IBA’s Aviation Market Update Webinar

Key Takeaways: IBA’s Aviation Market Update Webinar

Executive Summary

The webinar provided an in-depth analysis of the aviation market, focusing on macroeconomic factors, airline performance, supply chain challenges, and asset values. Despite some headwinds such as volatile currency movements, weaker GDP growth, and geopolitical uncertainties, the outlook for global traffic remains positive with continued growth expected through 2030. The aviation industry continues to face supply chain issues, particularly with engines, which are impacting production rates and maintenance turnaround times. However, this supports strong-value performance for both engines and aircraft. The market for narrowbody aircraft is stabilising, while widebody aircraft and engines show potential for value growth. The regional aircraft market remains stable, with some upside in the latest generation types. The webinar also highlighted the increasing risk in airline credit, with more defaults and restructurings expected. Sustainability issues are becoming increasingly significant, with emissions policies adding cost pressures that will drive innovation and the introduction of new technologies in aircraft by 2040. Overall, the aviation market is navigating through challenges but remains on a path of steady growth and innovation.

Speakers

Mike Yeomans, Director of Advisory & Consulting, Senior ISTAT Certified Appraiser IBA
Kane Ray, Head of General Aviation and Aftermarket, ISTAT Certified Appraiser, IBA
William McClintock, Senior Manager, Markets & Sustainability, IBA

Key Takeaways

1. Steady Traffic Growth: Outlook for long-term traffic growth is steady despite near-term headwinds such as volatile currency movements and GDP downgrades.

2. Rising Deliveries and Retirements: Deliveries are ramping up, and retirements are expected to rise in the coming years, enabling the transition to a majority of the latest technology fleet by 2030.

3. Emissions Cost Pressures:

Policies are now taking hold, increasing the cost of burning fossil fuels. This in turn will drive innovation and lower carbon aircraft technology, with a next-generation narrowbody expected to enter the market by 2040.

4. Increasing Credit Risk: Overall airline credit risk is heightened, but with a wider spread. More defaults and restructurings expected.

5. Supply Chain Uncertainty: Challenges remain, particularly for narrowbody engines, which continue to create uncertainty related to the ramp-up of aircraft production while supporting strong value performance for both current generation engines and aircraft.

Key Quote

The outlook is an upbeat position for global traffic. We are seeing good traffic growth this year, normalising to a steadier rate through to 2030 despite some of the cost and political headwinds.

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Webinar

Watch Full Webinar here.

FAQs: IBA’s Aviation Market Update Webinar

General Aviation Market Outlook

1. What is the overall outlook for global air traffic growth?
The outlook for global air traffic growth is positive, with strong traffic growth expected this year and a return to more normalized rates through to 2030. Despite some headwinds like volatile currency movements and GDP downgrades, the industry is supported by factors such as a weaker dollar and lower fuel costs.

2. How are fuel prices expected to impact the aviation industry?
Fuel prices are expected to remain relatively stable through to 2030. While geopolitical events can cause short-term spikes, the overall trend is downward pressure on prices due to increased supply and refinery capacity. However, the shift towards sustainable fuels and additional carbon policy costs may offset some of these benefits.

Aircraft Deliveries and Fleet Forecast

1. What is the forecast for aircraft deliveries in the near future?
Aircraft deliveries are expected to increase, although not reaching pre-pandemic forecast levels until 2029. Boeing and Airbus are both on track to meet their delivery targets, with Boeing already exceeding 2024 deliveries and Airbus expected to ramp up towards the end of the year.

2. How is the fleet composition expected to change by 2044?
The global fleet is expected to grow significantly, with the narrow body fleet increasing from around 19,000 today to about 36,000 by 2044. The Asia-Pacific region will drive much of this growth due to economic fundamentals and population increases. The wide body fleet is also expected to grow, with a cumulative annual growth rate of around 3.3%.

Airline Performance and Market Dynamics

1. What are the current trends in airline capacity and performance?
Airline capacity has been increasing, particularly in the US, but this has led to lower yields and squeezed margins for low-cost carriers. International markets, especially across the Pacific, are seeing stronger growth. Overall, operating margins are under pressure due to increased capacity and lower yields.

2. How is the risk outlook for airlines changing?
The risk outlook for airlines is increasing, with a higher likelihood of defaults and restructurings. The IBA Operator Score Index shows a decline in the global weighted average score, indicating higher risk. However, there is a divergence in performance, with some airlines performing very well while others face significant challenges.

Supply Chain and Engine Market

1. What are the main challenges in the aerospace supply chain?
The main challenges in the aerospace supply chain include engine shortages, long lead times for parts, and the need for increased production capacity. Engine supply is particularly tight, affecting both new aircraft production and the aftermarket. There are also issues with raw material availability and the need for new tooling and maintenance systems.

2. How are engine values and lease rates expected to change?
Engine values and lease rates for both new and current generation engines are generally increasing. For example, the CFM LEAP 1A and Pratt & Whitney GTF engines are in high demand, leading to strong lease rates. Current generation engines like the CFM56 and V2500 are also seeing increased values due to high demand and limited availability.

Sustainability and Future Technology

1. What are the key sustainability issues facing the aviation industry?
Key sustainability issues include the implementation of emissions trading schemes, carbon offset requirements, and sustainable aviation fuel mandates. These regulations are expected to significantly increase costs for airlines, particularly in Europe, where fuel costs could rise by about 25% by 2030 due to these policies.

2. When can we expect new technology aircraft to enter the market?
New technology aircraft are expected to enter the market around 2040. This timeline has been pushed back due to various factors, including the need for significant improvements in fuel efficiency and the current focus of manufacturers on existing aircraft families. The next generation of single-aisle aircraft is likely to be at least 15 years away.

Blog: Aviation Market Dynamics: Current Trends and Future Outlook

Introduction

The aviation industry is navigating a complex landscape marked by economic fluctuations, evolving geopolitical dynamics, technological advancements, and regulatory changes. Despite these challenges, the sector shows resilience and adaptability. This blog delves into key factors shaping the aviation market, including macroeconomic drivers, fuel pricing, fleet forecasts, delivery outlooks, and sustainability initiatives.

Aviation Market Dynamics and Future Outlook

Macroeconomic Factors

The aviation industry experiences strong traffic growth but faces challenges like volatile currency movements, fluctuating fuel prices, and GDP downgrades. A weaker dollar and lower fuel prices benefit airlines, while higher interest rates and geopolitical uncertainties, especially in the US and China, temper growth expectations. Despite these challenges, the medium-term forecast remains optimistic, with a 4.5% compound annual growth rate through the decade.

Fuel Pricing

Fuel pricing significantly affects the aviation industry, with fluctuations due to geopolitical tensions and supply disruptions. Historically, oil prices and the US dollar have had an inverse relationship, but recent geopolitical events have altered this dynamic. The outlook for fuel prices remains relatively stable, with peak oil demand expected by 2030. The shift towards sustainable fuels and increased refinery capacity in Asia and the Middle East will positively influence long-term fuel prices.

Fleet Forecasts

Fleet forecasts indicate robust growth, particularly in the Asia-Pacific region, driven by economic fundamentals and a growing middle class. The global fleet is expected to grow significantly, with narrow-body aircraft leading the expansion. Delivery outlook remains consistent, with production rates expected to recover to pre-COVID levels by 2027. Boeing and Airbus are on track to meet their delivery targets, though supply chain issues and geopolitical factors could impact timelines. New aircraft models, such as the COMAC C919, are also expected to contribute to fleet growth.

Financial Outlook

The financial outlook for aircraft deliveries is promising, with substantial funding secured for 2025. The shift towards cash and capital markets, along with leasing, drives growth in delivery financing. The tightening of aircraft availability and increased utilization rates highlight the need for OEMs to ramp up production to meet demand. The retirement of older aircraft is expected to normalize, with a gradual reduction in retirement ages driven by greater involvement of lessors and emerging markets.

Sustainability Initiatives

Sustainability is increasingly important in the aviation industry, focusing on reducing emissions and transitioning to new technologies. The latest technology fleet is expected to dominate by 2030, with significant advancements in aircraft efficiency and emissions reduction. The transition to sustainable fuels and the development of next-generation aircraft are critical components of this shift. The industry is also exploring new technologies and innovations to enhance sustainability, though the timeline for these developments remains uncertain.

Aviation Industry Challenges and Market Dynamics

Technological Delays and Sustainability Issues

Technological delays and sustainability issues are major challenges for the aviation industry. Environmental policies like the EU Emissions Trading Scheme (EUETS) and the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) are becoming more stringent. CORSIA's voluntary phase ends in 2027, and the EUETS will remove free carbon allowances for aviation by 2026, significantly impacting airlines' costs.

Market Competition and Capacity Growth

Market competition and capacity growth also influence airline performance. In North America, legacy carriers are competing on price and leveraging loyalty programs, pressuring low-cost carriers. Despite a 5% capacity growth in the US market, low-cost carriers face squeezed margins due to increased competition and lower yields. International markets, especially in Asia-Pacific and Europe, show stronger growth momentum, but increased capacity leads to softer pricing and margins.

Supply Chain Challenges

Supply chain challenges persist, with aircraft production ramp-ups hindered by engine delivery delays from manufacturers like Pratt & Whitney and CFM International. This results in higher storage rates for engines and a competitive market for spare engines. The adoption of new technologies and processes, such as AI and advanced maintenance systems, is crucial for efficiency but slower among lower-tier suppliers, adding complexity to the supply chain.

Aircraft Engine Market

The aircraft engine market sees significant changes in values and lease rates. New generation engines like the CFM LEAP and Pratt & Whitney GTF are in high demand, increasing market values and lease rates. Spare engine availability is limited, and operators seek to retain current engine technology for operational continuity. Meanwhile, current generation engines like the CFM56 and V2500 remain active, with rising values, highlighting the need to balance new and existing technologies to meet market demands and ensure efficient operations.

Wide-Body Engine Market Trends

The market for wide-body engines shows a split trend. The Gen.X1B engine's value is rising due to its success in the Boeing 787 program and new campaign wins. In contrast, the Trent 1000 is struggling with reduced order backlogs and fewer campaign wins, affecting its market value. Planned retrofits and enhancements support the Trent 1000's market stability, but it lacks the immediate success of the Gen.X1B. Current wide-body engines like the Trent 700 and CF6-80E1 have seen increased pricing, especially in lease rates. The G9115B engine shows strong market pricing and limited availability, driven by high maintenance turn times and low spare engine access.

Narrow-body engines, such as the CFM56-3, maintain stable values due to aircraft retention and service. The RB211, however, is experiencing a decline in values, indicating market volatility. Wide-body engines like the CF6-80C2-B6F and Pratt & Whitney 46, powering the 767-300ER, have strong pricing in transactions, particularly in the freighter market. A380 engines, including the Trent 900 and GP7200, are seeing a slow increase in values, reflecting a gradual market recovery.

Conclusion

The aviation industry is poised for growth despite notable challenges, influenced by macroeconomic factors, fuel pricing, fleet forecasts,