Global Aviation Industry Is High On Optimism Despite The Challenges Up Ahead

The challenge of environmental sustainability for the global aviation industry is driving a major expansion of investment and resources into developing new technologies and sustainable fuel sources

The commercial aerospace sector is a $1.5 trillion industry and a critical enabler of economic growth. The airline industry operates more than 30,000 aircraft, carries almost five billion passengers and transports 30 per cent of world trade by value. The year 2024 turned out to be better than what IATA had predicted. Net profitability was 23 per cent ahead of IATA’s forecast in December 2023. However, airline net profit was still 10 per cent ($31.5 billion) behind 2023 levels, representing a return on invested capital of 6.6 per cent, below the average airline cost of capital and sustaining the drag on recovery and investment.

A challenge for the global industry continues to be the shortfall in aircraft deliveries. Aircraft deliveries were 20 per cent below expectations in 2024, resulting from non-availability of aircraft due to unserviceable engines or component unreliability. These supply chain challenges are likely to continue for much of the decade, leaving airlines to deal with disruptive and costly network and fleet planning challenges for several years to come.

Adding to the airlines’ cost burden, the average age of the global commercial fleet has trended up for the past five years to hit 14.8 years in 2024, the highest on record and well above the 13.6 year long-term average.

A 12 per cent drop in fuel prices in 2024 globally compared to 2023 brought a welcome tailwind for the industry. Fuel prices are expected to remain moderated over the coming year. At the same time, fuel costs for the global airline industry fell by just three per cent compared to 2023, with non-fuel costs increasing by 11 per cent, reflecting the pressures of wage inflation and operating cost increases. However, wage increases were partially offset by a 4.7 per cent improvement in productivity.

The industry’s pent-up requirement for new capital to finance growth, develop and build aircraft, expand infrastructure capacity and absorb the costs associated with sustainability measures has never been greater. It was another strong year for aviation-related borrowing. However, several aviation lenders also exited the market, citing strategic and regulatory changes driven by Basel and ESG considerations.

In 2024, passenger traffic, measured in revenue passenger kilometres, surpassed pre-Covid levels for the first time.

Traffic from January to October 2024 was five per cent higher than for the same period in 2019, with Europe’s progress slightly slower at four per cent. However, five years of compounding growth should have produced 25 per cent growth by now. It is unlikely that this shortfall will ever be recovered. In absolute terms, IATA’s member airlines carried 4.89 billion passengers in 2024, an increase of 10.2 per cent.

More passengers are combining business and leisure trips, blurring the line between what had been two distinct categories of traveller.

A shortfall of more than 4,500 commercial aircraft now exists. For example, in 2024 alone, missed delivery commitments were an estimated 560 aircraft. These aircraft will never be built and delivered, leaving airlines short of capacity for many years to come. The number of firm orders booked also fell sharply in 2024 from 2023’s record-breaking total.

It is essential that airlines should not be subject to another peak season of frustrated expectations and late scheduling changes. Passengers should equally not have to bear the consequences.

The aircraft leasing sector has been a net beneficiary of the capacity shortage and 2024 saw virtually all remaining flyable aircraft on lessors’ books placed on lease. Direct orders are fully placed out to the end of 2026, with 2027 inventory already almost 50 per cent secured.

As a consequence of the capacity shortages, an unprecedented level of lease extensions is being experienced, with some lessors receiving requests to extend 90 per cent or more of maturing leases, compared to the typical 33 per cent. Lease rates are thus substantially higher than a year ago.

The long-term stability, profitability and resilience of the leasing sector underpin its attractiveness to investors. The trend towards consolidation of lessor platforms will continue, with more M&A activity for middle and smaller tier lessors.

The challenge of environmental sustainability for the global aviation industry is driving a major expansion of investment and resources into developing new technologies and sustainable fuel sources.

Meanwhile, much of the industry is now in agreement that meeting the targets to achieve Net Zero by 2050 will be extremely challenging and it can be achievable if Sustainable Aviation Fuel (SAF) availability and affordability improves significantly.

SAF production more than doubled in 2024 compared to 2023, but availability remains chronically low, accounting for less than 0.5 per cent of airline consumption. Alternative synthetic SAF products are needed. However, cost is a major consideration for airlines. Synthetic SAF is expected to be six to 10 times more expensive. The scale of investment required to develop the technologies and production facilities for synthetic SAF is currently far beyond what the market can raise.