CAPA State of the Industry - May 2025

Transcript

Jonathan Wober:Good morning and welcome back from the coffee break. If I can ask you to take your seats. My name's Jonathan Wober. I'm Chief Financial Analyst for CAPA, and I'm going to be spending the next 20 minutes talking about the state of the industry. So quite a small topic to cover in 20 minutes. I don't think so. I think if I would choose one word to describe the state of the industry currently, it would be uncertain. We've heard quite a lot of the issues that I'm going to touch on already this morning. I'm going to try and put some numbers on some of those issues and one or two others besides. The characterization is uncertain, and I think we're seeing a lot of geopolitical uncertainty. We're seeing conflict around the world. We're seeing a trade war developing, and we're seeing an economic slowdown. I'm not going to use the word recession, but certainly an economic slowdown. And none of those things are actually very good for air traffic demand, air travel demand. But I think it's also important to take a long-term perspective, and being here in Athens, which is the cradle of European civilization, it's quite a good place to take a long-term perspective. There was a Greek myth of a king called Sisyphus, and he was condemned forever to rolling a stone up a hillside only for it to then fall down again each time he got to the top of the hill, and then he'd start to roll it back up again. And sometimes the aviation industry does feel a bit like that. Every time progress is made, something comes along to knock things back down again. But the resilience of the industry remains. Okay, so I'm going to run through 20 numbers in 20 minutes. 18 minutes as I've got left now. These are some of the topics I'm going to touch on. Let's get into it then. So I'm just going to start off by reminding us of the resilience of the industry and the recovery from COVID If I show you this slide here, the, the 2 lines there tell us cargo traffic in cargo ton kilometers and passenger traffic in revenue passenger kilometers as a percentage of 2019 levels. What level they reached last year, 2024. So for the first year post-COVID, both passenger and cargo traffic were back above 2019 pre-pandemic levels. You can see there cargo traffic doing slightly better, 108%, and RPKs 104% in round number terms. They were both growing at double-digit rates year on year last year, but that double-digit rate obviously disguises the fact they're still coming back from a, a low base. If we look into the first quarter of 2025, RPKs grew year on year at 5.3% and CTKs year on year at 2.4%. But we may start to see some of that slowing down as the economy slows. We'll, we'll wait and see what happens there. Okay, so traffic back above 2019 levels. More recent data. So the most recent traffic data I've shown you from March. We can see seat data from our databases here as recently as the current week, and on that basis, seat capacity globally is 112% of the same equivalent week of 2019. And regionally, Africa is way ahead on 122.9%, then we've got Latin America and the Middle East around 115%, North America, Europe, and Asia-Pacific a little bit lower, 106%, 107%, but all comfortably back above the 2019 levels. One other measure relative to 2019. This is from the CAPA fleet database. This is the number of jet aircraft, commercial jet aircraft in service relative to pre-pandemic levels. So I'm looking at the end of April relative to the end of April of 2019 percentages. Total is 109%, so 9% back above 2019 levels, led by narrowbodies, 16% above, and then widebodies, 3% above, and regional jets actually not actually back to the pre-pandemic levels in terms of jets in service. Now, a lot of people, when I've put up a slide like this before, have asked me, hang on a minute, surely there's— surely that's not a real number. It can't be back above. There's so many jets that are currently being serviced, or, you know, with all the engine and other supply chain issues. So this chart— forget the chart, it looks a bit funny. Look at the numbers. It didn't look like that when I prepared the slide. I don't know why it's come out looking like that, but the numbers there, the number of inactive jets, the number of inactive jets as a percentage of the total has increased quite significantly. It was 3.8% in April 2019. It's now 7% in April 2025. So there has been an increase in the proportion of jets that are inactive, but as the previous slide shows, there has been a recovery back to above 2019 levels of jets in service. Okay, so moving on, we touched— we've heard a lot of these issues touched on this morning. This slide is one that looks at the supply chain issues in terms of aircraft deliveries. And this is the number of aircraft, aircraft delivered by both Boeing and Airbus going back to 1996. You can see the light blue blocks are Airbus and the darker blue Boeing. The combination of the two of them delivered just over 1,100 aircraft last year in '24, which actually is back to the level of 2012. So you could say 12 years have been lost. Of course, the, the slowdown in deliveries started before COVID It was started in 2019 when Boeing had to suspend its MAX jet deliveries. And so Boeing has been reduced much more significantly than Airbus in terms of delivery numbers. Estimates for the current year, what delivery levels might be, I've put that down bottom right-hand side of the slide. Airbus's official guidance is to deliver 820 aircraft. which compares with their 766 last year. Boeing not officially giving guidance, but based on current production rates, let's say something in the region of 570, which would actually still only be the level they were producing between 2011 and 2012, so still a long way to recover. And of course, that is vulnerable currently to things like China suspending the delivery of Boeing jets. Okay, so another slide that also looks at this issue of the supply chain challenges. This slide shows us the number of aircraft, not just Boeing and Airbus, but total passenger commercial aircraft, number of aircraft in the backlog, which by the end of 2024 was considerably over 16,000 aircraft. And if you convert that into the number of years of production, that is 14 years' worth of production, which is the highest it's ever been. Even if you assume that production rates increase and, and divide that total by the higher number of deliveries expected this year, probably still only goes to about 11 years, which is very high by historic standards. And of course, trade wars aren't going to help that, I don't think. Okay, so another slide here. This is low-cost carrier seat share has increased post-COVID. Last year, globally, low-cost carriers had 34% of seats globally compared with 30% in 2019 and going back 10 years, 28% back in 2014. So I guess you could say low-cost carriers have had a better recovery from COVID than full-service carriers. Another slide here looking at seat share. We have a session a bit later on this afternoon on alliances. And this shows us the alliance seat share for the 3 major global branded alliances, um, uh, uh, Oneworld, SkyTeam, and the Star Alliance, which is the biggest of them in terms of seat share. But the combined seat share of those 3 has actually been eroded slightly. So 41.4%, this is, this is just a snapshot from May this year, so it's not necessarily the same figures if you looked at it globally, but it's the trend I'm looking at. So 41.4% in May 2025, The same as it was a year ago, but less than it was in May 2019 when it was 44%, and that is less than it was in May 2015 when it was 45%. The big topic of— one of the big topics of the day, of course, has been the trade war and the US tariff increases. So this slide, which comes from the Budget Lab at Yale, shows us the average US tariff rate going all the way back to the year 1790. So there's quite a lot of data that have been captured. And the effective tariff rate increased from the 9th of April— that's including when, when the— some reductions were made— is 18— is 28%, sorry. 28% is the pre-substitution rate. I'll explain what that is in just a minute. 28% is the highest since 1901. So that's an incredibly high rate. And the post-substitution rate, which basically says rather than everybody importing the same goods from the same countries, they actually start to import them from countries where the tariffs are a bit lower, has been calculated at 18%. But that's still the highest since 1934. And even if you took away all the extra tariffs and just went to the basic 10%, which the Trump administration has applied to most countries around the world, even 10% would be the highest level since the end of World War II, since the 1940s. So we're talking about basically in modern times unprecedentedly high tariff rates. It was 2.4% last year, 28% this year. And the impact of that on aviation, I like to keep things fairly simple. I can't see how it does anything other than increase aircraft production costs and delivery delays. Boeing probably worse affected than Airbus. And in terms of airlines, lower demand as a result of weaker GDP growth, I think, is a conclusion. And also not just GDP growth, but sentiment. I think there's weakening sentiment from some markets towards travel to the US. So a lot of forecasters and economists have been revising down their GDP growth forecasts. This is just using the International Monetary Fund, IMF, the January 2025 forecast that they had for the global economy, just looking at the year 2025. So look at the left-hand group of bars. 2025, they were forecasting 3.3% global GDP growth, which was a modest increase from last year. In April, they revised that downwards. So instead of forecasting 3.3%, they're now forecasting 2.8% for the current year. And, and they're all— they also cut the forecasts for the different groups of advanced economies and the emerging market economies. So a cut from previous forecasts and a slowdown relative to last year. And just to put it in some kind of historical perspective, those global GDP growth rates are below global trend rates. So the long-term average for global GDP back to 1980 up to 2019 pre-COVID was 3.4%, and the long-term average just in the current century up to 2019 was 3.7%. So we're talking about significantly slower growth forecasts. And what's more, the commentary that accompanied the IMF's revised forecasts highlighted that uncertainties have climbed to new highs and there is intensifying risks on the downside. So really, who knows what's going to happen next? And why does GDP matter? Well, I'm sure I don't need to tell everybody in this room, but there has historically been a very close relationship between global GDP growth and global passenger traffic growth. The same is true of global cargo traffic growth. but the slide I've got here shows us, um, RPK growth, which is a slightly lighter blue, and GDP growth, which is the darker color. They move up and down fairly closely together, and historically over the past, uh, 50 years or so, the average multiplier has been 2 times. So for GDP growth, RPK growth is 2 times that. Probably not as fast as it used to be anymore into the future, but it's been distorted post-COVID. as we've had this bounce back in RPK growth distorting the relationship. So we're going to see slower passenger and cargo traffic growth as a result of slower world GDP growth. Focusing in just briefly on one market, so the North Atlantic, which is an important aviation market, one data point here which is visitors by air from Western Europe to the United States. This is US data. In March, so before the application of tariffs, that number reduced by 17% year on year. Now, it's true to say that there was a change in the timing of Easter, which would have had a negative impact, but not a -17% impact on that, on that statistic. So this, and this was before the tariffs were applied, which suggests that there's something going on other than pure economic effects. So that sentiment and also concerns about increased border restrictions in and out of the US has possibly been at work here too. Another data point, Willie Walsh mentioned this in the interview earlier on, North Atlantic RPKs fell by 1% year on year in March 2025. That being said, most of the big European and US airlines that have released quarterly results and have talked about this question have been quite positive about the outlook on the North Atlantic into the summer, saying that demand remains buoyant, although pointed to some weakness in European point of sale. Fuel cost, another thing that was touched on in one or two sessions earlier on this morning. The IATA global forecast for world profitability that were issued in December last year, so a long time before all the tariff issues and other economic concerns started to surface. They were forecasting that for 2025, the fuel cost would effectively be 25% of revenue this year, compares to 27% last year and close to 30% in the 2 years before that. Now, that forecast from IATA in December is based on an average Brent crude oil price of $75 in the current year. It did average $75 up to, into the first, up to the end of April, but it's, I haven't looked at it today, but it's been down as low as $60, $61, even occasionally dipping below $60. So we're probably gonna see that going down a bit further. Now, okay, lower fuel cost is good news. It is the biggest or second biggest cost for airlines, but lower fuel cost is a result of lower oil price, which is a result of lower economic growth. Right. So that is— it's a balance between those two. Weaker economic growth means weaker demand too. And also it means— so prices in terms of fares tend to move up and down quite closely with oil prices too. So your ability to pass on costs moves up and down with the oil price. This shows us just for the EU and the UK, it's not global, but EU and the UK, Airfare inflation has been declining, and in the most recent data, which was March 2025, it was actually negative 2.9% within the EU and negative 4.4% in the UK. But if you compare prices with pre-COVID, the equivalent month of 2019, we're still seeing prices in the EU 39% above pre-COVID and in the UK 52% above pre-COVID. So downward pressure potentially going forward on— in terms of, of airfare inflation. Um, another slide. This again has sort of been alluded to, uh, this morning on occasion. A return on invested capital in the global airline industry— only 4 years this century has it met the cost of capital. And of course, the cost of capital is what investors expect as their return from investment. They're not going to get that return. Why should they invest in this industry? And coming at a time when significant investment is needed to make the green transition and all the technology investment that goes with that, you need to be attracting investors into the industry. One of the reasons why you have low return on invested capital is there's too much competition, arguably too many airlines. There's a, there's a, there's a great need for consolidation. Regulators have tended to prevent that. So I think there's a growing argument for regulators to take a more lenient, if you like, view towards mergers and acquisitions in the industry to improve the returns. 2 more numbers. It's 25 years to achieve net zero. There is a panel this afternoon, and there's been already quite a lot of discussion on the sustainability issue. I do want to just mention a couple of thoughts of my own in just a second, but recapping the 20 numbers, I don't expect you to read all of those in one go. If you want to take a quick photograph, you'll get copies of these slides after the the event is over, but those are the numbers that I have been running through. But just a couple of minutes, I just wanted to say a couple more things on sustainability, and I think there's been a lot of mixed messages coming out in recent times. So just to give a couple of examples, in the UK, which is where I'm based, the Climate Change Committee, which advises the UK government on all issues to do with climate change, recently said that the government may need to take additional demand management measures And this, by the way, was a conclusion supported by consumers that they interviewed. For demand management measures, read demand suppression or demand limiting or taxing. And also, a consumer panel that they interviewed was in favor of limiting airport expansion. But almost at the same time that this came out, the UK government gave backing for a 3rd runway at Heathrow and said it was minded to approve the development of the North Runway at Gatwick. So, you know, some mixed signals coming from the UK. And here within the industry, most— well, all world aviation industry bodies are committed to net-zero carbon emissions in 2050, and it was good to hear Willie Walsh reiterating that commitment this morning. But at the same time, there are growing voices I hear within the industry which are questioning that commitment to the 2050 And in my opinion, and this is a personal view here and it's an observation, any weakening of the 2050 net-zero commitment does give more fuel, more ammunition to those looking to impose taxes and levies to limit the growth of aviation. And so I think it's a— it's better for the industry to be redoubling its efforts to work with governments and regulators to facilitate and encourage the green transition through appropriate regulatory investment and fiscal incentives. So we heard from Yanis from Athens Airport this morning. We don't want governments to look at the aviation industry as an emitter, just as a polluter. There are considerable benefits to it from aviation in terms of social, cultural, and economic benefits. So I think the industry— I've said this before and I'll say it again— aviation, I think, needs to be a lot more confident in expressing its economic and social benefits. Thank you. Thank you very much.

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