Concerns about aircraft supply shortages affecting airlines may be "overdone" as carriers report soaring profits, a slowing global economy curbs new jet demand and the use of larger narrow-bodies with higher seat counts boosts capacity, a report said.
China's diminished demand for narrow-body aircraft is also expected to reduce the effects of fewer deliveries from Boeing and Airbus over the next few years, according to a report by Bloomberg Intelligence on Friday.
"Despite reports of airplane shortages, our analysis finds that global airline profitability, weak return on capital and plateauing lease rates mean there may be no lack of planes," George Ferguson and Melissa Balzano, aerospace and defence analysts at Bloomberg Intelligence, said in the joint report.
"Demand could be abating on rising narrow-body seat counts, the peak of geared-turbofan [engine] inspections and slowing global gross domestic product [GDP] growth, especially in China."
A global shortage of aircraft has been pushing up fares and forcing airlines to keep older jets flying longer. Some carriers, such as Emirates, have invested billions of dollars to retrofit their older jets as they await delayed deliveries of new aircraft.
Airlines around the world have struggled to increase capacity in response to rising travel demand as supplies of jetliners are limited by parts shortages, industry-wide hiring problems and overloaded repair shops.
Bloomberg Intelligence's analysis of Boeing and Airbus aircraft shortages shows 466 fewer narrow-bodies were built than planned, from mid-2022 to the beginning of 2023, as supply chains slow down the manufacturers' production rates.
This deficit could rise to about 825 aircraft by 2025 and more than 1,100 by 2026, if supply-chain glitches continue to limit manufacturers, the report said.
However, offsetting this gap are 3,000 narrow-bodies delivered during the pandemic in 2020 to 2023 when travel demand was weak, according to the analysts.
Another offset is the larger seat counts of narrow-body aircraft delivered by Boeing and Airbus, amid a growing trend since the pandemic for airlines to move towards larger narrow-bodies amid higher pilot salaries.
During most of 2024, Airbus averaged 202 seats per A320 family of aircraft delivered, which is 8.8 per cent higher than in 2018, according to the report. Boeing's increase has been slight at 1.3 per cent, but this is against the backdrop of much fewer deliveries and lacking certification on the 737-10, the largest of that line.
"As both airframers boost deliveries in 2025, the higher amount of seats per airplane will have moreof an effect, mitigating delivery slowdowns due to supply chains," the report authors said.
High profits
Another important metric is airline profitability, which the report measured using global airlines' earnings before interest, taxes, depreciation and rental (Ebitdar) as an indicator of core airline earnings.
"We generally see lower Ebitdar margins at airlines globally, which doesn't seem to indicate there is a shortage," Mr Ferguson said in a LinkedIn post on Friday.
Of the 29 airlines on which Bloomberg Intelligence collects consistent quarterly Ebitdar margins, the majority are recording lower year-on-year margins and lower compared to 2019 margins, which shows no shortage of airplanes and may even lead to deferrals, the report said.
The authors concluded that "profits shouldn't struggle if airliners are few."
Weaker China demand
Slowing global economic growth, due to wars and trade disputes, will also curb jet demand over the coming years.
"A slower global economy likely means fewer narrow-body aircraft will be needed over the next few years, alleviating some of the potential shortages from supply-chain problems and strikes," Mr Ferguson and Ms Balzano said.
Global economic growth is projected to reach 3.2 per cent, unchanged from July forecasts, the International Monetary Fund said in its latest World Economic Outlook on October 22. Growth is forecast to hold steady at 3.2 per cent in 2025, amid heightened uncertainty due to conflicts, increasing trade tension, as well as elections and leadership changes in major economies worldwide, it said.
The IMF cut its growth forecast for China, the world's second-largest economy, by two-tenths of a percentage point to 4.8 per cent in 2024. Its 2025 forecast was unchanged at 4.5 per cent.
China's reduced demand for narrow-bodies will probably ease aircraft shortages from Boeing and Airbus over the next few years, the Bloomberg Intelligence report said.
Slower GDP growth after the pandemic and increased deliveries of Chinese manufacturer Comac's C919 planes are the main reasons, it said.
"Our base-case scenario sees 100 less deliveries into China per year over the next five years, largely due to lower growth as globalisation ebbs, perhaps accelerated when [US] president-elect Donald Trump takes office," the authors said.
"In a scenario where China bounces back to 5 per cent growth, demand is on pace to return to pre-pandemic levels. With less expansion, it could be 150 fewer planes per year."
'Clipped wings'
Still, global airlines throughout the year have complained about the shortage of planes costing them missed growth opportunities.
Emirates, the world's biggest long-haul airline, last week said its growth has been curtailed by late aircraft deliveries and other supply chain constraints, as it closely monitors troubled plane maker Boeing's turnaround efforts.
Abu Dhabi's Etihad Airways last month said it plans to invest nearly $1 billion to retrofit its older Boeing 777 and 787 Dreamliner aircraft. The move is aimed at capitalising on strong air travel demand amid a shortage of new jets. Etihad has a fleet of nine Boeing 777 passenger aircraft and 43 Boeing 787s, according to its website.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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