Airline Economics magazine - Issue 82

DISRUPTING DYNAMICS

The strain on the supply chain for aviation airframes and engines has significantly disrupted the traditional aviation economic cycle. It could be argued that the cycle has been distorted for many years, particularly during the elongated 13-year upcycle before the pandemic. Industry players are still grappling with understanding where the sector sits within the current cycle. Historically, a typical aviation cycle is characterised by five years of growth followed by five years of decline. The longer an upcycle continues, the more pronounced the correction is likely to be when it eventually occurs.

The last market correction was driven primarily by the impact of COVID-19, although its sustained aftereffects – along with more recent challenges such as the war in Europe and conflict in the Middle East – have exacerbated shortages of raw materials and labour. The protracted recovery on the production side, coupled with shifts in consumer behaviour, has made it increasingly difficult to predict the timing of the next cyclical change, given the persistent supply-demand imbalance. Despite these challenges, several positive fundamentals underpin the sector.

Passenger travel growth is forecast to continue, asset values remain inflated, lessor returns are strong, and residual values have proven to be an effective hedge against inflation. Moreover, a falling interest rate environment has attracted additional investors to the space. However, cyclical economics suggests that such a hot market is ripe for another correction.

Navigating these cyclical changes and identifying the optimal moments to capitalise on market conditions – particularly for buying and selling aviation assets – has always required a specialised skill set, often aided by an element of luck. In the current market, robust demand has attracted “tourist” capital from investors seeking shorter-term yields. At the same time, longer-term investors are reaping the rewards of a stable leasing market that has demonstrated resilience through two global black swan events.

The industry remains confident in its ability to successfully steer through the latest cycle, which many lessor CEOs believe is now at its midpoint or even past its peak. Airline Economics and KPMG have been releasing their annual Aviation Leaders interviews ahead of the final report, which will be published in January 2025 at the Growth Frontiers Dublin conference. These interviews explore these issues in depth.

You can view them at https://www.aviationnews-online.com/aviation-globalleaders or listen to the series on Apple Podcasts here: https://podcasts.apple.com/gb/podcast/aviation-global-leaders/id1541842716.