Why supply constraints are clouding the skies for airlines

Global airline demand has outpaced fleet capacity development, which puts growth plans for airlines under strain. This is reflected in the number of parked aircrafts, which is continuously sliding. Aircraft capacity struggles are expected to drag on through 2024 and its peak season. Capacity constraints force airlines to adjust flight schedules – Ryanair, for instance, announced that it is planning to serve 200m instead of 205m passengers in 2024. This is still around 10% growth, though less than previously anticipated. The constraints also limit the ability to restore and grow intercontinental networks. Flag carriers such as Lufthansa and KLM (including Transavia) revised available seat capacity downward for the full-year 2024.

The nature of aviation understandably puts safety above everything else, and multiple supply chain issues and incidents currently limit aircraft availability. A complicating factor for airlines is the limited flexibility across the aviation sector as pilots, cabin crew and maintenance personnel are also educated for a specific type of aircraft.

Connectivity lags as airline volume recovered in a different style
Airlines across the world downsized their networks throughout the pandemic, and this hasn’t been fully restored yet. This means that current air traffic is concentrated within less routes. In Europe, the number of direct and indirect destinations at airports ended up 13 percentage points higher in 2023, but still lagged behind its 2019 figure (at 84% of this level). This put a drag on flight activity (sitting at 91.5% in 2023).

Moving forward, networks will gradually recover further as flag carriers re-introduce more long-haul destinations, but a full recovery will take more time amid current supply and demand dynamics. And of course, the geopolitical environment has also changed the map of airlines, with flights to Russia from the West suspended and flights to Israel and Iran affected by cancellations.

The complex aircraft production supply chain involves highly specialised certified players. Therefore, diversification or switching suppliers in case of bottlenecks often isn't possible. On top of that, supply chain partners scaled back massively during the first phase of the pandemic, when the future was highly uncertain. The so-called bull-whip effect accelerated the downturn across the supply chain, and as a result, rescaling is now much more time consuming than it is in other sectors.

The industry also facing shortages of highly qualified skilled personnel. Both engines and other components such as seats with digital devices still have long lead-times. This means that engine makers such as CFM (GE/Safran), Pratt & Whitney and Rolls-Royce, but also parts suppliers such as RTX are struggling to keep up with demand. This limits growth potential for production of new aircrafts, but retrofitting and refurbishing programmes for older aircraft are also impacted next to regular maintanance progammes.

Aircraft load factors have returned to their 2019 seasonal highs and provide an indication of capacity tightness. Load factors for long haul flights are usually lower than on short haul trips. Strong passenger figures of low-cost carriers helped to raise this figure. In Europe, EasyJet’s load factor already neared 90% in the full-year 2023, and is inching closer to the 93% seen in 2019. Ryanair hit 93%, which is close to its natural max. Nevertheless, airlines are challenged to further raise the bar, especially flag carriers. But in practice, this is also a game of price dynamics. Especially in the US and Europe, where load factors are already relatively high, it will be challenging to further increase occupation rates.        

Close to 60% of the global aircraft fleet is leased out and owned by companies such as Aercap, SMBC and Avolon. Airlines are currently looking look into lifetime extension and many lease terms are extended to keep flying schemes afloat. Demand for older, used aircrafts is also going up. On the back of this, used market prices and lease rates have risen significantly, especially for narrowbodies. As such, rates of the A321 have risen some 18% in early 2024 compared to a year earlier and rates for a B737 MAX 8 have also surged 19% to $400,000 a month. This direction is expected to continue in 2024. With a delay, leasing rates for widebody aircraft such as A350/B787 have also recovered.

Weak demand pushed air fares development below figure inflation in 2020 – but this quickly turned around in 2022 as the world emerged from the pandemic. The combination of subdued capacity and strong demand fuelled ticket prices, and higher jet fuel prices added to that.

In Europe, prices are still outpacing inflation by some 15% in early 2024. Air fares are globally under upward pressure, but higher duties also play their part (especially in Europe). This dynamic marks a different era, as increased competition of low-cost carriers previously weighed on rates for a long time.

In several European countries, (higher) ticket taxes and an increased application of the Emissions Trading Scheme (from 25% in 2024 to 100% in 2026 for intra-European flights) will continue to add to higher prices, with fares already moving far beyond inflation figures. The internalisation of external factors will likely continue to grow moving forward, which will lead to structurally higher fares and more real pricing.  

Operational struggles challenges airlines finances, but demand still provides momentum
The world’s leading airlines roughly returned to pre-pandemic operating profits levels in 2023. And against the backdrop of capacity constraints, pricing power remains with carriers. At the same time, cost pressure remains high, with wage costs (often the largest cost fraction) likely continue rising in 2024-2025 as collective wage increases at Lufthansa suggest. Operational challenges due to delivery delays and extra maintenance – as well as more cancellations due to extreme weather, geopolitics and labour tensions – will also weigh on profitability in 2024. Nevertheless, we may see a slight uptick in operational margins.

Global GHG emissions in aviation fell steeply over the pandemic plunge, but have seen a rapid reversal since demand returned. In 2024, emissions will likely end up close to pre-pandemic levels. SAF blending has kicked off, and operational efficiency draws more attention to decarbonisation strategies – but the most important pillar for airlines, accelerated fleet renewal, is severely lagging. This slows the reduction of emissions per seat/kilometre.

The new generation A350 and B787 Dreamliner, for instance, have significantly lower fuel burn specifics than their predecessors A340 and B777. Airlines are now forced to keep older aircrafts in the skies, which impacts sustainability progress as the fuel consumption of new generation aircrafts is usually 10-25% lower.

The global skies continue to face inefficiencies due to sanctions and political tensions. Airline trips are hardly ever executed in a straight line from A to B, but avoiding various air spaces increasingly complicates things. Continued detours around the massive Russian airspace (with a fifth of Europe’s sky effectively closed) extend flight durations between Asia and Europe by up to four hours between Amsterdam and Tokyo. Tensions in the Middle East have also forced additional rerouting. Altogether, this leads to longer miles and higher emissions than seen previously.