“The package may be small, but the impact of on-time delivery is massive.” –Anonymous
In Part 1, we got acquainted with a Gen X perspective on the evolution of package delivery, distribution, and fulfillment centers, as well as the basics of leasing arrangements. Today, we’ll continue with this logistics topic, exploring examples of how supply-chain pieces, including planes, trains, automobiles (or trucks) – and warehouses, can be packaged for investors and the businesses that need them. Here we go!
Music is my Aeroplane
Even among the largest air cargo carriers, operating models differ significantly. The spectrum of options includes:
- End-to-end integrators: e.g., FedEx, UPS, DHL
- Cargo subsidiary models: where cargo is added to normal passenger flights (United, American, and Delta are unsurprising carriers in this space), and
- Cargo pushers: fleets dedicated to moving cargo between airports. I’d put Amazon Air in this third bucket, although they are starting to function as a third-party package delivery solution as well.
Since cargo carriers own and lease both new and used aircraft, there are many potential investment opportunities in cargo.
Some investment managers have identified areas of the market where they believe they can drive consistent returns via arbitrage, such as being able to acquire planes that are past their useful life for one carrier or market segment (thus at attractive prices) but viable for another type of carrier or market segment; examples of this include the conversion of engines and the conversion of passenger planes to cargo planes.
As with other specialized markets, managers in these spaces will naturally develop niche skill sets to accurately underwrite deals, including modifications, financial structuring, and maintenance packages needed to optimize risk/return parameters. Aircraft engine leasing (buying engines and then leasing them to carriers) has been another popular strategy, though I’d bet it’s not obvious to many investors that ownership of an airplane vs. ownership of the engines is often two separate things. Perhaps a topic for another day. But – to sum it up – there are investment strategies to access multiple aspects of owning, leasing, or retrofitting aircraft or aircraft engines. And, given that some of the larger planes can be $40,000+ per hour to charter, there is real money to be made if done right. There can also be turbulence along the way (think “COVID”), but – if you’re okay with pleasure spiked with pain – then perhaps this may warrant a place in your portfolio.
Hiding in plane sight
Some of you may already have assumed or suspected that you could invest in the above via the usual Alts ways – e.g., drawdown funds or interval funds that attack the situation from different angles – and, if so, you are correct. As alluded to previously, aircraft or aircraft engines can be purchased by funds and then leased (like rental properties) or bought and resold (like flipping properties), which can also involve providing financing (thus being on the credit side of the equation).
But what may fly under the radar is that aircraft and aircraft engine leasing have also found their way into asset-backed securities (ABS). We’ve covered securitization in the past, but this is essentially taking less-liquid assets and packaging them into investor-friendly bonds. ABS is simply the term for virtually any cash-flowing asset that someone believes may attract investment interest (conceptually similar to mortgage-backed securities, or MBS, which more people are familiar with). While I don’t know of any individual investors trading ABS, many of us already have exposure to this space through credit Mutual Funds, ETFs, or credit hedge funds. Interesting, right!?
Riding the rails
A topic that has become more prominent lately (at least in my world) is that of railcar ownership, so it’s worth noting, as it is also a component of the package-shipping supply chain. I haven’t encountered a dedicated fund for this, but I have seen it added as a marginal sleeve within a broader private equity mandate. Private equity logistics/commodities companies may also own railcars for additional storage/shipping capacity – particularly if they are in the business of manufacturing something that inherently requires railcars (e.g., fuel production).
Relative to the cost of a cargo plane, railcars could be much more palatable for an individual investor to consider. HOWEVER, as this “beginner’s guide” cautions, the hard part is knowing what you are doing with said railcar, including what it will be used to transport, and the many logistics/relationships involved. For the purposes of today’s discussion, railcars are used in transporting packages, and exposure can be garnered in multiple ways, which this article covers in more detail. Options range from direct ownership to shares in companies involved in railcar manufacturing, servicing, storage, or even the railroads themselves. And you can bet those items make appearances in both public and private investment funds.
Keep on truckin’
In the spirit of time and space conservation, we’re going to truck right through this section. Trucking loosely “rhymes” with the above railcar discussion. Unlike railcars, however, you can park trucks in a driveway or more easily find someone to drive your truck for one-off uses. In other words, this space has even lower barriers to entry than railcars and especially aircraft, so I haven’t seen it as an area of focus for investment managers.
A fulfilling (almost) ending
We skipped over the whole (minor) topic of global shipping and how items actually make their way to the US, but – as we touched on last time – the US package-delivery supply chain is bookended by distribution centers and fulfillment centers (at least in Amazon terminology). Items come through distribution warehouses and are transported via the above network of planes, trains, and trucks to fulfillment centers near their final destinations. Given the above, you may now be asking yourself, “Who Owns the Warehouses?” If so, you’re asking the right question.
As the linked Substack article points out, warehouses aren’t just for Amazon. They are a vital part of the logistics solution for UPS, FedEx, and big box stores alike (surprise: Walmart, Home Depot, and Lowe’s typically aren’t picking items off their store shelves to deliver to your home). As they also mention, Walmart is the exception, since it owns about 2/3 of its warehouses, but the rest of the industry probably leases 80%+ of its warehouse needs, creating a massive market for owning and leasing warehouses. Unsurprisingly, a couple of very big names in this space are Prologis and Blackstone.
Again, access comes in all the forms you’d imagine, though we now need to bring real estate investment trusts (REITs) into the picture. There are many publicly traded REITs (e.g., individual companies, ETFs, mutual funds, closed-end funds) as well as private REITs. Some private real estate funds that were previously structured as limited partnerships (LPs) have evolved into REITs, which can create greater tax efficiency and simplify tax reporting, but there are still many traditional LP drawdown or interval fund options, as well. There can be dedicated warehouse funds, but warehouse holdings are also typically included in diversified real estate strategies.
While aircraft/railcar/trucking investment options are more limited, there are an incredible number of options in the real estate space, and investors can choose from what may feel like an infinite number of options. There are about 225 public REITs, and the SEC estimates there are almost 5,000 private real estate funds (and, as an aside, nearly 50,000 private equity funds – yikes)! Good luck out there.
Don’t get left out in the warm
As an honorable mention, there are also specialized options within the supply chain, including cold storage. Some items need to stay cold throughout the journey of warehouses, planes, railcars, and trucks, and there are dedicated “cold storage” companies and strategies to focus on exactly that.
The actual last mile(s)
And, finally, the home stretch from the fulfillment center to your doorstep is addressed in several ways, including corporate-owned solutions (think FedEx and UPS trucks), independent contractors (a lot of Amazon delivery vehicles you see are actually locally operated fleets via their Delivery Service Partner program), and other courier/delivery services; thus, there are, once again, many ways to invest.
This edition has been a longer journey than usual, so thanks for bearing with me. I hope you’ll think twice about how that next package arrived at your door; if you choose to keep in mind how impressive it is, it’s yet another reason to be grateful (on a near-daily basis ).
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
