In times of volatility, economists search for constants to be able to better predict future growth patterns to inform current strategy. The airline industry is no exception and arguably has endured cycles of volatility caused by exogeneous shocks that have increased in frequency in recent years.

The pandemic was the deepest recessionary shock the world economy has ever seen, so it is unsurprising that economists are seeking to modify established forecasting models for a post-pandemic world.

Historically, aviation economists have assumed that the industry has a standard economic cycle of two to three boom years followed by a downturn lasting several years before finally ticking back upwards. Many adhere to that premise despite a deep break in the cycle during the elongated period of growth in the years from around 2004 to the onset of the pandemic.

Air travel growth continued despite the impact of the global financial crisis in 2008/9, which  possibly even contributed to the continued expansion of the industry thanks to global central banks suppressing interest rates for a decade at close to zero leading to an inpouring of liquidity from investors searching for higher yields.

Air travel’s relationship to global gross domestic product (GDP) has been well documented but in those boom years, however that relationship may have decoupled since the global airline industry grew at more than 5% a year between 1990 to 2010 – outpacing global GDP by almost double and well in excess of the industry’s long-term average. After the financial crisis, the industry’s compound annual growth rate accelerated to 6.7% before the pandemic grounded the world fleet in 2020.

Speaking at an investor conference in December 2023, Delta Air Lines chief executive Ed Bastian discussed his view that the relationship between air travel and GDP has endured despite the “tremendous amount of volatility and variability and exogenous factors” that have influenced the industry.

Bastian believes that the relationship between the size of the US economy and the amount that’s spent on air travel to and from the US specifically has been consistent since the 1980s at “about 1.3%” although he notes this dropped during crisis years to 1.1% in the aftermath of 9/11 and the financial crisis before being “broken” by the pandemic.

“The only time it has meaningfully broken in our modern history of US travel is the Covid crisis,” said Bastian. “From the period of 2020 through 2022, there was about $300bn of missing demand when you look at the size of the economy, the wealth of our consumers, and the fact that consumers could not travel but they had the desire to travel. Just a substantial amount of demand was missing.”

Bastian notes that “$300bn missing demand” from the pandemic period [Fig.1] is reflected in the rapid growth the industry has been experiencing over the past two years with so-called “revenge travel”. He adds that the industry is only now “back to trend” implying that air travel has not yet “made a dent into that $300bn” predicting that airlines will continue to see healthy demand over the next several years.

Speaking with Airline Economics in March 2023, American Airlines treasurer Meghan Montana made a similar observation that the industry finished 2022 with revenue of 0.88 of US GDP, indicating there was still $30bn of lost revenue to recapture.

While noting that it would not be possible to recapture all of that lost demand due to the continued supply and demand imbalance of aircraft that continues to restrict capacity today, she believes that it is possible for the industry to eclipse that historic 1% of GDP revenue given the strength of pent-up demand and the popularity of flexible working habits that in turn have provided more flexibility for travel.


Expanding this hypothesis to the global airline market, Figures 2 & 3 overleaf show the trend line between global GDP, air travel (measured in revenue per passenger kilometres, RPKs) and airline net profits from 2000 to forecasts for this year. This publication argued in its first report, Navigating the Cycle (2018), that the growth of air travel had become decoupled from global GDP growth as the product became more commoditised with the onset of more low-cost carriers, the growth of air travel in emerging markets and an elongated benign operating environment. The decoupling can be seen on Fig. 2 by divergence of the black GDP line and the yellow dotted net profit line from 2014-15 to the onset of the pandemic where any relationship was broken.

Ed Bastian argued that air travel has been evolving from what was becoming a commoditised industry and has pivoted to place a greater emphasis on premium travel revenue. “We lowered the price of using the premium products to attract more people,” he said. “We have changed the whole core economics. It used to be that our front cabins were our loss leaders. Now our front cabins are our profit centres [which is] a huge paradigm shift. People underappreciate the transition that the industry has gone through in distributing those premium products after years of just racing to the bottom on the commoditisation. And we’re still not done with that.”

Airline CEOs are again utilising economic performance as the best indicator to predict future growth of air travel notwithstanding the constraints on capacity from the lack of new aircraft deliveries. The GDP forecast lines on Chart Three show the air travel projections (blue line showing RPK forecasts) once again converging with the black GDP forecast line. Net profits are expected to remain elevated as capacity constraints, pilot shortages and higher inflation work to keep fares and yields elevated.

Since air travel resumed, the rebound in the industry has been nothing short of remarkable. Following such a sharp downturn, expectations were that the recovery would be a protracted process but airline yields have continually outpaced most forecasts, the feared risk of recession in world markets has receded over the past year and growth has continued despite the war in Ukraine, which is now entering a third year. Full year results for 2023 are expected to show a strong year for airline profits driven by healthy passenger revenue.


The International Air Transport Association (IATA) reported in December that total airline (passenger and cargo) revenue in 2023 is estimated to have recovered to 107% of pre-pandemic levels, with exceptional 47% year-on-year growth pushing passenger revenue up to $642bn in 2023 [Fig.4].

IATA expects net post- tax profit to reach $23.3 billion in 2023, with a “slim” net profit margin of 2.6%. Although the recovery in traffic has been swift and inflation has caused yields to surpass forecast, IATA – while still predicting a return to profitability in 2024 – is still somewhat cautious in predictions for the coming year.

This is due to the mixed performance of some regions, notably the slow recovery of Asia, specifically China, but also with an eye to the increased geopolitical tension throughout the world with wars in Europe and the Middle East. IATA forecasts airline net profit to reach $25.7bn in 2024 (industry net profit in 2019 was $26.4bn) with a 2.7% net profit margin (3.1% in 2019), but also expects growth in terms of RPKs to reach more stable levels, predicting RPK year-on-year growth of 9.8% for this year.


The latest air travel data from IATA shows that passenger travel for November 2023 globally has reached 99.1% of November 2019 levels. November 2023 international RPKs reached 94.5% of November 2019 levels, while domestic traffic was 6.7% above the November 2019 level.

Although international global travel remains 5.5% below pre-pandemic levels, IATA director general Willie Walsh said that the gap is “rapidly closing”, adding that current “economic headwinds are not deterring people from taking to the skies”. IATA also noted that long-term airline profitability shows that while the industry is exposed to external shocks, it typically returns to profitability “relatively quickly”.

Robert Morris, global head of consultancy at Cirium Ascend Consultancy, commented that airlines had one of their best years in 2023. “When you bear in mind that this is the start of the next growth cycle, it is surprising when you look at their finances.”

Morris noted that Cirium was expecting the airline industry to exceed IATA’s operating profit forecast for 2024, which he commented was “remarkable considering where the industry has come from in a relativity short period post-pandemic”.

Many airlines around the world remain burdened by debt raised during the pandemic and industry experts have been predicting a secondary wave of restructuring or even bankruptcies considering the relatively low number of casualties following the pandemic but that hasn’t happened – at least not yet – owing primarily to the growth in demand, constrained aircraft supply, and with inflation pushing up fares.

Many of the larger airlines have worked hard to reduce their debt stacks and smooth out their debt maturities to provide comfort to investors and shareholders that they are on a more stable track. Smaller airlines may be struggling with the heightened cost environment but lessors report that most customers are back to paying their lease rentals on time.

The world recovery has been inconsistent. Much was discussed in last year’s report about the lag in recovery in South East Asia and China but there are now more positive signs of an upturn in those areas despite ongoing macroeconomic and geopolitical challenges.

IATA data for November 2023 shows that China domestic travel was particularly strong, rising 272% as it recovered from Covid restrictions that were still in place a year ago. All of the numbers are positive for growth in air travel, especially in Asia-Pacific but headwinds are building and that has some being more cautious in their forecasts for the coming 12 months.

“All of the indicators are signalling concern – GDP growth projections or composite leading indicators – but I was signalling concern 12 months ago,” says Morris. “There was certainly concern

24 months ago when we were all worried about recessions in developed economies. We’ve seen slow growth, but we have seen growth. We haven’t seen any recessions yet. Predictions are for growth globally to be between 2-3% in 2023 and slightly slower in 2024 but still growth. In the context of those macroeconomics, that’s a positive.”

Economic headwinds and geopolitical shocks

Airlines are carrying a higher debt burden and although they are all now generating revenue, those airlines that did not receive government support may struggle to service those debts in the coming years.

“Airlines have rebounded but they are carrying a lot of debt on their balance sheets or are in arrears with lessors and other suppliers that they will need to find a way to refinance or restructure their balance sheets,” says Robert Korn, president and co-founder of Carlyle Aviation Partners. “Those airlines are generating cash today but certainly not enough from an operating standpoint to repay those amounts over the next two or three years.”

With balance sheets under pressure, rising costs are hitting profit margins and capacity restrictions are impacting airlines’ ability to expand and increase revenue.

“The headwinds are more normal in the sense that increased interest rates and the strength of the US dollar have made it more challenging,” observes James Meyler, chief executive officer of ORIX Aviation. “While the recovery has been very good, margins are still tender – the industry average is about $3 per passenger in terms of profit levels across the industry so it doesn’t take a big increase in costs to eat into that profit margin. Cost control is going to be the big challenge.”

Higher labour costs remain a pressing issue for airlines due to the continued lack of staff, coupled with union demands and renegotiated salaries across pilots and cabin crew, and there has been a significant increase in labour costs throughout the industry that has now been embedded.

Maintenance costs have also been increasing due to the similar staffing dynamics at MRO shops, as well as a shortage of slots driving up demand, and scarcity of parts driving up turnaround times for maintenance visits.

Fuel costs are outside airlines’ control for the most part and they have been riding waves of spikes due to the continued war in Ukraine and now in Gaza, which threatens to destabilise the Middle East and major oil producing regions.

Interest rates have risen rapidly but now appear to be stabilising at a new level around 4-5% in the US and Europe, while inflation has risen dramatically over the past year but again is showing signs of becoming more stable and even beginning to fall (see Fig.11: Inflation and Central Bank Interest Rates 2021-2023, Chapter Two, p23, where there is also a more in-depth look at the impact of interest rates on the sector.)


Higher inflation and interest rates have also been driving up lease rates, which is aiding lessors while putting additional pressure on airline costs.

Aircraft supply and manufacturing issues have become even more significant over the past year despite deliveries increasing from the original equipment manufacturers (OEMs). Adding to the general difficulty in restarting production lines following the pandemic shutdown with a lack of staff and supply chain challenges impeded production rates, manufacturing issues also came to light last year and into 2024 with issues relating to both airframes and engines.

Many of the major manufacturing issues were centred on the Boeing 737 MAX aircraft type. In August 2023, Boeing disclosed a manufacturing defect in its 737 MAX aft pressure caused by incorrectly drilled holes by supplier Spirit AeroSystems, which required inspections of inventory aircraft. At the end of the year, the Federal Aviation Administration (FAA) disclosed it was closely monitoring possible loose bolts in the 737 MAX rudder control system. On January 6, 2024, a door plug on a 737 MAX 9 became detached onboard an inflight Alaska Airlines leading to the rapid decompression of the cabin and an emergency landing.

There were no fatalities and the aircraft landed safely. However, the incident triggered an emergency airworthiness directive (EAD) from the FAA for all of the aircraft types to be grounded and inspected. Some 171 aircraft were grounded. Following inspections both Alaska Airlines and United Airlines reported issues related to the door plug installation such as loose bolts, while the US National Transportation Safety Board (NTSB) is continuing with its investigation. Although there are no definitive answers yet as to why the incident occurred, it is the latest in a series of setbacks for the Boeing MAX aircraft, which will only delay production further.

On the engine side, manufacturing issues with the Pratt & Whitney (P&W) Geared Turbofan Engines (GTF) PW1100 powerplants had been causing aircraft on ground (AOG) issues for some time but the real scale of the problem emerged in September 2023 when P&W parent RTX confirmed that 600 to 700 incremental geared turbofan engines would have to be removed from aircraft for quality checks between 2023 through to 2026 at a cost to the company of $3bn. (More detail on the manufacturing and supply chain issues are examined in Chapter Four, OEM and Fleet Challenges.)

Given the various supply chain issues and the fact that aircraft are taking longer to get out of maintenance than they have historically, the constraints on capacity are expected to continue into 2025, with some predicting 2026 before the production lines are back to full force and delivery streams have recovered.

“The supply chain and orderbook delivery stream is broken,” says Meyler. “Any hope of having a fix coming in soon has been thrown out of the window with various new challenges like the GTF engine issues, the continued certification delays and issues with the Boeing product.” Meyler expects it to be more like three to as many as five years before the manufacturers return to a more normal delivery schedule.

Cirium’s Morris notes that there are a thousand-plus suppliers in the aviation manufacturing supply chain, which each had their individual issues having been damaged by the pandemic. “Based on our projections from 2018, there are 3,000 single aisle aircraft that were never made,” says Morris, noting he believes that the structural deficit of aircraft will continue through 2027.

That dearth of new equipment has restricted aircraft availability for airlines, which have turned to lessors in the search for lift to serve the rapid increase in demand. This supply- demand imbalance has pushed up lease rates and asset values, increasing airline costs further.

The geopolitical environment has also worsened over the past 12 months. The Russian-Ukraine war has continued with no real conclusion in sight and the terrorist atrocities carried out by the Hamas militia in Israel on October 7, 2023 prompted a hot war in Gaza that threatens to destabilise the entire Middle East region.

John Plueger, chief executive officer at Air Lease Corporation, comments that current geopolitical issues are foremost in board discussions. “We are watching the current geopolitical situation very closely,” he says. “We were hurt a little in Russia but there was no way of predicting its invasion of Ukraine and certainly no one could have predicted the Hamas attacks in Israel. These are the realties we deal with.”


Geopolitical issues are omnipresent and part of the normal operational environment for the world’s airlines. “Every few years we run into geopolitical issues and we tend to get through them,” says Aengus Kelly, chief executive officer of AerCap. “We are a global industry. Every year, excluding Covid, more people will travel than the last. That has continued since the dawn of aviation. That structural trend is definitely there.”

Lessors were adversely impacted by Russia’s invasion of Ukraine since their aircraft on lease to Russia airlines were trapped in the country, with insurers refusing to pay out. In the past year however, many lessors, including Air Lease Corporation and AerCap, have begun to recoup some of those losses with insurance payments.

Geopolitical uncertainty is particularly high this year since aside from the two wars, 2024 is being tagged as the Year of Elections. There are significant elections being held in Indonesia, Russia, India, Mexico, the EU, the US and the UK, which Avolon chief executive Andy Cronin is concerned may lead to a shift in economic policy that could impact aviation.

“We have to be aware of the potential for escalating trade conflict,” he says. “We have seen a growing anti-globalisation among some of the major world economies. When you layer onto that some significant upcoming elections, with an electorate that is moving away from the centre, there could be some potentially big shifts in economic policy.”

IATA’s January 2024 key risks report also noted the importance of the upcoming elections since the results could lead to an impediment in trade and increased oil-price volatility.

Geopolitical issues are the main driver of fuel price volatility. In third quarter earning calls many airlines noted jet fuel prices as a major headwind to profitability but in the fourth quarter that tailed off slightly. The crack spread between the price of crude oil and jet fuel has also remained stubbornly high.

These headwinds and perceived risks have impacted investor perception of airline value, with share prices lower across the board. “Airlines are doing really well but their stock prices are performing poorly,” says TD Cowen’s Helane Becker. “They are below March 2020 lows, which I find amazing considering how well the airlines have recovered.”

The supply-demand imbalance for aircraft limits earnings growth for airlines but in the interim it has enabled them to raise fares leading to healthy yields over the 2023 summer period. That said, capacity constraints will begin to impact income growth as availability of aircraft becomes even more scarce and more costly.

JP Morgan’s Mark Streeter explains why the current market dynamic has made him bullish on aircraft rather than on airlines. “On a global basis, domestic travel has returned to 2019 levels but global GDP relative to 2019 is still way ahead by at least 10 or 15% - airline traffic should be a multiple of that so we have not recovered yet to the pre-Covid traffic trend,” he says. “When we talk to investors we explain that we are more bullish on the aircraft side than the airlines, which is a function of that long-term pull to trend on traffic and the supply-demand imbalance for aircraft.”

Streeter argues that air traffic should have recovered to levels beyond 2019 by now based on its relationship to GDP but it has been restricted by the lack of aircraft. “We haven’t had the aircraft availability to stimulate lower fares and more traffic because those brakes have been put on the market by the Boeing and Airbus supply chain issues and the GTF engine problems.”

AerCap’s Kelly agrees that investors are concerned about airlines’ rising cost base and the weakening macroeconomic picture despite record profits being recorded by many large airlines. “There is concern from investors about the stability of demand at these elevated yield levels,” he says, “because of the cost of living and rising interest rates, which means that the consumer has less disposable income.”

A good demonstration of this negative investor perception can be seen in equity investors’ reaction to Delta Air Lines recent record full year 2023 results. Delta delivered earnings per share (EPS) of $6.25 and a pre-tax income of $5.2bn, which was almost double the 2022 result, however the company lowered its EPS guidance for the first quarter of 2024 to $6.00 to $7.00.

While the mid-point of that range was right at the consensus estimate of $6.50, the outlook was below Delta’s (DAL) long-term profit target for several years of more than $7.00 EPS. The Delta team said on the January 12 earnings call that they were cautious on future guidance due to rising costs, with fuel and maintenance costs predicted to be up in 2024, added to the disruption caused by supply chain issues and a “testy” geopolitical environment.

Delta’s stock opened more than 7% lower following its results announcement, despite Delta’s forecast for free cash flow of between $3bn to $4bn.

North American strength

The North American market has been the major driver of traffic growth and profitability for the global industry over the last year, which is expected to continue into 2024 despite some softening of domestic demand seen in the latter half of 2023. The region accounts for 56% of IATA’s total industry profit forecast for 2024 amounting to $14.4bn – about the same as the $14.3bn estimated for full year 2023.

The region was the first to emerge from the crisis and was back to profitability in 2022 much earlier than other jurisdictions and in summer 2023 demand also returned for transatlantic travel.

“Airlines have done really well, especially in North America,” says TD Cowen’s Becker. “Over the past three years, we have seen a predictable recovery… locally, domestically, regionally and now internationally. This summer [2023] we saw very strong demand on the North Atlantic routes as people looked to recreate experiences they had pre- pandemic or just that pent-up demand for not have been able to travel for so long.”

Becker characterises 2021 and 2022 as years where domestic markets recovered, specifically in North America and European markets, with Asia-Pacific being slower to recover. International traffic recovered throughout 2022 and into 2023, and she regards 2023 and 2024 as the year of transatlantic recovery.

“2025 is probably the first year where we get a normalised, balanced travel year,” she says. Low-cost carriers (LCCs) benefitted from that early return of domestic travel, especially in the North American market, but over the past year a new phenomenon has emerged where travellers appear to be willing to spend more to travel further afield and for better service, which has translated to increased traffic and yield for the legacy carriers.

“What we’re seeing is almost a tale of two cities,” says Greg Lee, Global Head of Transportation Banking at Goldman Sachs. “Some of the larger airlines with significant international operations, premium business, long haul services, have been performing better than airlines with more of a domestic and low-cost carrier model. In the most recent series of earnings calls, we have seen a divergence between premium and the front of the cabin and the lower cost side of the cabin.”

“We are seeing something different happening than we would have seen previously,” agrees Betsy Snyder, S&P Global Ratings. “Typically low-cost airlines have done well due to their lower cost base and they did do well in the beginning when short-haul traffic started to come back after the pandemic. But in 2023 we have seen a change with the pent-up demand for international travel. The big three airlines – United, Delta and American – all have global operations and have been the beneficiaries in terms of demand.

Whereas the other airlines that focus on domestic travel have seen demand reduce… they also have exposure to higher fuel prices and labour costs have been increasing and there is a shortage of pilots that have been leaving smaller airlines for the larger carriers. They have been adding more capacity than some of the larger airlines so their earnings have been under pressure. Earnings for smaller airlines like Spirit and JetBlue have been subpar relative to the big three network carriers.”

The flip in fortunes for the LCCs with the legacy carriers is due to a number of factors, primarily cost convergence. LCCs historically had a lower cost base than legacy carriers but following the pandemic, there has been an increase in labour costs across the board, as well as pilot shortages bumping up their salaries which has led to operating costs of LCCs and legacy carriers converging eliminating that traditional “low-cost” advantage.

Aengus Kelly also notes that the fixed cost base for airlines has been increasing rapidly, particularly noting that the industry now has the first “million-dollar pilots”, with captains of widebody aircraft earning base pay of over $400 an hour in addition to pensions and healthcare benefits.

Rising fuel costs are an ever-present issue for all airlines but the collective increase in labour costs has severely challenged many carriers and continues to be a concern, with most agreements having been resolved recently with substantial increases.

The macroeconomic environment has also contributed to this reversal in fortunes for the US LCCs, since as Betsy Snyder suggests, they have a different customer base than legacy carriers whose “disposable income is not growing as fast as other segments of the economy”, which she says has been hurting LCC demand.

In the airline’s third quarter earnings call on October 31, 2023, Joanna Geraghty, JetBlue president and chief operating officer (now announced as the next CEO to take over on February 12, 2024), noted that the airline had suffered from a “softer than expected off peak and close in leisure demand in September” although she called the airline’s premium Mint offering a “bright spot” in the third quarter results with year-on-year revenue improving by 4.5%.

“We continue to see strength in Mint, even with our Mint capacity up 19% year-over-year”, said Geraghty. JetBlue was able to benefit from its transatlantic services using its A321LR aircraft to London and Amsterdam, expanding to Dublin and Edinburgh.

Spirit Airlines also reported a loss for the third quarter of 2023 amid “softer demand” for its services. Chief executive Ted Christie commented that the airline had not seen the “anticipated return to a normal demand and pricing environment for peak holiday periods”.

The airline also referred to challenges caused by higher fuel prices and Neo engine availability issues leading to a lower than expected margin for the fourth quarter.

Frontier and Allegiant echoed their LCC competitors reporting softening of demand for the fourth quarter and increasing operating challenges including elevated fuel and labour costs, as the financial impact from adverse weather and capacity constraints.

But the low margin airlines are not flying empty – load factors remain healthy but the differential for lower cost carriers has always been a focus on high aircraft utilisation, which has been hampered by adverse weather earlier in the year, airport/ATC delays and capacity constraints as aircraft are grounded due to engine issues.

The key for low margin airlines going forward into a more difficult operating environment will be balancing load factors with price.

The picture is different for US legacy carriers that have all reported increased demand for premium products as well as their basic offerings as travellers who can afford to pivot to more premium services.

United Airlines, Delta and American Airlines have all posted strong third quarter 2023 numbers and yields for their premium products and are also benefitting from a return of business travellers.

In its third quarter earnings, United Airlines chief executive officer Scott Kirby said that passenger numbers were up, from its basic economy product all the way to more premium products, including first class, on both its domestic and international routes, serving both business travellers and increasingly leisure customers.

The continued success of airlines to attract leisure flyers to premium products has endured past the point where many had expected so-called “revenge travel” to have petered.

Delta’s Bastian believes there is enduring demand for premium air travel; he says that the post pandemic premium cabin passenger is the same person but who is travelling for different reasons. He commented that people who had travelled in premium for business reasons pre-pandemic were continuing to do so for leisure reasons now and that the airline had seen “incredible stickiness” for its premium products.

For this reason, Bastian notes, that Delta is trying to keep premium travel affordable so people can use it for business and leisure travel.

Delta has rolled out a premium economy product on long-haul international routes, which Bastian described the revenue generation as “above our expectations”. Delta is also seeing an increase in corporate sales, which accelerated by the end of the year, including double-digit year-over- year growth in December.

The US carrier said that technology and financial services business were driving momentum for business travel. “We are finally starting to see tech companies traveling again,” said Bastian. “The return to office that is driving some of growth.”

The large US carriers have had the biggest recovery in both specialty and profitability and have been able to fill the front of their aircraft with premium leisure passengers. ORIX Aviation’s Meyler observes that this trend has continued “very resiliently throughout 2023”.

He noted though that there is an East-West divide on this current trend toward premium travel with Asian carriers not observing a growth in premium traffic potentially as a consequence of the lag in the recovery in Asia, which he adds is now beginning to change.

The change in fortunes for the traditional LCCs has led to a new moniker for the group – namely low margin airlines (LMAs) – although Allegiant has revised this for its business model to Profitable Leisure Focus Carrier or PLFC, according to chief Barry Biffle in the airline’s November earnings call.

North American airlines have been seeking mergers to strengthen their offerings. The JetBlue-Spirit merger however has been stymied by the ruling of US District Judge William

G. Young on January 16, 2024 that the merger – first announced in July 2022 – would substantially damage competition.

Alaska Airlines announced its intention to merge with Hawaiian Airlines on December 3, to resounding support from the industry but with the usual concerns over the reaction of regulators. TD Cowen’s Becker, said at the time of the announcement that she expects the regulators to approve this deal noting that the combination “makes a lot of sense, and it should be approved”.

JP Morgan’s Streeter also said at the time that due to Hawaiian’s relatively small size and the fact that after the merger Alaska would only by a quarter the size of the big three, he did not expect any regulatory issues.

European consolidation

European airlines have recovered well following the pandemic with airlines already back to profit. IATA is predicting European airlines will post a record net profit of $7.7bn for the full year 2023, with the positive trajectory expected to continue into 2024 with $7.9bn 2024 net profit forecast. Passenger revenue growth is expected to slow in 2024 to 10% from 22% last year but from a high base in 2022 of 102%, which shows growth rates are normalising for the region.

All airlines, including legacy carriers are riding high on the back of sustained demand for air travel, especially for premium services.

Lufthansa Group posted a very strong third quarter profit thanks to a “record summer” helping the group achieve €10.3bn in revenue with an operating profit of €1.5bn, making it the second best third quarter result in its history.

Net income was €1.2bn. Lufthansa stated that at 25% above the 2019 third-quarter level, third quarter yields reached a new record high with demand for leisure travel remaining strong “particularly in the premium segment”.

The German airline group indicated in November that the very good summer demand had extended into October, with strong demand during the Christmas season on both short-haul and long- haul flights remains high, especially among leisure travellers.

The company said that the trend toward more bookings in premium classes, meaning business class or first class, was continuing although chief executive Carsten Spohr noted on an earnings call in November 2023 that business travel was not yet back to full force but that premium cabins were more often being filled by private, i.e. leisure, travellers.

Lufthansa has increased its premium cabin offerings on board its A350, 777-9 and 787-9 aircraft with its new long-haul product, Lufthansa Allegris, investing a total of €2.5bn by 2050 – demonstrating the company’s conviction that demand for premium services from leisure travellers is set to continue.

Air France-KLM recorded a 9% increase in third quarter operating result to €1.3bn over the prior year quarter with passenger numbers up by nearly 8% year-on-year. The airline group credited the success to an increase in load factor on the long- haul, short and medium-haul routes and Transavia, as well as an increase in yield on the North Atlantic, Africa, Caribbean and Indian Ocean and short and medium-haul services. Air France is also continuing with a “premiunisation” journey to upgrade its premium classes with new cabins.

IAG – parent company of British Airways, Aer Lingus, Vueling, Iberia and Level – reported a healthy profit of €2.15bn for the nine months of 2023 on revenues of €22.3bn. The group has reported “very strong leisure demand across all our airlines”.

British Airways has also invested in its premium cabins, with an average of 56 business class seats per aircraft, but with a reduced first class cabin from 14 seats to approximately eight. Nicholas Cadbury, CFO at IAG, said that the company expects premium capacity to rise above 2019 levels by about 2025 and that the premium leisure market was strong.

In its third quarter results, Aer Lingus reported particularly strong premium leisure on its transatlantic network, which drove “record load factors in business cabins”. IAG is continuing to invest in lower fare brands and at its capital markets day in November 2023 announced that it was applying for an independent airline operating certificate for long-haul, low-cost brand Level to operate enhanced services out of Barcelona.

Although the legacy carriers have been enjoying a period of profitability thanks to higher fares and great demand, European low cost carriers have also been profitable.

Ryanair reported strong first half financial year results in November 2023, with profits up to €2.18bn on the back of a “very strong Easter” and “record summer traffic” with a steady average load factor of 95%. Chief executive officer Michael O’Leary noted that the airline was operating in a “constrained market” that was “good for traffic, good for load factors, and good for average fares”.

Ryanair’s costs have been rising however, with fuel up 29% for the first half of its financial year that the airline manages with a thorough hedging programme. O’Leary expressed his frustration at the continued disruption with Boeing delivery delays but said the airline was confident it would receive 45 of the 50 aircraft due for delivery by end of June in time for the summer peak in 2024, which he says are “critical to traffic growth” for this year.

However, it is clear that some airlines have been struggling to recover following the pandemic, which has stimulated airline consolidation in Europe. At the end of May 2023, Lufthansa announced an agreement to acquire a 41% stake in Italy’s ITA Airways for €325 million, which was agreed with the Italian Ministry of Economy and Finance in June including options to take a greater share at a later date. At the end of November, Lufthansa sought antitrust approval from the European Union (EU) with a decision expected by mid-January.

In October 2023, Air France- KLM acquired a 20% stake in SAS Scandinavian Airlines with a consortium involving the Danish government and Castlelake. Air France-KLM has the option to become a controlling stakeholder after two years. Benjamin Smith, Air France- KLM chief executive, said at the time the deal was announced: “With its well-established position and Scandinavia and strong brands, SAS offers tremendous potential.”

IAG confirmed in November 2023 that it anticipates completing its purchase of Air Europe by the end of 2024. The acquisition is currently being reviewed by the European Commission. TAP Air Portugal is also up for sale.

This move toward consolidation has led industry observers to predict that the European market may be moving towards a similar situation seen in North America, which is dominated by three large airline groups – potentially IAG, Air France-KLM and Lufthansa – with low fare market being dominated by the market leader, Ryanair.

The manufacturing issues with aircraft and the GTF engine though will continue to curtail capacity growth, elongating the timeframe for that consolidation prediction to play out.

Middle East & Africa

Middle East airlines have recovered in step with the rise in demand for long- haul air travel, which has also assisted with the recovering in demand for widebody aircraft. Airlines in the region are reporting a return to profits and are back to ordering aircraft.

With the push for economic transformation of the Kingdom of Saudi Arabia realised via Vision 2030 - the ambitious program to drive national economic transformation and achieve positive and sustainable change in the country – the growth in the region is beginning to ramp up.

The mission has been entrusted to the Saudi sovereign wealth fund, Public Investment Fund (PIF), which is promoting the launch of Riyadh Air as well as backing the new aircraft lessor AviLease that has captured market share quickly with the acquisition of Standard Chartered leading business. Africa retains its historic challenges with passenger travel, with the main flag carriers still struggling to recover.

South America

Latin America has recovered well from the pandemic slowdown, indeed Mexico was one of the first countries to recover their domestic traffic. Carriers continue to face challenges, however.

In Brazil, GOL is currently working to renegotiate its lease agreements, for now outside of a bankruptcy filing, but Azul has emerged stronger from its broad recapitalisation program, which included an unsecured dollar notes exchange agreement as well as the $800 million new issuance of new money notes secured by its loyalty program, brand IP and tourism operator. LATAM also continues to benefit from its restructuring and now has a positive trajectory.

Asia-Pacific resurgence

The Asia-Pacific region has experienced the strongest growth in airline revenue in 2023, with growth accounting for half of the 47% global increase to $642bn. IATA figures show passenger traffic (measured in RPKs) is up by 98% over last year, on the back of a 78% rise in capacity. Profitability is also returning to the region.

Avolon’s Cronin says that the post- Covid recovery that started about a year and a half later than in North America, is continuing to spread through Thailand, Malaysia, Indonesia and some of the bigger economies in the Asia-Pacific region although the Chinese picture he says is a little more mixed.

“We have seen domestic capacity surpass pre- Covid levels for some time now,” says Cronin, “but the long-haul build-up has been slower than anticipated. That is rapidly catching up now, with that pent-up demand still feeding through in Asia.”

SMBC Aviation Capital’s Peter Barrett sees “good momentum in Asia” with airlines showing increased demand, increases in capacity and he notes that “cash collections are very strong” adding that the only lag remaining in the region was perhaps cross border business out of domestic China but he expects that to recover in step the Chinese economy.

In early December, ORIX Aviation’s Meyler was more cautious on the Chinese recovery, specifically relating to airline profitability: “From a profitability level, 2023 has been very poor really across the Chinese market – loss making in fact,” he says. “While most kind of banking institutions will forecast a return to profitability of China in 2024, we’re not really seeing it play out yet.”

Although the market is still waiting for a big reopening of international traffic from China, domestic traffic patterns in China have been robust. International carriers are all reopening routes to Chinese mainland, preparing for a spike in demand for long-haul trips.

United chief commercial officer Andrew Nocella noted that demand for Atlantic and Pacific travel for the third quarter of 2023 was “truly outstanding” which United forecasts continuing into the fourth quarter. He added that United had taken advantage of the resurgence in demand across the Pacific by adding capacity to key markets including resuming daily flights to Beijing and Shanghai from San Francisco and adding routes to Manila.

India is again being forecast for substantial growth in air travel. India has lagged behind other parts of the world for some time in terms of the development of the aviation sector. That is changing, and changing rapidly.

“In India, you have to appreciate the growth of the population, the growth and maturity of the middle class, and the number of new airports under construction,” says Carlyle Aviation’s Korn. He sees growth in India coming from the low-cost carriers as well as large airlines with access to capital placing large aircraft orders.

A little over a year following its takeover from the Indian Government by the Tata Group, Air India placed an historic order for 570 aircraft Boeing and Airbus aircraft (140 A320neos, 70 A321neo, 34 A350-1000, six A350-900s, 190 737 MAXs, 20 787s and 10 777Xs).

Not to be outdone, rival Indigo announced an order for 500 A320 Family aircraft at the Paris Air Show.

India is also revitalising its aviation finance offerings, with the closing of the first finance leases through Gujarat International Finance Tec-City, popularly known as GIFT City. Air India financed six A350-900s via GIFT City by the end of 2023. (For more details, see Chapter Two, Avation Finance).

Fig 7 - Aviation growth in Asia & Middle East
Fig 8 - India GDP growth

Fallout from GoFirst insolvency

India has not been all about growth in 2023. It also saw the demise of Go First. The Indian carrier cancelled all of its flights in May and filed an insolvency plea before the National Company Law Tribunal (NCLT), reportedly with debts of nearly $798 million.

GoFirst blamed the situation on Pratt & Whitney for its non-supply of engines.

“GoFirst has had to take this step due to the ever-increasing number of failing engines supplied by Pratt & Whitney’s International Aero Engines, LLC, which has resulted in GoFirst having to ground 25 aircraft, equivalent to approximately 50% of its Airbus A320neo aircraft fleet as of 1 May 2023,” the airline said in a press release.

“The percentage of grounded aircraft due to Pratt & Whitney’s faulty engines has grown from 7% in December 2019 to 31% in December 2020 to 50% in December 2022. This is despite Pratt & Whitney making several ongoing assurances over the years, which it has repeatedly failed to meet,” GoFirst added.

The airline has been facing problems with the unavailability of aircraft for many quarters. All of its A320neo aircraft are powered by Pratt & Whitney engines. Air India and Vistara, the other two A320neo family operators in India, are powered by CFM engines. IndiGo opted for CFM as part of its follow- on order, while GoFirst selected Pratt & Whitney for its second round of orders too.

Responding to Go First’s accusations against Pratt & Whitney, the engine manufacturer said that GoFirst had a “long history” of missing payments.

Previously, GoFirst had been found to default on payments to operational creditors including $146 million to vendors and $318 million to aircraft lessors.

Lessors have been struggling to repossess aircraft from GoFirst.

However, On October 3, 2023, the Indian Ministry of Corporate Affairs issued a notification to amend Section 14(3)(a) of the Insolvency and Bankruptcy Code 2016 (IBC 2016) stating that the provisions shall not apply to transactions under the Cape Town Convention relating to aircraft, aircraft engines, airframes and helicopters.

The announcement was greeted favourably by the aircraft leasing community as it provided more clarity that the Cape Town Convention would take precedence in future insolvency hearings involving aircraft assets. The Aviation Working Group (AWG) issued a positive notice in response to the ruling.

However, the AWG subsequently issued a negative ruling on India’s compliance with Cape Town since the lessors in the GoFirst case remain waiting for a ruling to initiate a corporate insolvency resolution having already terminated aircraft leases and filed deregistration applications with the DGCA.

Although the National Company Law Appellate Tribunal (NCLT) upheld the admission of GoFirst’s application and the imposition of the moratorium (intended to allow swift repossession of the aircraft), it ‘left to the NCLT the question of whether the leased aircraft…. fell within the scope of the moratorium’.

Although changes to the Indian Insolvency and Bankruptcy Code were intended to make it easier for lessors to repossess their aircraft in the event of an insolvency (placing the country’s legislation in line with the Cape Town Convention), without specific underlying core legislation having been passed by Parliament, concerns remain as to whether these will be applied prospectively or retroactively.

The AWG notes that ‘beginning on 18 May 2023, certain lessors brought writ petitions seeking orders by the High Court compelling the DGGA to register and export aircraft in accordance with the terms of Indian law’, but confusion remains.

At the time of the Aviation Working Group’s Watchlist Notice Update No.2, ‘CTC remedies have not been made available to lessors nor have lessors been able to access aircraft to determine that their aircraft are being maintained in accordance with the leases,’ highlighted the Aviation Working Group in a recent statement.

Indeed, the time period (210 days and counting) since the commencement of GoFirst insolvency proceedings is more than double the period in which remedies should be available, adds the statement.

The nature of the Indian court system is also allegedly further compounding these problems, with difficulties in scheduling dates and further delays adding to lessors’ misery. However, despite regular communication channels with both government and bankruptcy administrators, the requirement for primary legislation (underpinning the Cape Town principles) remains crucial.

The ongoing ambiguity surrounding the Section 14 moratorium – in particular, delays imposed in resolving legislation seen by many lessors as essential – could also do profound damage in a market already experiencing exponential growth.

Citing the over-double waiting period having already passed, ‘failure to make remedies available to creditors is non-compliant with the Cape Convention,’ notes the AWG, adding that ‘material non-compliance is compounded by significant delays in court hearings while the aircraft remain in possession of the debtor and insolvency administrator’.

With no ‘express recognition’ of the timetables and ‘no near-term end to the litigation,’ India’s outlook for CTC compliance has been downgraded to ‘negative’.

Airline bankruptcies and restructurings have continued over the past year as smaller airlines have struggled to resume profitable operations following the crisis with little government support or access to affordable capital.

The most prominent of 2023 bankruptcies has been the GoFirst case in India, still working its way through the courts, which the airline blames squarely on the grounding of its aircraft due to the GTF issue (see sidebar for more detail).

When the scale of the GTF issue was revealed, some experts were predicting more airlines could follow suit but since that time as Pratt & Whitney has put in place its fleet management plan and worked to compensate affected companies, there is more of a sense that the issue will be resolved with too many airline casualties.

Airline Country
Cascadia Air Canada
Flybe UK
Flyr Norway
Novair Sweden
Aeromar Mexico
Viva Air Colombia
Ultra Air Colombia
Niceair Iceland
GoFirst India
Fly Gangwon South Korea
Air Moldova Moldova
Thai Smile Thailand
Buta Airways Azerbaijan
Swoop Canada
MY Airways Malaysia
JC International Airlines Cambodia
Equair Ecuador
Hi Air South Korea
Airline Country
Ghana Airlines Ghana
Aerus Mexico
Centrum Uzbekistan
Air Samarkand Uzbekistan
Sky Vision Airlines Egypt
Air Moana French Polynesia
ESAV Airlines Ecuador
Yazd Air Iran
JetSMART Colombia Colombia
City Airlines Germany
Silk Avia Uzbekistan
Air1 Iran
Global Airlines UK
Mexicana (2.0) Mexico
Discovery Germany
Valetta Airlines Malta
AJet Turkey
BeOnd Maldives
NG Eagle Nigeria
Naysa Canary Islands, Spain
Bermudair Bermuda

Read more from the Aviation Leaders Report 2024