The Global economy is projected to contract 4.9% in 2020, with World merchandise traffic falling 13 to 32% and a 50 to 60% decline in air passenger revenue miles. In response, more than two-thirds of governments across the world have scaled up fiscal support with budget measures now standing at 6% of GDP on average. Covid-19 lockdowns, trade disagreements, and changing Class One Rail operating methods have impacted the cash flows and profitability of transportation assets that serve the Air and Rail investment segments.

Despite deteriorating economic conditions, Rail carload freight has remained profitable for the Class One Railroads. The impact of Precision Scheduled Railroading (“PSR”) is evident as they have maintained profitable operations even with freight volumes decreasing (U.S. rail traffic for the first 29 weeks of 2020 decreased 12.8% compared to last year). Class Ones are focused on carload traffic which drives their PSR operating models.  ‘Pricing discipline’, longer train lengths, and a reduced need for equipment and labor have improved operating ratios. The Class Ones are all reporting second-quarter profits (examples: CSX $499 million, Union Pacific $1.1 Billion, Norfolk Southern $392 Million, Canadian Pacific C$635 Million, Canadian National C$545 Million and Kansas City Southern $109 Million).  

While Air cargo flights have surged, travel restrictions have resulted in a steep contraction of regional, mid-haul, and long-haul passenger demand.  Second-quarter losses across all the U.S. carriers demonstrate this. Delta, the world’s most profitable airline prior to the pandemic, reported a 91% decline in revenue and a second-quarter operating loss of $3.9 Billion (plus an additional $3.2 Billion non-operating write-down related to fleet restructuring and write-downs of investments). United’s revenues were down 87.1% with a reported net loss of $1.6 Billion (after adjustments a net loss of $2.6 Billion). American reported an operating loss of $2.5 Billion and a GAAP net loss of $2.1 Billion. Southwest (the only investment-grade rated carrier in the U.S. airline industry) reported a second-quarter net loss of $1.5 billion (excluding special items).  

All are parking portions of their fleets and adjusting network schedules as they focus on returning to break-even cash flow. The downturn has extended to aircraft manufacturers Boeing and Airbus.  Boeing delivered just 20 aircraft in the second quarter, down from 90 last year (their lowest quarterly total since 1963). Airbus delivered 74, down from 227. The International Air Transport Association aptly summarized the situation.  At the end of 2019, the commercial passenger jet fleet in service was 23,710 units (including regional jets, single-aisle, and twin-aisle).  The equivalent fleet needed to operate in 2020 is 16,360 units (at a 62% load factor).  

Gulfstream delivered more high-end private jets in the second quarter (32) than Boeing’s total commercial deliveries.  Budget carriers like Southwest can set up and dismantle specific point to point routes based on profitability (legacy carriers need their whole hub and spoke network to work to stay cash positive). Yes, the recovery’s timing remains uncertain, but transportation assets under a lease that span the expected term of the pandemic provide attractive alternative investments.  

To find and unlock these pockets of opportunity?  Call RESIDCO.

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