The mantra of many aviation industry economists over the past few years has been that the current operating environment is “as good as it gets” and there are few signs yet of that changing in the near-term.
Despite the arguments over the shape of the cycle, the industry remains a cyclical business that will continue to be driven and impacted by changes in GDP even though its relationship with RPKs has altered slightly, which is making it very difficult for economists to predict the next downturn.
Pressures are building, however, for all three areas of the industry. Interest rates, oil prices and operational costs, such as salaries, are all rising. Increasing competition is impacting airline yields although passenger demand is offsetting that to keep profits up, for now. Liquidity remains but, the recent past has shown, that market shocks can cut off sources of liquidity abruptly.
Airlines are generally better at managing capacity, but competition pressures have fuelled expansion in pockets of the world that could see a correction.
New entrants to the leasing space and the desire for scale to heighten efficiencies and cut costs is driving consolidation in the leasing market but the general sense is that there will likely be more smaller scale deals than larger scale mergers although there remains the potential for some larger scale transactions, particularly if the market changes.
Awash with liquidity banks are helping renew fleets. New technology aircraft are aiding the sector with airlines hedging their fuel risk with more efficient equipment, although there are some concerns over values being impacted by too many variants and any impact on the useful life of aircraft.
Advances in technology and big data to help drive predictive maintenance and better consumer services is helping airlines and lessors alike to cut costs and attract more customers. Despite being impacted by new technology disruptors in the financial services space, the aviation finance business seems insulated from the worst of this change and lags behind advances that could help to commoditise products, although there are differing opinions on the benefits of such progression.
The robustness of the aviation sector is attracting new investment into the space with aircraft leasing more recognised globally for generating strong and stable returns, attracting more talented individuals into the industry. Airline profitability is healthy thanks to better capacity and cost management and strong demand. The state of the industry is strong and durable and certainly as good at its gets going into 2018.