Aviation sector braces for tariff impact while rising decarbonisation costs loom

The aviation industry is braced for the impact of global tariffs. The scope of plausible outcomes range in severity, with differing deleterious consequences on supply chain resilience, delivery delays, increased manufacturing and maintenance costs, lease rates, and ticket prices. It is the latest challenge for an industry mired in perpetual turbulence. For European airlines, tariffs add to the challenges posed by persistent aircraft shortages, which are expected to persist for the remainder of the decade, restricting fleet expansion, constraining growth, and inflaming tensions between manufacturers and carriers.

Tariff Risks

The complex global aviation supply chain is underpinned by swathes of suppliers with parts and systems that require regulatory approval and are not easily substituted. The Trump administration’s previous 25% tariff on aluminium and steel from the European Union prompted retaliatory EU tariffs on US aluminium and steel exports. In a worst-case scenario where a 25% tariff is applied to aircraft imports, the price of a Boeing 787 could increase by $40 million, estimated Aengus Kelly, CEO of AerCap, the world’s largest aircraft leasing company. Boeing is likely to absorb additional material costs, increase production expenses, and squeeze profit margins per aircraft, according to Wouter Dewulf, an air transport economist at the University of Antwerp. Airbus reportedly said it will “adapt accordingly” by passing on higher costs to airline customers. Ultimately, prolonged trade wars risk softening currently robust passenger and air cargo demand. Trade wars also risk rekindling inflation, which if severe, implies slower monetary policy easing or at worse, new hikes that would hurt demand. 

Airline profitability is forecast to surpass $1 trillion for the first time this year, with passenger demand growth running ahead of expected expansion of capacity. These forecasts were modelled at the turn of the year. Since then, two major US carriers have lowered their demand outlook after a first quarter that was “a parade of horribles,” following economic volatility, bad weather and wildfires, as well as a series of high-profile aviation accidents in the US that have spooked some flyers, reports Bloomberg. Tariffs further fuel the near-term gloom, raising scepticism over the $1 trillion global annual revenue milestone. 

In Europe, Air France-KLM and Deutsche Lufthansa reported strong first quarter demand, following last year’s travel disruptions, weak demand and delivery delays, which forced the carriers to fly older planes in its fleet for longer, Leading to higher fuel and aircraft maintenance costs. IAG, the owner of British Airways, fared better by reallocating capacity to transatlantic flights, following airspace closure due to Russia’s invasion of Ukraine, capturing wealthy leisure tourists that replaced declining business travel demand. Low-cost carriers Ryanair and Wizz Air are vying to deploy capacity in Ukraine, in the event that a US-led diplomatic push to end the Russia-Ukraine conflict is successful. However, access to additional planes remains the limiting factor. 

Ryanair plans to reallocate scarce capacity growth over 2025 to markets incentivising traffic growth by cutting/abolishing aviation taxes, including in Poland, Sweden and Italy. European short-haul capacity is to remain constrained, as Europe’s Airbus operators work through Pratt & Whitney engine repairs, manufacturers struggle with delivery backlogs, and EU airline consolidation continues, including Lufthansa’s acquisition of a 41% stake in Italy’s state-owned ITA, Air France-KLM’s acquisition of a stake in SAS last summer, and the delayed sale of Portugal’s flagship carrier, TAP.

Aircraft shortages and maintenance problems

European airlines are expecting to receive 387 aircraft deliveries in 2025, followed by 431 in 2026. Few expect these targets will be reached, according to the International Air Transport Association (IATA). The backlog for new aircraft orders has now reached a record 17,000 planes, equivalent to 14 years of production at current delivery rates.

Boeing has made early progress in resuming production, reducing inventory, and stabilising supply chains following last autumn’s industrial action, says Fitch Ratings. However, escalating trade tensions and geopolitical instability are a risk. Boeing continues to be subject to regulatory-imposed production limits following the mid-air blowout of a section of a 737 Max in January 2024, while Airbus optimistically aims to deliver 820 aircraft in 2025, which assumes an unlikely benign operating environment, with no disruptions to global trade, the global economy, the supply chain, air traffic, or its internal operations. These challenges are compounded by the complexity of aircraft production. A Boeing 737 consists of two million components from 700 suppliers, a US Government Accountability Office (GAO) report noted. Many parts must be ordered months, even years, in advance, making investment decisions difficult in an environment mired in supply chain uncertainty and trade volatility.

Defective engines and scarcity of critical components continue to create major operational bottlenecks. Pratt & Whitney’s engine problems have grounded dozens of planes, with disruptions expected to last four to five more years. Approximately 14% of the global fleet – around 5,000 aircraft – remains parked, with at least 700 grounded due to ongoing engine inspections, IATA data shows. Overall, around 3,000 Pratt & Whitney engines worldwide require inspections and part replacements due to raw material shortages, warned Wizz Air’s CEO, Jozsef Varadi. This backlog is expected to persist over the remainder of the year. 

British Airways and Virgin Atlantic were also forced to cancel hundreds of flights last winter 

due to delayed engine deliveries from Rolls-Royce, a problem expected to persist into 2026. Given that supply constraints are expected to persist for the remainder of the decade, growth-minded European airlines face a critical decision: boost capacity by seeking alternative aircraft from manufacturers outside the Boeing-Airbus duopoly or turn to the leasing market, which has become more expensive due to these conditions.

Few viable alternatives to the Boeing-Airbus duopoly

China’s state-owned COMAC is making the most aggressive push to disrupt the Boeing-Airbus duopoly. Its C919 jet is already flying with China’s three largest airlines – Air China, China Eastern Airlines, and China Southern Airlines – and COMAC is now targeting Southeast Asia and Europe. However, COMAC is heavily reliant on US-made engines, making the firm vulnerable to trade restrictions. Additionally, the C919 does not yet have regulatory approval to operate in the US or Europe. Elsewhere, Brazil’s Embraer – once a potential Boeing acquisition – is reportedly developing a new aircraft to compete with the 737 and A320 families. However, its limited production capacity remains a barrier to international expansion.

Leasing surges as supply constraints tighten

With airlines struggling to secure new aircraft, many are increasingly turning to leasing markets to bridge the gap. The ‘lower for longer’ supply environment has driven airlines to rely more heavily on leasing markets to fill capacity gaps, replace grounded planes, and accommodate passenger growth. Aircraft leasers, who own over 50% of the global fleet, report lease rate hikes of up to 20% compared to 2019 levels, with further hikes expected. ​

Increased maintenance demands from both advanced, fuel-efficient aircraft and an aging fleet, are a longer-term challenge to solve. Both new and older plans require longer repair times. Newer aircraft, designed to meet sustainability goals, utilise rare materials and require highly skilled labour, while legacy aircraft need more frequent maintenance checks. The average age of the global fleet has risen to a record 14.8 years, up from 13.6 years between 1990 and 2024. Consequently, supply chains for spare parts and maintenance services will remain under strain.

Sustainability pressures and rising decarbonisation costs

The rising cost of decarbonising the aviation industry is becoming a larger financial burden. In Europe decarbonisation cost estimates have surged 27% to €2.4 trillion, according to a consortium of industry groups, driven by the high production cost of Sustainable Aviation Fuel (SAF), an alternative jet fuel that reduces carbon emissions by up to 80%. Inconsistent government incentives are slowing production growth despite increased regulatory-driven demand. By the end of 2025, SAF production is expected to reach 2.1 million tonnes (2.7 billion litres), or 0.7% of total jet fuel production. However, while reducing carbon emissions by up to 80% over its lifecycle, SAF emits nearly as much CO₂ as fossil fuels at the point of combustion.​ The potential of SAF is further limited by the availability of waste products for its production, leading to concerns about land use changes and competition with food crops when considering agricultural sources.​ Given these challenges, there remains scepticism about SAF’s role as a panacea to reduce aviation’s carbon footprint.

The US has been subsidising SAF production through the Inflation Reduction Act (IRA), a Biden-era tax credit programme that offsets high production costs and incentivised output growth. However, Trump immediately paused the disbursement of IRA funds on his return to the White House, creating uncertainty over future subsidies. While market participants remain hopeful that some SAF production incentives will be preserved, the loss of subsidies – combined with persistently high production costs – has clouded the production outlook. In February, BP sharply reduced SAF investment, shifting to a partnership model, while Shell paused construction of a major SAF biofuel plant last summer with no restart confirmed. 

SAF prices are projected to remain two to three times higher than jet fuel through 2030, leaving energy companies reluctant to expand production capacity. While airlines and logistic service providers have shown a willingness to pay a significant ‘green premium’ for SAF, if this translates into higher ticket prices it could run counter to policy intentions. Since January 2025, UK and EU airports must comply with new regulations requiring a minimum 2% SAF supply for departing flights, rising to 10% in the UK and 6% in the EU by 2030. The UK government has committed to reviewing SAF policies if supply shortages lead to unexpected ticket price increases. 

Conclusion

Aviation’s resilience is continuously tested. For businesses operating in the complex aviation supply chain, strengthening operational and balance sheet resilience, alongside strategic technology integration, will help adapt to the risks ahead. If your business or portfolio company is directly impacted by these challenges and would like to explore strategic options, do not hesitate to get in touch to see how we can assist.