Lessor Orderbooks to Be in High Demand as Supply Shortage of Aircraft Continues

The value of new aircraft deliveries is expected to rise by more than 15% to $100 billion in 2024, according to a paper published by aviation finance company Avolon. The paper further states that the delivery of more than 1,450 new large commercial aircraft will help drive airlines’ passenger revenues up 12% to $717 billion in 2024 and airlines’ net profit is projected to rise by 10% to $26 billion.

According to Avolon, 4.7 billion people are expected to fly in 2024, more than any year in history. Aircraft values and lease rates rose sharply in 2023 as a structural undersupply of both narrowbodies and widebodies was reflected in the market, and further increases are expected in 2024. India, Saudi Arabia and the United Arab Emirates are emerging as key drivers of growth. Airlines and lessors that waited to commit to new orders to source new aircraft risk waiting into the next decade for supply, according to Avolon.

Domestic airline capacity has reached 106% of 2019-levels globally, whilst the international recovery lags slightly at around 95%, largely due to the slower than anticipated rebound in the Chinese market and the knock-on impact this has had on previously busy routes in Southeast Asia.

Key Findings & Trends

  • Airlines: In 2023, airline revenues accelerated 22% compared to a 3% rise in global GDP. A return to positive cashflows has enabled airlines to repay $57 billion of government debt provided during the COVID-19 pandemic. The continued reopening of Chinese international travel will provide positive momentum for airlines through the year.
  • Manufacturers: The undersupply of aircraft will take years to unwind, increasing the value of delivered aircraft and extending their economic lives. The widebody production recovery is lagging behind narrowbodies, resulting in a tighter market and longer wait times for twin-aisle aircraft.
  • Lessors: With both aircraft and capital in short supply, the role of lessors is strengthening. Investment grade lessors that have secured attractive new aircraft orderbooks are best positioned for the years ahead. Market lease rates took time to adjust to higher interest rates, but they rose as much as 35% in 2023, with further growth expected this year.
  • Innovation & Sustainability: Momentum behind sustainable aviation fuel (SAF) is building and an estimated $2 trillion of investment is required to scale up production to levels required to hit net zero goals. Flying will get more expensive this decade as airlines face tighter labor markets, increasing sustainability pressures and engine durability challenges.
  • Risks: The macroeconomic outlook is normalizing as inflation trends downward, but softer demand threatens in the U.S. and potentially Europe. Political risk will be in focus in 2024, with conflicts in the Ukraine and the Middle East and ongoing tensions between China and the West. The production ramp up by original equipment manufacturers is vulnerable to supply chain pressure and regulatory oversight.

“The economic and social benefits of travelling will continue to drive aviation and underpin the resilience of our sector,” Andy Cronin, CEO of Avolon, said. “Airlines’ growth in 2024 will be supported by around $100 billion in new aircraft deliveries, with lessor orderbooks and capital supporting fleet expansion plans. While geopolitical and economic risks remain, the market backdrop as we start the year is likely to drive lease rates and residual values higher.”

“India, China and the Middle East are driving aviation’s growth,” Jim Morrison, chief risk officer of Avolon, said. “A structural undersupply of both narrowbodies and widebodies will take years to unwind. While new aircraft designs with step-change improvements in energy consumption will ultimately be required to decarbonize, in the short-term, the industry must focus on scaling up sustainable aviation fuel production.”

2024 Forecasts

The paper, which was co-authored by Morrison and Marc Tembleque-Vilalta, senior vice president of portfolio strategy at Avolon, includes eight predictions:

  1. Engine-related AOGs will peak in June. New technology engine durability challenges have been major disruptions to airline operations. Design and production quality issues will continue to persist in the fleet for years, but the operational impact will diminish following the peak mid-year.
  2. Four airline will mergers close and four won’t pass regulatory approval. Mergers can provide synergies, reducing overhead and increasing revenue potential, but sometimes at the expense of passenger choice and affordability. Several of the dozen or so currently proposed mergers will be approved, but some will be blocked, as seen by the recent U.S. court decision on the JetBlue-Spirit merger.
  3. More new aircraft will deliver to China than any year this decade. Boeing’s first 787 delivery to China in four years in December 2023 marked the re-opening of a key export market. According to Avolon, 737 MAX deliveries will follow, as Chinese airlines need to access new aircraft to renew their fleets and return to growth. China is too big a market to not be a priority for Boeing and Airbus.
  4. Widebody production skylines will sell out to the end of the decade. Mega-orders have filled up manufacturers’ skylines, and Asian airlines late to order will risk missing out, according to Avolon. The remaining slots will soon be sold, leading to increased demand for lessor slots and used widebodies.
  5. At least two new passenger aircraft variants will be certified in 2024. Likely candidates to enter service are the Airbus A321XLR and the Boeing 737-7. The 737-10 and 777-9 act as further stretch targets to Avolon’s forecast.
  6. The next clean-sheet large commercial aircraft will enter service in 2036. Given the 10-plus years it will take from program green light to certification, Boeing and Airbus will need to commit to their next designs soon. No new clean-sheet designs for the next decade will protect the investment case of today’s new-technology aircraft.
  7. Two investment grade lessors will receive rating upgrades again. Investment grade is a key differentiator for scale lessors. Rating agencies will continue to acknowledge the resilience of the lessor business model with ratings upgrades.
  8. A global framework for a SAF book-and-claim system will be agreed upon. Airlines and lessors will have access to verified SAF credits, enabling them to leverage SAF without having to transport liquid fuels over long distances. Agreeing to a framework will attract the capital required to kickstart SAF production.

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