Air travel demand remains strong in the first half of 2024 as indicated by first quarter results posted by the world’s airlines in the past few weeks, with passenger traffic expected to exceed pre-pandemic levels this year. Yet demand is propped up against the backdrop of supply chain constraints and growing operating expenses, potentially limiting growth.
Demand appears to be outpacing airlines’ fleet capacity growth as airlines collectively lament over Boeing’s delivery delays in the first quarter. Earlier in the month, Dubai Aerospace Enterprise (DAE) CEO Firoz Tarapore said in its first quarter earnings call that its Boeing deliveries were “markedly lower”, having only received one aircraft from the American manufacturer in the first quarter and expects to receive an additional four in this quarter. Tarapore had added: “The only thing we can reliably expect from Boeing these days is a delivery delay notification as opposed to aircraft. So, we hope that they get their act together.”
Boeing is still recovering from the Flight 1282 Incident, where an Alaskan Airlines flight on a 737 MAX 9 aircraft saw a door plug blow out on January 5, 2024, also blew open the floodgates to a plethora of safety concerns surrounding Boeing aircraft.
The subsequent US Federal Aviation Administration (FAA) investigation into the company had initially grounded all MAX 9s in the US and later slammed its safety culture in a report. The report claimed Boeing’s safety reporting systems were “inadequate and confusing”, and the FAA limited Boeing’s output of 737 MAXs to 38 per month.
The impact of the FAA action reverberated across the aviation industry and is continuing as Boeing’s key supplier, Spirit Aerosystems (Spirit), are reported to be planning to lay off over 400 staff, according to an internal memo seen by local US media outlet KSN TV
In response to a query from Airline Economics, a Spirit spokesperson confirmed the news: “The recent slowdown in the delivery rate on commercial programmes compels a reduction to our workforce in Wichita. In the coming weeks, we will inform affected employees.”
Spirit had already limited overtime and hiring with the slowdown of 737 MAX output, according to a report by Reuters last month. And in its recent aircraft delivery update, Boeing revealed that only 24 commercial aircraft were delivered in April.
These delays are spilling over into airlines’ capacity and are, as a result, adjusting their networks to stave off the constraints. ING Research found that, in Europe, Ryanair had revised its estimate of 205 million passengers in the year down to 200 million. It also discovered that Lufthansa and KLM had revised their seat capacity downward for the full year. JP Morgan analysis by Jamie Baker found that “US airline capacity continues to be trimmed, supporting a recovery in domestic unit revenues”. Capacity growth in the second half of 2024 is expected to be approximately 3.5%, Baker added.
First quarter results echo similar testimonies of growing operating costs, such as higher lease costs of older equipment and lease extensions, as well as higher maintenance and labour costs. In particular, there have been a notable number of airlines announcing newly negotiated staffing contracts for pilots and other crew. Additionally, TUI had said the increased lease rates on its older aircraft, coupled with delivery delays, had a significant impact on its first quarter results. However, Cirium Ascend Consultancy analysis found that, despite these cost pressures, airlines were optimistic for a strong summer with “robust forward bookings and strong yields”.
The constraints on airline capacity have begun to filter down to the consumer. ING research found that European airline ticket prices outpaced inflation by around 15% in the first quarter of the year.
“Air fares are globally under upward pressure, but higher duties also play their part (especially in Europe),” writes ING senior sector economist Rico Luman. “This dynamic marks a different era, as increased competition of low-cost carriers previously weighed on rates for a long time.”
Luman added that the increased application of the EU’s mandatory emissions trading scheme (ETS) would add further pressure on airfares.
Supply chain, operational costs to impact airfares and airline growth
