The announcement of a new Covid variant from South Africa demonstrates how concerned markets are to the impact of renewed travel restrictions[1]. Almost immediately the United States, Canada, the UK, and the EU announced travel bans from South Africa and other southern African nations (Israel has closed its borders to foreign nationals entirely). As long as the world continues to face Covid-19 variants, supply chain and air travel disruptions will remain.

Global extended supply chains have not responded well. Both just in time inventory management and Precision Scheduled Railroading (‘PSR”) have demonstrated an inability to absorb and respond to disruptions, whether caused by weather, politics, tariffs, mercantilist nationalism, or travel restrictions. Add in a shortage of truck drivers, port inefficiencies, passenger air carrier belly space, and multiple waves of government stimuli and the result? Inflation is at a three-decade high (job claims have fallen to historic lows and labor shortages are causing worker compensation to rise at its fastest pace since 2001).

The West Coast’s pandemic associated supply chain problems have highlighted a mismanagement of asset flows. Terminals function smoothly only when outflows make room for new inflows. In implementing PSR, the Class Ones eliminated surge capacity and returned assets. Yet commerce requires speedy delivery, consistent reliability, and resilience in the face of disruptions. The lack of labor and asset availability has created a domino effect compounding supply chain delays (the U.S Rail intermodal traffic drop off now spans 15 consecutive weeks[2]). The rail transportation supply chain needs to support West Coast terminal needs. “If you don’t have additional capacity in your hip pocket, even moderate disruptions will put you in in a world of hurt”[3]. Since speed is not a freight rail trait, the solution requires more inland terminal yard capacity and railcar asset availability.

As Thanksgiving Holiday air travel demonstrated, U.S. domestic air travel has largely recovered from pandemic lockdowns. On Wednesday, November 24th more travelers passed through Transportation Safety Administration checkpoints than on any other day during the pandemic (about 2.3 million). Daily passenger volumes exceeded two million for seven straight days. Earlier staff cuts had resulted in air carriers struggling to keep up as demand returned. A shortage of pilots and equipment led to delayed (or cancelled) flights, long lines, and packed planes. Even with the pandemic lingering, the International Air Transport Association expects total passenger numbers to grow to 3.4 billion in 2022 from 2.3 billion in 2021 (recall the industry carried 4.5 billion passengers in 2019). Air cargo demand is expected to continue above 2019 levels in 2022. It is international air travel that will continue to face traveler uncertainty over the new coronavirus mutations. Supply chain challenges will remain persistent as easy money and excessive government stimulus work their way through the economy. Inflation will remain elevated and will continue to impact equipment values. Manufacturers will face higher transportation costs (as well as continuing labor shortages).

Faced with current market volatility and multiple mid-life equipment opportunities, modeling asset values becomes more complex. The pilot of a 777 monitors more instruments than the pilot of a single engine Cessna. Managing equipment investment under alternative market scenarios requires real options analysis. Be nimble, be alert.


    Glenn P. Davis, 312-635-3161

[1] Wall Street Journal, Stocks tumble as WHO Identifies New Covid-19 ‘Variant of Concern’ that Triggers Global travel curbs, November 26, 2021.

[2] Railway Age, November 24, 2021.

[3] Intermodal analyst Larry Gross, July 15, 2021, in Trains.

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