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Updated January 3rd, 2024 at 16:36 IST

Rising costs, operational issues key to aviation sector’s 2024 trajectory: CAPA

Sustainability, digital transformation, supply chains and international recovery to shape air travel industry.

Reported by: Saqib Malik
CAPA Aviation Summit
Source: CAPA Global Aviation Summit | Image:CAPA
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Aviation industry outlook: Center for Asia Pacific Aviation (CAPA), which provides market intelligence for the aviation and travel industry, has underlined that rising costs, environmental sustainability, operational issues, international recovery, digital transformation, and supply chains will shape-up the future trajectory of air travel in 2024. In an exclusive interaction with Republic Business, CAPA India’s CEO & Director Kapil Kaul, said moderating of Air Turbine Fuel (ATF) prices is also an important factor, and is likely to cause a seasonal dip in airfares during Q4 FY24.

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More ATF softening 

Softening global crude oil prices, during the last two months, is likely to further soften ATF prices.  Kaul, a noted civil aviation analyst, told Republic Business that air travel in India will be considerably cheaper in the fourth quarter of the current fiscal. This outlook is in the wake of CAPA’s top brass industry deliberations held at the “World Aviation Summit” in Dubai recently. As per CAPA, rising costs, environmental sustainability, operational issues, international recovery, digital transformation, supply chains, and also provided guidance on the future trajectory of air travel in 2024.

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Regulatory framework 

India holds the third position in the domestic aviation market and eighteenth internationally. With a reshaped Air India and Indigo’s fleet expansion to utilise its full potential, Kaul has pointed out some weak links in the country’s aviation framework. Apart from reshaping Air India and Indigo’s fleet expansion plans, the mandate should also be to strengthen the governmental bodies, he has pointed.  

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In its guidance, CAPA has also highlighted airline credit ratings taking a hit during the pandemic and the way forward for the airlines to build back their credit ratings while battling heavy debt loads and the increased cost of capital.  “Airline lessors are expected to fund around 50 per cent or more of global fleet deliveries in 2024. How well placed are lessors to absorb a higher cost of debt? Outside of banks, lessors and internal cash, how are alternative financing options changing?,” says the CAPA guidance. Environment, Society and Governance (ESG) issues being important in the finance sector, sustainability-linked financing and other ESG elements factor will be into consideration for aircraft financing, CAPA says. 

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Insolvency Proceedings 

As per CAPA analysis, aircraft leasing industry has proved to be one of the most robust sectors of the air transport industry in recent history. Airline lessors have come out of the pandemic era with a larger role than ever in the sector, even in the face of global economic and geopolitical uncertainty. The airline industry took on a heavy debt burden, and found a new affection for government ownership and state-supported aid packages, in order to survive the pandemic, and it found itself desperately in need of financial support, it says.  

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The leasing companies at their end, saw both a threat and an opportunity. Lease delinquency and aircraft-on-ground rates spiked, and lease agreements needed to be restructured to reflect the new realities that the air travel sector was dealing with. At the same time, lessors took on a greater share of global aircraft delivery financing. Leasing firms accounted for better than 50 per cent of financing for OEM deliveries during the pandemic, and around 60 per cent in 2022, says CAPA. “Sale-and-leaseback agreements became popular as cash-strapped airlines sought to reduce liabilities and improve short-term liquidity. With the airline industry saddled with debt from COVID-19, the cost of financing on the increase and aircraft deliveries trending towards pre-pandemic levels, the outlook for commercial aircraft financing is to watch out for,” it has added. 

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Lessors takeover of airline finance market

As per CAPA analysis, leasing companies now control more than 50 per cent of the global commercial airline fleet. “Given the substantial lessor backlogs with OEMs, the growth of the lease-friendly low-cost carrier (LCC) and ultra-low-cost carrier (ULCC) models and heightened levels of sale-and-leaseback activity, lessors are likely to continue to build their share of global fleets,” it adds.  However, not everything is rosy for the sector. 

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“As central banks have tried to tame the post-pandemic inflationary environment, global interest rates have been rising substantially through 2022 and into 2023,” says CAPA.  While lease rates for aircraft have risen, there is a natural lag, given the relatively small proportion of renewals in any one year, so it will take time to catch up to rising interest rates, says CAPA. 

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Aviation Trends 

In its analysis of the aviation trends of 2023, CAPA has asserted that leasing firms have managed to build substantial liquidity reserves when rates were low, mostly through accessing unsecured bond markets. However, CAPA says, the maturity profiles of some lessors mean that new issuances will need to be made at a higher cost of capital, or sources of financing will need to be diversified. “The industry has also needed to deal with the fallout of the Russia-Ukraine conflict – more than 400 lessor-owned aircraft remaining in Russia and unlikely to ever be recovered. 

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This has led to some risk-averse segments of the market, notably asset-backed securitisations, being walled off as a financing source,” says CAPA.  In the near term, leasing companies may find they are faced with renewed competition from other financing sources. Airline finances are improved, and traditional and alternative funding sources are also becoming more active. With strong demand for air travel persisting and aircraft deliveries rebuilding, the industry is fundamentally better than it has been in years. Lessors are better positioned than ever before as travel continues to recover, says CAPA.

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In its analysis of the aviation trends of 2023, CAPA has asserted that leasing firms have managed to build substantial liquidity reserves when rates were low, mostly through accessing unsecured bond markets. However, CAPA says, the maturity profiles of some lessors mean that new issuances will need to be made at a higher cost of capital, or sources of financing will need to be diversified. “The industry has also needed to deal with the fallout of the Russia-Ukraine conflict – more than 400 lessor-owned aircraft remaining in Russia and unlikely to ever be recovered. 

This has led to some risk-averse segments of the market, notably asset-backed securitisations, being walled off as a financing source,” says CAPA.  In the near term, leasing companies may find they are faced with renewed competition from other financing sources. Airline finances are improved, and traditional and alternative funding sources are also becoming more active. With strong demand for air travel persisting and aircraft deliveries rebuilding, the industry is fundamentally better than it has been in years. Lessors are better positioned than ever before as travel continues to recover, says CAPA.

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Published January 3rd, 2024 at 16:20 IST

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