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For at least the next two years, aviation will be supply-constrained rather than demand driven

Analysis

CAPA ANALYST PERSPECTIVE - a series where CAPA - Centre for Aviation's analyst team provide their personal views on a hot topic facing aviation around the world.

Global airline seat capacity finished 2023 at 99% of 2019 levels. Given that barely 18 months ago in 2022 global seat capacity was at a mere 50% of historic levels, this return to near normality is a remarkable achievement.

Some variability in the level of recovery and regional volatility still exists.

Asia Pacific international travel is the major outlier, finishing 2023 at around 85% of 2019 levels. However, most airlines have passed out of the survival and rebuilding phases.

Simon Elsegood, Head of Research at CAPA - Centre for Aviation shares his viewpoint.

Global travel returns to normal, but growth is increasingly at the mercy of aircraft-makers

On top of this, global economic activity continues to hold up better than expected, with interest rates and inflation likely at, or past, their peaks.

Oil prices have stabilised and are forecast to remain at more reasonable levels of around USD80 to USD85 per barrel. Although international trade is weak – hurting the previously buoyant air cargo sector – activity jumped late in 2023 and is expected to pick up overall as 2024 progresses.

Global airline association IATA’s latest forecast is that the airline industry will achieve aggregate profits of close to USD26 billion for the year, on record revenues of around USD964 billion.

Travel demand remaining strong – this is particularly so for international travel and in premium leisure cabins. Although the highly profitable business travel sector has been slow to come back, ending the year at around 80-85% of 2019 levels, there is still headroom for substantial growth.

The outlook for the airline industry generally is positive. Most airlines will be expanding network and traffic beyond pre-pandemic levels, while working towards improving profitability and resolving the last lingering issues from COVID-19.

Positive outlook drives aircraft ordering to new records

Airlines and leasing companies have embarked on an unprecedented aircraft ordering spree. Customers which had delayed/deferred fleet plans in 2020 through 2022 have finally made substantial orders.

Other airlines have made ambitious growth statements based on the rapid recovery of passenger traffic, and the overall favourable outlook in either their domestic markets or the wider international sector.

As a result of the spending, unfilled global aircraft orders reached a record 15,993 as of the end of 2023 – this is a new record, more than 800 aircraft above the previous peak achieved in 2018.

Aircraft production is failing to keep up with demand

Although the record global order book reflects recent strong demand for commercial aircraft, the backlog has also ballooned out due to the cuts in production that OEMs have made in recent history.

The onset of the COVID-19 pandemic had a tremendous impact on aircraft manufacturing. OEM output dipped 45% between 2019 and 2020, and even then, manufacturers were making more new aircraft than their customers could handle. This resulted in unprecedented inventories of undelivered aircraft left to idle on aprons and taxiways awaiting delivery.

Although air travel has recovered to near pre-pandemic levels, aircraft production has not done the same.

COVID-19 has upset the usual production cycle and sent backlogs skyrocketing

Based on 2023 delivery numbers, it will take global OEMs around 12.6 years to fill this backlog of orders. Excluding the aberration of the 2020 and 2021 pandemic years, this is the highest ratio of orders to production on record.

In recent decades major economic downturns have meant that global aircraft deliveries have dropped, and then recovered, to match or exceed pre-downturn peaks within two to five years. If this had been a usual cycle, aircraft deliveries would normally have reached the 2018 peak of just over 1,800 deliveries somewhere between 2020 and 2023.

Instead, OEMs are scrabbling to raise production and meet customer demand. With deliveries still so far off their peak, the downturn in production since 2019 has resulted in a delivery shortfall of 3500 and 4000 aircraft.

This shortfall has meant that airlines have been forced to kept older and less efficient aircraft in service just to maintain operations.

OEMs planning an unusually steep ramp-up… but the supply chain is still the weak point

Unsurprisingly, the OEMs have announced historically steep production ramp-up in order to bring backlogs down, accelerate deliveries and support the customers.

While OEM’s plans are being welcomed by airlines and lessors, there is also scepticism from customers and key parts of the supply chain that these targets are realistic or sustainable.

Even before the pandemic, the aerospace supply chain had been visibly struggling to deal with the ramp-up in production at Airbus and Boeing. Delivery delays had become an industry norm, and OEMs had been forced into a vertical integration strategy as they sought to raise output.

Although the pandemic period created what appeared to be a temporary breather for the supply chain, it only ended up exacerbating existing issues and opening up new ones.

With the air travel sector in crisis, aircraft manufacturing sector went into survival mode.

Border closures, local lockdowns and other restrictions of the COVID-19 pandemic saw shortages emerge in everything from raw materials to microprocessors. This resulted in production bottlenecks.

Some of these have proven stubbornly difficult to eradicate, with OEMs still investing in supply chain management, support and supervision programmes.

There are no short term solutions to these problems, which means that meeting the steep ramp-ups envisaged by OEMs will be a difficult task. While the demand is certainly there, in terms of both airline traffic and aircraft orders, the first priority for OEMs should be to shore up supply chains.

Aircraft makers have already shown that they are willing to push back output targets on multiple aircraft programmes – given that the supply chain is still dealing with the post-pandemic shake-out, it is unlikely that 2024 will be any different.

For at least the next two years, the aviation market will be supply-constrained, rather than demand driven.

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