Is the sun finally shining behind the clouds for aviation? † Analysis

The pandemic and the global shutdowns had a dramatic effect on the aviation industry. The airspace is now almost completely reopened, which is not only good news for travelers, but also for aviation as a financial sector. Simon Finn, director and aviation expert at the international bank MUFG, sees that covid has brought about lasting changes and expects heyday for aviation.

During the pandemic, airlines have had to take drastic economic measures. Some swapped bonds for shares to survive, shareholders had to invest more, and the government stepped in to help where possible. Many flights were forced to be canceled and supply chains are still disrupted and we are facing significant staff shortages.

The airspace has now reopened, but the war in Ukraine is once again creating unrest. Airline leasing companies have, as far as possible, recalled their aircraft from Russia, but it is likely that a large part of the Russian leasing fleet will be ‘nationalized’ – raising questions about the aircraft’s airworthiness. The war also incurs additional costs because planes have to make a detour to bypass Russia and Ukraine. But the most visible effect of the war is the rise in energy prices, which along with high inflation will hit travelers hard this year.

Back to 2019 level

Fortunately, it is not all doom for the aviation sector. Aviation still accounts for about 3.6 percent ($ 2.7 trillion) of global GDP, supports world trade and economic development, and provides employment in various sectors. And although the sector has not come out of the corona battle unscathed, it is safe to say that the measures and support have been successful. We still have a long way to go again, but half of the lost growth since 2019 has now been recovered.

There is one area of ​​the industry where growth has already exceeded the monthly level in 2019: cargo flying. Demand for cargo planes exploded during the pandemic due to e-commerce, and much was invested in new planes. Airbus tried to increase its market share and introduced the A350F to compete with Boeing’s large cargo aircraft. It also invested in converters for the A330 and A320 / 321. And there are already several players in the market that can turn the Boeing 737-800 into a cargo plane, something that many airlines use.

Like many other industries, aviation faces the challenge of reducing its environmental impact. In the long run, the biggest contribution to this is likely to come from the introduction of new technologies, such as hydrogen-powered aircraft. In the medium term, the greatest gains can be achieved through increased use of sustainable aviation fuels. In the short term, however, the replacement of older technology aircraft with newer, more fuel-efficient aircraft remains the most efficient.

Cirium data shows that the current world fleet of commercial jets built in the West consists of 29,700 aircraft – these are aircraft in operation or in storage. Of these, about 6,700 are more than twenty years old, and the technology they use is in many cases much older. Only by replacing the oldest aircraft can we significantly reduce CO2 emissions in the foreseeable future and reduce operating costs.

Financing of sustainable aviation

On the funding side, the Transition Pathway Initiative (TPI) helps investors and financiers find airlines and landlords that meet sustainability criteria and follow a clearly defined green framework with measurable KPIs for CO2 reduction. The finance community is clearly embarking on sustainable space finance with this, but more development and commitment is needed to grow this market further. This can be achieved through strategic partnerships, think tanks, financing of aircraft equipped with the latest technology and supporting landlords and airlines in their transition planning towards net-zero.

On top of the pandemic, manufacturers were forced to cut back on production of new aircraft to avoid oversupply in the market. As demand is rising, especially for domestic traffic around the world, Airbus and Boeing plan to increase the production of single-passenger passenger aircraft. Boeing, which has so far produced 26,737 a month, is aiming for 31 a month in early 2022, while Airbus is currently planning a monthly production of 65 A320neo family aircraft by the summer of 2023. If production allows, it may be surprising if Boeing is not trying to keep up with the competition, so the demand for new aircraft financing will increase accordingly. Landlords will undoubtedly continue to account for a large part of the financing, but the capital markets, investment associations and banks also have an important role to play.

The sector is improving. There are more flights to more destinations than a year ago, and the flight value is largely stabilizing or improving. Schedules are increasing. We see how resilient air transport is and our dependence on it is still undeniable. Some will say that the sector still has plenty to complain about. But behind the clouds, the sun is clearly shining.

This contribution was written in June 2022 by Simon Finn, Director and Aviation Expert of the International Bank MUFG.

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