“The Chinese use two brush strokes to write the word ‘crisis.’  One brush stroke stands for danger, the other for opportunity. In a crisis be aware of the danger but recognize the opportunity. – John F. Kennedy

2019 will create opportunities for those who are prepared.  The reasons? Politics, the continued strength of the U.S. economy, and the economic challenges facing Europe and China.

China’s Economic State

In China, the economy is slowing.  It’s burdened by excessive debt and dependent on government subsidies.  Recognizing its low labor cost advantage, China has advanced its country interests by forced transfer of intellectual property so that products can be manufactured in China without the need to pay research and development cost.  The result? Firms (and countries) that initially designed products can be out-priced and killed off. If you can see the future, you’ll recognize that Trump’s 90-day reprieve from increased U.S. tariffs (which expires March 1) is not likely to change the Chinese Communist Party’s basic industrial policy.  In Europe, economies are slowing, and the United Kingdom faces a March 29 deadline to officially exit the European Union.

Transportation Investment Landscape

Since both aviation and rail transport assets are long term investments, it’s best to gather and analyze information that is available about trends taking place, and then adjust your investment tactics based on current investor behavior playing out around you.  The Aviation and Rail investment markets are competitive. FlightAscend has identified 100 new names that have entered the commercial aircraft operating lease sector over the past 10 years. The competition has pushed lease rate factors on some deals to sub-0.5 levels with relaxed maintenance reserves and less stringent return requirements.  Airline operators are pushing for shorter lease terms due to ASC 842 and IFRS 16.  Sale-leaseback financing valuing aircraft at more than original airline capital cost is being supported by aggressive residual value estimates (on NEO and MAX aircraft).

The landscape for transportation investment has always been non-linear, turbulent, and in a state of flux.  If you accept that the industry cycle has peaked and is heading on a slow downward trajectory, you’ll see today’s environment as providing a greater opportunity for value acquisitions.  Strategy is done above the shoulders (tactics below) and a challenging market reduces competition. Interest rates, crude oil, and labor cost all affect the psychology of the market and influence the availability of capital and level of risk-adjusted returns available. Strategy recognizes the structural risks of financial and operating leverage which magnify the impact on profits of rising and falling revenues.  The aviation industry is global (and its hard dollar assets are liquid). Since no one knows what the macro future holds, successful secondary market transport investment is created by developing opportunities that create current value. Superior investment results do not require the purchase of newly built equipment.  Rather they come from buying existing equipment when the deal is good, the price low, the potential substantial, and the downside limited.  

Value investing.  For insight, experience, and confidence in judgment,  call RESIDCO.

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