The end of the year is nigh, and it is time to summarize where we are and where we are going as an industry. Here’s our viewpoint on the current situation and our forecast of where we are headed in 2023.
Let’s start with the current situation, focusing on demand and the all important supply chain.

Demand

Airlines are continuing the pandemic recovery around the world at various rates. We are at about 95% of pre-pandemic traffic in the US, 88% in Europe, and just over 50% in Asia can be largely traced to China’s lockdowns and zero-covid policies. While those are hopefully easing, we forecast that the US market will recover to the “new normal” in early to mid-2023, Europe in the last half of 2023, and Asia not until late 2024 or early 2025.  But that new normal is not what it was before the pandemic. The true answer for when we return to normal is never, as normal has changed.

The differences include business travel not fully recovering because of technology substitution through desktop videoconferencing. The difference is the question of whether this trip could have been accomplished virtually rather than in person. We forecast the last 10-15% of the business travel recovery to “normal” simply won’t be there.

While in the short-term, the pent-up demand to meet customers and get to know new individuals after the “great retirement” impacted business relationships has been strong, that impetus will be impacted by cost-cutting measures, and business traffic will plateau in 2023. That isn’t good news for airlines, who rely on high-yield business travelers.

The Supply Chain

Aircraft OEMs struggle with the supply chain, including obtaining enough engines to meet their planned production schedules. The engine manufacturers are facing shortages of investment castings they need, and those casters are facing labor and material issues in their supply chains. The supply chain crisis will continue on through the majority of 2023 in the US and into 2024 in China as production ramp-ups prove difficult. We forecast that this will continue to fuel inflation in multiple industrial sectors, as we’ve seen some outrageous increases in pricing due to high demand and limited supply for some components. We’re going to tire of hearing about the supply chain and resulting constraints for another couple of years.

The major focus of the OEMs in 2023 will be ramping-up production and solving supply-chain issues. We expect continued consolidation at the bottom of the market, including Tier 3 and Tier 4 specialized manufacturers who may need capital to expand their capacities to meet OEM targets. We don’t expect to see Airbus at 70 narrow-body units per month until 2025, nor Boeing back to 60 narrow-body units any time soon.

The OEMs are optimistic that wide-body demand will improve and that production rates can begin to crawl back to pre-pandemic levels. We forecast that this will occur slowly, with production rates growing by only 1 or 2 aircraft per month. Demand should begin to return in higher numbers as routes re-open, particularly in Asia, the last market to recover, in 2024-2025.

Our Ten Key Forecast Predictions for 2023

1. Airlines in the US will fully recover traffic to 2019 levels, but with a higher mix of leisure to business travelers than pre-pandemic. While the loss of business yields will be partially offset by an increase in “premium leisure” travel, that market will also fade as pandemic fears and demand for additional space yield to economic realities. We foresee only about 30-50% of the new premium leisure customers remaining long-term. Combined with a business travel plateau, airlines will find themselves cutting costs in 2023 to counterbalance an inability to maintain higher yields during high inflation.

2. Fuel prices will continue to fall, particularly for the US market, where domestic demand and be sustained on domestic supply for the foreseeable future. Of course, while weather events or geopolitics could erupt at any time to send things in the opposite direction, this isn’t something we believe will happen in 2023.

3. Switching to SAF to reduce carbon emissions, which the industry is counting on as a key element of future climate change solutions, can’t occur without a massive increase in infrastructure and will be a trickle in 2023. Several JetA refineries will need to change over to SAF, farmers will need to provide the appropriate feedstock, and the economics of producing SAF will need to achieve critical mass before it can be readily adapted. So, for 2023, lots of talk, but only an extremely tiny amount of SAF will use on a percentage basis. The industry will need massive infrastructural change to allow this, and it can’t happen fast enough.

4. On the regional aircraft side, we forecast that Embraer will announce a new 90-seat turboprop model at the Paris Air Show. This will be the first all-new regional aircraft in quite some time and will likely provide a step-function improvement in operating economics over existing models. We expect it to be very well received, including a multi-class model with premium classes that meets US scope clauses..

5. We forecast that Boeing will obtain a compromise extension of its 737 MAX 7 and MAX 10 certification time frames. Still, the FAA will require the synthetic third AOA sensor, some upgraded crew alerting, and a cut-off switch for the stick shaker to satisfy international regulators and maintain reciprocity agreements. Boeing will likely have until YE 2024 to certify the airplanes and until YE 2025 to retrofit the improvements into existing MAX models.

6. We project that Airbus will fall short of its 700 aircraft deliveries in 2023 due to supply chain constraints but will reach that target in 2024. The A350 series will also obtain a key order in 2023.

7. We forecast a shakeout among Urban Air Mobility providers to begin in 2023, with at least two of the players planning new aircraft unable to meet their goals due to funding shortfalls. While we expect flying prototypes to take to the skies at four companies in 2023, none will complete certification before 2024.

8. Low-cost carriers in North America and Europe continue to be well-positioned and primed for profitability in 2023. Ryanair and Wizzair in Europe, Frontier, Allegiant, Spirit, Breeze, Volaris and Viva Aerobus in North America, Azul, GOL, JetSmart, and Viva Air in Latin America should all be profitable as the recovery to 2019 traffic levels is achieved in those regions.

9. Former low-cost carrier Southwest is facing slower growth in revenues than in costs. It may fall behind the other major US carriers in profitability until it can replace its large 737-700 fleet with the MAX 7. Southwest’s profit growth may be more limited in the near term, as competing carriers modernize their fleets faster.

10. The pilot shortage in the US will continue unabated and constrain capacity growth. The 1,500-hour requirement continues to be a major impediment that Congress will not address. While the emergence of 19-seat electric aircraft will enable a new generation of pilots under Part 135 will meet less restrictive requirements, who can gain experience and move up to Part 121 carriers, we are still years away from electric airplanes.

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President AirInsight Group LLC

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