In times of economic volatility, constants are essential for predicting future growth and informing strategic decisions. The airline industry, marked by cycles of volatility and exogenous shocks, exemplifies this need. The COVID-19 pandemic, the deepest recessionary shock in modern history, has necessitated a reevaluation of established forecasting models for a post-pandemic world.
Historically, aviation economists have identified a standard economic cycle of two to three boom years followed by several years of downturn. However, the prolonged growth period from 2004 to the onset of the pandemic disrupted this cycle. Despite the global financial crisis of 2008/9, air travel continued to expand, driven by low interest rates and a surge in liquidity from investors seeking higher yields. This growth decoupled from global GDP, with the airline industry growing at more than 5% annually between 1990 and 2010, outpacing global GDP growth.
The pandemic caused a significant drop in growth, creating approximately $300 billion of "missing demand" from 2020 to 2022. A phenomenon known as "revenge travel" has driven rapid growth over the past two years, but the industry is only now returning to trend, with healthy demand expected to continue. Revenues for the airlines can continue to be on track to surpass the historic 1% of GDP revenue, driven by pent-up demand and flexible working habits.
Globally, air travel growth is projected to align with GDP growth, with net profits expected to remain elevated due to capacity constraints, pilot shortages, and higher inflation. The International Air Transport Association (IATA) reported that total airline revenue in 2023 recovered to 107% of pre-pandemic levels, with passenger revenue reaching $642 billion. IATA forecasts airline net profits to reach $25.7 billion in 2024, with a 2.7% net profit margin.
However, the recovery is uneven, with Asia, particularly China, lagging. Airlines face significant challenges, including higher debt burdens, rising costs, and capacity restrictions. The cost environment, driven by increased labour, maintenance, and fuel costs, poses a significant challenge to profitability. Interest rates have stabilised around 4-5% in the US and Europe, with inflation beginning to fall.
Manufacturing issues, particularly with the Boeing 737 MAX and Pratt & Whitney's Geared Turbofan engines, have compounded supply chain delays, pushing capacity constraints into 2025 or beyond. These issues, along with geopolitical tensions and upcoming elections in major economies, add to the industry's uncertainty.
Despite these challenges, the industry has shown remarkable resilience. Airlines have adapted, reducing debt and smoothing out maturities. Investor sentiment remains cautious, with concerns about rising costs and the stability of demand. However, the structural trend of increasing air travel persists, driven by a global desire to travel.
European airlines have recovered well following the pandemic and are already back to profit. IATA reported European airlines posted a record net profit of $7.7 billion for 2023, with a forecasted $7.9 billion net profit for 2024. Passenger revenue growth is expected to slow to 10% in 2024 from 22% in 2023, indicating normalisation from a high base of 102% in 2022.
All airlines, including legacy carriers, benefit from sustained air travel demand, especially for premium services. Lufthansa Group posted a strong 2023, achieving €35.4 billion in revenue and an operating profit of €2.7 billion, driven by high demand for leisure travel, particularly in the premium segment. Air France-KLM also recorded €30.0 billion in revenue with profits at €934 million in 2023, attributing success to increased load factors and yields on various routes.
IAG, the parent company of British Airways, Aer Lingus, Vueling, Iberia, and Level, reported a revenue of €29.5 billion and a profit of €3.5 billion for 2023, with strong leisure demand across all airlines. British Airways has invested in its fleet, premium cabins and digital transformation expecting premium capacity to rise above 2019 levels by 2025.
European low-cost carriers have also been profitable. Ryanair reported strong results for the financial year 2023, with profits after tax up to €1.43 billion, driven by high traffic and load factors. However, Ryanair faces rising costs and Boeing delivery delays, impacting its growth plans.
Airline consolidation in Europe is accelerating. Lufthansa announced an agreement to acquire a 41% stake in ITA Airways, while Air France-KLM acquired a 20% stake in SAS Scandinavian Airlines. IAG is also progressing with its purchase of Air Europa. This consolidation trend may lead to a market dominated by a few large airline groups, similar to North America, with Ryanair leading the low-fare market. However, manufacturing issues and geopolitical tensions may elongate this consolidation timeframe.
While passengers are flocking back to the skies, the financial scars of the pandemic linger. Airlines are grappling with higher debt burdens, rising fuel and labour costs, and ongoing supply chain disruptions. Traditional lenders remain cautious, perceiving the industry as high-risk due to its vulnerability to external shocks. This has led to constrained access to credit, hindering airlines' ability to capitalise on surging demand.
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