Unpicking the trends shaping global aviation
As the aviation industry navigates through fluctuating demand and evolving consumer preferences, discernible trends have emerged, marked by a strategic focus on sustainability and technological innovation.
Investors are increasingly directing their attention towards carriers that demonstrate a commitment to eco-friendly practices and cutting-edge advancements, reshaping the landscape of aviation finance.
In an article for FINN, Denis Hogan, managing director of Alton Aviation Consultancy, explores this topic in more detail…
The industry has recovered strongly from the unprecedented challenges of the Covid pandemic. As of November 2023, passenger traffic recovered to approx. 99.1% November 2019 levels while cargo traffic was at approx. 97.5% of November 2019 levels. The lifting of travel restrictions and easing of testing requirements contributed greatly to the surge in travel demand across regions and the accelerated recovery of the airline industry.
According to IATA, passenger traffic in 2024 (measured in RPKs) is expected to grow 9.8% from 2023 levels, surpassing pre-pandemic levels by 4.5% for the year. While airlines saw negative profitability in 2020, 2021, and 2022 largely due to the pandemic, they showed positive net margins in 2023 and are expected to remain profitable on aggregate again in 2024.
Supply and Demand for aircraft
As of February 2024, the global commercial air transport fleet (which includes narrowbody, widebody, regional jets, and turboprops) totalled roughly 29,693 units in active service, of which 26,934 are in passenger service (but may carry freight in cargo holds) and 2,759 are in dedicated freighter configurations. There were also 3,391 inactive or stored aircraft, of which 3,074 were passenger configuration and 317 dedicated freighters.
The major drivers of demand for aircraft growth include:
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- Economic and middle-class expansion, particularly in emerging markets;
- Stimulation from low fares due to the continued growth of Low-Cost Carriers;
- Market deregulation and liberalisation, which have facilitated international competition and cooperation.
The drivers of demand for aircraft replacement include:
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- Fleet demographics and economic life of the aircraft:
- Fuel prices which, where elevated, make newer aircraft more economical;
- Emissions regulations that affect older aircraft most significantly;
- Passenger-to-freighter (P2F) conversions that create a market for older aircraft that are no longer suitable or efficient for passenger operations.
Based on its 2023 forecast update, Boeing expects 42,000 new jet aircraft (excluding turboprops) to be delivered from 2023-2042. Of the total new deliveries, 50% of the units will be for growth with the balance for replacement, such that the total global fleet will reach 48,578 in 2042.
As fuel prices remain high, many operators will strongly prefer new technology aircraft as they are more fuel efficient and have lower operating costs compared to aging models. These cost savings are driven heavily by the use of more fuel-efficient engines, even though they have generally experienced durability challenges that have caused challenges for the industry.
In the wake of the COVID-19 pandemic, there has been a notable recovery in demand for air travel, leading to a significant increase in demand for new and used aircraft. However, OEMs have encountered numerous production challenges in meeting this heightened demand. Both Airbus and Boeing have been attempting an aggressive ramp-up of production rates to meet a large order book; however, these aggressive plans have been hindered due to continued supply chain disruption experienced in the industry. Paired with the lower-than-expected durability/reliability of certain engines, which has caused an increasing number of engines to be driven into the spare engine market to support the current fleet rather than final assembly lines.
Therefore, continued tightening of the supply/demand balance for aircraft is anticipated in the near term.
Carbon Emission Regulation/Sustainability
In the medium term, increasingly restrictive emissions regulations, particularly in Europe, should be expected to drive additional retirements; relative demand for new, next-generation aircraft should rise in response. The EU’s Destination 2050 initiative anticipates net zero CO2 emissions for the aviation industry. The French National Assembly’s April 2021 passage of a bill banning domestic flights on domestic routes serviceable by high-speed rail in under 150 minutes may also be indicative of the direction of policy changes.
Industry bodies have discussed the regulations of carbon dioxide emissions generated by the airline industry over the past years. Formally, the International Civil Aviation Organisation (ICAO), has worked with national and regional bodies to develop standards to regulate future emissions from commercial aircraft.
The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), a resolution adopted by ICAO, targets carbon-neutral growth after 2020 by a combination of technology and operational improvements, sustainable alternative fuels, market- based measures, and policy tools such as emissions trading schemes. CORSIA is initially voluntary for ICAO Member States but mandatory from 2027.
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