By Chris Wills, Head of consultancy operations, senior ISTAT appraiser

The conclusion that we are (mostly) still climbing is what came out of the latest Cirium Ascend Consultancy webinar, Are we still climbing? The 2024 Market Outlook. Moderated by Lalitya Dhavala, Valuations Manager, Rob Morris, Head of Consultancy and George Dimitroff, Head of Valuations discussed the recovery over 2019 of key elements of the market.

In summary

• Traffic is still mostly in the climb, having almost reached 2019 levels in November, the slight dip to 2.5% is not yet indicative of a stall, but we should be conscious of geopolitical risks and macroeconomics.
• Capacity is up and is projected to climb to be 6% above 2019 levels early in 2024.
• The global passenger fleet is on the rise, already bigger than in 2019 and a different composition.
• Aircraft utilisation is climbing, with monthly hours back almost to 2019 levels.
• Parked inventory is decreasing with around 400 of the young aircraft in storage (temporarily) GTF powered aircraft or 737-9s, although few of the latter remain stored. 
• Deliveries are struggling to climb. With both deliveries and first flights lower in January 2024 over January 2023 and notably lower than in 2019.
• Demand for older aircraft continues to climb, with inventories, values and lease rates reflecting that,
• Commercial backlogs are climbing but are not at the historical highs previously seen when normalised as a percentage of the installed fleet.
• Based on the Cirium Fleet Forecast there is headroom for orders to climb but this will further increase an already significant backlog as deliveries lag target.
• Despite anecdotal indications trading is only in a shallow climb.
• Values and lease rates are climbing, with room for further lease rate growth if interest rates don’t come down quickly/significantly.
• New aircraft pricing is climbing, which we saw post 9-11 and then collapsed but that might not be the case in this cycle.
• Engine value as a proportion of the total value of new aircraft is climbing, driven by higher spare engine, overhaul and LLP pricing but that can only continue with an increase in new aircraft pricing, otherwise engine values and maintenance costs would need to slow their rate of climb at some point.
• The key thing to monitor in 2024 is production, for now specifically progress towards planned increases, however we should also be mindful of the risk if OEMs raise production rates too quickly in the next 5 years, that could ruin the party of rising values and lease rates.
• Boeing may be forced to accept a lower market share in terms of volume than previously, as there is now a clear focus on quality.
• Thank you again to everyone who voted for us as the 2024 Appraiser of the Year!

In more detail

Looking at passenger traffic the trend is still positive, however there was a softening in December over November, so globally was down 2.5% over 2019. Large domestic markets, including the US saw some softening of demand, while capacity increased, which is something to watch. Traffic flows are of course seasonal and while the figures to 2019 are December to December, the summer season will be significant in defining if the recovery is still on track.

Geopolitical risks are ever present, and if anything, risk is increasing.

Macroeconomics should also be considered but so far rising prices have not impacted demand trends.

The small softening compared to November, which was almost back to 2019 levels is at least not yet indicative of a stall in recovery.

While capacity growing faster than traffic is not healthy long term, it can also be a leading indicator of forecast growth. Scheduled capacity marginally passed 2019 levels at the end of 2023 and the projection is a 6% increase over 2019 by the end of the first quarter this year.

The global passenger fleet is in the climb and has now surpassed the in-service fleet of 2019. It is important to note, that while larger, the fleet in 2024 is different to that of 2019, just one example being the retirement of effectively all 747-400s during the downturn.

Not only has the fleet grown, the other key capacity metric, utilisation has increased as well. Aircraft monthly hours flown are now nearly back to 2019 levels.

The parked inventory is decreasing and while there is a portion that won’t return to service there are a significant number that may. Prime candidates are those that have been in storage for less than 2 years, as well as those less than 15 years old. That said, there are 1,000 aircraft over 15 years old, which typically we would not expect to return to service, but given the current supply constraints, some may return. The A320neo and 737-9s are only temporarily out of service and while there will be a rolling average of around 300+ parked in the coming months, ultimately all will return to service.

The supply of new aircraft is one area where the market is struggling to climb. Deliveries and first flights were lower in January 2024 than in January 2023 and notably lower than in 2019. There are a multitude of factors driving these challenges, despite target monthly delivery rates above the current levels both Airbus and Boeing seem unlikely to achieve them over the coming year. However, longer term oversupply could be an issue if either OEM is tempted to push for even higher production rates once they have achieved their planned targets in 2025 or 2026.

Commercial backlogs are climbing, approaching 14,000 firm aircraft orders, although as a percentage of the installed fleets they are not at historic highs. Single aisle aircraft peaked in 2020 at around 85% of the fleet (albeit skewed by fleet disruption that year; prior peak was 77% in 2014), while for widebody aircraft this was felt in the previous downturn peaking in 2008 at over 70%.

Based on the Cirium Fleet Forecast, there is more room for more orders to be delivered towards the end of the decade, but given the already significant backlogs and the delivery challenges facing the OEM’s (Original Equipment Manufacturer), some of which have come post the completion of the most recent Ascend forecast, how much room is there for more orders?

While the rolling average of sales with lease attached is growing, partly impacted by reduced trading at the end of the year and compared with the anecdotal indications that came out of Dublin at the end of January it is a slower climb then might be expected.

While not for every type, the majority Values and Lease rates are climbing. On a fleet-weighted average basis, the Market-to-Base Value ratio is higher than it was before Covid. 

While lease rates are growing, they are still following values to a large extent, and there is still room for them to rise further this year. While recent increases are remarkable in percentage terms form the depts of Covid, if we compare them to historical levels, lease rates are not really that high, when inflation and interest rates are considered. It is also worth noting that ownership costs are the fourth largest item in the Direct Operating Cost (DOC) pie for airlines (after labour, fuel and maintenance), so operators can absorb higher lease rates with less pain than their other rising costs.

New Aircraft pricing is climbing after decades of stagnation, which is a trend we have seen before between 2003 and 2008, but they then collapsed with the Global Financial Crisis and never truly recovered. However, that might not be the case in this cycle for a couple of reasons. The backlog is much bigger and stretches into the 2030s, meaning that OEMs already have an element of escalation built in, which works in favor of the continued rise in new delivery pricing. While supply constraints continue, they support increasing new aircraft prices, however as these are overcome later in the decade and if OEMs start to over-produce, some of the gains could be reversed or the rise could flatten.

The ratio of engine value to the value of a new aircraft is climbing, but that does not appear sustainable for much longer.  If new spare engine, overhaul and life limited parts (LLP) pricing continue to grow, aircraft values also have to go up, otherwise arbitrage could be created encouraging the parting-out of young aircraft. The solution is for airframers to raise new aircraft pricing consistently and engine manufacturers have to rely less heavily on aftermarket revenues and sell new installed engines for more.

The key thing to monitor in 2024 and going forward is production rates. For now, there are clear challenges with meeting delivery targets, and higher production rates are desperately needed, but if production continues to rise too much into the end of the decade or beyond, it could create over-supply and pressure values and lease rates once again. Of course, new aircraft are needed to meet demand as well as for replacement, particularly if we are to meet sustainability targets.

In terms of competition, we don’t see the duopoly going away and the market needs it both for capacity but to maintain a competitive pricing landscape.

We also don’t see Boeing being able or willing (or needing to) reduce pricing significantly on the 737, having already discounted a lot of white tails after the Max grounding. Lower delivery rates mean higher unit costs. That said, compensation for any heavily delayed deliveries could be expected to reduce the real final price that airlines pay. While Boeing may have focussed on defending market share in the past, it’s current focus is clearly on quality and not quantity. In the past, we may have predicted an all-new aircraft programme launch if market share was to drop significantly for one OEM or the other, however with such large and long-term backlogs there seems less opportunity for this in the near term. Therefore, we might see Boeing accept lower market shares for the time being in terms of volume than we have in the last two decades.

Thank you again to everyone who voted for us as Appraiser of the Year and we will continue to live up to this accolade in doing everything the most awarded appraiser would be expected to, and more!

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WATCH THE WEBINAR ON-DEMAND, HERE