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Higher aircraft utilization is a sign the air transportation market is getting better. It is countered by the most unpleasant prognosis since WWII!

The fundamentals of supply, demand, price , inflation and interest rates.

Supply, demand and price form the most fundamental concepts of economics. Market dynamics are the factors that change the supply and demand curves. Understanding the basics of the air transportation industry supply and demand models can be complicated. The notion of supply and demand equilibrium is a motivation in everything we do. Inflation and interest rates cause price volatility. The size of the orderbook, used aircraft supply and prices, maintenance status, all contribute to price behavior. The supply-side theory of the aircraft market is the more the benefits of investment that trickle into airlines and lessors, the better it is for the economy, as measured by GDP. Supply. The supply curve identifies the relationship between the price and supply of the aircraft. The airline, the manufacturer, the systems supplier, the financing institution, the lessor and the overhaul provider bear the brunt of these, rather than the consumer, who is driven by the cost of travel relative to disposable income. The counter position is that if the demand for aircraft and leasing services drops, as it did during the pandemic, the government should intervene with fiscal and monetary stimuli. That did occur in 2020, but any more support will be heavily contingent on a radical reduction in aircraft Greenhouse gas emissions. The technology needed is 20 to 30 years away. Demand theory. Demand-side economists, argue that the creation of growth in the aviation sector comes from the high demand for air travel goods and services. As consumer spending increases, the demand for these services grows. This stimulates investment in airlines and lessors, adding to job creation. As unemployment falls, wages grow, and the demand for air transportation grows.Demand. Job creation is not a priority in a full employment economy. Wage growth is being eroded by the rate of increase in inflation, higher food and energy costs. The demand for travel is negatively impacted by pandemic issues and civil unrest as illustrated by the war in Ukraine. Price. As aircraft prices rise, Airbus and Boeing increase output, The more manufacturers sell, the greater are the profits. The more aircraft that lessors order, the greater are the discounts. The more lessors dominate the orderbook, the higher the lease rates they can charge.Liquidity. The lower the tax rate, ideally zero, the greater are the incentives for investors to supply liquidity to the market. Interest rates are risingTaxation. Research into the support of governments between 2020 and 2022, suggests that they "prioritized air transport connectivity in order to protect economic activity and jobs, in aviation and in related sectors such as tourism." White tails. If orders shrink, buyers cancel deliveries, the OEMs reduce production. They eventually reach the point where whitetails, new aircraft without a customer, are put in storage. Buyers that do commit to new aircraft, expect and get steep discounts. Prior to the pandemic, large orders benefited from 30% to 60% discounts and the manufacturers earned margins in the 8% range. As it is likely that bottom fishers are demanding even higher discounts, the manufacturers are exposed to negative returns, and some could exit the market, merge. downsize, or abandon civil aircraft in favor of defense and space technology. Product range. As it stands Airbus has four types on the production line, the A220, A320/A321, the A330 and the A350. Boeing has the B737 Max, the B767 tanker, B777 and B787. The future of the Max is under a cloud. The B777 has engine design issues and the B787 production line is stopped. The B767 tanker is making losses. Climate enissions compliant aircrat types. None exist.Supply chain mapping and black swan events. The pandemic started in China, where the supply chain has been severely disrupted. This is different because China is now a major part of the global economy compared to what it was during past disasters. “Supply chain disruptions often have a bullwhip effect or a black swan event, a rare, unpredictable disruption that causes lasting damage. They start with retailers and spiral out in greater magnitude to distributers, producers, and then suppliers in the first, second, and third tiers. Upstream suppliers are likely to be severely damaged.” (MIT professor Yossi Sheffi, director of the MIT Center for Transportation and Logistics). Stakeholders in the air transportation supply chain, manage a disruption, to continue in business and they provide a steady flow of parts and materials. Developing a supply chain map will identify what each supplier makes, the parts made in each location, systems production and assembly locations. From there, a list of critical parts, parts that can be eliminated from building aircraft, engines and parts, and alternative suppliers of critical items, can be identified. Mapping is an effective way to quantify each plant’s operational status and inventory levels. Mapping out how an airline’s supply chain works provides essential supply chain visibility, as the crisis advances.Inflation & cost of inputs. If the economy is in an inflationary phase the costs of inputs for the manufacturer and the airline increase, that puts both of them in a state of tension, whereby the airline does not want to take deliveries of new aircraft and the manufacturer wants to cut back production. Governments are proscribing tax based offshore financing, reducing the value of asset-based investing. Higher interest rates increase consumer income and disposable income, but inflation shrinks it. Central Banks. Central banks attack inflation by increasing interest rates, a move that is an anathema to the interests of manufacturers, investment institutions and lessors.Interest rates. Interest rates increases, cause lessor, investor funds and investment institutions cost of funding to rise. Lessors have to juggle higher funding costs, and forego planned higher leasing rates, in a weak market, where lessees will not pay, or pay when they can. Fiduciary investors. Fiduciary investors may cut back on asset-based financing, until demand recovers. Many aerospace banks already exited the market as an after effect of the 2008 financial crisis. Fiduciary investors may follow. Airlines & lessees. Airlines pressure the lessors for lower lease rates, smaller reserves, flexible leasing periods, and a share in residuals. Airlines know that lessors are in a bind and become more lax about meeting lease costs. The lessee wants relief from the cost of leasing and the payment of reserves. In policy documents, IATA and ICAO urge them to renegotiate terms and even to defer payment.Role reversal. Manufacturers and airlines reach a point when they realize that the intermediate stake holders, the lessor, is increasing their cost of doing business. They are taking the lions share of the new and used aircraft trading profits, and they are drawing cash from airline diminishing cash flows. Market responses. If the input costs to build a B737 Max is $40M, plus the variable costs of labor, and overhead burden, the production line would incur heavy losses once order positions generate less than $40M.Lessor exposure. At this point the lessor is at greatest risk. The reasons why the lessors dominated the market from 9/11/2000 to 2019 was because the airlines access to the stock market was squeezed, and they sold off fleets on a sale and lease back basis, to raise cash, and the manufacturers ran out of ways to provide seller financing. The aerospace banks pulled out of the market after the 2008 financial crisis. Most recently lenders have pass on higher insterest costs, but lessors cannot pass that cost on to lessees. Depleted lessor cash flows, increases the uncertainty about rising lessee defaults, forces the lessor to defer or cut back orders, and distress sell-aircraft that are surplus to requirements. Investors resist this move in the expectation that the market will recover, and if they do not, they put pressure on the lessors to exit the market as fast as possible. Where are we going and where will we end up? The market is in a phase where lessors are falling like dominoes, following that is a glut of used aircraft, leading to lower aircraft prices. The market bottom will be the point that white tail are sold and delivered, and the airline-manufacturer buying relationship is reestablished.
The airline business model is made up of a mix of demand projections and supply constraints. The above table identify the most critical inputs and constraints developed by MIT during research projects that measure the impact of supply on air transport demand. "During the sixties the demand for air transportation services experienced substantial growth rates due to the fact that fares (in constant dollars) were continually declining (because of increasing productivity of transport aircraft) and partly due to the fact that the level of service offered was continuously increasing, again the result of improvements in technology." At the beginning of the 2020s, the growth in the demand for air transportation services began to exhibit radical and unforeseen changes. These changes were caused by a reversal of the impact of the two factors: 1. Fares are increasing (due to rapidly increasing costs, particularly with respect to the price of fuel). 2. Level of service are decreasing, particularly evidenced by fewer total flights and fewer direct flights. Demand based economic models do not always factor in the supply of air transport services. The demand models developed in the sixties were adequate to caution airline managers on the impact of changes in the general state of the economy and changes in fare level. The MIT research concludes that: since these models did not adequately incorporate the factors relating to the supply of air transportation services, very few analysts were able to predict the impact of a change in the level of service such as: 1. When the level of service offered changed as a result of a general recession and shortage of fuel, demand models did not predict supressed traffic growth rates . 2. Airlines cut costs by reducing the level of service offered as their financial position weakened. 3. Reducing the level of service did not lead to improved profitability of the carriers. 4. Instead, the strategy suppressed traffic and revenue, leading to lower profits. A demand-supply economic model is needed. The MIT researchers concluded, from this evidence, that there is a critical need for the development of economic models that simultaneously incorporate the factors effecting both the demand and the supply of air transportation services. NASA's Ames Research Center, Aeronautical Systems Office funded an MIT research project to investigate how the supply related variables (particularly those related directly to technology) contribute to the determination of the demand for air transportation. The research was divided into two parts. 1. The first part was exploratory in nature, and designed to determine whether sophisticated economic models incorporating supply and demand factors can be developed given the state-of-the-art in econometric modeling and the limitations of the existing data. During this phase the research analyzed the existing data, the components of the levels of service, and from that they developed a simple models which serve merely to generate avenues of pursuit for further research in the second phase. The results of this exploratory phase provided directions for research in the second phase carried out in 1976. During the first phase, research efforts were directed at investigating single equation models incorporating a level of service index in addition to the usual fare and socioeconomic terms. The models were calibrated using data from fifty-eight region pairs over a sixteen year period. They developed a new flight frequenct service index to represent an improvement over the one incorporated in past models. The new level of service index is a nondimensional generalized trip time scaled from zero to one, which takes into account not only the number of flights, but also number of intermediate stops, direct or connecting service, speed of aircraft and most important, the matching of the departure schedules to time variability of demand. Based upon the preliminary results, it appears that the level of service is a more appropriate explanatory variable in the demand model than just frequency. The significant results of the demand models developed in this exploratory stage of the research will be discussed in the following sections of this report. Section 2 describes the reasons for calibrating the models based upon region pair data rather than city pair data. Section 3 differentiates between the supply and demand components of air travel and elaborates upon the development of the level of service index. Section 4 discusses the sampling procedures used in determining the region pairs. Section 5 contains the specification of the single equation models and presents the empirical results. The final section of this report outlines the plans for future research in Phase II of this project.
Oil, inflation, interest rates, enduring pandemic, environmental solutions, trade, tourism, European realignment, recession - heading in the wrong direction.
As a derived demand, the airlines, airports and aircraft trading & leasing markets depend on the stability of commodities markets, speed of recovery of global trade, the travel & tourism industry. Patrick Harris.

Trade in goods & services $28.5Tn.

Global trade gains benefit China as forexast for 2022 are but back. "The World Trade Organisation has cut its forecast for global trade growth this year, from 4.7% to 3%, due to the economic disruption caused by the Russia-Ukraine war." WTO Strong global trade growth in 2021, not expected to continue in 2022. Overall, the value of global trade reached a record level of about US$ 28.5Tn in 2021, an increase of about 25% relative to 2020 and an increase of about 13% relative to the pre-pandemic level of 2019. The 2021 trade growth was not only limited to goods. Trade in goods and services followed similar patterns, with stronger increases. Trade in services reached pre-pandemic levels during Q4 2021. On a year-over-year basis, trade in goods outperformed trade in services, with increase of about 27% and 17% respectively. During Q4 2021, trade in goods increased by almost US$ 200Bn to reach about US$ 5.8Tn, a new record. During the same period, trade in services rose by about US$ 50Bn to reach about US$ 1.6Tn , a value just above prepandemic levels.

World Trade Organization Global trade outlook.

Note: Published before the breakout of the Russia-Ukraine war. The positive trend for international trade in 2021 was the result of:1. Increases in commodity prices.2. Subsiding pandemic restrictions.3. Strong recovery in demand due to economic stimulus packages. These trends were expected to fade, suggesting international trade trends would normalize during 2022. The outlook for world trade in 2022 is changing because of the the following factors: 1. Slower than expected economic growth. Economic growth forecasts for 2022 are being revised downwards. The International Monetary Fund cut its world economic growth forecast for 2022 by 0.5 points (from 4.9 to 4.4.) because of persistent inflation in the United States and concerns related to China’s real estate sector. It is likely that global trade trends will reflect these macroeconomic trends, with lower-than-expected trade growth. The IMF will likely make further adjustments to reflect the Russia-Ukraine war. 2. Continuing challenges for global supply chains. The COVID-19 pandemic resulted in unprecedented pressures on supply chains. Logistic disruptions, a semiconductor shortage and rising energy prices have further contributed to supply shortages and spiraling shipping costs. As a result, major companies have become strongly focused on improving reliability and managing risks for their supply networks, but delays have persisted, nevertheless. Efforts to shorten supply chains and to diversify suppliers could affect global trade patterns during 2022. 3. Trade agreements and regionalization trends. On January 1, 2022, the Regional Comprehensive Economic Partnership (RCEP) entered into force. This trade agreement facilitates trade among many of the East Asian and Pacific economies, and is expected to significantly increase trade between members, including by diverting trade from non-member countries. The regionalization of trade flows is also expected to increase in other parts of the world in line with other regional initiatives (e.g., the African Continental Free Trade Area) and due to increasing reliance of geographically closer suppliers. 4. Monthly consumer prices increased by the most in 16-1/2 years. In March 2022, as war in Ukraine boosted the cost of gasoline to record highs, cementing the case for a 50 basis points interest rate hike from the Federal Reserve.5. Transition towards a greener global economy. Trade patterns in 2022 are expected to reflect the increasing global demand for products that are environmentally sustainable. Such patterns may also be supported by government policies regulating the trade of high-carbon products. Moreover, global trade patterns could also be influenced by increased demand of strategic commodities required to support greener energy alternatives (e.g., cobalt, lithium, and rare earth metals). 6. Rising concerns about debt sustainability. Given the record levels of global debt, concerns of debt sustainability are likely to intensify in the incoming quarters due to mounting inflationary pressures. A significant tightening of financial conditions would heighten pressure on the most highly indebted governments, amplifying vulnerabilities and negatively affecting investments and international trade flows.

Tourism market is inverted.

UNWTO explains why tourism recovery needs stronger coordination and increased vaccination rates. 2020, was the worst year on record for tourism, when international arrivals decreased by 73%. The agency reports that 2021 was another challenging year: arrivals were still 72% down on 2019 pre-pandemic levels. The 2021 global tourism industry's direct gross product rose 19% from 2020 to $1.9Tn , but barely surpassed half its 2019 levels.
A total of 400m international tourist arrivals were reported in 2020, and grew to 415M in 2021. Each tourist spent more and stayed longer compared to 2020. The first 2022 issue of the UNWTO World Tourism Barometer indicates that rising rates of vaccination, combined with easing of travel restrictions due to increased cross-border coordination and protocols, have all helped release pent up demand. International tourism rebounded moderately during the second half of 2021, with international arrivals down 62% in both the third and fourth quarters compared to pre-pandemic levels. According to limited data, international arrivals in December were 65% below 2019 levels. The full impact of the Omicron variant and surge in COVID-19 cases is yet to be seen.The UNWTO World Tourism Barometer does not take into account the higher inflation and interest rates in 2022, or the volatility in the oil market. a paragraph. Drag me to add paragraph to your block, write your own text and edit me.

Air transportation sector

The air transportation market is in crisis even if Coved is behind us, and/or trade, and tourism recover in 2022. On the horizon are: inflation, interest rates, recession, climate legislation, polution control regulation, technical regulation, and war risk. They must be cleared before the market takes-off.

High aircraft supply & weak demand pose a significant risk to the value of investor portfolios.

The aircraft market has similarities to the real-estate market and one notable difference. If the demand for an aircraft is weak, the owner can reposition it to a market that is stronger, contra leases are such an example. If the weakness is long term, then the owner can put the aircraft in an FAA approved care and maintenance programe, to await return to service as demand recovers. If the demand for a building is weak, the owner cannot pick it up and move it to a location where demand is strong. Left unattented long enough, the view of real estate as an inflation proofing investment, in bricks and morter, develops a stigmata. Stigmata is a negative attribute of real estate acquired by environmental contamination and reflected in its value (R. Guimera`*, S. Mossa†, A. Turtschi‡, and L. A. N. Amaral*§, 2004), (Elliot-Jones, 1996). In a follow up report, MIT observed that pricing techniques can be applied to determine the existence and duration of stigmata. Pricing data banks are widely available in real estate markets facilitating a rigerous analysis. The economics of the tourism industry drive the market for aircraft. and so the demand and price are less direct. However, we do have precident in the case of noise emissions (addressed with Stage I, II and III engine hush kits), metal fatique highlighted by the Aloha B737-200 airframe failure, addressed with corrosion prevention programs; and design failures as in the case of the B737MAX and B787, for which the jury is still out. We postulate that commercial aircraft long term stigmata risk, if it occurs, may be similar to the outcome contaminated real estate. If the travelling public develops a perception that the Greenhouse Gas (GHG) polution from aircraft gas turbine engines is a failure. Adopting Jones' research to aircraft, "temporary stigma and long-term stigma are possible equilibrium outcomes if the hazardous waste generated by [aircraft] are not eliminated. The results depend critically on where the hazardous waste is generated. The World Air Network (WAN) is is physical infrastructure and so we can visualize there the level of contamination is greatest and where the pools of wasted assets are likely to present themselves. ,

Rebuilding requires major changes to airline fleets.

No one says it is easy for the aviation industry to recover in time to achieve Net-Zero emissions goals. Air transportation is in crisis even if Coved is behind us. The Russian War is impacting the World Air Network (WAN). Concurrent with that Climate change is a major threat. Rebuilding the value enhancement features of air travel; mobility, economic growth, tourism, business development, employment generation, energy efficiency, are stuck in care & maintenance mode.
"Globally, key fundamentals remain negative, over-leveraged airlines and lessors, capacity over supply, weak revenues, higher fuel costs and rising inflation. Together they are pushing costs to the point where airlines are raising prices., with some leaving the market." Airbus.
Market Analysis. The aircraft leasing and trading market has gained from steadily lower, near-negative interest rates, favorable double-taxation treaties, and discounted new aircraft prices. Interest rates began to fall in 1998 and hit zero in 2014. Rates gradually increased again up to 2019. Today they are at near-zero level. Black Swan events. The one market behavior not built into the GMFs, is the phenomena of "Black Swan events." The 2020 pandemic, $100-oil, the higher than modelled inflation trend, the higher cost of money, the crisis in the Ukraine, and the underperformance of the CORSIA scheme, fall into this category. Supply shock. If aggregate demand is unchanged, a negative supply shock causes a product's price to spike. A positive supply shock causes product prices to fall. The supply shock arising from the disruption to shipping lanes, and oil supply, are unexpected events and so negative that they suddenly changed the supply of aircraft, parts and fuel supplies. These disruptions resulted in an unforeseen change in shipping costs and fuel prices. Inflation or stagflation. Negative supply shock , supply chain woes & monitory policy response are combing to complicate the potential for the recovery of the aviation industry. Among experts, Karl Whelan at University College Dublin, who strongly agrees, that stagflation is a likely outcome, says: “This is a classic negative supply shock. As we know from the 1970s, these shocks raise inflation and reduce output.” Larry Samuelson at Yale, says. "whether the supply shock is inflationary depends on the monetary policy response.” “A protracted conflict, on top of existing supply-chain woes, will be detrimental to the world economy.” Interest rates. Inflation has reached a point where interest rates will be increased until rising costs are curtailed. Higher borrowing costs will result in consumer spending declines and investment cuts. Recession outlook. In previous inflationary periods the Fed used interest rates to curb inflation, and recesssion followed. If the Fed is agressive, say ~ 0.25% increase in the Fed Funds rate, in the 8 hearings in 2022 and 2023, recession is a risk in 2024, for 15 to 40 months. Climate change. "Though we often think about human-induced climate change as something that will happen in the future, it is an ongoing process. Global temperatures rose about (1.1°C)/(1.98°F) from 1901 to 2020, but climate change refers to more than an increase in temperature. Extreme climate and weather-related events: floods, heatwaves, drought, hurricanes, wildfires and loss of glacial ice are visible and costly. (NOAA). If the climate crisis deepens, and no significant progress is made in the transition to aircraft Net-Zero aircraft emissions, the pressure on the utility of aircraft will continue to grow and value of aircraft will fall. Energy supply. Oil supply is unreliable. The price of oil is hight for now and will hit a low, and stay low for some unpredectable period of time. The reliability and price pattern or any alternative source of propulsion is unknown , because they remain in the R&D phase. Environmental damage. Ecosystems and communities around the world are being impacted by the environmental damage caused by climate change. (NOAA). Things that civilization depends upon and value — water, energy, transportation, wildlife, agriculture, ecosystems, and human health — are experiencing the damaging effects of a changing climate. Aircraft are being seen as part of the problem not the solution. That perception needs to be arrested by deeds not platitudes. Sustainability. International air transport faces an environment threshold in 2027, that could lead to legislative action and strong regulations to curbe climate changing impact of aircraft greenhouse gas emissions. Technology risk. The technology transfer risk is increasing in importance because the options for redesigning or replacing the gas turbine engines, high CO2e emitters, with Net-Zero engines, low CO2 emitters, is not making the progress anticipated a few years ago. Noise. Aircraft noise has been the subject of research for the past 65 years, with ncremental results. Most of the research covering noise has focused on commercial aircraft. Progress was made by introducing new engines with features that reduce noise. Subsonic commercial aircraft benefit from changes to the engine cycle that reduce exhaust velocities and noise. The problem is that the noise from commercial aircraft is generated from multiple sources. As newer aircraft with higher thrust and performance levels are introduced, the noise tends to increase due to higher jet exhaust velocities. Research is now focused on three areas, subsonic fixed wing, subsonic rotary wing and supersonic noise. NASA research suggests that, in the long term, variable cycle engines, can be optimized for lower jet noise during takeoff operations and higher thrust for operational performance. NASA also suggested that the engine nozzle systems should be reengineered to reduce the impact of jet noise. Litmus test for air transportation stakeholders: 1. Too much debt is impeding industry stakehoklders ability to make principal and interest payments and to cover operating expenses.2. Evidence of downward financial spirals resulting in the need to borrow more.3. Stakeholders have restructure debt or filed for bankruptcy to resolve overleverage problems. Overleverage. Leverage can be measured using the debt-to-equity ratio or the debt-to-total assets ratio. In the air transportation industry, overleverage constrains growth, results in the loss of assets, limitations on borrowing, and new investors are slow to invest. Airlines and lessors are overleveraged and carrying too much debt compared to operating cash flows and equity. Over the last two years the industry has undergone a downward financial spiral this is likely to continue through the next two years. The results in stakeholders having to borrow more to keep aircraft in revenue service. This spiral is evident in the number of airlines that have restructured debt and the number bankruptcy protection . Weak revenues. The airlines needed government aid to pay operating expenses in 2020 and 2021 because of lost revenues and excessive fuel costs. Airlines and lessors are not generating sufficient cash flows to service debt.These key stakeholders have difficulty paying interest and principal payments. Travel & Tourism. February 15, 2020. The WTO is rethinking the restart of tourism. The UN World Tourism Organization reported that: "For decades, tourism has been a pillar of economic growth and opportunity for" tourism destinations. "Now, as the sector restarts and recovers from the impacts of the pandemic, UNWTO is working alongside local authorities on a package of technical advice and practical assistance." As restrictions on travel continue to be steadily eased or lifted, UNWTO is shifting its focus from supporting its Members as they mitigate the impacts of the historic crisis to rethinking tourism’s longer-term role in building resilience and providing opportunity. The shift in direction is that WTO is going to work: "with communities themselves to rethink and restart tourism." The thrust of WTOs efforts will be forming "new partnership with communities and advancing people-first policies. Airlines bought new aircraft and sold used, less efficient ones, to reduce operating costs, and to meet growing passenger demand. Proceeds from used aircraft sales generated the cash needed to pay for new aircraft as they were delivered. Ticket prices. Globally, key fundamentals remain negative, over-leveraged airlines and lessors, capacity over supply, weak revenues, higher fuel costs, rising inflation and interest rates. Together they are pushing costs to the point where airlines must raise ticket prices in a period of weak demand. Scarcity & overbuying. Lessors bought the surplus aircraft as airlines rotated fleets, or did sale-and-lease backs, which priced in the financial benefits of taxation treaties and low borrowing costs. Sustained by the low tax rates, and the liquidity from asset backed securities (ABS) funding, the buying rush of traders, caused the used aircraft market to tighten; prices hit higher and higher levels. Coupled with the low cost of money, lessors aggressively bought new aircraft. Orders were placed to satisfy the demand for capacity from airlines that could not find used aircraft at prices lower than the equivalent lease terms offered by lessors, or did not, or could not, buy competitively from the manufacturers, because the volumes of aircraft they needed and delivery timing, were not attractive. In time, lessors upscaled to buying new aircraft in bulk, at steep discounts, in some cases, 60% to 70% of list price. Anyone wishing to buy new aircraft had to take delivery positions further and further forward, because the lessors dominated the orderbook. Oversupply. The market flipped in 2020. Oversupply of new and used aircraft, excess of ASKs to RPKs, and low load factors, reduced the operating commercial fleet by an estimated 10,000 aircraft, with long haul aircraft carrying the greatest burden. It is to be expected that this oversupply pushes aircraft prices and ticket prices downward. Even though airlines are hoping for higher fares, at current levels, they are losing money. This scenario should be visible in the aircraft trading market, but verifiable data is not available to evaluate this assumption. Oversupply of aircraft can be corrected by cutting production of new aircraft, delaying the introduction of new aircraft designs, until all white tails are delivered. Used aircraft oversupply can be corrected by the early retirement of aircraft due for heavy airframe and engine maintenance, and by conversion to non-traditional modes such as firefighting, and climate change research. Those stakeholders that do continue to hold new aircraft order positions, can do so because, the OEMs need to clear the production lines, and succumbed to discounted pricing, with flexible delivery schedules and other buyer risk mitigating terms and conditions. The oversupply of news and used aircraft will continue for as long as fares are weak, white-tail aircraft are not sold, new and used aircraft remain in deep storage due to market conditions, and governments finalize change change legislation and regulation. Asset Managers. Investment risk management is complicated by the fact that ABS securities are serviced by the lease cash flows, and are not secured by the aircraft. Title resides in special purpose companies (SPC), managed by lessors. In effect, lessors have become asset managers with the technical and trading skills that banks do not provide in-house. Price behaviour. As asset managers, the lessors say they are prevented from selling distressed aircraft at discount to book prices because of covenants in the agreements with the investors who hold the securities. The aircraft manufacturers do not disclose actual contract prices. As such, the trading prices for new and used aircraft are not visible to the public. Investment institution, broadened the range of securities purchased beyond prime-asset US treasury securities, in search of higher returns,. They created products based on cross-border tax benefits and ABSs serviced by the cash flows produced by aircraft leasing, a non-prime, alternative-asset class. In effect, the ABS market replaced the traditional aerospace bank financing. Aircraft manufacturers enjoyed the benefits from a growing orderbook that filled production lines and created healthy profits and high stock prices. Supply chain. As the industry consolidated around two major manufacturers, Airbus and Boeing, they lost considerable pricing power, an advantage previously held by them. The airlines, as launch customers, previously held sway over the introduction of new aircraft designs, have come to the realization, that lessors have a say in what aircraft are built and the quantities sold. Gradually, it became apparent, that the traditional supply change has been disrupted. The lessors had become the main sales conduit between manufacturers and the airlines. Lessor expectations. It may be, that the lessor’ asset management approach, is based on traders’ expectation that the market will return to the long-term trends, being the market conditions in 2019, and that prices will also recover. Investor paradox. In any normal market, the outcome from market disruption would be a glut of surplus aircraft, and fire sale prices. If this has occurred, it is not visible to market observers. This can be explained in part by the legal constraints on investment institution portfolio-mix decisions. They cannot cut off the flow of investment funds to alternative asset classes, even brown assets, that offer high yields, because they need them to generate the returns expected by their customers, corporations, government agencies, pensioners, and insurance policy holders. Residual values. The lease-financing business model is dependent on the sale value of the aircraft at the end of its lease life. The appraisal profession treatment of residual value is facing downward pressure, in part because they are projected 10, 20, 30 years into the future. Pressure on aircraft future values will increase the closer we get to the next review of the CORSIA scheme in 2027. Brown asset, stigmatization, and wasted asset phenomena. For as long as humanity has thought about flying, the image was one of new frontiers and revolutionary breakthroughs in unimagined technologies. For the most part, these things have been realized and the shift is now to space frontiers. Much of the goodwill surrounding aircraft remains to this day. However, the realization in the public mind, that aircraft are significant contributors to greenhouse gas emissions, and that very little seeming to be changing, may erode that goodwill. Civil society groups and many investment institutions are skeptical that the stakeholders in the aviation industry are willing to solve the emissions problem. Observers point to the doubt being expressed about the intentions of stakeholders in the oil, coal, gas and cement sectors, to transfer responsibility for climate change to other industries and to consumers. This "blame-others" strategy has stigmatized these industries in the public mind. Investment institutions, aware of the problem, categorize oil, coal, gas, and cement as “brown assets.” They may not like the impact they have on the environment, but they are assets that offer high returns. Banks will continue to invest in brown assets, until is established that we have a high temperature or low temperature climate scenario in 2050. Pension and insurance companies, have a fiduciary duty to manage both scenarios until then. Imagine the legal liability that pension fund and insurance managers would face, if in 25 years’ time, the world economy is still based on fossil fuel energy and their portfolios are overweight in green bonds! Those investors who continued to hold brown asset securities would see returns rise. That that abandoned fossil fuel would see the value of green assets fall! The same outcome would result if climate change were addressed, and portfolios are awash with brown asset securities. Aircraft as brown asset may seem inconceivable. The risk is that if the promises made by the aviation industry do not begin to show results in the next few years, aircraft will be stigmatized as brown assets, in ways that could pressure governments to force airlines to cut emissions through punitive legislation and restrictive regulations. Should that occur, lessors will have to manage pools of wasted assets. Market forecasting. The Global Market Forecasts (GMF) published by manufacturers, banks, and lessors, reinforced the decision of all players, to buy delivery positions far into the future, five and seven years, or more. GMFs project market trends in twenty-year cycles, the latest being 2021-2040. Invariably the projections are bullish based on the analysis of air traffic and fleet pattern evolutions. The belief that air-traffic always returns to its long-term trend after a recession, stems from this concept. The Airbus projections account for factors such as demographic and economic development, tourism trends, air cargo trends, aircraft efficiency, sustainability, energy-prices, and airline network development. The GMFs highlight future traffic growth and aircraft demand in the over 100 seats commercial aircraft category and include technical services forecast. These developments created a speculative asset-price boom-busts over the last few decades. Traffic trends. Traffic growth rates in 2020 and 2021, did not follow the post-financial crisis pattern of 2010 and 2011, possibly because the pandemic decoupled the air transportation industry from the global economy. War risk, impact on GDP, inflation and recession. An overwhelming majority of experts think that the economic and financial sanctions that have been implemented to date will lead to a deep recession in Russia; and nearly four in five consider that the fallout from the invasion will both reduce global growth and raise global inflation in 2022. A slightly smaller majority agree that a total ban on oil and gas imports from Russia carries a high risk of recession in European economies. Foreign exchange. Asked about the potential effects of the weaponising of dollar finance, on its role as the dominant world currency, reactions are mixed. (IGM Forum at Chicago Booth).The economic and social upheaval being caused by the Russia-Ukranian War, makes is unlikely that traffic will grow ~10% in 2022.
Aircraft trading was mostly stimulated by falling interest rates from 1998 to 2019. Crisis after crisis had a dampening effect but they were too short to deflate aircraft prices.
Airbus published a Market Outlook for Asia-Pacific during the Singapore Air Show. Monday 14th of February, 2022. The collapse in air travel in 2020 and 2021 put extreme pressure on airlines worldwide. Asia-Pacific is recovering faster than the the rest of the world. Airbus and Boeing, together hold a virtual duopoly of 99% of the LCA (Large Commercial Aircraft) market. Airbus gained market share when Boeing grounded the B737 Max because of safety and design issues. Airbus reported that "it expects Asia-Pacific travel will reach 2019 levels between 2023 and 2025," in line with market expectations.The Asia-Pacific market accounts for "over 40% of the company's global demand." LCA freighter orders could grow faster than prior estimates, because Asia-Pacific's freight revenue, grew 20.1% 2021, after falling 15.4% in 2020. Airbus expects the volume of regional air freight in Asia-Pacific, to double by 2040. The LCA order book remains weak. According to Reuters, the catch is that airlines are negotiating to cancel orders for passenger LCAs. Singapore Airlines disclosed a tentative deal in December, for Airbus' A350 freighter as a trade-off for cancelling passenger aircraft orders.

Update - Russian-Ukraine War.

March 2022 update - Russian-Ukraine War & need to raise interest rates to curb inflations, increases recession risk. Timing the recovery of air transportation may now depend on how fast & how high rates have to go. The potential fallout for the (1) Russian economy (Cecchetti and Schoenholtz 2022, Garicano 2022), for the (2) European economy, the (3) US dollar’s role as an international currency, (4) for global growth and (5) inflation, are viewed as key issues.

"The strongest action aircraft manufacturers could take to manage stricter regulations is to decarbonize today's fleet powered by gas turbine engines, that covers the fleet. . Solve that problem and the air transportation industry will see clear skies ahead!" Glenn E. Pickard.

“Climate action is understood as the efforts to measure and reduce GHG emissions and strengthen adaptive capacity to climate induced impacts.” UNFCCC. There is a growing consensus as to how the future resilience of airlines and tourism will depend on the their ability to embrace a low carbon pathway and cut emissions. Airlines and tourism businesses balance two climate emergencies.The travel and tourism industry is balancing two opposing forces with respect to global warming that require action:1. Tourism is vulnerable to climate change and at the same time,2. It Contributes to climate change by emitting greenhouse gases (GHG). Action plans.

Market feedback from the aircraft manufacturing sector.

April 20, 2020. General Electric Co. stock price fell from $233 in March 2017, after a sell off of 44M shares. THe stock hit a low of $44 in May 2020 when 127M shares were traded. The five year average stock price is $104. This pattern was an alert to the aerospace & defence industry that: (1) the supply-chain problem is serious and persisting, (2) the labor shortage is real as large numbers of skilled workers reach retirement age and, (3) shortages leading to material inflation is real and will persist through mid-2023.

Aircraft - market supply exceeds demand.

Globally, key fundamentals remain negative, over-leveraged airlines and lessors, capacity over supply, weak revenues, higher fuel costs and rising inflation. Together they are pushing costs to the point where airlines are raising prices. The technology transfer risk is increasing in importance because the options for redesigning or replacing the gas turbine engines, a high CO2e emitter, with Net-Zero engines, low CO2 emitters, is not making the progress anticipated just a few years ago.
2021 global air passenger totals show improvement from 2020, but still only half pre-pandemic levels. (ICAO). Market imbalance - Aircraft.Aircraft supply grew faster than passenger demand in 2021. Global seat capacity offered by airlines increased by 20%, a level higher than the seats purchased by passengers. Demand – measured in RPKs. 2021 RPKs were 40% of 2019 levels, and are expected to improve to 61% in 2022. Demand – passengers carried.Worldwide, ICAO reports that airlines transported 4.5 bn passengers in 2019, 1.8 bn in 2020, 2.3 bn 2021, and projects 3.4 bn in 2022. That projection preceeded the fall-out from the Russian-Ukraine war. Demand – Domestic vs International. In 2020, domestic passenger traffic fell to 28% of 2019 levels, and to 68% of 2019 levels in 2021. International traffic remains at 28% of the 2019 level.Supply – aircraft.In 2021, airlines supplied the market with 50% of the number of aircraft they offered in 2019 (Pre-Crisis).Supply is expected to continue to increase faster than demand, reaching 67% of pre-crisis levels in 2022.Supply – Seats.Global airline seat capacity offered by airlines increased by 20% in 2021 exceeding the growth in passenger demand. Utilization - load factor.2019 passenger load factor was a record 82.6%, The 2020 average load factor was xx%, a level not seen since 1994. (ICAO). In 2021 the passenger load factors was 40%. The load factor is expected to recover to 60%, in 2022, a level exceeded in every year since 2005 until this crisis hit, and far below the 82.6% record set in 2019.\ Market outlook. Demand: ICAO is projecting that in 2022, passenger totals will be 26% to 31% less than 2019 levels. The forecast from IATA is that travel demand will remain subdued in 2022, at below 2019 levels. Supply: ICAO expects seat capacity will be xx to 23% less. Capacity is expected to continue to increase faster than demand in 2022, reaching 67% of 2019 levels.
Data sources.ICAO reports airline data for 193 national governments signatory states to the Chicago Convention (1944). IATA represents ~290 airlines operating scheduled and non-scheduled air services in 120 countries. Carrying 83% of the world’s air traffic, IATA members include the world’s leading passenger and cargo airlines. The illustrations are provided by Airbus and Boeing.