Deception in Paris: The biggest plane order in history can’t hide the truth

The backlog for existing orders already stretches out almost a decade. IndiGo’s massive order, for instance, probably won’t be delivered until somewhere between 2030 and 2035 at best.

The industry, from manufacturers to carriers to the airport infrastructure, shed an enormous number of employees in response to the pandemic and has struggled to attract them back or replace them with suitably skilled people even as demand for travel has surged.

According to the International Air Transport Association (IATA), global domestic passenger traffic surpassed its pre-pandemic levels in April while international traffic reached about 84 per cent of its pre-pandemic levels. Most of the Asia Pacific carriers believe they will return to pre-pandemic levels in their international businesses next year. Qantas, for instance, has said it expects to achieve 100 per cent of its pre-COVID capacity in March next year.

There’s a shortage of capacity, created partly because carriers mothballed or offloaded planes during the pandemic and have struggled to return capacity to their fleets in line with the rebound in demand. A skilled labour shortage is also compounding the problems they’ve experienced.

That’s resulted – as imbalances in supply and demand always do – in a sharp spike in fares that is flowing through to fat margins and record profits for the better-managed carriers.

Singapore Airlines, which lost just over $1 billion in 2021-22, last month reported a record profit of about $2.5 billion for the year to March. Qantas, which lost $1.9 billion last year, expects to post an underlying pre-tax profit of approximately $2.4 billion this year.

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For an industry that generally suffers from over-capacity and sub-economic returns, the current settings are attractive, even if their passengers are disgruntled. However, the industry’s history suggests those settings won’t be sustained and that, even if demand were to hold up, carriers will end up adding too much capacity.

The unveiling of the livery of yet another Middle Eastern airline at the airshow, Saudi Arabia’s Riyadh Air – which has an ambition of carrying more than 100 million passengers to more than 100 destinations by the end of the decade after beginning commercial services in 2025 – is a case in point.

It’s just what the market doesn’t need, another sovereign-backed airline throwing untold billions at forcing an entry into the market.

For the moment, at least, some discipline will be enforced, unintentionally, by the manufacturers.

Their existing order books stretch beyond the end of this decade but continuing supply chain bottlenecks – their suppliers have been as labour-constrained as the manufacturers and carriers – have throttled their production. The best guesstimate is that it could be another two years before those issues are resolved.

Demand for air travel is highly correlated to global economic growth, so a global recession, which looks possible and even probable, would be a shadow over the sustainability of the industry’s bounce back from the pandemic that nearly destroyed it.

If all the orders in the Airbus and Boeing queues could be delivered on time to carriers and aircraft leasing companies, the market would be flooded with capacity.

There are near-term and longer-term question marks over demand.

As interest rates continue to rise to combat decades-high levels of inflation, economies will slow. Demand for air travel is highly correlated to global economic growth, so a global recession, which looks possible and even probable, would be a shadow over the sustainability of the industry’s bounce back from the pandemic that nearly destroyed it.

Meanwhile, interest and leasing costs have risen sharply and fuel costs remain relatively high.

Longer term, airlines face structural challenges from the increasing pressure to curb their emissions.

IATA has estimated it will take about $US5 trillion ($7.5 trillion) for the industry to achieve net zero by 2050. That would require the development of new fuel sources at a massive scale and probably significantly increased cost, and would act as a curb on the global fleet’s expansion.

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Airbus and Boeing, the dominant manufacturers, expect to benefit from the drive for fuel efficiency. They expect there will be about 40,000 new planes needed over the next 20 years – half to meet growth in demand and half to replace less fuel-efficient aircraft. The strength of future demand will determine how accurate that forecast is but clearly, whatever its size, the nature of the global fleet will have to evolve.

The Paris air show was a celebration of the recovery the industry has made since the depth of the pandemic.

However, the narrow base of the demand for new orders points to some of the challenges and uncertainties that the industry (and incoming Qantas chief executive Vanessa Hudson) will confront over the next decade … or two or three.