Air travel levels will gain more altitude this year after traffic overtook pre-Covid totals in 2023, according to Irish aircraft lessor SMBC Capital Aviation.
The Dublin-based firm, one of the three biggest in its industry globally, predicts in a report that high interest rates and manufacturing delays are likely to increase the rents that airlines pay SMBC and its rivals to lease aircraft.
The report, written by the firm’s market strategic analysts, Shane Matthews, Darren Naughton and David Griffin, notes that airline capacity “finally” exceeded that of 2019 by the end of last year.
“However, we see further upside, with published schedules indicating further growth in quarter-one 2024,” says the report, called Push and Pull Factors on Aircraft Lease Rates.
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SMBC’s figures confirm that 2022 was a key year for post-Covid recovery in travel, with year-on-year air traffic doubling in Europe, topping 140 per cent in the Middle East and hitting 80 per cent in Africa.
However, the report’s authors note that recovery varies widely in different regions. Transatlantic travel has recovered fully, but transpacific travel is down 16 per cent on 2019, while Europe-Asia trails by 8 per cent. Long-haul’s recovery has been slower than short-haul.
In China, which remained locked down for longer than many other parts of the world, domestic schedules are 17 per cent ahead of 2019, but international departures were 36 per cent down in the final quarter of last year.
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While business travellers have been slower to take to the skies, SMBC says some airlines at least have noticed that more affluent holidaymakers are filling aircraft premium cabins instead.
The firm notes that European carrier Air France-KLM recently said this trend more than offset a fall in corporate travel.
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However, airline earnings will suffer if business travel remains slow in the longer term and the demand for premium space from tourists recedes, it cautions.
Airlines around the world earned $23 billion (€21 billion) in profits last year, according to the International Air Transport Association, which predicts they will increase to $26 billion, or about $5.40 a passenger, in 2024.
The SMBC report says it will take “some time” for carriers to recover the near $140 billion losses they suffered in 2020, when governments shut down travel to curb Covid-19′s spread.
Rather than buying aircraft, airlines frequently lease them from specialised lessors, many of which are based in the Republic, a recognised centre for aviation finance.
High interest rates normally drive up the rents that airlines pay to lessors, according to SMBC. Even where the rent is fixed – which is most common – the agreement will allow the parties to adjust the sum for interest rate changes between signing the lease and delivery of the aircraft.
Less common floating rents change with interest rates through the lease’s term.
Lessors also pass on the higher cost of borrowing cash to buy planes when agreeing rents with airlines.
Manufacturing delays, which have coincided with revived airline growth, will also have the effect of increasing rents, says SMBC.
Fallout from the Alaska Airlines mid-air door loss in January has hit US manufacturer Boeing’s plans to increase production of its 737 Max aircraft to 45 a month, from 38 last year.
SMBC points out that many of the Max jets are destined for “stronger” airlines, including Irish carrier Ryanair and United and Southwest in the US, which do not use lessors.
The firm suggests this will reduce the supply of that model to its industry.
Airbus hopes to increase production of its A320neo model to 65 a month by the end of the year, but faces delays as the engines used on these aircraft are subject to a review for possible repairs and replacement.
