Coming out of the pandemic and in the early stages of a recovery, the world is responding to Putin’s choice to invade Ukraine. The impact on investor confidence is reflected in the market’s volatility. Crude oil prices are up. Rail and air freight capacity from Asia to Europe has been eliminated. The European Union Aviation Safety Agency (EASA) advises Ukrainian airspace and airspace within Russia and Belarus within 100 nautical miles of Ukraine borders pose flight risks (recall the Malaysia Airlines flight MH17 which was shot down over eastern Ukraine in 2014). Air carriers and countries are shutting down commercial flights. The UK banned Aeroflot (the Russian Flag carrier) and all Russian registered aircraft from landing in Britain. In response, Russia banned British airlines from landing at Russia’s airports (and from crossing its airspace). Hungarian airline Wizz Air and Ireland’s Ryanair have suspended flights. Poland and the Czech Republic have closed their airspace to Russian airlines. The FAA expanded the area in eastern Europe and Russia where U.S. airlines cannot operate. The expanded area includes all of Ukraine, Belarus and a western portion of Russia. Russian companies have 980 passenger jets in service, of which 777 are leased. Of the 777 aircraft, 515 are leased from foreign firms (generating $100 million every month from Russian firms to Irish based leasing companies). Dublin based AerCap has 118 aircraft managed or operated by Russian based carriers. As international payment transfers through SWIFT (the “Society for Worldwide Interbank Financial Telecommunication”) are disrupted, leasing companies will be forced to develop contingency plans.
Ukraine is a significant producer of uranium, titanium, iron ore, steel, ammonia, and agricultural products. Rising fuel, commodity, and fertilizer prices will impact inflation in Europe and the U.S. Prior to the invasion the U.S. Bureau of Labor Statistics reported the consumer price index rose 7.5% over the last 12 months (core inflation which excludes food and energy rose 6%). U.S. consumer price inflation is at its highest level in the last 40 years and is now expected to go higher. Fourth Quarter 2021 U.S. GDP growth was 7%[1] . For the year 2021, GDP grew 5.7% over 2020. The uncertainty of the impact of the Russian invasion of Ukraine on U.S. economic activity complicates the Fed policy response to domestic inflation. With the Fed balance sheet at $9 Trillion and U.S. debt approaching 130% of GDP, the Fed said last month it would approve a final round of $30 billion in bond purchases in February before ending its portfolio expansion in March. Fed officials are now expected to raise interest rates at their March 15-16 meeting. The question is by how much?
Solid growth in domestic freight rail traffic is expected from the Infrastructure Investment Jobs Act. The Railway Supply Institute’s American Railway Car Institute Committee (ARCI) reported a 50% increase in fourth-quarter 2021 freight railcar orders (compared to third-quarter 2021). Backlogs increased to 42,993 railcars. Class One profitability continues. Even with rail traffic totals down 9% year over year (through February 5th), coal carloadings are up (due to natural gas pricing inflation), crushed stone and sand gravel loadings are up, chemicals up, and grain loadings up. Auto component shortages continue and primary metal products, and lumber and wood product loadings are down (home sales reached a 15 year high in 2021). Labor force participation is at 62.2% in December, the highest since the pandemic (but inflation is causing adjusted wages to fall).
As the pandemic becomes a memory, the U.S. faces twin geopolitical challenges (Russia, China). With Globalization fractured, new equipment inflation and rising interest rates will create opportunities for placement of existing midlife Aero and Rail equipment.
Glenn P. Davis, 312-635-3161
[1] Bureau of Economic Analysis.
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