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CEO Talks: 3 Trends to Reshape the Airline Market

The aviation industry is finally entering a new cycle, where everything is headed in an upward trajectory. That includes not only demand for air travel, but also lease rates and the number of potential bankruptcies.

How can airlines navigate this increasingly competitive landscape? Chairman of Avia Solutions Group Gediminas Ziemelis shares his thoughts on the market’s future.

Capacity Consolidation in the Hands of Major Lessors

We are living in interesting times. Over the past 18 months lease rentals and market values have seen an unprecedented increase. It is a seller’s market and airlines are ready to pay more and more to secure capacity. Based on appraiser data from ISTAT, narrowbodies are now 25-30% above their pre-COVID level. Rates for older leased aircraft have risen, but even so, airlines are eager to extend leases on these aircraft nonetheless.

Take for example the popular Airbus A321neo. During the tumultuous times of the pandemic in 2020, its monthly leasing rates plummeted to approximately $340,000. In a striking turnaround, these rates have now surged to around $420,000, slightly surpassing pre-pandemic figures, as revealed by aviation data group Ishka.

At the same time, after taking a nosedive during the pandemic, aircraft manufacturers are struggling to keep up with the demand. According to Cirium, Airbus and Boeing delivered 1190 passenger jets in 2023, and the deliveries projected for this year are unlikely to surpass those of 2018. But still, this does not fully compensate for the almost 3000 aircraft shortfall that is estimated from pandemic shut-downs and production logjams.

Although Boeing and Airbus are planning production increases between 2025 and 2030, industry projections hint that this new capacity is likely to be concentrated in the hands of top lessors (Aercap, Avolon, and the like). This concentration of capacity in the hands of several lessors is more convenient for the manufacturers, as well, as it provides more security, and a better return for shareholders. But what will this mean for the smaller airlines and players?

a man standing in front of a model of a plane

Smaller Airlines being “Squeezed Out” by Larger Players at Higher Rates

After some of the toughest years in aviation history, we are finally entering a new cycle.

According to IATA, this year airlines around the world are forecasted to earn more than $23 billion in profits (compare to $140 billion lost in 2020). The question is how many companies will be able to enjoy the fruits of any coming boom. A lot of this depends on the depth of their pockets, and how leases are currently structured.

Amidst the rush to place massive orders for new aircraft — deliverable in 7-10 years — airlines must navigate potential cost escalations and inflation. The looming uncertainty is whether the future market will sustain such investments or if the eventual delivery costs, potentially exacerbated by inflation, will undermine the ability to refinance the fleet.

The proactive restructuring of leases by carriers like Azul and Air Asia illustrates a strategic pivot to balance current needs with future fleet renewal. In the recent past, lease extensions have outpaced transitions, with the ratio shifting from 40:60 to 70:30, underscoring a cautious approach to fleet management.

Airlines are now tasked with a delicate balance: committing to future growth while maintaining financial flexibility to absorb new deliveries in a market that remains in flux. This strategic foresight will likely dictate which carriers will capitalize on the forecasted boom.

Gediminas Ziemelis, Chairman of Avia Solutions Group

Over the previous year, the landscape of aircraft leasing has been characterized by a notable shift: airlines are increasingly opting to extend their current leases instead of returning the aircraft at the end of their term. This trend is underscored by Air Lease Corporation's (ALC) reported 100% renewal rate, evidencing the airlines' strategic push to secure their existing capacity. The industry's dynamics boil down to a keen awareness among airlines that releasing their hold on current aircraft could lead to competitors snapping up these coveted assets.

So, what we are seeing is a very Darwinian market emerging, with the larger players who have easier access to resources putting up barriers for smaller airlines. The upshot? Unfortunately, increased levels of bankruptcies, but also opportunities for acquisitions and consolidation.

Gediminas Ziemelis, Chairman of Avia Solutions Group

Invariably, the reasons for these financial woes are connected to capacity and fleet dynamics. In fact, many struggling companies cite aircraft and engine delivery delays and aircraft groundings. One example is India’s Go First, which filed for bankruptcy in May 2023, putting the bulk of the blame on the grounding of almost 50% of its A320neo fleet.

Amid already strained maintenance, repair, and overhaul (MRO) capacities, with aircraft shop visits extending up to a year, industry forecasts predict an average of 350 aircraft will remain grounded due to gear fan turbine (GFT) issues from 2024 to 2026. The most acute phase of this impact is anticipated in the first half of this year, underscoring a critical bottleneck for airline operations and fleet availability.

a white airplane on a runway

ACMI Leveling the Playing Field

In a market where the fittest not only survive but flourish, ACMI leasing is the equalizer for airlines.

In the current landscape, where the International Air Transport Association (IATA) predicts air travel will rebound to 4.35 billion passengers in 2024, nearing pre-pandemic levels of 4.5 billion in 2019, ACMI leasing emerges as a strategic tool for airlines navigating through financial and operational turbulence. ACMI's flexible leasing solutions offer a hedge against these challenges, enabling airlines to ramp up capacity responsively without risky financial commitments in an era of rising interest rates.

Moreover, the structural advantages of ACMI leasing extend to addressing the labor shortages facing the industry. With high attrition rates reported across various sectors, ACMI leasing allows airlines to tap into a broader pool of aviation talent, mitigating staffing challenges and ensuring operational continuity.

I've always advocated for a strategic blend in fleet composition, ideally with a modest proportion—somewhere between 6% to 15%—of aircraft obtained through ACMI leasing. Such an approach strikes the right balance, affording airlines the necessary agility to adapt to market demands while avoiding the pitfalls of burdensome financial obligations that currently pose a significant challenge.

In summary, ACMI leasing emerges as a key strategy, energizing airlines to harness the air travel demand rebound. It infuses the post-pandemic aviation sphere with financial and operational agility, acting as a safeguard amidst market volatility, empowering airlines to navigate the unpredictable currents with adaptable fleet management and staffing solutions.