Aviation Industry Outlook 2022

As has been demonstrated over multiple industry cycles and shock events, the aviation sector and its customers are highly resilient. What are our predictions for the coming 12 months?

A look back at 2021

There is little pleasure in being able to boast that many of the predictions made in last year's Aviation Industry Outlook were realised. COVID-19 has not gone away and did indeed get worse after an initial period of improvement. Governments have not swept away the majority of restrictions on international travel, quarantine requirements and the like, nor have they shied away from making last-minute rule changes, bringing financial and social misery to millions.

Despite the extensive challenges for the industry, the quantum of failures and restructurings amongst the airline and lessor communities has been lower than anticipated, with many of those fractures reflecting weaknesses that pre-dated COVID-19. The airline industry has benefitted from extraordinary amounts of government financial support, whilst top tier lessors have continued to access plentiful and affordable liquidity. Investors have been exploring multiple opportunities to acquire assets, platforms and paper, some with a level of distress, others brought to market as part of a broader shareholder agenda.

Like every other exogenous shock event, however, the initial impact of COVID-19 on commercial aviation is beginning to damp down and, as further time passes, more of the world's air travellers will reach an accommodation with the changing face of the disease and continue the process of demand recovery. It is with this more distant horizon in mind that this year's Industry Outlook reflects on the challenges and opportunities ahead.

The global economy

The extent to which demand for air travel is influenced by the health of the global economy cannot be overstated. The pre-COVID-19 economic outlook anticipated a moderate GDP slowdown coming off the back of almost a decade of strong and stable economic activity. Longer-term economic growth was expected to average between 3% and 3.5% per annum albeit with a wide gap between developed and emerging markets.

COVID-19 caused world GDP to decline by 3% in 2020, many multiples worse than during the Global Financial Crisis when emerging markets continued to grow. In 2020, emerging market economies' GDP fell by over 2%, with developed economies suffering a 4.5% fall. The associated unemployment levels, business failures and a loss of wealth and disposable income for large segments of society created additional societal pressures, on top of the health concerns, that will continue to have an impact after the pandemic has ended.

The IMF1 estimates global GDP to have rebounded by 5.9% in 2021, slightly lower than earlier predictions due to the widespread supply chain and delivery logistics disruptions that are impacting the pace of recovery. In numerical terms, this represents a clear V-shaped recovery, however, the profile of economic activity will have been fundamentally altered by diverse factors that include working from home, video conferencing, business failures and changes in shopping habits. Looking ahead, the IMF predicts a further 4.9% GDP increase in 2022, with subsequent convergence to their medium-term GDP forecast by 2024.

However, uncertainty over the potential emergence and spread of new COVID-19 variants and the considerable challenge to deliver and administer vaccine doses on a global basis add to the probability that the shape and timing of recovery will not be uniform, with potentially a long tail for the least developed nations.

Economists are nevertheless starting to converge on a "more likely" trajectory, suggesting that, by mid-decade, there will be approximately a two-year lag in world GDP relative to pre-COVID-19 expectations.

The airlines

For most airlines, 2021 was another year of disappointment and deeper economic pain. Although conditions for air travel eased during the year in Europe and North America, significant parts of the world, including much of Asia and Africa, never really opened up at all. And even when progress picked up some momentum, new COVID-19 waves and "Greek" variants triggered reversals of policy by governments that were mostly reacting to horses that had already bolted. These frequent rule changes brought enforced quarantine and additional testing requirements at a significant cost for travellers, creating a climate of uncertainty that reversed previously positive booking trends.

With all of these headwinds, passenger numbers only rebounded by an estimated 18% in 2021 – a disappointing outcome that recovered barely half of the pre-COVID-19 numbers. Unsurprisingly, there were wide regional variations, with North American RPKs recovering by 72% and Asia Pacific traffic dropping by a further 10% at the extremes.

It is clear however, that when air travel is set free from the shackles, passenger response is immediate and strong – people want to fly and having been deprived of that freedom will seek to return to the skies as soon as they are physically and legally able and feel safe to do so.

The development and approval of multiple vaccines has provided a clear route to full emergence from the crisis – but only when the scale of vaccine delivery can be ramped up and globalised. Currently, despite first world initiatives such as Covax, the level of vaccination in most emerging markets, especially the more impoverished ones, remains far too low.

For that reason, the routes to a full market recovery will diverge by region, market and reason for travel. Domestic travel has already shown its resilience in markets such as China and the USA, where individual governments can dictate the parameters for air travel. Travel within the EU Schengen Area also responded strongly to the launch of the EU's universal Vaccine Passport system in July 2021, although some member states subsequently imposed additional requirements that impacted demand. Elsewhere though, cross-border trips that require multiple government coordination to align travel policies have continued to lag, with movement within the Asia-Pacific region still especially constrained. Once again though, travellers have been quick to respond when these restrictions are eased, such as when the USA removed barriers to inbound travel for 34 countries, including the EU, in November 2021.

The majority of the traffic recovery seen to date has involved leisure travel, including vacations and visiting friends and relatives ("VFR"). Motivations tend to be strongest in these categories, particularly given the extent of migrant worker activity that now exists around the world and especially in emerging markets, and also where protracted lockdowns and isolation have underlined the importance of taking a break and a change of scenery. These travellers are also more price sensitive and many leisure airlines have been using fare reductions and seat sales to stimulate demand – although this only works if the threat of potential quarantine and costly testing is removed.

The recovery in business travel remains more problematic, particularly for high-yield long-haul passengers, where full-service network carriers often depend on their premium fares and have invested heavily in business class cabins. Some trips, particularly travel linked to intra-company meetings and events, may now be deemed non-essential by companies. A further proportion will return, but be more value driven. Airlines will therefore need to modify their product offerings, with expanded Premium Economy cabins replacing some business class capacity to accommodate price-conscious business travellers plus some trade-ups from the economy cabin seeking extra personal space.

Even as the latest shape-shifting Omicron variant runs its course, there is a growing sense that the evolutionary trend of COVID-19 is taking the virus from a pandemic to endemic status. At the same time, vaccination regimes in developed countries are significantly reducing the risk of critical health service overloads and governments are also starting to re-think the strict lockdown and shutdown policies that have been so damaging to economies. Consequently, it is becoming increasingly likely that within the next 12 months COVID-19 will start to be treated as endemic, rather than a pandemic.

IATA's outlook for 2022 forecasts a 50% increase in passenger numbers, although RPK growth will be lower reflecting the lag in longhaul recovery. Assuming a continued reduction in the severity of future COVID-19 variants, the "recovery corridor" for global passenger numbers to return to pre-COVID-19 levels is predicted to lie between 2023 and 2025. However, this ignores the underlying industry growth trend, which at 4% - 4.5% per annum would leave passenger traffic some 10% below previous expectations by 2025 and defer the "full" recovery until later in the decade.

Despite all of the headwinds that have buffeted the airline industry over the past 20 months, the survival rate has been higher than initially expected, with "only" 64 airline failures, including 30 that have ceased operations, with 15 currently in restructuring and 19 that have already emerged. The fall-out would have been considerably greater without the extraordinary levels of government support that have been made available to airlines since the start of the pandemic – well over $200 billion in total - provided in the form of a cash injection or equity (usually with some conditions), loans or loan guarantees, wage subsidies and tax waivers. However, although many airlines in the US, Europe and parts of Asia have received substantial amounts, assistance for airlines in Latin America, the Middle East and Africa has been more limited, with privately owned operators largely missing out. Until traffic and revenues consistently return and stabilise, the exceptional levels of indebtedness taken on by airlines with otherwise weak balance sheets will continue to present challenges that may yet trigger failures or need to be addressed through restructuring.

The latest set of IATA forecasts, published in November 2021, predicts an industry net loss of US$51.8 billion in 2021 and a further loss of US$11.6 billion in 2022. The profits generated through the post-GFC recovery up-cycle, which peaked at a record $37.6 billion in 2017, have now been virtually exhausted. However, the industry appears to have passed the point of inflection, with cash outflows, which remained negative throughout 2021, expected to turn positive during 2022.

The lessors

As airlines move out of crisis mode and begin their recovery journeys, the situation for the majority of operating lessors has also started to moderate and recover. At the end of 2021, 22% of the total lessor delivered fleet was listed as inactive in Ascend by Cirium's Fleets Analyzer database, compared to 32% a year earlier. The proportion of lessor AOGs has also fallen to 8.4% from more than 30% - a numeric reduction of around 70%. The majority of short-term agreements to defer or otherwise relieve lessee payment obligations have either lapsed or been converted into broader contract amendments that aim to maintain the underlying lease economics whilst continuing to provide financial support. Lease rate reductions will often have been linked to lease extensions or new business opportunities, with power-by-the-hour lease rates more widespread than previously seen but still mostly granted on a short-term basis when other options are exhausted.

Notwithstanding the shared pain over the course of the pandemic, aircraft leasing is more established than ever as an essential funding channel. In 2020 and 2021, over 53% of all new delivery financing was sourced through the lessor channel and the unprecedented levels of indebtedness taken on by airlines during the pandemic seems certain to keep the lessor share of fleet financing above 50% for some years to come.

Demand for sale and leasebacks of new and already delivered aircraft continues to surge and plentiful capital combined with aggressive growth ambitions are keeping the pricing and economics of highly competed airline RFP transactions down around pre-COVID-19 levels. Consequently, leasing platforms with an experienced global origination footprint will remain focussed on off-market transactions, based on deep relationships, where returns are measurably higher.

The pandemic has highlighted the differing levels of financial resilience that exist within the lessor community. The largest Tier 1 lessors, most of which hold investment grade status or equivalent, have continued to access the capital markets for plentiful and well-priced liquidity and maintained substantial cash reserves to ride out the crisis and to be insurgent where attractive opportunities arise. Some of the smaller platforms, often with more challenging portfolios and exposed to cyclical variations in the financial markets, have been less fortunate in securing additional liquidity, driving them to restructuring solutions with lenders and investors. Whilst the largest M&A transaction in the history of aircraft leasing – Aercap's acquisition of GECAS – was not directly attributable to COVID-19, other recent transactions reflect both the challenges and opportunities arising from the COVID-19 business environment that have worked to the advantage of both buyers and sellers. It is notable that these transactions have all been asset plays by acquirers that already have a platform. Further consolidation is likely as other lessors work through their challenges, along with additional moves by new entrant investors seeking fully formed platforms.

The OEMs

Whilst 2020 represented the weakest year on record for net commercial orders, coming in at minus 124, 2021 saw a substantial resurgence in demand, as airlines, many of which have shed inefficient capacity over the past 18 months, have moved to secure medium-term new generation delivery slots. Airbus secured 771 gross orders, of which almost 85% were for single aisle models, but were beaten by Boeing, which closed the year with a gross tally of 909. Both OEMs experienced substantial further cancellations – 264 and 422 respectively, taking the net order tally to just over 1,100, including approximately 140 from Embraer, ATR, COMAC and others.

Total deliveries increased by 30% in 2021, but are also still well below pre-COVID-19 levels. Airbus delivered 600 aircraft to commercial customers, whilst Boeing managed barely half that number (307). Although the 737MAX backlog has been steadily reducing, new 737 production remained low-key during the year, with a ramp to 31 a month due early this year. Boeing deliveries were also seriously impacted by 787 production issues that look set to extend well into 2022.

Airbus has been capitalising on Boeing's problems, particularly in respect of single aisle sales, where its market lead over Boeing continues to grow, most recently reflected in landmark wins at KLM and Qantas. A rate increase from 45 to 65 A320 family aircraft a month by summer 2023 is planned, with A321neos now dominating the order book, with 58% of the backlog.

Whilst Boeing executives are playing down the competitive dynamic at the largest end of the single aisle family market, the strength of A321 sales must increase the pressure to start work on an all-new narrowbody and any further widening of market share gap should start to worry both Chicago and Toulouse.

Twin aisle production remains subdued in both camps, with neither OEM anticipating a rapid recovery to pre-COVID-19 demand before mid-decade. The difficulties experienced with 787 manufacturing and the delayed 777-9 service entry have benefitted the current market by reducing the flow of additional capacity entering the system, but the financial impact is unhelpful, to say the least, and Boeing is also facing an erosion of its previously inviolable factory freighter dominance with the ending of 747 production and the launch of the A350F.

The strength of the backlog for both OEMs remains high, with a combined total of more than 11,000 representing a delivery skyline that extends to the end of the decade.

The money

When the COVID-19 crisis hit almost two years ago, many of the traditional aviation lenders pulled back from the market, putting new deals on hold. Where additional financing was forthcoming, it was predominantly to a small subset of existing customers with strong relationship relevance and, even then, tighter terms and higher margins were required.

Since then, some aviation banks have been returning to the market, but still picking their transactions selectively and leaving a potential funding gap. The market response has been the emergence of alternative non-bank lenders that have identified a preferred risk/reward profile in structured loans rather than the direct asset investments that they may previously have been contemplating. The capital markets are also still open for business with substantial quantities of investor liquidity actively seeking opportunities in the sector, looking at individual assets, leasing platforms including M&A support, new issuance and distressed paper, and new platform formation.

Although the level of uncertainty around risk versus reward has remained rather too high for many until now, the improving financial results at most lessors, a strong resurgent demand for modern technology single aisle aircraft and the performance of popular financing structures are building investor confidence.

Take the ABS market as an example, which stalled early in 2020. 2021 came back with a vengeance, with more than $7.5 billion of transactions, the second highest level on record, behind 2018.

Whilst higher tranche A and B notes have continued to perform through the pandemic, C notes have been under pressure and are trading rather thinly at around a 30% discount, reflecting their "pseudo equity" status. E notes are pretty much dormant. This year's ABS issues reflect the changing risk profile of the market, typically requiring longer remaining lease terms, less diversification of asset types, stronger airline credits, younger vintages and shorter debt service coverage ratio triggers.

Crucially, aircraft ABSs still offer a yield premium over comparable transportation asset classes and look like continuing their strong performance into 2022.


Of course, the aviation sector is no stranger to challenges and notoriously susceptible to external shocks and events over which its participants have little control.

Many of the old concerns are again rearing their heads – oil prices, global politics and tensions, inflation and interest rates, all of which are currently moving in the wrong direction.

There are also some significant new challenges which will change the landscape of the industry over the coming years. ESG and sustainability are right at the top of the list, with a broad range of environmental activist groups more than ever able to spread the message , supported by the ubiquitous reach of social media.

Sustainable fuels are being developed that will be available in scale to bridge the inevitable technology gap between current fossil-fuel powered aircraft and future generations of electric, hydrogen and other options. The level of research and investment in these green alternatives has continued to increase throughout the pandemic and a number of high profile initiatives have been adopted by airlines, lessors and OEMs in recent months.

The sheer scale of the industry today means that the sustainability impact will be spread over decades rather than years and therefore the threat level should not be considered existential to either airlines or aircraft as investments. However, there will inevitably be a financial cost to the industry as new technologies are developed and inducted and as both sticks and carrots are used to encourage behaviour changes on the part of operators and end users. Whilst the additional cost will primarily be borne by industry stakeholders initially, they will over time trickle down to customers, leading to more expensive air fares in the future.

Financiers and investors are also placing increasing weight on the environmental credentials of their customers and business partners, with under-performance potentially resulting in reduced access to funding and/or higher pricing. In a recent PwC investor survey, 79% of respondents agreed that ESG is becoming a critical component of investment decision-making, with 76% taking a company's exposure to ESG risks and opportunities into account when considering potential investment opportunities. Over 80% of respondents believe that companies should embed ESG directly into their corporate strategy.


Nevertheless, as has been demonstrated over multiple industry cycles and shock events, the aviation sector and its customers are highly resilient.

Traffic demand has been, and once again will be, closely correlated to GDP growth, with a growth multiple that in recent pre-COVID-19 times was comfortably in excess of 2x, fuelled by the availability of low-cost point to point fares offered by the LCC airlines. These affordable entry points to air travel have been especially important in the growth of passenger demand in emerging markets, including many located in the Asia Pacific region, including China, India, Indonesia and the Philippines.

COVID-19 created an unprecedented de-linking of traffic volumes and GDP due to the blanket government travel shutdowns that were imposed. However, that's not to say that the relationship won't revert on the other side of the pandemic.

It may take longer than usual to fully recover, but these are unusual times. Despite Omicron, recovery is now underway across much of the world and hopefully will continue to gather momentum as the travelling public regain confidence and COVID-19 weakens its grip and moves from pandemic to endemic.

To end on, here are some predictions for the coming 12 months:

  • Most of the world will transition to treating COVID-19 as endemic rather than a pandemic
  • Consequently, passenger traffic to, from and within the Asia-Pacific region will start to flow again; although, China could remain an outlier
  • Orders and deliveries will both increase, ending 2022 close to pre-COVID-19 levels
  • Lessors will once again finance over 50% of new deliveries
  • Further lessor platform consolidation and acquisitions will occur and several new entrant lessors will launch
  • The combination of a strong US Dollar, rising interest rates, inflation and oil price will create familiar headwinds
  • Sustainability will remain a driving force for airlines, OEMs, investors and financiers, becoming more widely embedded in company strategies and policies

Author: Dick Forsberg, Senior Consultant to PwC's Aviation Finance Advisory Services

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  1. Forecasts from October 2021 World Economic Outlook
  2. Source: PwC's Global Investor Survey – the economic realities of ESG, December 2021

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