The End of the Innocence? - 2020 Aviation Industry Outlook: pwc.ie/aviationfinance
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2020 Aviation Industry Outlook: The End of the Innocence? pwc.ie/aviationfinance
Introduction
As the aviation industry sits sustainability and the
poised at the start of a new environment.
decade, a sense of change is
Whilst still comfortably
in the air. Familiar challenges
profitable, 2019 was a bumpy
continue to demand attention
year in many respects, raising
– oil prices, legacy vs low
existential challenges on a
cost business models, yield
scale rarely encountered in
management, economic
the aviation industry, from the
cycles, regional conflict and
737 Max grounding to flight
instability, over-capacity.
shaming. Is the “Golden Age”
But increasingly, new risk
of aviation about to lose its
factors are impinging on our
lustre? What’s in store for the
thinking – OEM dependability
coming 12 months … will this
and product reliability, the
year’s Fearless Forecasts be
rise of nationalism and
as accurate as the last ones?
protectionism, China’s
expanding global influence,
1 | PwC Aviation Outlook 2020
The airlines
The airline industry has been and more than 1,000 large
in a positive, expansive and turboprops, with the annual
profitable state for a decade, delivery financing requirement
experiencing a longer bull run more than doubling, although
than in almost every previous falling shy of Boeing’s
industry cycle. Passenger predicted $143bn in 2019, for
traffic growth averaged more obvious reasons.
than 6% per annum over that
Over the past decade, airlines
time and was above trend in
have earned a cumulative
8 out of the last 10 years. The
net profit of $220 billion and,
commercial jet fleet is 40%
uniquely, the industry was
larger than a decade ago and
profitable in every one of
the average passenger aircraft
those ten years. Interestingly,
has 15% more seats.
although the spot price of
Consequently, there is now crude oil, a key component of
66% more capacity in the airline profitability, fluctuated
market – yet passenger load by over 400% over the
factor still hit a new all-time decade, the average price
high in 2019. Over the decade, in 2019 was within 5% of its
the OEMs have delivered 2009 level.
14,000 commercial jets
2 | PwC Aviation Outlook 2020
The operating environment other unhelpful foreign policies constrained by the grounding
in 2019 continued to feel playing out around the world. of the MAX fleet and is not
pretty good for many industry per se signalling a market
However, although the rate
participants, although IATA downturn. Indeed, it is likely
of RPK growth slowed in all
reported slower passenger
regions by between 25%
that long-term passenger Worldwide passenger
traffic growth of 4.2% for
the year, well below the and 50%, according to IATA,
demand will continue to match numbers are set to
capacity growth, which the
rates experienced over this was matched by similar
OEMs are still intent on driving
pass 4.7 billion this year
the preceding 6 years. or greater reductions in
above historic levels.
Furthermore, the cargo capacity growth, which was
recovery failed to materialise cut to 3.5% overall. The close Worldwide passenger
as global economic activity correlation between supply numbers are set to pass
and trade flows were impacted and demand growth strongly 4.7 billion this year and are
by trade wars, sanctions and implies that traffic has been increasing by 200 million
3 | PwC Aviation Outlook 2020
every year. However, almost the total now generated in backlogs an opportunity to
all of the growth is coming North America. Despite its reshape their capacity growth
at the low end of the market, reputation for dynamic growth plans and reduce their cash
with little overall increase in and demand, the Asia-Pacific outlay to preserve a larger Airline industry made
premium traffic. Consequently, region accounted for less than war-chest as they head into
the new traffic flows are 20% of global profitability, more challenging times. a very respectable
highly price sensitive, with and three regions – Middle
However, there is a risk that a
US$26 billion net profit
passengers attracted by, and East, Africa and Latin America
flood of excess capacity will
dependent on, access to – continue to lose money.
be released as the backlog of
affordable seats provided by The unevenness of airline
400-odd built but undelivered
low cost carriers, which on performance was punctuated
a global basis now account by the failure of several more
aircraft deliver to airlines 65% of the total now
that have put contingency
for over a third of the market high-profile operators during
capacity in place that they
generated in North
– and much more in some 2019, including Thomas Cook,
can’t immediately divest. The America
parts of the world. This helps Wow Air and Jet Airways, with
resulting excess capacity may
to explain why 2019 saw a several others on life support.
trigger more fare wars until
further reduction in average
In the short term, the MAX fleets can get back to the
passenger yield.
grounding has a silver lining, profiles originally intended. Asia-Pacific accounted
Although the airline industry as not all of the capacity This process is likely to
made a very respectable taken out of the market extend beyond 2020 and will
for less than 20% of
US$26 billion net profit last has been replaced. It has come to pass as the market global profitability
year, according to IATA, given customer airlines environment is deteriorating.
success remains unevenly with stretched finances and
distributed, with 65% of perhaps over-ambitious
4 | PwC Aviation Outlook 2020
The OEMs
Boeing’s MAX issues have down Boeing’s spine as more last year, as they continued The global backlog of more
obviated the traditional year- of the middle-market ground the transition from E1 to E2, than 13 thousand aircraft
end OEM contest to secure fell to the competition. but net orders slowed, barely still represents 7.5 years of
the most deliveries. Airbus cresting 50 compared to more production, with the most
Whilst the traditional book-to-
easily won that race of than 200 in 2018. They might popular product lines sold
bill metric is meaningless
course, with a total of 863, have done better had their out well into the next decade.
for Boeing, Airbus achieved
compared to 380 commercial JV with Boeing concluded Nevertheless, it is to be hoped
a creditable 0.89, despite
aircraft delivered by Boeing. its competition approvals that the recent trend of orders
over 360 order cancellations.
Despite their own production process, but the completion and cancellations combined
Boeing’s own order book
challenges on several models, of this deal has run on into with less bullish economic
increased very modestly, with
but most prominently on the 2020, following which an indicators and multiple
246 gross orders offset by 192
A321neo, Airbus surpassed expanded sales resource and sources of market uncertainty
contractual cancellations. The
2018’s total by 8% and set a range of other synergies are should persuade the OEMs
level of cancellations in both
another industry record. expected to deliver results. not to push ahead with plans
camps hit an all-time high last
It is to be hoped that the for any further rate increases.
Airbus also secured 768 year, by some margin, partly
project does not become a
net orders, a small increase as a result of airline failures,
victim of Boeing’s challenges
over 2018. This included 476 but also as airlines trimmed
and a resulting lack of focus
A321neos, which accounted some of their over-exuberant
on leveraging the true and
for well over 70% of all backlogs.
considerable value of the
A320neo family orders, up
Embraer maintained their Embraer partnership.
from a 25% split in 2018. This
E-Jet delivery rate close to 90
will have sent another shiver
5 | PwC Aviation Outlook 2020
Boeing and the MAX factor
Boeing’s year-end decision At this stage it is all but certain on engineering excellence
to freeze 737 production that the MAX grounding will be and closer linkages between
supports what several analysts more than a year in duration, the company’s HQ and the
had already calculated, namely as US airline customers commercial airplane business
that the cash reserve from 737 continue to defer deployment in Seattle will be required
MAX PDPs received by Boeing into their networks, now for lasting recovery to be
is all but depleted, leaving reaching into the summer achieved. This recovery is
them with little choice other season. Furthermore, Ryanair unlikely to be a quick process
than to put a hold on further has stated that they now and will be further hampered
cash outlay to the supply expect to see only a few by the parallel need to
chain. This will hurt many of of their MAX8-200 variants manage MAX service re-entry
their suppliers around the delivered in 2020, with and the delivery of some
world that are heavily reliant unspecified design changes 400 completed aircraft to
on their Boeing contracts and reported to be required for that customers whose priorities
some may be forced out of variant. and requirements will likely
business, creating another have changed over the
The departure of Boeing
challenge for Boeing when intervening months.
CEO Dennis Muilenberg
the program is re-started.
was inevitable, as Boeing’s
Furloughs will surely follow
leadership team had failed
in short order, not only within
to restore confidence in the
Boeing but far beyond, on a
brand. Realistically, a renewed
scale which could send ripples
focus on traditional Boeing
through US economic and
values and culture, centred
employment data.
6 | PwC Aviation Outlook 2020
Industry
regulation
Of course, Boeing is not the
only one facing challenges
here. The whole set of
relationships between OEMs
and regulators is under intense
scrutiny. The core value of
safety is central to the routine
operation of airlines and
the continued health of the
industry. Complacency must
never be allowed to develop.
Air travel remains by far
the safest means of mass
transportation, yet for the
first time in perhaps 40 years
there is a widespread narrative
7 | PwC Aviation Outlook 2020around the inherent safety take control over the MAX including products already further evolutions of existing
of aircraft. Passengers must review and re-authorisation in development and flight models. It remains to be seen
have absolute confidence in process. More broadly, testing, and will arguably to what extent the service
the aircraft that they will fly however, the approach that lead to longer lead times for entry of the new generation
in and implicitly must also regulators take to approvals service entry and, potentially, 777s will be impacted.
trust the manufacturers and and oversight, to their to fewer new aircraft types
When the dust settles, a
the regulators to keep safety relationships with the OEMs, being brought to market in the
complete re-evaluation of the
paramount. This is now being and indeed with each other, future. Equally, jurisdictions
product development process
called into question, with warrants a detailed review. around the world will be less
will be required from all the
relationships existing between Regulators must maintain or comfortable basing their
OEMs and their supply chain
OEMs and regulators by re-establish a clearly visible approvals on an FAA or EASA
partners, in close consultation
allowing self-certification and professional distance from sign-off alone and will feel the
with the regulators.
the extension of grandfathered the manufacturers and stop need to undertake their own
design changes. the delegation of key parts independent assessment of
of the approval process to new aircraft.
With respect to the FAA,
the OEMs. Self-certification
it would appear that a If launched, Boeing’s NMA
by the OEMs, at least in
significant contributory will be at the forefront of this
safety-critical areas, must be
factor has been a shortfall in change in process, while the
eliminated.
resources and funding over next generation of single-aisle
a period of time. Following The necessary changes aircraft will almost certainly
the grounding decision, will inevitably impact new now have to be developed
the FAA moved quickly to aircraft development, from scratch rather than via
8 | PwC 2020 Aviation Industry OutlookSustainability
The other conversation consider whether taking
dominating the media in 2019 short-haul flights is the right
was climate change and the thing to do, suggesting that
environment. It is not going where rail travel is an option,
away and, given aviation’s it should be used more, and
core reliance on fossil fuels recommending an increase in
for the foreseeable future, the the use of video conferencing
climate change movement for its business travellers.
has huge potential to score a
direct hit on the industry. The
rapid development of “Flight
Shame” and its spread from
Scandinavia into other parts
of Europe, has already had an
effect on demand for short-
haul travel. Swedish airports Carbon emissions
saw passenger flows decline
by 4% in 2019, with domestic
per passenger have
air travel 9% lower. declined by more
KLM has gone so far as
than 50% since 1990
to invite its customers to
9 | PwC Aviation Outlook 2020This from an industry that has efficiency improvements, little to reduce emissions, technologies to ensure that it
done more than any other whilst other industries are governments continue to view is sustainable over the long-
to reduce harmful emissions making great strides to airlines as soft targets and term. But additional measures
and fuel consumption since improve their own carbon use taxation as a blunt tool to will clearly also be needed.
the dawn of the jet-age, with footprints. Inevitably, aviation’s respond to popular demand
Although research into bio-fuels
enormous financial investment share of harmful emissions with little heed to the wider
and blended fuel products has
by the OEMs over decades will rise and the weight of economic damage caused by
started to yield practical results
to develop and optimise new public opinion will increasingly restricting air services.
and more airlines are committing
technologies. According to encourage governments
The aviation sector is to take a proportion of their
IATA, carbon emissions per to ban, limit or tax airline
committed to reducing fuel uplift from sustainable
passenger have declined by operations.
net CO2 emissions to 50% sources, total biofuel production
more than 50% since 1990
The aviation industry must of 2005 levels by 2050. is currently less than 0.1% of
and, over the past ten years,
keep control of the narrative Achieving this goal will require industry consumption and is
fuel efficiency has been
and speak up for what it has continued investment in new unlikely to exceed 10% by 2050
improving by an average of
been doing and is continuing technologies. However, the given the considerable technical
2.3% per annum, delivering
to do to improve its impact challenge is not inconsiderable and commercial barriers to
a cumulative improvement
on the planet. Unfortunately, - current industry growth mass-production.
almost 60% ahead of target.
continuing to rely on past rate forecasts will push
Initiatives to mitigate aviation’s
Today, largely thanks to performance is no longer aviation’s share to 10%, with
carbon footprint include
these steady and significant enough to convince the the potential to go as high
CORSIA, ICAO’s new industry-
improvements, aviation court of public opinion or as 24% by 2050 if the pace
wide carbon offset program
accounts for less than 2.5% government policy-makers of technological change
which aims to stabilise CO2
of man-made CO2 emissions. that further intervention is not remains the same. Of course,
emissions from international
However, sustained growth in required. Despite evidence the industry must continue
aviation at 2020 levels,
demand will outpace further that passenger taxes do to explore and invest in new
offsetting around 2.5 billion
10 | PwC Aviation Outlook 2020tonnes of CO2. Individual make business decisions. The
airlines can go further. EasyJetimpact of ESG will become
is to be applauded for its increasingly relevant in the
commitment to offset 100% coming years as businesses
of its carbon footprint, but direct their relationships to the
many others will also need strongest ESG performers.
to step up – the voluntary Developing a positive ESG
offset schemes offered to narrative should therefore be at
passengers still have a take up the top of every airline CEO’s
rate of only 1%. to do list, as the entire industry
risks being tarred with the
ESG (Environmental, Social
same negative environmental
and Governance) factors are
brush if decisive steps are not
becoming increasingly relevant
taken to become differentiated.
in the corporate world, with
IATA’s Chief Economist
a new emphasis on the “E”
recently stated, “Climate
piece. More companies,
change is not just an issue for
capital providers and investors
protesters or scientists…This
in Europe and, increasingly,
is on the top of the agenda for
in North America are now
mainstream investors now.”
mindful of their environmental
credentials, and those of
their counterparties, as they
11 | PwC 2020 Aviation Industry OutlookSummary
Whilst all eyes in 2020 will be air cargo market is overdue both sides of the Atlantic will
on Boeing and the restoration but remains contingent on have found, wishing it so does
of the 737 Max program, an easing of trade flows and not make it so.
Airbus and the industry’s punitive tariffs.
lessors and investors will
Climate change and the
be fervently hoping that the
environment will stay in the
story has a happy ending headlines, but the start of the Fearless forecasts
and Boeing is not compelled CORSIA program could take
to fast-track an all-new some of the heat off aviation Six out of my seven predictions concerns, with regional airlines
single aisle replacement. A for a while, although any made at the start of 2019 came increasingly replacing older
truncated economic life profile significant dissent on the part to pass – the expected launch of jet fleets with environmentally
for the NEO and MAX would of member countries or airlines NMA was overtaken by events! friendlier propeller-driven
be hugely disruptive for the would be a major setback. As Here are my offerings for 2020. alternatives.
industry’s financiers and also more airlines commit to their • The EU will open discussions
for the engine makers, which own independent stance on • The 737 MAX will return to service
on further ways to cap, and
depend on high utilisations carbon neutrality, a pattern in Q2, but unevenly around the
ultimately reduce, aviation
and multiple shop visits to of differentiation will begin world and less than half of the
emissions
deliver their economic returns. to emerge as ESG ratings undelivered backlog will have
become a requirement for been cleared by year-end • Climate change concerns will
As growth capacity starts to put more pressure on European
investment and fund-raising. • New orders will remain below
flow into the system again, domestic and regional growth
passenger growth should tick On balance, despite the recent peaks, with an aggregate
prospects. Most other parts
up in line with seats, however many economic, political and book-to-bill below 1:1
of the world will remain only
yields will likely maintain their financial uncertainties, 2020 • Turboprop sales will get a marginally affected.
inverted relationship, making should see another strong boost from climate change
it harder for airlines to make performance from the industry
money. The recovery of the – although, as politicians on
12 | PwC Aviation Outlook 2020About the author
Dick Forsberg has over developing and promoting the of White Papers on key
48 years’ aviation industry company’s business strategy industry issues and is a
experience, working with with investors, lenders and regular speaker, moderator
airlines, operating lessors, stakeholders, defining the trading and panellist at industry
arrangers and capital providers cycle of the business, providing conferences and aviation
in a variety of roles spanning the primary interface with the schools. His New Year industry
Dick Forsberg business strategy, industry aircraft appraisal and valuation outlook papers are issued
analysis and forecasting, community, industry analysis annually and this year’s insights
External Senior Consultant asset valuation, portfolio risk are published in this document.
and forecasting, driving thought
Aviation Finance Advisory Services management and airline credit leadership initiatives, setting Dick has a Diploma in
assessment. He retired from portfolio risk management Business Studies and in
leading aircraft lessor Avolon in criteria and determining capital Marketing from the UK
March 2019 and now provides allocation targets. Institute of Marketing and
advisory and consultancy
Prior to Avolon, Dick was a is a member of the Royal
support to the industry. He is
founding executive at RBS Aeronautical Society. He is
currently supporting PwC’s
Aviation Capital and previously a past Board Member and
Aviation Finance Advisory
worked with IAMG, GECAS Vice-President of ISTAT
Services team as an external
and GPA following a 20- (The International Society of
Senior Consultant.
Transport Aircraft Trading)
year career in the UK airline
As a founding executive and and currently serves on the
industry.
Head of Strategy at Avolon, board of ISTAT’s International
Dick’s responsibilities included Dick has published a number Appraisers’ Program.
13 | PwC Aviation Outlook 2020Yvonne Thompson Colum Carr Aviation Finance Tax Partner Aviation Finance Advisory Services Leader yvonne.thompson@pwc.com colum.carr@pwc.com Brian Leonard Bryson Monteleone Aviation Finance Tax Partner Aviation Finance Advisory Services Senior Advisor brian.a.leonard@pwc.com bryson.monteleone@pwc.com Joe Conboy Dick Forsberg Aviation Finance Tax Partner Aviation Finance Advisory Services External Senior Consultant joe.conboy@pwc.com dickfors@aol.com At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with over 276,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.ie. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. © 2020 PwC. All rights reserved
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