New KPMG and Airline Economics report finds that aviation industry had tenth consecutive year of growth in 2019, in unprecedented ‘supercycle’
The aviation industry continues to enjoy a record period of growth, with 2019 representing the tenth consecutive year of global airline profitability. However, the growth cycle has likely peaked, and a slow downturn has commenced, according to a new report released today by KPMG and Airline Economics.
The new report identifies significant new challenges for the industry, including the global grounding of the Boeing 737 MAX and the need to address climate change.
The report, Aviation Industry Leaders Report 2020: Steering the Supercycle, captures the views of over 40 industry leaders across the leasing, airline and banking markets and includes the views of the rating agencies and analysts covering the sector.
Ireland remains a global leader and hub for airline leasing and financing, with most major leasing groups being Irish headquartered, and over 60% of all leased aircraft worldwide managed by Irish-based leasing companies.
The report notes that the global grounding of the Boeing 737 MAX is significantly distorting the market, both for airlines and lessors, and has the potential to cause even further disruption in 2020. Large scale lessors that ordered the MAX have been disrupted, with adverse impact on their balance sheets and lease income over the past year. However, the grounding has provided a benefit to some lessors, as the grounding has driven demand and pricing for older aircraft as airlines seek replacement capacity for the nearly 400 MAX aircraft which are delivered but not in use.
Overall, uncertainty regarding the timing of the MAX’s return is a major issue which could have an even greater impact if it is not back in service for the 2020 summer season.
The research points out that there has been a dramatic shift over the last 12 months, with the climate change agenda now having an ever-increasing impact on the aviation sector. Many airlines are investing in cleaner, more efficient new-technology aircraft, which can be recycled more easily, and are investing into research exploring the use of biofuels. However as ‘flight-shaming’ and the ESG focus of investors grows, industry leaders agree that more needs to be done to better communicate how the industry is addressing its impact on the environment and also to promote the wider social and economic benefits of air travel.
A number of other significant headwinds remain on the horizon, such as the volatile geopolitical environment, slowing economies, a strong US dollar, increasing production rates and capacity constraints.
Despite these challenges, however, the outlook remains broadly positive and cautiously optimistic.
Airline profitability reached $25.9bn in 2019, the fifth highest on record. This was supported by relatively stable oil prices and the low interest rate environment. Passenger traffic continues to grow, with 4.2% RPK (Revenue Passenger Kilometres) growth in 2019, and the supercycle is set to continue into 2020 for a record eleventh year.
The outlook for lessors remains positive despite the challenges, given the fact that significant capital will continue to be needed to fund aircraft deliveries and the percentage of leased aircraft will continue to trend upwards towards 50%.
The report also anticipates that the rise in bankruptcies and the weaker trading environment will result in further airline consolidation in 2020. It notes that most consider Europe to be overdue for more airline consolidation.
Speaking about the research, Joe O’Mara, Head of Aviation Finance, KPMG Ireland said:
“With a tenth consecutive year of growth, in a sector where business cycles typically last eight or nine years from peak to peak, we are in uncharted territory. On the financing side, aircraft leasing continues to become more mainstream and there is greater market confidence in the business model.
“While the headline figures for 2019 are positive, they represent a decline from 2018. We have also seen a spike in airline bankruptcies during the year. Therefore, aviation leaders agree that the cycle has peaked, and while things look positive for 2020, a slow downturn has commenced.”
“Overall, the outlook of industry leaders is cautiously optimistic, more so than 12 months ago, with an appreciation that while there remains some uncertainty, such an environment may also drive opportunity.”