We are seeing a market recovery that continues to gather pace, with a positive rebound in aviation that is heavily focused on domestic and regional travel. It is clear that people have been eager to travel and that there remains huge pent-up demand. This recovery started in domestic markets and has since expanded into regional markets in Europe, North America, and Latin America.
Market Analysis
However, the speed of the recovery in Europe and some other markets did catch the industry by surprise. Many leading airlines, airports and third-party service providers laid off staff during the pandemic. These people proved extremely difficult to replace when demand picked up. The problem was exacerbated by Covid outbreaks amongst staff and the result has been mass flight cancellations, the imposition of airport traffic caps, chaotic security queues, huge problems with misplaced baggage, and other issues which have capped the recovery and caused severe embarrassment for the industry.
A significant component of the problem was that in parts of Europe, the restrictions were relaxed almost overnight, partly because of the outbreak of war in Ukraine. The industry had expected a lead-in time which failed to materialise.
The recovery has not been as quick in Asia where some countries took a more cautious approach to reopening their economies than those in the West. Indeed, China has maintained a zero Covid approach and this is likely to hamper the recovery in international travel in that market and some of the other Asian markets for some time to come.
As we move into 2023, we will see a more pronounced recovery in long haul travel, and it should have recovered fully by 2024 to 2019 levels.
One of the lessons learned over the past two years is that the risks presented by a global pandemic have not gone away and we must be prepared for similar events in the future. We have had SARS and MERS in the past, but they were more successfully controlled. Covid was more contagious and harder to contain although it proved to be less lethal.
The economic and social disruption and dislocation it caused was truly devastating and the effects of this are likely to be felt for many years to come.
On the other hand, the speed at which vaccines were developed and deployed was totally unprecedented. Not only did the vaccines save countless lives but they enabled the adoption of living with Covid policies by governments around the world by giving them confidence that health systems would not be overwhelmed by new waves of Covid cases. That allowed countries to reopen for tourism and brought a sense of normality back to air travel. The reality is that people still want to travel. At the beginning of the pandemic, people were afraid to travel, then they were restricted from travel, and now that the restrictions are being removed they are flooding back.
It would be a mistake to focus entirely on tourism when discussing aviation markets. Aviation plays an extremely important role in the global economy. It enables people to travel for work and education and it supports international trade through the transport of high value goods. It is a very important lubricant and distributor of wealth for the global economy.
An interesting effect of the pandemic lockdowns was the increased recognition of the importance of aviation. Even within large domestic markets like the United States, travelling across the country is not practical without aviation.
Historically, aviation has demonstrated an ability to be an indicator of economic trends. As the economy slows down business travel bookings tend to fall off and this is followed by leisure travel. This slowdown looks somewhat different, however. Airlines have built up large numbers of pre-booked tickets due to pent-up demand among consumers. This is likely to sustain the 2022 recovery and aviation will continue to show meaningful growth during 2023.
An interesting effect of the pandemic lockdowns was the increased recognition of the importance of aviation. Even within large domestic markets like the United States, travelling across the country is not practical without aviation.
That growth must be put in the context of the relatively low base it is coming from. At time of writing the airline industry was still operating at approximately 85 per cent of its 2019 capacity offering significant headroom for continued growth into 2023 despite the economic and geopolitical challenges which are likely to persist for some time to come.
While growth will continue, we are certainly seeing booking times coming in with people becoming more cautious in relation to advance leisure travel spending commitments. This is not a new phenomenon, and airlines can stimulate demand through special price offers and other promotions on short haul routes.
It is far more difficult to stimulate long haul demand. Long haul travel tends not to be an impulse purchase and can frequently involve once-in-a-lifetime trips which require long term planning, visas, vaccinations and so on.
On the other hand, if Covid-19 has proven anything, it is just how adaptable and resilient humans are. Our ability to move on from quite traumatic events is truly remarkable. We have seen that throughout history. The Spanish Flu pandemic which ravaged the world in the aftermath of the First World War was largely forgotten until its centenary occurred just before the Covid-19 pandemic. We should never underestimate the human ability to adapt, and this will continue to be a driving force behind the recovery in air travel.
SMBC Aviation Capital Strategy
Our strategy has positioned us well to benefit to the fullest extent from the nature of the recovery in the global aviation market. As a business, we have always focused on having the youngest most efficient aircraft in the market. These are the aircraft which came back into service quickest. They are more reliable, more fuel efficient, and offer the lowest operating costs.
Our financial strength also enabled us to work with our customers in meeting the challenges they faced. Initially, this took the form of sale and leaseback activity which offered our customers access to capital when it was most needed.
Over the past year, we have supported customers as they went through restructuring processes. The strong financial backing we receive from our shareholders was instrumental in facilitating that activity. That financial backing has also enabled the strategically important acquisition of Goshawk. We are bringing together very similar businesses which are strategically aligned and very complementary.
The acquisition of Goshawk will not result in a major change to our strategy. The Goshawk fleet is similar to ours and is largely made up of very young aircraft. The acquisition will make SMBC Aviation Capital the number two lessor globally and positions us well to participate in capital raising both from our shareholders and the markets.
In December 2021, SMBC Aviation Capital launched a company-wide ESG strategy to manage its own carbon footprint, help customers decarbonise across the aviation industry and to promote industry collaboration on climate issues.
ESG Strategy & Progresse
There is a growing, and necessary, sense of urgency in our industry for reducing global emissions and, as one of the largest global aircraft leasing companies, we have an opportunity to make a meaningful impact.
In December 2021, SMBC Aviation Capital launched a company-wide ESG strategy to manage its own carbon footprint, help customers decarbonise across the aviation industry and to promote industry collaboration on climate issues.
We’re incredibly proud of the progress we’ve made. In particular, the Company has offset all of its unabated emissions since 2019 with its chosen credit provider Vita, which specialises in environmental cookstove and clean water projects in Ethiopia and Eritrea.
We are also encouraged by the strong demand for more environmentally sound aircraft and are pleased to meet this demand by offering one of the most environmentally friendly portfolios of any major leasing company. Our strategy is to continue focusing on the most modern, efficient and desirable aircraft types, working closely with our airline and investor customers to meet their specific requirements, which will be further enhanced by our acquisition of Goshawk.
The Nest
The Nest is our Innovation Hub where we generate new ideas for the business. In recent years, its focus has been on the creation of ESG solutions for both our own business and airlines. This has resulted in the development of a sector-leading, comprehensive sustainability initiative to help our customers achieve their net zero targets.
The programme includes an initial $53 million investment in high quality carbon credit programmes that align with the United Nations Sustainable Development Goals (UNSDGs). We are the first major global leasing company to introduce a carbon credit programme to help airlines execute on their CORSIA commitments that will require airlines to cap emissions at 2019 levels.
The carbon credit programme offers airlines significant advantages including access to carbon credits that are of the highest quality available on the market, increased certainty over accreditation and a more predictable, fixed-cost supply of credits.
In a hard to abate sector, before SAF becomes mainstream, carbon credits, while an interim measure, are a concrete, practical and comprehensive solution that will support efforts by airlines and the wider aviation sector to mitigate their environmental impact.
We are focused on providing practical near-term solutions for our customers and this is only the first step we will take. We recognise the challenge ahead for the sector and look forward to working with our airline customers and other stakeholders to reduce the industry’s environmental impact through these and future initiatives.
Shane Matthews
Head of Strategic and Market Analysis
30 June 2022
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