Sustainability
Despite the disruption created by Covid-19, the war in Ukraine and the downturn in the global economy, the dominant trend in the aviation industry worldwide is decarbonisation. The International Air Transport Association (IATA) has committed the global air transport industry to achieve net-zero carbon emissions by 2050, in line with the Paris Agreement target of restricting global warming to a maximum increase of 1.5°C.
This is particularly challenging for the aviation industry which is faced with the task of reducing emissions at the same time as it flies ever more passengers. At present, the industry is focused on improving the energy efficiency of aircraft, using increasing amounts of sustainable aviation fuel (SAF), developing new technologies to make air travel even more fuel efficient, and using carbon offsets.
“The most interesting development over the coming years will be the impact that the environmental challenge will play,” says KPMG head of Aviation Finance, Joe O’Mara. “We have not yet seen its impact on leasing groups, airlines, or their ability to raise funds.
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“However, this agenda is clearly growing in importance, and it will be interesting to see whether those leasing groups which have newer technology and lower emission aircraft in their fleet will be able to gain a strategic advantage in attracting debt and equity investors in the near future. Leasing groups are aware of this coming challenge. KPMG is working with a number of those groups on their ESG strategies.”
The sustainability agenda will also affect the nature of aviation finance. “It will bring about new products like green bonds and transition bonds,” says Professor John Cotter of the UCD School of Business. “We will see increasing aviation finance sector activity in that space. It hasn’t been very high to date.
“Transition bonds allow you to move from red to green financing. And if you borrow using a green bond, you have to buy aircraft that use sustainable aircraft fuel (SAF) or have more efficient engines and so on.”
Continued growth in air travel
While there was much discussion about flight-shaming prior to the pandemic and speculation during it about a permanent reduction in air travel as a result of the new ways of living and working. The sharp rebound in demand following the lifting of public health restrictions across much of the world in the early part of 2021 put paid to that.
“Demand for air travel is getting back to pre-Covid levels,” says John Cotter. “People want to fly after not being able to for a couple of years. Consumer demand for flights is increasing year on year and this will mean more demand for planes.”
This is good news for Ireland, he explains. While we don’t make the planes here and we don’t use most of them, we do have world leading leasing companies here who rent them to the airlines. “If the market grows, we should expect the aircraft leasing industry to do well,” he says.
The emergence of bleisure travel
Demand for air travel is being boosted by what has become known as bleisure – a combination of business and leisure travel. Business travellers have been eschewing morning redeyes and late night return flights on the day of a meeting in favour of travelling mid-morning or early afternoon on the day before and returning home the day after giving them a two night break away. More costly and time consuming than the Zoom alternative but a lot more enjoyable. This has largely been a US phenomenon to date, but it is a trend to watch out for in Europe in 2023.
Aircraft shortage
Air travel growth could be slowed by a headwind in the form of a shortage of new aircraft. Both Boeing and Airbus missed production targets during 2022 and there are likely to be further significant shortfalls this year. One key reason for this was the dramatic cuts in production during the pandemic which had an impact not only on the pipeline of new aircraft rolling out of the hangars but also on the industry’s supply chain.
Those suppliers were badly hit by the lack of orders over the past three years, and many of them do not have the working capital required to ramp up production again to meet the increased demand for parts and components from the plane makers. Industry reports indicate that it could be 2027, or even 2028, before the industry catches up with demand.
Higher prices on the way
Aircraft shortages and rising interest rates mean higher costs for airlines. “As interest rates rise and there are continued delays in the production of new aircraft, we will also continue to see an increase in the lease rates which aircraft lessors charge their airline customers. We saw this trend develop over 2022 and we expect it to continue this year,” says Joe O’Mara.
This spells bad news for passengers as these increased costs will ultimately be passed on to consumers in the form of higher ticket prices. It will probably be good news for low-cost carriers like Ryanair, however, with their market share predicted to continue to grow in the coming years.