Global aviation outlook: Air fares climb higher amid the unprecedented recovery of travel

After an unprecedented drop in demand for air travel during the Covid-19 pandemic, the aviation sector is witnessing a significant rebound. Travel figures for the first half of 2023 show that people are eager to fly. Despite purchasing power pressures and a global economic slowdown, people are prioritising previously postponed trips. Strong labour markets are supportive here, as just 10% of the global population in the upper middle and higher income classes are responsible for almost 90% of passenger traffic. Of course, “revenge” travel supported the recovery this year, but without restrictions and health concerns, people seem keen to resume flying more permanently, especially for leisure purposes and family visits. Domestic air travel has recovered the most so far, particularly in the US and India.  

Airlines downsized their global networks of (indirect) connections and destinations over the pandemic, and this hasn’t been restored yet. For European airlines, the number of direct and indirect destinations at airports (connectivity) ended up at 71% of pre-pandemic levels in 2022. This lags behind flight activity (83% on average in 2022), which can be explained by subdued intercontinental and business traffic which is catching up more strongly in 2023.

Airlines have started to reintroduce long-haul destinations and raise frequencies at European airports, but only recently. And, of course, the war in Ukraine and the closure of Russian airspace have also had a negative impact on European connectivity.

Recovery isn’t equal across geographies. Traffic in the US already exceeded its 2019 level in 2022, but in the Asia-Pacific, (international) traffic is just below two-thirds of its 2019 level. European flight traffic returned relatively strongly and hovered around 92% in June. Low-cost carriers make up a larger share of passenger traffic this year on the back of the leisure travel surge. This was illustrated by stronger bounceback flight activity in countries like Portugal, Spain and Greece in 2022. Ryanair even exceeded pre-pandemic passenger levels by around 15%. This shows that leisure travel has rebounded the strongest.

The Asian-Pacific market also offers the highest structural growth potential. This is not only driven by population growth but also pushed by the expanding middle class, as flying is strongly correlated with income. Flights per capita are still low compared to advanced countries. Before the pandemic in 2019, the US had 2.8 passengers per capita and the European Union 1.7, compared to 0.5 in China and just 0.1 for India.

The returning demand for wide-body aircraft from carriers is also a sign of sustained recovery in this segment. British Airways – an important airline for business travel – believes this will recover to 85% in 2023. Premium class or business seats are now also filled up by consumers willing to pay extra for more comfort.  

No permanent blow for airline traffic, but lower future growth

The resilience of business travel has been underestimated, but nevertheless the pandemic will leave traces. The current rebound is being fueled by business partners seeking to catch up on physical meetings after years of restrictions, and is at least partly attributed to pent-up demand. Meanwhile, long-term growth perspectives are also tempered in the general sense, for three reasons:   

• Although business travel is in recovery, remote working and the increase in online meetings will remain part of office work and replace part of business travel.
• Climate awareness is growing among consumers and there are a rising number of sustainability-linked policy measures as airlines align ambitions. Sustainable aviation fuels will start to push up ticket prices, and in Europe carbon prices (ETS) will gradually kick in more strongly the following years. Higher fares won’t hold consumers back from flying, but will probably temper the pace of growth.  
• The war in Ukraine and the closure of Russian airspace for the Western world is not likely to end anytime soon and this makes intercontinental flying less efficient. A flight between Frankfurt to Tokyo avoiding Russia is now one-to-three hours longer, which is up to 20% more fuel-consuming. European airlines also have a disadvantage here compared to Chinese airlines. In a broader sense, global geopolitical tensions and headwinds for international trade could drag on air cargo growth and possibly business travel.  

All in all, air travel is still expected to see long-term annual growth, but the figure will be closer to 3% than to the pre-pandemic 5-6% for the next two decades, with Europe probably seeing the lowest number.

Orders for new aircraft ramped up in 2021 and 2022. In these years, the total net new order intake of around 1.500 aircraft at Boeing and Airbus equalled its 2019 level. This year also shows acceleration, as the Paris airshow in June generated already orders for 1.250 aircraft. Alongside the struggle to increase production, this means order books remain packed. Based on current production levels, the backlog reaches up to 10 years. Airbus’s 500-plane order by Indian budget carrier IndiGo – the largest order in history – won’t be delivered until 2030-35.

The global commercial aviation fleet comprises about 28,000 aircraft in total and is expected to expand significantly over the next two decades. The lagging production figures result in a looming deficit of aircraft. This has revived strong leasing demand, keeping older aircraft such as B777s and A330s, with lessors – companies that lease out their fleet of aircraft to airlines – able to charge higher leasing rates. According to Cirium, parked inventory aircraft was still 5% of the total fleet above pre-pandemic levels in May, but aircraft that are good to go on short notice (an estimated 60%) are returning to service quickly. And there are also still (leased) units stalled in Russia. This means there is still some spare capacity, but this is diminishing fast and varies per aircraft type.

Several airlines have run into limitations because of postponed delivery schedules, including United Airlines, Delta Airlines and Ryanair. The cancellation of flights by airlines such as Transavia in the Netherlands illustrates the tightness of current capacity, as component delivery faces limitations as well.

The delay also has negative implications for efficiency. New generation aircraft are usually 10% to even 25% more (fuel) efficient than their predecessors. Postponed replacements slow reductions of emissions per seat/passenger km for airlines in the years ahead.

Another limiting supply factor is labour shortages in the air as well as at airports

Aircraft capacity is not the only constraint. The airline industry is also facing the challenge of staff shortages; pilots, cabin crew, as well as security, handling, and traffic control staff at airports. This has already held back traffic over the summer of 2022 and the industry still faces hiring issues. Many workers left the industry during the pandemic but vacancies are returning with the rebound. The tight labour market also poses a higher risk of labour conflicts against the backdrop of elevated inflation.

Freight market in reverse

After highly profitable years for air cargo, with global transportation over the pandemic and the circumvention of blocked supply chains, the return to normality came with a setback for airfreight. Belly capacity has returned with the gradual reintroduction of long-haul flights and a range of new freighters added by airlines, but container carriers like Maersk and CMA-CGM, and logistics services providers’ capacity, has almost returned in full. At the same time, demand for high-value and time-sensitive (consumer) products has faced a correction.

Freight rates in cargo are still higher than before the pandemic, but with faltering trade growth the peak in air cargo came crashing down in 2023 and 2024. Despite dropped freight rates, cargo activities will still deliver a higher contribution to the revenue of active airlines, but rates remain under pressure. New trade routes and higher capital costs for cargo underway could provide some support for demand in due course.