Joe O’Mara, Head of Aviation Finance at KPMG Ireland, provides his overview of the key issues driving the aviation market over the past year and shares insights he has learned from his discussions with major aviation leaders.
We are delighted to present you with our Aviation Leaders Report 2025: The Supply Strain. The report captures the views of industry leaders across the leasing, airline, and banking markets including input from rating agencies and sector analysts.
Our report last year focused on the continuing resurgence in airline performance, as a fragmented recovery extended into Asia-Pacific, and on the challenges the financing environment was facing as it coped with significant interest rate rises, which caused issues with respect to the capital markets and the trading environment.
Last year, we also spoke of the supply side challenges the sector was facing, both for the airframe and engine OEMs, and this continues to be the dominant theme as we head into 2025. The strain on the supply chain permeates through all areas of the sector.
The supply strain
The challenged state of aircraft manufacturing did not materially improve over the course of the year.
Boeing commenced the year dealing with further issues for its 737 MAX, after the Alaska Airlines malfunction in January and challenges for the beleaguered company persisted throughout the year. While still under the FAA imposed production cap following the above safety issue, Boeing then had to deal with hugely disruptive machinist strike lasting seven weeks from the middle of September.
While Boeing was able to return to production of all aircraft in December, the strike cost the group $5 billion and its output in October and November fell to its lowest post-Covid levels. While it remains a long road to recovery, the nature of OEM duopoly means the wider industry needs them to succeed.
Airbus was not immune to supply chain challenges, facing a world of bottlenecks that caused issues with raw materials, components and engines. All of which stymied its plans to reach a target of 770 deliveries by the end of the year. Airbus has pushed out its planned monthly production of 75 A320s from 2025 to 2027, a target that many believe will prove out of reach.
The IATA estimate for total deliveries in 2024 is 1,250, which is down 30% from what was forecast a year ago and a long way from the peak of 2018, when over 1,800 aircraft were delivered by the two OEMs. The 2025 forecast has been revised down from around 2,300 to 1,800, with a significant health warning that further cuts to this number should be expected.
The reliability issues relating to the Pratt & Whitney GTF engine came to light last year and their impact was felt across 2024, with over 650 aircraft being grounded in November alone. While this is hoped to be the peak of the disruption and over $1 billion of compensation has been paid out to the operators during the year, it further compounds the chronic supply situation.
Dating back to the original MAX issues and the Covid enforced shutdown, there remains a gap of 5,000 planned aircraft yet to be produced. While some argue that this supply shortage has imposed discipline on airlines and helped maintain yields, a significant amount of lift is missing from the system. It is also resulting in older aircraft flying for longer than expected, which carries its own adverse environmental impacts too.
Airline performance
Against this backdrop, airline performance remains robust. Global passenger demand is forecast to be up 11% on last year, representing a 6% rise on the 2019 pre-Covid levels and reaching an all-time high.
This was driven by a buoyant performance in the largest passenger markets, in Europe and America, the continued recovery in Asia-Pacific, as well as a rise in international traffic across the board. Further, albeit slower, growth is expected in 2025.
In terms of profitability, it was another stellar year with airline net profits estimated to reach over $36bn, representing one of the strongest years on record. This number was materially improved by the benign fuel environment, with oil prices falling nearly 20%, primarily driven by oversupply in the market.
The impact of Sustainable Aviation Fuel (SAF) mandates, which are in force in some regions, are not yet having a material impact (though we fully expect this topic to grow in importance in the coming years).
Fuel aside, it remains a challenging cost environment for airlines. While global revenues are expected to top the $1 trillion mark, owing to high load factors and airfares reflecting the constrained capacity, operating margins remain slim as they fell to 6.4% from 6.8% in 2023.
The key driver on cost increases has been labour, with several high-profile pilot strikes and subsequent settlements forming a significant element of this. Airline labour costs have seen double digit growth in each of the last three years, though there is an expectation that this should fall to 7.6% in 2025.
From a traveller perspective, the trend towards premium continues, as customers show their post-pandemic willingness to continue to spend in the experience economy. This has led to some challenges for the low-cost carriers in the US market, and there remains an expectation that we will see some consolidation in that segment of the market.
Another significant string to some airlines’ financial bow has been their loyalty programmes, which drive material ancillary revenues and provide significant security for fund raising. For the larger established airlines in the US and several airlines across Europe, loyalty programmes are becoming an increasingly important part of their business plan and offer a growing competitive advantage against their local rivals.
The general view of participants is that airlines are well placed to continue to prosper into 2025, with international traffic expected to grow further and for Asia-Pacific to continue to recapture the expected growth it missed out on in recent years. While there are some concerns around how potential Trump driven tariffs could dampen demand, it remains too early to tell whether this issue will have a meaningful impact.
Financing environment
The aviation debt market, encompassing the traditional banks, structed product, the capital markets and the alternative lenders, is in a healthy state. There is no shortage of debt capital, and several avenues are open to those seeking to borrow.
In last year’s report the common refrain was that interest rates were in a higher-for-longer period. As we approached the end of last year, we have started to see falling interest rates and, for the larger established lessors, we have also seen spreads tighten. All of this speaks to a more welcoming and receptive debt market for aviation finance.
We saw a significant uptick in unsecured bond market issuances by leasing groups in 2023 and this trend continued into 2024, as investment grade lessors continued to successfully tap that deepest well of debt capital.
The importance of investment grade status for aircraft lessors continues to grow and during the year we saw more leasing groups either achieve that aim or continue to make strides towards it, typically by issuing in the high yield market.
On the structured finance side, the first green shoots in the ABS aviation market were seen in the back half of the year. Generally driven by experienced issuers, we saw a number of ABS deals close with an overall value in excess of $4 billion, which included a couple of aviation loan transactions. While these recent transactions have typically been in respect of A and B tranches, the LTV ratios are moving positively and there is some optimism that if interest rates continue to recede, we may see an appetite for the return of E note issuances in the near term.
While sustainability-linked financing was active during the year, it remains a niche sport and, given the robust nature of the debt markets, there were only a handful of transactions that closed in 2024. The general view amongst participants was that ESG concerns were not yet having a material impact on the price of debt, or indeed the ability to attract equity investors.
Aircraft leasing
The supply demand imbalance continues to favour large scale lessors. Lease rates, driven on a lag basis by interest rates and in real-time by the demand environment, have continued to rise for all types of assets, as airlines fret on their ability to access lift. This has also been reflected in lease extensions, with very high extension rates and some airlines looking to engage more than two years out from the end of the lease.
With asset values materially increasing, we have seen trading activity increase substantially. Having been less active sellers in recent years, the larger lessors are happy to book substantial gains on sale, while also helping to maintain a relatively young fleet.
The challenge remains for those that are not at scale. Investment grade status and an order book are key differentiators. With OEM orderbooks sold out for many years and the sale and leaseback environment remaining a very competitive space, those looking to grow are facing narrow paths. That could perhaps lead to further M&A activity, but the list of attractive targets is not substantial, and the expectation is that where consolidation occurs, it will continue to be larger players absorbing those at sub-scale.
In closing
Overall, despite ongoing geopolitical and macroeconomic headwinds, the industry outlook is positive with an optimism that the post-pandemic cycle has strong fundamentals that will continue to drive opportunity.
I would like to thank all those who gave their time and insights and I really hope you enjoy the read.
