Ireland-based international aircraft leasing company Avolon (which has an owned, managed and committed fleet of 834 aircraft) expected global air traffic to return to pre-Covid-19 pandemic levels by June this year. The forecast is contained in a report released by the company on Monday, entitled “2023 Outlook: Climb to Cruise”, which was co-authored by Avolon Chief Risk Officer Jim Morrison and its Counterparty Risk & Sustainability head Rosemarie O’Leary.

Last year saw global air passenger traffic recover by 70%, a development led by North America and Europe. This year, the report forecast, the recovery would be led by Asia, boosted by China’s recent reopening. Of total airline capacity (in terms of seats) added this year, 50% would be in Asia. Last year’s recovery brought airlines almost back to profitability, after suffering total global losses of $180-billion in 2020 and 2021. This year, they were expected to achieve a total global profit of $4.7-billion.

“Aviation has demonstrated its resilience and is ready to thrive having come through a pandemic-driven two-thirds drop in traffic,” highlighted Avolon CEO Andy Cronin. “Airlines, manufacturers, and lessors share an ecosystem that creates opportunities for all but requires collaboration to overcome key challenges including a higher interest rate environment, limited aircraft availability and the need to make further progress on decarbonisation goals.”

The report noted that the recovery in airline finances was running ahead of their recovery in capacity. Consequently, while air passenger traffic was still 25% below the pre-pandemic levels of 2019, airline revenues were only 13% below those levels. This was because airlines were using their pricing power to raise fares. The constraint to recovery was no longer air passenger demand, but the number of aircraft that airlines could fly. Some 100 new airlines had started operation over the past three years, and Avolon predicted that this year would see consolidation in the sector and the exit of the less successful startups.

Airliner manufacturers continued to suffer delays in producing and delivering their products. The pandemic had prevented the production of a planned 2 400 aircraft, and this production 'gap’ was now beginning to cause a shortage of new airliners. The consequent “tension” in the aircraft supply was providing support for long-term residual values for airliners. Avolon forecast that both Airbus and Boeing would delay their delivery ramp-up targets by a year, to focus on ensuring quality and delivering on schedule.

Since 2019, airline-owned fleets had declined by 3%, but lessor-owned fleets had increased by 17%. Currently, lessors managed 53% of the total global airliner fleet (by value). Interest rates were rising, and lease rates were also increasing. This was creating opportunities for lessors which were well-capitalised and had investment grade ratings. Avolon expected that at least two investment-grade lessor companies would receive ratings upgrades this year.

Regarding sustainability, the airline sector needed to make more progress. Last year had seen the production of sustainable aviation fuel (SAF) triple, but that still came to only 1% of the figure hoped to be produced in 2030. To increase SAF production enough to allow it to provide 10% of jet fuel would need a global investment of $250-billion. For this year, Avolon expected SAF production to reach 80-billion litres, a 100% increase over last year.

“The rebound in 2022 is set to continue in 2023, with China’s reopening helping to drive global traffic levels to pre-pandemic levels by June,” said Cronin. “Airlines are enjoying higher fares and load factors, and manufacturers are under pressure to ramp up production quicker. Whilst geopolitical and macroeconomic risks remain, this is a positive environment for lessors as supply constraints drive higher lease rates and increase the value of order books.”