A new report by aviation finance firm Avalon forecasts that growth in the Asia-Pacific region will help drive global airline revenue above the US$1 trillion mark for the first time this year.
Today, January 10th, Avalons is released 2025 Outlook: Fast forward Co-authored by Jim Morrison, Avalon's chief risk officer, and Mark Temblek, senior vice-president of portfolio strategy.
Andy Cronin, chief executive of Avalon, commented: “The aviation outlook to 2025 is strong, reflecting continued growth in travel demand against a backdrop of structurally low supply of new aircraft. Asia-Pacific will be the engine of that growth, and we expect global airline revenue to surpass the US$1 trillion mark for the first time. In this environment, lessees will benefit from continued strength in lease rates and valuations as airlines compete for scarce aircraft. With strong balance sheets and an attractive orderbook of new technology aircraft, these lasers are best placed to exceed and serve the growing needs of the world's airlines.”
Morrison added: “The airline's profitability in 2025 will build on a strong performance in 2024 where lower oil prices have helped offset higher maintenance and labor costs. While high demand for air travel is evident, we are entering a less visible operating environment. There is uncertainty about what political changes will mean for trade and growth, but structural fundamentals for the industry remain favorable. Aviation's net zero challenge will also require global policy coordination to stimulate investment, but reducing emissions remains a key industry priority.
Points to consider
The report predicts that Asia-Pacific will add more seats to schedules in 2025 than all other regions combined, even if airline growth in the US and Europe slows.
Lower oil prices helped offset a 19 percent increase in maintenance costs and an 8 percent increase in labor costs in 2024, helping the sector return to pre-pandemic profit levels.
This trend is expected to continue throughout 2025 with the net profit of the sector exceeding USD 36 billion annually.
Aviation security will be a challenge this year
Securing aircraft for fleet expansion and replacement will be a major challenge in 2025, with new aircraft slots sold out even after 2030.
Airlines are adapting to structural undersupply through lease extensions and extending the life of their existing fleets.
As a result, lease rates have increased by as much as 50 percent over the past two years and are expected to remain as strong as aircraft valuations in 2025.
Trends to Watch in 2025
- Airlines: A third year of profitable growth in 2025 will help airlines recover losses in 2020 and 2021. It wiped out the gains of the previous decade. Markets that recovered first, such as North America and Europe, are still growing, albeit at a slower pace. While the Asia-Pacific gains momentum. Airline revenues have returned to their long-term average share of world GDP, with the potential for an additional US$100 billion in revenues if the peak experienced in the last decade is achieved.
- Manufacturers: After declining in 2024, new deliveries will increase by c.20% in 2025 with more than 1,400 aircraft delivered. Despite rising deliveries, Airbus and Boeing will continue to struggle to hit their targets to increase production. A structural undersupply of new aircraft is driving the market dynamics of the aviation industry. Airbus and Boeing's next production slots won't be available until the 2030s, meaning airlines will continue to extend leases and in-service lives to meet their fleet plans.
- Readers: Lasers now deliver more new aircraft in 2030 than Boeing and Airbus combined. Orderbooks are concentrated around a small number of tenants who will benefit from higher placement returns as under-ordered airlines compete for scarce aircraft. Availability of capital and access to aircraft are differentiating among the largest, investment grade lessors who are well positioned.
- Innovation and Sustainability: Aviation generates US$ 3.5 trillion in global GDP, supports 88 million jobs and accelerates social and economic development, but it contributes only about two percent of global emissions and therefore the goal of achieving net zero emissions is critical. IATA estimates that US$4.7 trillion is needed to finance aviation transformation. Governments have a strong role to play in setting coordinated global policies by attracting private investment in both sustainable aviation fuel production and transformative new technologies such as hydrogen and electric-powered flights.
- Risks: A low visibility operating environment has emerged. Global economic growth is slowing to a steady 3.2% in 2025 from a peak of 6.6% GDP growth in 2021. Inflation is easing toward the central bank's target as the fastest rate-hiking cycle in four decades transitions smoothly in most major markets. Credit spreads hit multi-decade lows with market price saturation.
Seven fearless predictions
- More seats have been added to Asia-Pacific airline schedules than all other regions combined: Asia-Pacific has returned as a growth driver for the industry. Airline capacity in the region was the last to return to pre-pandemic levels but will again lead route openings and passenger growth as the emerging middle class takes flight.
- Each continent has agreed to a major airline affiliation: Consolidation will continue to be driven by airlines' need to secure capacity and strengthen balance sheets. As airline share prices recover, current owners may be tempted to exit as consolidators look for opportunities to strengthen market positions.
- New aircraft deliveries increased by 20 percent, no 30 percent: 2024 demonstrates the challenge of pushing production rates faster than the system can withstand. A 20 percent increase in new aircraft deliveries would be the fastest ramp-up in two decades.
- Narrowbody delivery slots sold in 2040: New deliveries will ramp-up and slots will become available in the early 2030s, but airlines and lessors will need to adopt longer-dated delivery profiles to secure the next available slots, with aircraft delivery orders expected this year in the 2040s.
- The A330neo garners more new orders and placements than any other widebody: After 780 widebody orders in 2023 and an additional 320 in 2024, there are few A330neo slots left this decade. The A330neo 70 offers a strong value proposition for A330ceo operators who have not yet selected a replacement type.
- Chinese company orders 800 aircraft: 182 aircraft were delivered to China in 2024 and this is expected to increase significantly in 2025 to meet increased travel demand and a fleet replacement wave that is coming. International relations will play a role in China's central aircraft procurement process, creating win-win opportunities for large-scale transactions.
- Two investment grade lasers have been upgraded a notch. Two other ledgers have been upgraded to investment grade: After enduring the triple shock of Covid, Russia and the fastest interest rate hike in 40 years, the air charter business model has proven its resilience. Rating agencies are reflecting the credit strength of airlines with rating upgrades and a positive outlook that will continue into 2025.