Aircraft Leasing Booms Amid Ongoing Shortages in 2023, Predictions Show Rise in 2024
- Air Travel Revenue to Skyrocket to $717 Billion as More Flyers Take to the Skies
- Growth Trajectory Seen in India, Saudi Arabia, and UAE as Major Contributors
- Sustainable Aviation Fuel (SAF) Gains Traction in Airline Industry Decarbonization
Aircraft lessor Avolon projects a sharp increase in the demand for new aircraft deliveries in 2024. However, airline needs exceed supply which will stimulate more aircraft leasing agreements. Avolon expects lessor order books will be in high demand as the aircraft supply shortage continues.
The delivery of more than 1,450 new large commercial jets will increase airline passenger revenues by 12%, hitting $717 billion. Airlines profits could climb by 10% to a total of $26 billion.
An unprecedented 4.7 billion people will fly in 2024, more than any previous year. Aircraft value and lease rates have seen a considerable upsurge in 2023 due to limited supply of both narrowbody and widebody planes. This trend will continue into 2024, particularly bolstered by India, Saudi Arabia, and the UAE. Airlines and leasing companies that delayed new orders are now facing extended wait times, potentially until the next decade.
Global domestic airline capacity has surpassed pre-pandemic levels by 6%, while international travel is recovering at a slower pace, sitting at 95% of 2019 levels. This discrepancy is largely due to the slower recovery in the Chinese market which has affected regional travel in Southeast Asia.
Avolon’s report, 2024 Outlook: New Horizons, delves into critical trends shaping the aviation landscape.
Key Takeaways from Avolon’s 2024
- Airlines: Revenues soared by 22% in 2023, outpacing global GDP growth. Post-pandemic cashflow recovery has enabled the repayment of $57 billion of government debt. Chinese international travel returning to form is a positive signal for airline momentum throughout the year.
- Manufacturers: The imbalance between supply and demand for aircraft will endure, improving the value of current deliveries and extending their operational lifespan. Production of widebody aircraft trails behind that of narrowbodies, leading to a scarcity in the market that increases wait periods for twin-aisle jets.
- Lessors: Scarcity of both aircraft and capital bolsters the leasing sector. Lessors with high credit ratings and promising order books are well-positioned for growth. Lease rates rose by up to 35% in 2023 due to interest rate hikes, with further increases anticipated in 2024.
- Innovation & Sustainability: The push for SAF is intensifying, with an estimated $2 trillion needed to elevate production to meet net-zero objectives. There could be soaring costs in air travel this decade due to labor market constraints, sustainability efforts, and challenges related to engine durability.
- Risks: While the macroeconomic landscape is stabilizing with inflation rates decreasing, challenges like softer demand in the U.S. and Europe, political tensions globally, and supply chain pressures threaten the industry outlook. The uptick in production among Original Equipment Manufacturers (OEMs) remains susceptible to these challenges.
Value of Travel Sustains Aviation
Andy Cronin, CEO of Avolon commented:
“The economic and social benefits of traveling will continue to drive aviation and underpin the resilience of our sector. Airlines’ growth in 2024 will be supported by around US$100 billion in new aircraft deliveries, with lessor orderbooks and capital supporting fleet expansion plans. While geopolitical and economic risks remain, the market backdrop as we start the year is likely to drive lease rates and residual values higher.”
India, China and Middle East Will Drive Growth
Jim Morrison, Chief Risk Officer of Avolon commented:
“India, China and the Middle East are driving aviation’s growth. A structural undersupply of both narrowbodies and widebodies will take years to unwind. While new aircraft designs with step-change improvements in energy consumption will ultimately be required to decarbonise, in the short-term the industry must focus on scaling up sustainable aviation fuel production.”
The paper—co-authored by Avolon’s Chief Risk Officer, Jim Morrison, and SVP Portfolio Strategy, Marc Tembleque-Vilalta—makes eight forecasts:
Avolon’s Aviation Forecasts 2024
1. Engine-related AOGs peak in June
Recent issues with the durability of new airplane engines have caused significant problems for airlines. Although these quality issues with the design and manufacturing might last for a while, the authors of Avolon’s report expect them to cause fewer operational problems after reaching their highest point mid-year.
2. Four airline mergers close. Four don’t pass regulatory approval.
Mergers can create benefits, such as lower costs and higher earnings, but they may also lead to fewer options and higher prices for customers. While some of the many planned mergers will get the green light, government regulators may stop others. This was evident when a US court ruled against the JetBlue-Spirit merger.
3. More new aircraft deliver to China than any year this decade
In December 2023, Boeing delivered a 787 to China for the first time in four years, signaling the return of an important market for exports. They will also start delivering 737 MAX planes as Chinese airlines look to update their fleets and grow again. For companies like Boeing and Airbus, China’s large market is too important to overlook.
4. Widebody production skylines will sell out to the end of the decade
Manufacturers are receiving very large orders, and the available production slots are filling up quickly. Asian airlines that have not yet placed their orders may find none left for them. This could result in a higher demand for leased and second-hand widebody airplanes.
5. At least two new passenger aircraft variants will be certified in 2024
Avolon expects the Airbus A321XLR and the Boeing 737-7 will enter service this year, with the 737-10 and 777-9 as further stretch targets in the forecast.
Editor’s Note: Boeing’s recent 737-9 MAX issues leading to increased FAA oversight of Boeing’s production line might stretch the timeline further for deployment of the new variants, particularly the 737-10.
6. The next clean-sheet large commercial aircraft enters service in 2036
Boeing and Airbus will need to decide on their new aircraft designs quickly, as it takes over 10 years to go from starting a project to official approval. There won’t be any completely new models in the next ten years, which helps maintain the value of the latest planes they have released.
7. Two investment grade lessors receive rating upgrades, again
Having an investment grade rating is crucial for large-scale aircraft lessors. Credit rating agencies recognize the strength of the leasing business structure, often resulting in improved credit ratings.
8. A global framework for a SAF book-and-claim system
Airlines and leasing companies will be able to use certified Sustainable Aviation Fuel (SAF) credits. This means they won’t need to move the actual fuel long distances. Setting up a system for this will help gather the money needed to begin producing SAF.
Avolon is a global company that finances the aviation industry, linking investors with airline customers. The company values its strong connections with clients, team cooperation, and quick deal-making. Avolon focuses on long-term investments while spreading out the risk and managing funds wisely to keep a stable financial status. Serving 146 airlines across 65 countries, Avolon maintains an extensive portfolio that includes ownership, management, and future commitments of 1,035 aircraft as of the end of December 2023.