Recovering air travel demand masks deep aviation capacity problems and supply chain bottlenecks

Global air travel demand has recovered to within 1% of pre-pandemic levels in the year to November 2023, underscoring consumer resilience despite higher ticket prices and tighter economic conditions. According to International Air Transport Association (IATA) data, air passenger traffic, measured in revenue passenger kilometres (RPKs), surged by 29.7% in November, with domestic travel leading the rebound since April. However, international travel still lags behind pre-pandemic levels, albeit rapidly closing the gap.

But trading conditions in the aviation sector are never smooth. After four lost years of air travel demand growth, the aviation industry has struggled to build spare capacity amid a persistent labour shortage and a faster than expected travel demand recovery. But the challenges run deeper still. Aircraft delivery delays and fleet maintenance bottlenecks have snowballed due to supply chain disruptions, escalated by geopolitical tensions in the Middle East and Ukraine. At the turn of the new year a deeply regrettable lapse in manufacturing standards led to the Alaska Airlines incident, which has had huge ramifications.

Supply woes snowball into near crisis

Airline manufacturers and suppliers are under intense pressure from supply chain bottlenecks. Boeing and Airbus continue to struggle to meet delivery schedules for major carriers, limiting industry capacity and keeping upward pressure on ticket prices. Added to these constraints is a scarcity of key parts to support fleet maintenance, forcing carriers to ground aircraft awaiting essential maintenance. During 2023, the Lufthansa Group temporarily grounded a third of its Swiss Airbus A220 fleet in Zurich due to issues with Pratt & Whitney engines. Swiss International Air Lines and Brussels Airlines were also affected. Elsewhere, IndiGo – India’s biggest carrier – is one of the airlines most affected by Pratt & Whitney engine problems. During an analyst call last November, CEO Pieter Elbers said around 40 were grounded.

On Friday 5 January in a Boeing 737 Max 9 aircraft operated by Alaska Airlines, a serious lapse in manufacturing standards caused an unused cabin door to break open shortly after take-off from Portland, Oregon. Boeing admitted fault and all 737 Max 9 planes were immediately grounded worldwide, causing significant disruptions and financial losses for airlines, including flight cancellations, rebooking costs, and reduced revenue. Initially the crisis was primarily a US issue, but second-order effects of global aircraft production delays start to impact broader regions. 

The Federal Aviation Administration (FAA) halted Boeing’s planned production expansion of the 737 Max 9 with no guidance on the duration of the production cap, making it difficult for airlines to plan and execute fleet modernisation and growth strategies. The order is part of the FAA’s increased scrutiny of Boeing’s manufacturing procedures, systems and suppliers. The production intervention will exacerbate existing capacity constraints among airline carriers’ dependent on Boeing as one of only two major global plane manufacturers alongside Airbus which has maintained its dominance since the second 737 Max crash in 2019. United Airlines has approached Airbus to purchase additional A321neo jets to fill the void; however, a quick fix is far from likely. Airbus is also operating at production capacity, with its own delays due to supply chain restrictions. Ryanair offered to take up any Max jet orders ditched by United Airlines, highlighting the intense scrap for new aircrafts. To put into context, Max 10 deliveries are estimated to be five years behind their original delivery date, according to United Airlines CEO, Scott Kirby. Boeing suspended financial guidance for 2024, in its annual results at the end of January. “While we often use this time of year to share or update our financial and operational objectives, now is not the time for that,” CEO Dave Calhoun told employees in a memo, reported Bloomberg. 

Politics, geopolitics, sustainability and industrial action

The aviation industry is grappling with ongoing industrial action, the cost of compliance with rising sustainability requirements, and heightened political risk. In 2023, Europe suffered 67 days of air traffic controllers (ATC) strikes, 13 times more than in 2022, according to Ryanair, forcing the cancellation thousands of flights within Europe and the UK. In Germany, further industrial action looms after Verdi, the labour union, warned strikes are an option if wage negotiations with airline group Lufthansa fail. The union says the high cost of living and a heavy workload due to staff shortages justify a 12.5% wage increase for Lufthansa’s 25,000 employees over a 12-month period plus a one-time €3,000 payment to adjust for inflation, Reuters reported. 

2024 is a historic year for democratic elections worldwide, including the US, the European Union’s parliamentary elections, India, and, potentially, the UK. Together, these elections represent 60% of global GDP and around 75% of passenger air traffic. There is concentration risk that potential election surprises will have a profound impact on geopolitics and economic developments and influence aviation for years to come. 

Recent geopolitical disruptions have caused jet fuel prices in Europe to increase, exacerbated by the aviation sector’s reliance on refined Russia petroleum. The Israel–Gaza conflict and the subsequent shipping crisis in the Red Sea have intensified cost pressures as shipping costs spiral and capacity reduces. According to IATA, a sizable proportion of European fuel is transported from the Middle East, India, and Southeast Asia through the Red Sea. The rise of jet fuel prices in Europe has distorted the competitive landscape for regional airlines and may prompt further ticket price inflation from European carriers.

The aviation industry’s decarbonisation challenge is difficult circle to square. Governments, carriers and regulators are aligned to the energy transition of aircrafts by using sustainable aviation fuel (SAF) to reduce carbon emissions, and achieving net-zero carbon emissions by 2050. This translates to an insatiable demand for SAF, which current production falls woefully short of, creating another industry bottleneck. In 2023, SAF volumes doubled and production is expected to further triple in 2024. But even with that impressive growth, SAF as a portion of all renewable fuel production will only grow from 3% this year to 6% in 2024, according to IATA. Aviation needs between 25% and 30% of renewable fuel production capacity for SAF. Until such levels are achieved, limited supply keeps sustainable energy prices high and caps aviation’s decarbonisation. “It is government policy that will make the difference”, explains Willie Walsh, IATA’s Director General. “Governments must prioritise policies to incentivise the scaling-up of SAF production.” Financial incentives, subsidies, tax breaks, and carbon trading schemes are required to make SAF production economically viable and encourage private sector infrastructure investment, IATA added.

One controversial sustainability strategy was in France which introduced a ban on three short-haul direct domestic routes, between Paris-Orly airport to Nantes, Bordeaux, and Lyon. The French government said the ban would reduce carbon emissions, promote low-carbon alternatives and support the domestic transport industry. However, IATA pushed back suggesting the carbon emission saving is “unjustifiably small with respect to the inconvenience imposed upon travellers on those routes”.

Aviation consolidation could further reduce short-haul capacity

Consolidation within the European airline sector could further constrain short-haul capacity over the coming years. The European Commission is investigating two proposed acquisitions: Lufthansa’s takeover of Italian carrier ITA Airways, and IAG’s proposed acquisition of Air Europa. The European Commission cited competitive concerns in respect of both takeovers. The Commission will make a decision by early June. Elsewhere, Air France-KLM hopes to acquire a majority stake in TAP, Portugal’s national carrier, as well as a stake in Scandinavia’s SAS. If these deals are successful, it could lead to reduced intra-European short-haul routes.

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