Regime Change: Transportation Market Expectations Assessment
The departing U.S. Administration has overwhelmingly focused on social, environmental and business regulation. Their policies produced a lack of business capital investment which resulted in declining worker engagement and productivity. Even with the Fed’s historically low interest rates and multiple quantitative easing programs the best the U.S. economy could do was to return to ‘trend line’ 2% GDP growth.
That’s about to change. Purpose and confidence drive investor expectations. And it’s these expectations that drive business investment, economic growth and the level of passenger and freight traffic. It’s clear the incoming Administration has a much greater focus on U.S. economic growth than the previous. With tax reform, reduced ‘red tape’ and increased government spending, business and investor confidence in our future is returning. Trade, geopolitical issues, nationalism, and the retreat of globalism remain as risks to these upside expectations. The new Administration will create opportunities, but the impact of these changes may not be felt immediately. Which industries will benefit most?
Commercial air enjoys strong fundamentals with a broad and global base. Over the last 20 years, passenger demand has increased on average 5% per year, outpacing GDP growth. Will new efforts to balance trade lead to less travel? Very unlikely and it may have the opposite effect as businesses and consumers adjust to currency revaluations and reduced red tape. Commercial air travel is expected to double in the next 15 years (global traffic growth continues with passenger traffic up over 6% since 2014). And, there is a growing market share of aircraft on lease. Challenges? Capacity and yield management in the face of rising fuel and labor cost. Can it be done? Yes, Delta met its earnings targets even though passenger revenue was 2.7% lower and capacity increased .9%.
Rail loadings have bottomed out; equipment on line is down and train velocity is up. New leadership to deregulate should help many rail dependent commodities including coal and possibly petroleum. Export focused trade balancing leadership could bolster all rail dependent commodities. And these basic transportation assets have a long useful life and a broad North American installed base. For most railcar types, secondary market prices for cars with leases attached are robust. The minimal risk of technological obsolescence supports leased railcar values; and, looking beyond the short term, a large portion of the fleet is approaching retirement.
Leased transportation equipment offers predictable cash flows over medium to longer term durations. While it’s too early to know the results of the New Administration’s policies, we do know that long lived transportation equipment assets generate better returns than bonds. In this environment, equipment selectivity is important. Invest in fundamentals; invest for growth and current income. Knowing your financial goals, time horizon, and risk tolerance we tailor investment opportunities.
For Air or Rail transportation equipment, call the transport investment specialists. Call RESIDCO.
 President Coolidge, in an address to the Society of American Newspaper Editors on January 17, 1925, “… the chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing and prospering in the world.”
 Chicago Federal Reserve economists are predicting a continuation of trend line growth (2% GDP) Will Strauss economic presentation, January 6, 2017.
 FlightAscend Consultancy, V1EWPOINT, 4th Quarter 2016, Issue 53.
 Delta Posts Fourth-Quarter and 2016 Earnings, January 12, 2017 (Delta website).
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