Growth in the Asia-Pacific region is expected to help drive global airline revenue over $1 trillion for the first time in 2025, according to Avolon’s outlook report. The lessor’s paper forecasts that the region will lead the charge in terms of adding capacity compared to all other regions combined in 2025.
“The aviation outlook for 2025 is robust, reflecting continued growth in travel demand against a backdrop of structural under-supply of new aircraft,” said Avolon CEO Andy Cronin. “Asia-Pacific will be the engine of that growth, and we anticipate global airline revenues will exceed the $1 trillion mark for the first time.”
The lessor said it anticipates Chinese companies to order 800 aircraft this year.
For 2025, airlines’ net profit is estimated to rise 16% to over $36bn, marking a third year of growth. In addition, aircraft deliveries are expected to increase by 20% this year, signalling the fastest ramp-up in two decades. The lessor predicted that orders aircraft delivering in 2040 are expected this year.
“Airline profitability in 2025 will build on a strong performance in 2024 where lower oil prices helped offset higher maintenance and labour costs,” said Avolon chief risk officer Jim Morrison. “While the higher demand for air travel is evident we are also entering a low visibility operating environment.”
The report said that a third year of profitable growth for airlines will help recover losses made from the pandemic that had erased a decade of profitability.
The report added: “The markets that were first to recover – North America and Europe – are still growing, but a slower pace, while Asia-Pacific gains momentum. Airline revenues have returned to their long-term average share of world GDP, with an additional $100bn of revenue potential if peaks experienced last decade are achieved.”
“The US airline industry has often set trends ahead of other regions,” the report stated. “While it recovered first after Covid, it has showed the first signs of slowing. Low-cost carriers (LCCs) leveraged the pandemic recovery to capture market share, growing domestic capacity at twice the market rate. Network carriers are now competing with LCC fares in economy class while driving yield in business cabins and international routes. LCC profitability has been challenged as costs converge between US carriers due to new labour contracts.”
This was evident with Spirit filing for Chapter 11 bankruptcy towards the end of last year – the first major US airline to do so in a decade. With the US setting the trend, one does wonder if this will perhaps signal worrying signs ahead for LCCs in other regions.
“While European LCCs, reported softer fares in Q3 2024, they continue to produce strong earnings,” the report said. “Network carriers in Latin America have been adding capacity faster than LCCs, while capacity in Southeast Asia is still recovering. Loyalty-driven credit cards have transformed the earnings potential of network carriers, but the lessons learned in the US will need to be applied differently to different markets.”
The report added that further consolidation in the European airline sector is expected this year, with TAP Air Portugal and Air Europa seeking outside investors. Avolon seemed confident in consolidation, forecasting that a major airline merger will be agreed on each continent in 2025. “Scale matters for airline resilience through the cycle,” Avolon said. “Consolidation will continue to be driven by airlines’ need to secure aircraft and fortify balance sheets.”
Lower oil prices last year offset a 19% increase in maintenance costs and 8% rise in labour costs, facilitating a return to pre-pandemic levels of profitability for the industry. This trend, Avolon said, is expected to continue in 2025 with a projected 16% increase in the sector’s net profit to over $36bn for the year. However, currency weakness in countries such as Japan, Latin America, and Southeast Asia exposed unhedged airlines to foreign exchange risks. The Brazilian real, Avolon notes, was hit particularly hard with it down 22% against the US dollar in 2024. The report noted Brazil’s GOL, which filed for bankruptcy at the start of 2024, as well Azul which attempted its second out of court restructuring.
“A potentially weaker US dollar in 2025 would be a tailwind for airlines in emerging markets that rely on local currency sales to pay for fuel, maintenance, and aircraft costs,” the report said.
Securing aircraft for expansion and fleet replacement will continue to be a major challenge in 2025, with slots for new aircraft sold out beyond 2030.
With the ongoing supply chain issues, lease rates have risen as much as 50% in the past two years are expected to remain strong this year, along with aircraft valuations.
“In this environment, lessors will benefit from continuing strength in lease rates and valuations as airlines compete for scare aircraft,” continued Cronin. “Those lessors with strong balance sheets and attractive orderbooks of new technology aircraft are best placed to outperform and serve the growth needs of the world’s airlines.”
The report added that the net zero emissions goal for the industry “remains firm”, but determining a timeline is challenging.
“Transitioning the global fleet to new-technology aircraft is the most impactful near-term action that can be taken to reduce aviation’s carbon impact,” said Avolon in its report. “Lessors are leading the fleet transition with nearly 60% new-technology assets by value under management today compared to the global fleet average of 53%.”
The report noted that energy transitions typically take two generations – such as wood to coal, oil to gas, and now currently transitioning to wind and solar. “Each transition has spanned more than 40 years, and each required substantial policy support,” the report stated. “Renewable energy generation will surpass coal for the first time in 2025.” The aviation transition to sustainable fuels will require $4.7 trillion in financing.