CAPA Outlook State of the Industry | August 2023
Lori Ranson is currently a Senior Analyst at the Centre For Aviation (CAPA). Her coverage has touched on all aspects of commercial aviation, including marketing and distribution, network development, safety, maintenance, repair and overhaul, aircraft programmes, alliances, regulatory developments, finance and the passenger experience. Prior to joining CAPA, Lori spent more than a decade covering the commercial aviation industry, specializing in the North American market. Previously she was Americas Air Transport Editor for Flightglobal, where she led a team of journalists and worked with freelancers to produce content for Flightglobal, FlightglobalPro, Flight Daily News and Airline Business magazine. Prior to that, she worked as a Senior Editor for Aviation Week, covering low-cost and regional airlines.
Transcript
Lori Ranson:Thank you all for being here this morning. Unfortunately, I was unable to travel at the last minute, but I'm happy to be doing this from my home. So we're going to look to the future this morning, and I think this is a great quote. I've been having this discussion recently with my colleagues about benchmarking to 2019 and how in many cases it's just no longer useful. I think Mr. Hazy sums up where the industry is headed pretty nicely. Comparisons to 2019 are increasingly becoming irrelevant, with a couple of exceptions that I'll talk to you about shortly. On slide 3, you can see in Latin America, capacity at year end is growing about 4% compared to last year. A lot of airlines in the region are operating in their high season and see strong demand continuing. Brazil is slowly seeing corporate demand return while leisure traffic remains strong. You all know that there's been some upheaval in Colombia this year, but it seems like the dust is settling and the capacity that exited the market is being backfilled for now. In Mexico, there's a bit of oversupply. As the country waits for a safety upgrade from US regulators. There's also a new entrant slated to enter the market later this year as the Mexicana brand is revived. Europe's capacity continues to grow year on year, but like other operators, European airlines are navigating through extreme weather events. That's caused some challenges in operations, but not nearly as the levels of last summer. The region's 3 largest airline groups continue to see strong demand. IAG has said about 30% of its seats for the 4th quarter are booked, which is pretty usual for this time of the year. It also said demand remains strong across all of its airlines as passengers are prioritizing holidays and visiting friends and relatives, which is helping to offset a slower recovery in corporate travel. In North America, system capacity is going to be up around 14% compared to 2022 at year-end, with international up 19%. Airlines in North America, particularly the US, are working through a higher level of demand for inter— international travel this summer, and domestic pricing is also returning to more normal levels after airlines had outsized fare traction last year. Many US airlines that are domestic-centric have lowered their financial guidance. JetBlue has said it saw a greater-than-expected geographic shift to long-haul travel that's pressured its short-haul performance. The airlines that are facing those headwinds from the shift in demand believe it should abate as kids return to school and holiday travel kicks in in the 4th quarter. But some large US airlines are seeing signs that long-haul demand in regions, particularly Southern Europe, could extend into the fall season. On slide 6, this shows that Asia-Pacific capacity has a nice bump this year. In June, Asia-Pacific airlines saw a 128% jump in traffic and capacity climbed nearly 116%. And this is year over year. But China's economic performance remains under scrutiny since this is a significant factor driving the region's traffic growth. There's no doubt the recovery in Asia-Pacific is on the upswing. Just a brief example, Cathay Pacific recently exercised purchase rights for 32 A320neo family aircraft and is also considering an order for widebody aircraft. It's also set a timeline to repurchase shares the Hong Kong government bought to support the company during the pandemic, which is also another promising sign going forward. Here you can see year-over-year traffic performance in the 2nd quarter by region. It's not surprising that China and Asia-Pacific have the biggest increase since many markets just opened up at the end of last year. There's a nice rise in traffic in most regions, and Latin America's momentum should continue given the 2nd half of the year is busy for many of the region's airlines. Here you can see orders, and there was a significant jump in orders from May, June, and July this year compared with 2022. And that's largely, largely driven by IndiGo's order for 500 jets and Air India's commitment for 470 aircraft. And the big question is, will India have the infrastructure necessary to support all the aircraft entering the market in the next decade and beyond? Here you can see retirements, and in July, slightly above 25 units, 42% below 2022. That's due to supply chain constraints. Airlines are opting to keep older aircraft or buying older aircraft from lessors and extending aircraft leases. That's keeping leasing rates on an upward trajectory. There's also a surge in demand for wet leasing. driven by maintenance bottlenecks, engine issues, and delivery delays. Slide 10. Deliveries from May to June— I'm sorry, excuse me, May to July grew year over year. Most airlines in the short term see deliveries slipping, but perhaps not at the same rate as in the recent past. Obviously, the big issue at the moment is availability and reliability of new aircraft engines. Operators of the Pratt Whitney geared turbofan engines are trying to determine how much of their fleet will be affected by new inspection protocols for a portion of those engines recently outlined in a new airworthiness directive from the FAA. That situation creates challenges from both an operation and network planning perspective, and the engine issues are going to be an overhang well into next year and likely beyond. So on this slide, I want to talk about utilization because I think utilization is one area that could be beneficial to make comparisons to 2019. This shows in July commercial utilization was roughly in line with pre-pandemic levels. It's important to push for airlines to push their utilization back up since it increases reliability and efficiency, which help to lower cost. On slide 12, this is utilization by region for May through July compared to the same period of 2019. Latin America is up and North America is down. US airlines have had to build some padding into their schedules and lower utilization to compensate for infrastructure constraints that are going to be a challenge for the foreseeable future. And that's adding to the existing supply chain supply chain constraints that are going to take a couple of years to resolve. Slide 13 shows the industry's gotten a reprieve from higher fuel costs, but prices are starting to creep back up. So it's worth watching to see if OPEC makes any further adjustments to its production. And perhaps just finally, there's been a lot of discussion recently about demand and if it's cooling off or just settling down from historic highs over the last year. For now, capacity constraints should continue to push yields up, but over the near term, airlines are going to be studying demand patterns to see how they unfold. And I'm sure that may be a topic of discussion over the next couple of days. Thank you very much for your time and enjoy the conference.
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