.” The purpose is to stop the forced transfer of U.S. technology (and mandatory joint ventures as a condition for doing business in China). China’s theft of intellectual property and their refusal to let American companies compete freely threatens millions of future American jobs.

China’s “Made in China 2025” plan is to make a China-dominated Eurasia an economic rival to the American dominated transatlantic trading area. The plan prioritizes ten sectors including Advanced Information Technology, Aerospace, Aeronautical Equipment, and Rail transport. But without a free domestic market, China’s production bears no relation to demand and is export driven. Its state-owned company contracts are simply the beginning of negotiations, and cyber warfare and technology theft are embedded in their state-controlled business model.

Evaluating the risk of engaging in a serious ‘Trade War’ and measuring its unintended impact on global economic activity, supply chains, and Air and Rail transportation equipment is critical.

Energy

Oil prices have risen 50% compared to last year. Given the difficult to predict political factors at play, the near-term outlook remains clouded [1]. The Saudis and Russians have indicated a willingness to increase output in response to the geopolitical risk to supply from Iran and Venezuela. Higher oil prices will help American shale producers and increase crude by rail shipments. More oil production means more natural gas. As a result, lower gas prices are expected to reduce domestic coal consumption 2% (to 756 short tons in 2018) as gas-fired plants increase generation of electricity (up to 34% while coal-fired generation falls to 28%).

Aircraft Engines

Spare engine values continue to increase to a point where engines could represent 90% of total aircraft value at 10 years of age if current inflation trends continue. With more than 30,000 in service with over 500 different air carriers, the CFM56-7B engine is the most popular high-bypass turbofan engine in the world. The Federal Aviation Administration has mandated ultrasonic inspection of its fan blade population due to the recent Southwest incident where a fan blade fractured in-flight. Similar problems with the Rolls-Royce Trent 1000 engine (which power Boeing’s 787 Dreamliner) are forcing air carriers to idle equipment.

Rail Investment

Improving economic activity is driving rail carload traffic. It is up 4.2% for the week ended June 9th from the same week a year ago. For the first 23 weeks, carloads are up 1.3% and intermodal units up 3.6%. Rail is continuing to benefit from tight trucking capacity. The percentage of the fleet in storage fell to 18.6% (306,500 railcars, of which tanks comprise 34% of total empty stored railcars).

Over the next four years, the Canadian Pacific (“CP”) is replacing its grain fleet with 6,000 new high capacity grain hopper cars (using National Steel’s shorter and lighter car design with a 15% greater cubic volume). The CP said it will be able to fit 147 of the new cars in an 8,500-foot train, a 44% increase in capacity. CSX has removed its boxcars from the nationwide Boxcar Pool (25,000 remain in the national pool managed by TTX). This has improved CSX service levels but has put an added strain on the shrinking fleet of boxcars which now total about 122,000 cars, down from 660,000 in 1971.

Reality is noisy. To extract transportation investment signals from the noise, get smart. Call RESIDCO.

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