The aviation industry has experienced a stronger than expected return to business. The International Air Transport Association (IATA) in June 2022, announced an upgrade to its outlook for the airline industry’s 2022 financial performance as the pace of recovery from the Covid crisis quickened. Passenger revenues in 2022 are expected to account for $498 billion of industry revenues, which is more than double the $239 billion generated in 2021. Willie Walsh, IATA’s director general, said “it is a time for optimism even if there are still challenges”.
While there is still some way to go before the airline industry can return to the levels of profitability experienced in 2019, other projections offered by the IATA point to an expectation that the industry will return a net profit of $4.7 billion in 2023. Despite the extreme financial difficulties experienced by airlines (and by extension lessors and financiers) during the Covid years, there are many reasons to be positive. Global passenger numbers are expected to rise to 4 billion in 2023, which will allow for continued investment in cleaner fuel and aircraft types.
David McGovern, partner and head of aviation and asset finance, Mason Hayes & Curran LLP, says all stakeholders within the industry also understand the imperative to meet a net-zero target by 2050.
“As an example of this we have seen great advances in sustainable aviation fuel such that its usage can reduce CO2 emissions by up 80 per cent compared with traditional aviation fuel. In the context of sustainability, many financial institutions have implemented lending policies with ESG at their core. At this stage we haven’t seen a significant reduction on investment in the aviation industry due to emission concerns, however, it is possible that capital investment will decrease as a focus on green financing comes to the fore,” says McGovern.
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John Cotter, professor in finance and the chair in quantitative finance at University College Dublin, is also quietly confident about the ability of the sector to rebound.
“The industry has held up well especially considering it was pretty much grounded for the guts of two years. The planes are pretty much full again, especially within Europe. It’s a bit slower in New Zealand and across Asia, particularly in China, and when you travel you can still see people wearing masks. It’s moving in the right direction but Covid hasn’t gone away like it has here.”
Cotter adds: “It was also fortunate that we were in a low-interest environment and that some 50 per cent of planes are leased which meant the airlines went into crisis healthier than before as they didn’t have to pay fixed costs on their balance sheets.”
Kieran O’Brien, head of aviation advisory for KPMG, also views the airlines’ financials as being largely healthy, and praises their financial planning both in the short term and longer term.
“For all aviation and aviation-related businesses they have clearly been focused on the short term in terms of liquidity and working capital. However, we have also seen the more mature organisations really focus on the quality of their balance sheet into the long term. We are also seeing investment in enterprise performance management tools to enable a more automated report with advanced scenario planning as businesses want to be more prepared for the future.”
Importantly, O’Brien sees significant interest in the sector from an investment perspective. “It is still seen as a very strong sector and represents value at the moment.”
However, O’Brien agrees that the net-zero agenda will have a far-reaching future impact. “The net-zero agenda is the single most important agenda item for the sector as a whole. We have seen the agreement by IATA, the recent sustainability charter by Aircraft Leasing Ireland and in general we are spending a significant amount of time with our clients in helping them plan and prepare to get to net zero,” says O’Brien.
It’s not as though airlines can ignore the carbon question with air travel accounting for 2 per cent of all carbon emissions and 12 per cent of all transport-related emissions, according to figures published by the Air Transport Action Group.*
More worryingly, air travel emissions in mature aviation markets, such as the US and EU, are closer to 4 per cent of overall emissions. And according to Science Direct** only 1 per cent of the world’s population – business people who fly the most – account for 50 per cent of all aviation emissions.
These facts were acknowledged at Cop26 where leading airlines, airports and manufacturers of aircraft and engines committed to net-zero emissions by 2050. It is also reflected in the increasing sophistication of investors looking for real results from this sector.
O’Brien says: “Airlines are being particularly innovative, as they need to be. They are looking at ground operations, fuel, more efficient technology as well as contrails management etc. Some airlines are further than others, but they are all very focused on this. However, it is important to note that the answer is industry-wide, involving all elements, OEMs, airlines, lessors, fuel companies and other service providers, to ensure the drive to net zero.”
Another technical approach has been the decision by many airlines, as part of their network and fleet restructuring, to bring forward the retirement of their older, less-efficient jets – for example the B747s – and are focusing on leaner, newer and fuel-efficient technology to drive a reduction in their cost base.
Overall the problem of reducing airline industry greenhouse gas emissions is challenging and there are no obvious answers. To meet these challenges stakeholders will need to investigate new technologies and employ strategies to balance the emissions – as well as establishing agreed standards to accurately measure emissions. Only then will sophisticated and green money continue to flow into the sector.
* https://www.atag.org/facts-figures.html
** https://www.sciencedirect.com/science/article/pii/S0959378020307779