UK: Soaring Demand But Are Turbulent Times Ahead In Aviation?

Last Updated: 8 November 2019
Article by Conor Blake

It is little secret that for the last decade, the aviation industry has been enjoying a favourable cycle. It has been buoyed by access to cheap finance and growing passenger numbers. Although sentiment at the ISTAT conference leaned towards that cycle now entering a period of slow decline in the rate of growth, demand remains strong - Boeing predicts a demand for just over 40,000 new aircraft in the next 20 years at a value of over US$6 trillion.

There was certainly plenty to touch upon across the three days, including the effects of the prolonged grounding of the Boeing 737 Max and the vast number of returning aircraft and lease transitions expected in the next two years. I will focus here on three themes that commanded considerable air time. These are:

- Is a greener sky on the horizon?

As environmental awareness has risen in recent years, so too has the scrutiny of the aviation industry. Emissions from aviation account for more than two per cent of global emissions and the International Civil Aviation Organisation (ICAO) forecasts that by 2050, aviation emissions could grow by a further 300-700% on 2005 figures. Although the aviation sector is well ahead of shipping in terms of fuel efficiency and cleanliness, escalating pressure from investors and public sentiment will push airlines to do more to address environmental concerns.

Interestingly, a poll of the conference audience revealed that 59% believed the green agenda will lead to higher costs. Consequently, this would result in increased fares and reduced demand. The International Air Transport Association (IATA) has recognised this, stating that climate is top of the agenda for investors. This is understandable; the guilt associated with the nascent trend of 'flight-shaming' is having a tangible effect on passenger growth in countries such as Sweden, where it has significantly slowed in the past year. This could lead to sizeable changes in travel habits and regional flights are most likely to suffer first, with trains providing a more environmentally friendly alternative.

- Turbulent times ahead in the macro environment

Unsurprisingly, there was a lot of discussion about the convergence of several global headwinds and their consequent effect on airlines, lessors and banks. The lingering threat of a global economic downturn in the next two years was high on people's list of concerns. This isn't helped by slowing global GDP growth on the back of the Chinese-US trade war; Iran and Saudi Arabia tensions heightening in the Gulf; and Brexit uncertainty continuing to hinder decision making in Europe.

There was also a concern that jet fuel prices may come under pressure in the next 12 months, particularly as the International Maritime Organisation 2020 mandate nears implementation. This will push the shipping industry - which consumes approximately three million barrels of fuel a day - to compete directly with the aviation sector for fuel.

- Demand for aviation travel continues to soar

Despite the challenging global environment, the growth in global passenger numbers remains relatively strong. By 2037, IATA estimates that global passenger numbers could more than double from four billion (2017) to 8.2 billion. With that, there is a major demand for pilots; Boeing forecasted that around 800,000 are required over the next 20 years.

One statistic that was particularly eye-opening in terms of growth potential was that roughly, 80% of the world's population make up only 30% of air travel, or inversely 20% of the people do 70% of the travelling.

Attention was also given to the significant growth in air travel by countries such as India, China, Mexico and Brazil, where increasing wealth and development has resulted in more middle-class families eager to travel.

Coming as little surprise given India's vast population of over 1.3 billion, the Ministry of Civil Aviation stated that it expects India to become the biggest aviation market in the world by 2030. It is well on track too; it had the fastest growing domestic air travel market in the world in 2018, with 18.6% more people flying within the country than the previous year. This growth is being propelled by the increased presence of low cost carriers, making it more affordable to travel.

Naturally, China also featured in discussions throughout the conference. Increasing passenger demand means Chinese air traffic is set to increase 5% year-on-year; a figure expected to continue over the next 20 years. As a result, there has been huge growth in the number of Chinese lessors over the last few years. They are bolstered by their ready access to cheaper finance as many are sovereign or bank owned. However, given their potential lack of global diversification, one concern raised was their potential exposure to economic volatility in China.

It will be interesting to see how the headwinds play out on the global stage, particularly as the era of cheap finance draws to a close. As air travel demands increase and financing becomes more complex, the need for specialist finance structuring to improve efficiencies strengthens.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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