Passengers are travelling in near pre-pandemic numbers and facing prices not seen for years. Photo / AP
Passengers are travelling in near pre-pandemic numbers and facing prices not seen for years. Photo / AP
As Kiwis reel from how much they’re paying to fly on Air New Zealand, international research shows how airlines around the world are using their pricing power to raise fares.
Research by international aircraft leasing company Avolon finds global traffic will reach pre-pandemic levels by June.
After a 70per cent recovery in passenger traffic last year, led by a rebound in Europe and North America, Asia will drive growth this year, helped by China’s recent reopening.
Drawing on multiple sources, Dublin-based Avolon says that for every two seats of airline capacity added in the world today, one is in Asia.
The traffic recovery brought the sector back to the brink of profitability in 2022, after combined industry losses of US$180 billion ($281b) in 2020 and 2021. A profit of around US$4.7b is forecast for 2023 as recovery continues.
Airlines’ financial recovery is running ahead of their capacity recovery. This means they are benefiting from the reduced number of flights.
“While air traffic is still 25 per cent below 2019 levels, revenues are just 13 per cent lower as airlines flex their pricing power and raise fares,” says Avolon. “Demand for travel is no longer the constraint to recovery, but airlines’ capacity to put planes in the air.” Rising interest rates, a strong US dollar, elevated oil prices, a scarcity of skilled workers and higher engine maintenance costs all forced up prices
In New Zealand, third-quarter Consumers Price Index (CPI) figures late last year showed fares up 20 per cent, while Australian government figures show fares there hit a 15-year high in December.
In the United States, airfares are up 28.5 per cent on last year, although December CPI figures show they’re easing, down 3.1 per cent on a month earlier. However, demand is still booming, with net sales 14.6 per cent above the pre-pandemic 2019 level for the week ending January 8, according to Bank of America.
Avolon’s chief risk officer, Jim Morrison, and head of counterparty risk and sustainability, Rosemarie O’Leary, prepared the report, Climb to Cruise.
Airlines have emerged from the cloud of Covid and are heading for pre-pandemic capacity. Photo / Grant Bradley
With the global economy 15 per cent larger today than it was in 2019, airline revenues remain US$130b to US$260b below their historical share of world GDP.
“This creates a buffer against weakening economies in 2023,” says the report. “While an uptick in defaults among smaller carriers may occur as government support is withdrawn, this is reflective of normalising airline credit conditions.”
Avolon says that of the US$26 trillion of fiscal stimulus and monetary expansion in 2020 and 2021, US$220b went to airlines. In Aotearoa, Air New Zealand has received more than $2b in direct and indirect government support.
Analysts Cirium found the drop in airline revenue since the pandemic began led to industry-wide net losses totalling almost US$220b.
Avolon says different speeds of airline recovery have emerged, and Asia has taken the growth lead from North America and Europe.
Globally, domestic capacity is now nearing 90 per cent of pre-pandemic levels and though slower to recover, international traffic is now back to over 75 per cent.
Corporate travel has recovered to around 75 per cent of 2019 levels while leisure is booming - above 100 per cent in the United States as families reconnect.
Older, current-generation aircraft are back in demand as the supply of new-technology aircraft remains constrained.
Delivery delays have become “endemic” and an aircraft shortage is emerging, given the lost production of 2400 planes that had been planned but were not built due to the pandemic. Avolon says airlines have shrunk their owned fleets by 3 per cent since 2019, whereas lessors have grown theirs by 17 per cent and now manage 53 per cent of the global passenger fleet by value.
Among “fearless” forecasts for 2023, O’Leary and Morrison predict:
China drives global passenger traffic to 2019 levels by June: reopening of the world’s second-largest aviation market will drive a rapid uptick in air travel.
Manufacturers delay delivery rate targets by a year: Airbus and Boeing are aiming to produce a combined 140 single-aisle and 24 twin-aisle aircraft per month by 2025. These targets will be delayed by a year to focus on delivering to schedule, and quality versus aspiration.
A330ceo (current engine option) market lease rates increase by 35 per cent: used widebodies will be back in demand as international markets fully reopen, new aircraft are in short supply, and a pressing need for additional capacity emerges.
Airline consolidation to accelerate as new airline start-ups slow: 100 new airlines started operations in the past three years, capitalising on available aircraft and crews. Consolidation will replace fragmentation in 2023 and start-ups without competitive niches will be forced to exit.
The volume of sustainable aviation fuel (Saf) under offtake agreements doubles: offtake agreements reduce the risk of project financing by locking-in future revenue. The International Civil Aviation Organisation tracks 40 billion litres of Saf under agreements today. This will increase to 80 billion litres, but more is needed.
