China’s reopening economy will drive global air traffic to pre-pandemic levels by June

Of all the sectors of the global economy relieved to be finally looking the pandemic in the rear-view mirror, aviation ranks high on the list.

Ireland is the leading global centre for aircraft leasing and this week Dublin will play host to two of the largest industry conferences of the year, with thousands of delegates in town from airlines, manufacturers and leasing companies.

We will be gathering to reflect on the resilience the sector has shown despite a two-thirds drop in traffic due to the pandemic.

Coming out the other side, it is clear that the passion for travel remains undiminished and the desire for proximity and face-to-face interaction with friends, families and business contacts is tangible.

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The industry has responded with the quickest supply ramp-up in history: aircraft have returned to service, crews returned to flight and airports returned to capacity. It has not been without its challenges, but the ability to return to a degree of normality following the impact of the pandemic is a credit to all industry stakeholders.

China’s reopening is the last vital step required for the rapidly recovering Asia-Pacific market to catch up with the earlier recoveries in Europe and the Americas

This year will be one when aviation will thrive. In our Outlook 2023 paper published today (January 16th), we predict that China’s reopening economy will drive global traffic levels to reach pre-pandemic levels by June. This will help airlines return to profitability after combined losses of more than $180 billion (€165 billion) in the past three years.

China’s reopening is the last vital step required for the rapidly recovering Asia-Pacific market to catch up with the earlier recoveries in Europe and the Americas.

While recession is likely to impact some economies this year, the headroom for growth in aviation after a three-year hiatus provides a cushion. With the global economy 15 per cent larger today than in 2019, airline revenues remain $130 to $260 billion below their historical share of about 1 per cent of global GDP, showing the potential for further recovery.

Higher fares

For airlines, demand for travel is no longer limiting the recovery but the ability to put capacity into the air. If the early January blues have driven you to book a holiday escape later in the year, you will be well aware that airlines with capacity are commanding higher fares.

Airlines have accumulated more than $200 billion in state loans and other debt during the pandemic and are now under pressure to repair over-burdened balance sheets. This presents an opportunity for leasing companies to help airlines finance new, fuel-efficient planes so that they can continue to connect people globally.

As a sector, we are now dealing with the challenges of growth and expansion. They are not inconsiderable challenges, but a much better place to be than some of the darker days of 2020 and 2021.

Manufacturers such as Boeing and Airbus have been particularly stretched by their efforts to ramp up production to deliver the new planes being sought. Delivery delays have become endemic, and an aircraft shortage is emerging given the deadweight lost production of 2,400 planes that had been planned but were not built due to the pandemic.

This scarcity creates another positive for lessors, as it helps to boost the values of our existing fleets and planes for future delivery in our order books. It’s not just supply constraints that will drive values but also high inflation. Aircraft are real assets that have historically retained their value well when prices are rising

The leasing companies with investment-grade credit ratings all retained them throughout the pandemic, even with the added shock of the war in Ukraine. In the growth environment and favourable market dynamics of 2023, this resilience should be reflected by the ratings agencies with credit upgrades.

Before the pandemic, lessors were already a central part of aviation’s ecosystem, but with airline fleets reducing by 3 per cent since 2019, and the lessor fleets increasing by 17 per cent, lessors now account for more than 50 per cent of the commercial passenger jet fleet. Given the current outlook, the proportion will likely rise further.

Scarcity of planes is also helping to drive lease rates higher – industry speak for airlines paying more to rent a plane off a lessor. Another factor in this dynamic is the dramatic recent rise we’ve seen in interest rates, which has driven up the yield required by investors in any asset class.

Drumbeat of decarbonisation

Am I troubled by higher interest rates? Not really. People seem to forget that on any longer-term perspective, rates are merely normalising rather than high. What has been the challenge is the pace at which they have moved, and you would have to go back four decades to find a period where rates have risen so quickly.

Sustainable Aviation Fuel promises to play a key role. It can cut life-cycle emissions by up to 80 per cent but currently comes at a cost three to five times that of oil-based jet fuel

In thinking about the themes for aviation in 2023, environmental considerations cannot be ignored, and the drumbeat for decarbonisation will continue to be heard loud and clear.

As a capital, labour, and energy intensive industry, aviation has always had strong economic incentives to be efficient. Planes fly an hour more per day than they did two decades ago with almost half the number of empty seats, while burning 25 per cent less fuel per passenger transported over the same distance.

Nevertheless, aviation needs to make greater progress addressing concerns about its long-term environmental impact.

Sustainable Aviation Fuel promises to play a key role as a solution. It can cut life-cycle emissions by up to 80 per cent but currently comes at a cost three to five times that of oil-based jet fuel and is not produced in sufficient volumes to meet demand.

With aviation back in growth mode, there can be no excuse not to seek ambitious solutions to the challenges faced.

Andy Cronin is chief executive of Avolon.