Something is brewing again. Aviation fuel is more expensive than ever, inflation is making everything more difficult, interest rates are rising, airline debt is immense, salaries for employees in the industry are rising rapidly worldwide, and at the same time a new recession is looming in North America and Europe. The list of factors that could plunge the aviation industry into the next crisis could be extended almost indefinitely at the moment.
The members of the International Society of Transport Aircraft Trading (ISTAT) met this week in Marrakech/Morocco for their annual meeting, bankers, but above all the leasing companies, which now order more than 50 percent of all aircraft and then to the much financially weaker airlines rent profitably. The largest leasing companies each have fleets of between 500 and 1000 aircraft, industry leader AerCap even has around 2000 machines in its portfolio. Their customers are dozens of airlines each. The leasing companies are therefore both extremely important for the aircraft manufacturers Airbus and Boeing, and their market forecasts are also very important.
The surprising thing is that the major aircraft buyers are extremely optimistic despite everything. “The strength of sales makes up for everything,” says new Avolon boss Andy Cronin. Avolon is one of the most important leasing companies along with AerCap and Air Lease Corporation (ALC). In Europe, Easter business was still canceled this year due to corona travel restrictions. But since most countries have allowed their citizens to travel freely again, the demand has exploded and in many places completely overwhelmed the air traffic system in the summer – long queues, flight cancellations, lost suitcases. But the European airlines have also made money for the first time since autumn 2019 – more than necessary in view of the mountain of debt accumulated during the Corona period.
Cronin points to a big difference between the Corona crisis and a possibly approaching recession. Corona hit the airlines more than most other economic sectors, many had to more or less completely stop their work for months. A downturn would be just a normal crisis, so to speak, which airlines and manufacturers have learned to deal with over the decades. “Growth will slow down a bit, but we won’t reverse,” predicts ALC boss Steve Udvar-Hazy.
The airlines want new planes, but there are production problems
In the short term, however, there can be no talk of weakening. “The airlines want to get planes as fast as they can,” says Cronin. “I wish we had more aircraft to lease,” says Firoz Tarapore, head of Dubai Aerospace Leasing.
The fact that demand for short- and medium-haul jets such as the Airbus A320neo family has returned sharply has not been news since spring 2021 at the latest: At that time, Airbus announced that it would increase production from 40 machines a month to 75 in the next few years. Boeing has not been able to keep up with this for a long time, especially since the 737 MAX was not allowed to deliver for almost two years after two crashes. But now it’s no longer just about European or domestic routes: the airlines are interested in long-haul jets again.
Boeing recently had a lot of trouble with the 737 MAX model.
(Photo: Elaine Thompson/AP)
In most regions, the demand for international flights, often long-haul, is now strong again. In North America, traffic is back to 87 percent of 2019 levels, in Europe it is around 80 percent, and Africa, the Middle East and Latin America are also just close to these figures. For the moment, however, Asia is still lagging far behind at 35 percent – China in particular with its rigid travel restrictions and lockdowns is responsible for this.
At the same time, the airlines have phased out large parts of their long-haul fleets in the past two years. British Airways has sent more than 30 Boeing 747-400s into the desert overnight. Lufthansa has also mothballed four-engine jets such as the Airbus A380 or A340 and the aging Boeing 747-400 – some of the machines are now coming back for a few years because the group fears otherwise losing too much market share. Boeing delivers wide-body jets like the 787 and the new 777-9 only with a delay of several years.
All of this plays into the hands of those who have planes to give away. “In the past 30, 60 or 90 days, there has been enormous momentum in the market,” says ALC CEO John Plueger. “We still have less than ten of our wide-bodied jets to place from our entire portfolio.” Avolon has no long-haul machines to give away at all. Malaysia Airlines just took off the last 20.
As here in Hong Kong, many airports are still pretty empty, especially in Asia.
(Photo: Isaac Lawrence/AFP)
Airbus has also noticed the trend reversal for a long time, but is still cautious. The monthly production of the two wide-bodied models A330neo and A350 will only increase in the next few months from two to three and five to six machines respectively – provided that the problems in the supply chain, which are also plaguing the aviation industry, allow it. With the smaller A320neo, Airbus is already feeling the full impact, much to the annoyance of Udvar-Hazy, who laments delays of “two to four months”.
But there are also warning voices. “Next winter will be brutal for the airlines,” believes Adam Pilarski, chief economist at consulting firm Avitas, which has industry oracle status. Pilarski argues that many airlines could still face bankruptcy in the low-traffic period. The reasons: the debt burden, the exploding costs, the collapsing sales. At the same time, the states would no longer help “their” airlines with rescue operations.
A Bernstein Research study comes to a somewhat more differentiated conclusion: in Europe, small providers in Central and Eastern Europe are particularly at risk, as they compete to a large extent with the low-cost providers Ryanair and Wizz Air. The low-cost airlines themselves are in excellent financial shape anyway, and Lufthansa and Air France-KLM could, if in doubt, rely on the state again.
How business develops in 2023 depends very much on whether China opens its borders again after three years, because then airlines, manufacturers and leasing companies could compensate for possible declines in Europe and North America with many travelers from Asia. At the moment, however, nobody knows whether the calculation will work out: “Until China has clarified its stance on the issue, it’s difficult to predict,” says Tarapore.