Financiers at the centre of a $200 billion industry underpinning worldwide airline fleets are meeting in Dublin this week, gambling that China’s long-awaited decision to free travel will accelerate their recovery while warning of a shortage of jets.
Three years after the spread of COVID-19 grounded thousands of airliners, demand for air travel is booming again, boosted by Beijing’s decision last month to unwind its zero-COVID policies.
In a report on Monday, the world’s second-largest aircraft leasing company, Chinese-owned Avolon, predicted global traffic would return to pre-pandemic levels as early as June this year – months earlier than most in the industry have predicted.
“After a 70% recovery in passenger traffic last year led by … Europe and North America, Asia will drive growth in 2023, helped by the recent reopening in China,” Avolon said.
Others remain more cautious.
“Airlines are not dramatically increasing their frequency to China. It’s going in the right direction but … it’s going to take some time,” said aviation adviser Bertrand Grabowski.
“For now, I think we must think about China in a cautious way” Rob Morris, head of global consulting at Ascend by Cirium, told the Airline Economics conference, which along with a separate event hosted by Airfinance Journal, brings financiers to the world’s aviation finance capital for talks each year.
“Passenger confidence is going to be a key thing,” he said.
Data so far suggests Chinese are resuming travel ahead of the Lunar New Year, despite worries about infections after Beijing ended curbs last month, with passenger traffic jumping to 63% of 2019 levels since the annual travel season began.
The crippling impact of COVID-19 saw dozens of airlines go out of business and wiped billions of dollars off balance sheets.
HIGHER FARES, LEASE RENTALS
In a sharp reversal, the industry’s biggest worry now is getting hold of enough of narrow-body jets, which are the most widely used, to meet demand as battered supply chains delay new aircraft deliveries.
On top of that, severe bottlenecks in maintenance, repair and overhaul (MRO) plants are frustrating efforts to keep existing jets in regular service or get others out of storage.
“The bottom line is MRO; they are totally full,” Grabowski said, adding that stored aircraft needed extensive checks.
In public, airlines and leasing firms have deplored delivery delays and are seen likely to press aircraft makers for compensation.
Privately, many airline executives acknowledge the shortages have allowed them to hold air fares higher to help replenish balance sheets, cushioning them against fears of a recession.
The same is true of aircraft rentals charged by lessors, some of which have on average risen by double-digit percentages over the past 12 to 24 months, according to Morris.
“The basic mood is cautious optimism because we hear about China’s market opening,” Marjan Riggi, a senior managing director at Kroll Bond Rating Agency, told Reuters.
“China is the second biggest market in the world in aviation. And if they’re successful with the opening of borders – which is somewhat debatable given the rise of COVID in China as we speak – that’s bound to help with traffic going up.
“The one thing that’s not clear is whether there is enough aircraft supply to meet demand.”
At the same time, macroeconomic concerns continue to dog an industry whose traffic trends closely track economic growth.
Inflation is driving up prices of planes spare parts, while raising questions over the resilience of travel demand.
With interest rates racing higher to combat inflation, leasing companies must pay significantly more to service the large debts inherited from a multi-year plane ordering boom.
All airlines face volatile oil prices, and those in most emerging markets face a steep rise in the cost of dollars needed to pay for aircraft rentals and fuel.
All this is happening while the industry is figuring out how to implement and pay for pledges to reach net-zero emissions by 2050.
This week’s gathering of more than 2,000 financiers, lessors, investors, airline bosses and manufacturers will spawn hundreds of private meetings to whip up financial backing for newly delivered aircraft or to find new homes for old ones.
Overall, more than half of the world’s airline fleet is controlled by global leasing companies rather than airlines.