Key market insights
Demand and capacity up in May
The International Air Transport Association (IATA) reported that in May 2024 total aviation demand, measured in revenue passenger kilometres (RPKs), was up 10.7% compared to May 2023. In addition, total capacity, measured in available seat kilometres (ASK), was up 8.5% year-on-year and the May load factor was 83.4% (+1.7ppt compared to May 2023), which is a record high for May.
Breaking that down, international demand rose 14.6% compared to May 2023 with capacity up 14.1% year-on-year and the load factor improved to 82.8% (+0.3ppt on May 2023). Domestic demand rose 4.7% compared to May 2023, capacity was up 0.1% year-on-year and the load factor was 84.5% (+3.8ppt compared to May 2023).
Air navigation service providers under pressure
These statistics led IATA’s Director General, Willie Walsh, to comment: “Strong demand for travel continues with airlines posting a 10.7% year-on-year increase in travel for May. Airlines filled 83.4% of their seats, a record for the month. With May ticket sales for early peak-season travel up nearly 6%, the growth trend shows no signs of abating. Airlines are doing everything they can to ensure smooth journeys for all travellers over the peak northern summer period.
“However, our expectations of air navigation service providers (ANSPs) are already being tested. With 5.2 million minutes of air traffic control delays racked up in Europe even before the peak season begins, it is clear that Europe’s ANSPs have unresolved challenges. And the 32,000 flight delays over the Memorial Day weekend in May show that challenges persist in the US, too. Airlines are accountable to their customers; ANSPs must be as well. ANSP performance matters to their airline customers and to millions of travellers. We all need them to do their job efficiently.”
Investec pays close attention to engine green time when assessing aircraft residual values and sizing aircraft debt balloons. We have seen engines contributing to an increasing portion of an aircraft’s residual value. In line with our expectations, Cirium has recently adjusted its base value curves such that they generally have a shallower depreciation profile and higher floor.
All regions showed strong growth for international passenger markets in May 2024 compared to May 2023. The load factor increased in all regions except North America.
Continue to lead the way, with a 27.0% year-on-year increase in demand. Capacity increased 26.0% year-on-year and the load factor rose to 81.6% (+0.6ppt compared to May 2023). This performance maintains Asian carriers as the largest contributor to industry-wide growth in May, accounting for 42% of the year-on-year increase.
Saw an 11.7% year-on-year increase in demand. Capacity increased 11.3% year-on-year, and the load factor was 84.7% (up 0.3ppt compared to May 2023).
Saw a 9.7% year-on-year increase in demand. Capacity increased 9.0% year-on-year and the load factor increased 0.5ppt to 80.7% compared to May 2023. Asian routes to the Middle East are particularly strong, now standing some 32% higher than in 2019. Another notable development is the Europe-Middle East route, which saw an April-May RPKs increase for two years in a row, reversing the previous historic pattern of a decline between these months. In the coming months, it will become clearer to what extent these trends could be related to the Russia-Ukraine war.
Saw an 8.1% year-on-year increase in demand. Capacity increased 9.7% year-on-year, and the load factor fell to 84.0% (-1.2ppt compared to May 2023).
Saw a 15.9% year-on-year increase in demand. Capacity climbed 14.3% year-on-year. The load factor rose to 85.1% (+1.2ppt compared to May 2023), the highest among the regions.
Saw a 14.1% year-on-year increase in demand. Capacity was up 8.2% year-on-year. The load factor rose to 72.3% (+3.7ppt compared to May 2023). This was the fastest increase in load factor among all regions, although Africa still has the lowest load factor overall.
Domestic passenger markets
Domestic demand increased at a stable pace in May. China’s growth rate surged in line with the post-Labour Day holidays with Japan’s decline of -1.8% possibly reflecting low business and consumer confidence.
Air cargo traffic
In 2023, geopolitical tensions, continued inflation, impaired supply chains and rising cross-border trade restrictions weighed heavily on the world’s trade in goods. Even though many of these headwinds have carried over to 2024, the World Trade Organization expects merchandise trade volumes to grow by 2.6% year-on-year this year, after falling by 1.2% in 2023. This would be just above the historical (2010–2023) average of 2.5% year-on-year, but there is considerable downside risk to this forecast.
With the disturbances in global supply chains in the aftermath of the Covid-19 pandemic, both sea freight and air transportation rates were very volatile. Disruptions in ocean container shipping have reemerged since late 2023, linked to the Red Sea, the Panama Canal drought, and the accident at the Baltimore Bridge. This has again brought about a sharp drop in relative air cargo rates over maritime shipping in the first quarter of 2024 radically increasing air cargo’s competitiveness. It is crucial for the air cargo outlook to ponder whether the shift in global supply chains could be a lasting phenomenon.
Airline financial performance
Considering the relatively high crude oil prices, the strong US dollar against many other currencies and persistent inflation, as well as higher interest rates, the aviation industry has demonstrated a remarkable ability to adapt to the changing market environment. In 2023, revenues exceeded the 2019 level and operating profits rebounded to a level last seen in 2018.
Thanks to higher-than-anticipated yields, 2023 profit forecasts for all regions have been revised, most notably in Asia Pacific, Latin America and Europe.
At the industry level, expectations are now for 2023 net profit stands to reach US dollar 27.4 billion and the current operating margin should climb to 5.7%. In 2024, expectations are for further growth in traffic, though at a slower pace than that seen in 2022 and 2023. This should allow net profits for the aviation industry to reach USD30.5 billion, with a 3.1% net profit margin and a 6.0% operating.
The operating margin is expected to continue its upward trend, driven by sustained demand and further gains in fleet utilisation and load factors. These factors should help dilute the unit cost (specifically, the non-fuel unit cost measured per available tonne-kilometre (ATK) and boost the profit margin. Delays in aircraft deliveries can have contrasting effects on airlines and their network. On the one hand, limited seat availability may prevent the maximisation of anticipated revenue growth. On the other hand, delays can enhance profitability if higher load factors lead to higher yields, potentially improving margins.
High interest rates tend to have a negative impact on net margins and typically impact airlines’ financing costs with a lag. The full effect of the tighter monetary policy is likely to be felt in 2024 and 2025. Furthermore, delays in aircraft deliveries have already driven operating lease prices to record highs, which could also impact profitability this year.
Despite these challenges, expectations are that 2024 will see a relatively stable macroeconomic outlook and strong passenger demand. These factors should enable the airline industry to improve its operating margin compared to 2023.
However, it is essential to consider that higher aircraft ownership costs may keep the net margin broadly flat year-on-year, despite an increase in operating margin.
The improved financial health can also be observed on company balance sheets. First reads of industry financials this year indicate nominal debt levels falling to a level just a notch above 2019 and a rough estimate of the adjusted net debt/EBITDA ratio of 4.1x compared with 2017-19 average of 4x. On the other hand, debt levels now imply higher interest burdens, given a sharp increase in interest rate, which may put pressure on net margins.
Freighter aircraft demand
With the global softening in demand for air freight, compared to recent years, partly driven by the faster-than-expected return to operation of large aircraft with belly hold capacity, there were concerns about an oversupply of narrow-body-sized freighter aircraft. Some recently converted 737-800s are now understood to be parked, awaiting deployment.
As noted above, conflicts, accidents and weather are all impacting global sea freight. The desire for ‘just in time’ logistics in supply chains and other limitations in supply chains, in general, are driving more manufacturers towards air rather than traditional sea freight. This is especially the case in technology markets, where assembly of consumer goods relies on the supply of essential microchips from Far East manufacturers.
With aircraft manufacturers still unable to ramp up their passenger aircraft production to planned levels, demand for used aircraft is taking up some of those positions. This is leading to adjustments in the flow of passenger aircraft being converted to freighters, with many lessors choosing to redeploy aircraft out of their conversion programmes back onto extended or new passenger operation leases. When the programmes were first put together, they included some very young aircraft that bucked the traditional 20-plus years before conversion trend and began to lower the average age of a converted freighter, but this age reduction is now likely to slow down.
