Key market insights

$23bn
The International Air Transport Association (IATA) industry profit forecast
European airlines reporting strong earnings

The International Air Transport Association (IATA) is forecasting an industry profit of $23bn and an operating margin of 5%, the same margin as that earned in 2019. Following a generally successful 2023, many airlines are now braced for the challenge to sustain capacity levels in the wake of engine and other issues taking aircraft out of service, with production levels still slow to ramp up as supply chain issues persist. Higher interest rates, inflation and heightened geopolitical tensions are all challenges to the airline operating environment in 2024.

Europe’s largest full-service carriers reported strong third quarter (Q3) results, on the back of seasonal and pent-up leisure demand paving the way for higher fares. International Airlines Group (IAG) reported a record operating profit of €1.7bn, Lufthansa €1.4bn and Air France-KLM €1.3bn with operating margins of 20%, 14% and 15%, respectively. IAG attributed its success to sustained strength on its North and South Atlantic routes and in leisure destinations around Europe. Lufthansa recorded the biggest growth in passenger numbers (15% quarter-on-quarter) by adding flights and up-gauging aircraft. Notably, in the face of capacity constraints, Lufthansa reactivated less fuel-efficient current technology aircraft, such as the A340 and B747. All three airlines have been utilising cash to decrease net debt, which has been reduced in aggregate across the three airlines by €5.2bn since 2022.

Download the Q4 Aviation market report PDF 3.37 MB
US LCCs waning

The three large European low-cost carriers (LCCs) also reported strong Q3 operating results. Ryan Air led the trio with an operating margin of 35% for the quarter ended 30 September 2023. Wizz Air reported an operating margin of 24%, reversing a prior year loss attributable to sub-optimal fuel hedging, and EasyJet reported an operating margin of 21%.

Across the Atlantic in North America, the results were mixed. The US majors reported positive Q3 operating margins (Delta 13%, United 12%, America 5%, Southwest 2%). However, the US LCCs – Frontier, JetBlue, Spirit and Allegiant – reported negative operating margins of -6%, -7%, -15% and -3% respectively, perhaps indicating that pent-up demand in the North American ultra-low-cost market segment is waning. Spirit cited reduced demand coupled with inflationary pressures and noted that increases in employee costs have exceeded Available Seat Kilometres (ASK) growth.

 
Boeing’s production woes continue

The recent 737 MAX-9 door plug loss incident in January 2024 has highlighted another apparent failure in production line quality control, although this is yet to be confirmed by the investigation. The loss of a door plug in flight was a lucky escape from what could have been a catastrophic incident if it had happened at a higher altitude when passengers may have unbuckled their seatbelts. The very nature of 737 main cabin doors is that they ‘plug’ the aperture from the inside and thus the pressurisation exerts a force on the doors which helps to keep them in place in the unlikely event of door mechanism failures and to maintain the cabin pressure.

The door plug in this case was fitted to fill an aperture which could have an emergency escape door fitted if the operator uses a higher seating density configuration. With a lower density configuration, there is no need for an additional exit and thus the aperture is covered and is not visible from the inside of the cabin. The door plug is hinged at the bottom and has attachment bolts to hold it in place. Although still speculation, the latest evidence does point to a production or pre-entry into service issue as the inspection of other similarly configured 737 MAX-9 aircraft with other operators has apparently revealed loose retention bolts. If this is found to be a result of quality control or other process failures, then further scrutiny will fall on Boeing from the Federal Aviation Administration. 

The 737 MAX has also suffered recent incidents of loose or incorrectly assembled rudder control rod fasteners as well as some non-standard fittings in the vertical stabiliser fitting bolts on certain MAX aircraft. There is speculation that the industrial processes in the supply chain are suffering as a result of the loss of many experienced workers during the Covid-19 pandemic layoffs and production line shutdowns, but we have to await the outcome of investigations to identify the root causes. 

Nick Cowney
Nick Cowney, Investor Relations, Aviation

Major airlines have reported strong results due to yield and revenue management as customers continue to prioritise experiences and travel in the face of the cost-of-living crisis.

 
Orders up for OEMs

On a positive note, for both primary original equipment manufacturers (OEMs), orders and deliveries for 2023 are as follows:

2023Net ordersActual deliveriesMid-year estimated deliveries
Boeing1,456528503
Airbus2,094735712

 

Both Boeing and Airbus look to have broadly met or just exceeded their revised 2023 targets for overall production numbers, but the challenge will be how to ramp up that production to hit the much-increased intended target rates for 2024 onwards in the face of well-documented challenges. The door incident on the 737 MAX 9 at the moment looks unlikely to impact production rates but should the outcome of the investigation point to systemic failings in the production process, the plans to ramp up the rates may be further impacted.

Download the Q4 Aviation market report PDF 3.37 MB

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