Our editors at the IATA AGM in Istanbul heard discussions on aviation sustainability, OEM supply chain frustrations and other key issues.

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Rush Transcript

 

Karen Walker:

Hello everyone, and thank you for joining us for Window Seat, our Aviation Week Air Transport Podcast. I'm Air Transport World and Group Air Transport editor-in-chief, Karen Walker. So, welcome on board. And this week I'm joined by my colleagues, Lori Ranson, senior analyst, Americas at CAPA, Adrian Schofield, senior editor, Asia Pacific at Aviation Week, and Jens Flottau, executive editor, Commercial at Aviation Week.

And we are all in Istanbul where we hosted the ATW Annual Airline Industry Achievement Awards, and then went to cover the 79th AGM of the International Air Transport Industry Association, or IATA. Now, this year's a AGM and its adjacent conference saw a record attendance of more than 1,500 people, that included the CEOs and other senior executives at airlines from around the world.

There was definite ere feeling of an industry returning or even returned to normal. We heard from my IATA's chief economist, Marie Owens Thomsen, who spelled out their latest forecast for the industry this year. And for the most part there was good news that reflected that return to normal.

The world's airlines are expected to post a $9.8 billion net profit this year, more than double what had been anticipated just six months earlier, as the economic and other conditions have improved. Total revenues are expected to be $803 billion, the first time they will have exceeded $800 billion since 2019.

And operating profit is now expected to reach $22.4 billion, which is way more improved over the December forecast of $3.2 billion. Then, additionally, they expect some 4.35 billion people to fly in 2023. So, that's getting really close to the 4.54 billion who flew in 2019.

"However, for all the big numbers, the industry's net profit margin will be a very weak 1.2%," IATA says. Owens Thompson put that in perspective saying it means airlines will make just $2.25 profit per passenger, or as she said, the price of half a cup of coffee in Geneva. And with that, she gave what was probably one of the best liners of the conference, "Maybe we should think about asking for tips," she said.

So, with that background, I'm sitting here with my colleagues who have all done many of these AGMs, and we'll have a discussion of what they saw and heard and what some of the key talking points were. Jens, I'm going to start with you. You definitely one who's seen many AGMs. What was the big thing that struck you from this one?

Jens Flottau:

Well, for all the good news that you've mentioned already, there's also another side to this, which is supply chain issues, aircraft delays, engine issues. We've reported about that over the past few months extensively. I remember doing a story late last year when Guillaume Faury, the Airbus CEO, told us that he thought, at the time, he has seen the worst.

Well, of course, turns out six months later that statement was false. He hasn't seen the worst. It's getting worse and it seems it's still getting worse. Much of the focus is on engines, and within the engine industry, the focus is on Pratt & Whitney, the GTF engines that do have clear durability issues that affect airlines around the world.

Recently, we've done a story trying to figure out how many aircraft are actually on the round because it's very hard to determine precisely, but we've come up with more than 200, and there's obviously lots of aircraft in interim dangers waiting for fixes, not yet grounded.

Utilization is low. It's a huge problem almost across the board. It does raise a lot of questions going forward as well. Near-term, as far as for production rates as the industry grows, will there be enough engines for aircraft that are produced in Toulouse and Seattle, will there be enough engines for MRO shops?

We already heard about competition between delivering engines to the final assembly lines versus to the airlines, to the MRO shops. Then, longer term, if engines are so undurable, so not reliable, then the question will be raised, what are the airlines going to order in the future? It's a slippery path for engineer OEMs, that clearly, they need to get their act together.

That's the message I've been hearing here from a lot of airlines, that they're fed up. Willie Walsh said they're beyond frustrated with the situation. So, generally, economic outlook, great, back to growth, but operationally, partly, it's really a nightmare.

Karen Walker:

Yeah, absolutely. Obviously, the IATA Board of Governors meets here during the AGM, and that's the top CEOs of their member airlines, and clearly that had been a big discussion point. As you said, Willie Walsh, the director general at IATA called it beyond frustrating. And of course, he was formally the CEO at IAG, so he clearly understands that from an operator's perspective.

I think it was, again, Owen Thomsen who said, these days, if a plane is six months late, it's considered on time, and you could just hear the airlines nodding in agreement, and they're fed up with it. Adrian, from the supply chain issues, what were you hearing there?

Adrian Schofield:

Similar sort of things. A lot of airlines affected by the Pratt & Whitney engine issue, aircraft on the ground. I talked to Hawaiian Airlines, Air New Zealand, and ANA about that issue, and ANA was saying that they've had between 15 and 20% of their Airbus narrowbodies on the ground for that reason. So, it's really about how they adjust to that, what operational changes they have to do to flex around that.

Hawaiian's been operating some of its A330s on some of those former A321 routes due to that. So, just in terms of supply chain, just how you... And they all realize that it's a problem much bigger than them. It affects them, but I think they feel a bit helpless in the face of it.

Karen Walker:

Yep, absolutely. Lori, what were your thoughts in terms of that being a focus area among the airlines, from the supply chain perspective?

Lori Ranson:

It's definitely a focus area. I spoke to Air Canada, and their A321 XLR is going to be pushed out to 2025, so they're having to get interim lift this year and next year. And they said that the issues with the Pratt & Whitney engines is actually reducing the time that they can actually fly their A220s, which is not ideal for an airline, as we all know.

Another thing that was interesting to me is, United said that it was watching the MAX-10 certification, which is to be determined, United said, and it would affect their outlook and order book at this point because it's just so uncertain. And I believe WestJet said their delivery date for the Dash 10 was September 2024, but I believe that they're making some contingency plans because we all know that that's not going to be a reality.

Karen Walker:

Yeah. Again, what you're hearing, of course, it's a shared pain. It's not just happening in one region or one type of airline. So, I definitely got the impression, here at the AGM, it was something that was a common issue for them to all talk about. Another big topic, it just gets bigger every year now, is sustainability. And we all know, of course, that this industry committed to a goal of being carbon net-zero effectively by 2050.

And that commitment was actually made at the Boston AGM, which was in 2021, the first one that had happened after the, well, in fact, we were almost still at the tail end of the pandemic. I don't don't know what anybody... Again, I'm going to go around and ask you, Jens, you and I were just at the final wrap up with Willie Walsh briefing, I just got a bit of the impression of just how it's starting to really sink in just how difficult that 2050 target is going to be.

Jens Flottau:

Yeah. Boston, obviously, was an important start, but it was relatively easy in the sense that they committed to it, but now the action has to follow and the details have to follow, the roadmap has to follow. And I agree with you, I think airlines are now recognizing how hard that is, how difficult it is to even settle on interim steps, on interim targets that get you to 2050.

A lot of the comments that I've heard, to me seem to indicate that it's really going to be tough. And not officially, but behind the scenes people are starting to doubt that 2050 is realistic. It doesn't mean they won't be ambitious in trying to get as closely to net-zero as they can, but I think it's fair to say there is a realization that... Some will tell you, behind the scenes, it's impossible, some will say, "We'll try it hard as we can," but bottom line, it's going to be extremely tough.

Karen Walker:

2050 is not that far away. And some of the things, there was a huge lot of discussion about sustainable aviation fuel, SAF, and how on earth to, first of all, increase the production, and to have it everywhere. We just heard the CEO of RwandAir, who is just taken over as the Chair of the Board of Governors at IATA, and she was just saying, "We have nothing in Africa. There is no SAF supply in Africa. So, even if we can get it, it's going to be really, really expensive," because they're going to have to go and try and find somebody else's supply.

And 2050 isn't that far away. If you've got nothing, even if somebody said tomorrow, "Let's start as a SAF production plant," how long is that going to take to do, et cetera, et cetera. So, I think there's a lot of talk about SAF and the SAF supply. Jens, what do you think about that?

Jens Flottau:

Well, SAF is one part. It's 62% of the solution, as IATA says. I was quite annoyed until very recently about the lack of action that I've seen from aircraft OEMs on new aircraft programs. And I was telling, "You guys, you can't be serious. Don't leave it all to SAF, don't leave it all to the engine manufacturers. Do something." But for a long time we haven't heard a lot apart from a AAM projects and small hydrogen aircraft.

Now, I think that seems to be changing slowly at least. We've heard Boeing talk a lot more about the truss-braced wing project that could lead to a real product in 2035. We've also heard Airbus talk about an A321neo successor that is conventional for the mid-2030s. Now, that's, of course, 12 years from now, and it's still too long if you asked me, but at least they're talking about this, they're becoming more concrete, and I feel better about it than I did just three months ago.

Karen Walker:

Interesting. And Lori, in the United States, of course, the picture's changed really, hasn't it, of late? It's interesting because for a while it looked like the Americans, they're not really interested in this climate change thing. Now, because of different government incentives and everything, now that's really stepping up production or the incentives to encourage production of SAF. So, we're in a position where America's really taken a lead in some of this.

Lori Ranson:

Yeah. I think there's not a day that goes by that you don't see some SAF announcement or SAF investment in the US, and that's good, and what the government here or in the US is doing is positive. The problem is, there is no harmonization among governments when it comes to SAF or SAF production or incentivizing SAF production because you have the opposite happening in the EU.

So, I think that's what a lot of airlines are frustrated with as well is, there's no organization or entity that's taking the lead to say, "How can we harmonize this to make to jumpstart SAF production?" And I think that's a real problem, and I don't see a solution to that anytime soon.

Karen Walker:

Adrian, what are your thoughts?

Adrian Schofield:

Well, among the Asia-Pacific carriers, it's interesting that more countries are looking at this idea of the SAF mandate like Japan is looking at that. And just very recently, Qantas, an airline, called for its government to mimic some of these other countries and bring in a SAF mandate. And who would've thought an airline asking for more regulation in that area. But they see it as important, and they see that as a way to help incentivize and stimulate the industry if there's a SAF mandate.

And Lori's right, you hear a lot of SAF announcements, but the ones that really get my attention are when an airline commits to a SAF-uplift agreement. So, they're saying, "Yes, we will buy X amount of SAF," and that gives the SAF industry confidence if there's going to be someone there to buy it. I think that's one of the best things that airlines can do to stimulate the SAF industry is just to give them assurety that there's going to be a market for it.

And similarly with electric aircraft, I'm sure you know Air New Zealand put a marker out saying, "We replaced our Q300s. We want it to be either electric aircraft or hydrogen-powered, or hybrid. And okay, manufacturers come to us and tell us what you can do." And I think that's another way that airlines can push manufacturers to develop in that area.

Karen Walker:

Right. Yep, exactly. And again, there was a huge amount of talk about the SAF side, not so much, as Jens said, the other technical solutions and things, because again, when it came to the aircraft, I think they're mostly focused on trying to get the aircraft they've already ordered. But again, it was interesting. I think, again, Willie Walsh was saying that... I think he was asked, "Well, what are the steps that you're doing? What steps are you doing to increase SAF?"

And he basically said, "It's a bit too early to talk about that. There was a big discussion at the Board of Governor's meeting, but we will have those steps. It is critical and it will involve everybody." So, I think that's going to be interesting. Now, I mentioned, at the beginning, some of the big profit and the forecast numbers, the profit and revenue that's anticipated.

So, still nice to see that, as a whole, the industry will be profitable, albeit on a much reduced basis. But that's pretty good in ‘23 considering where things have been in the pandemic. But of course, it's not uniform. So, again, the North American carriers are the leaders, or expected to be the leaders again in terms of making a profit this year. Then, I think it was Europe, and then the Middle East carriers.

But that still left Asia-Pacific, Africa, Latin America will all, as a collective, each of their regions will be in the red, albeit they're seeing improvement, they expect improvement, in other words, less losses in '23 versus '22.

A huge area that you cover, Adrian, Asia-Pacific, and of course, this is the year that China opened up in January, which was earlier than people had anticipated. That's still a region that's expected to be in the red again this year. So, just tell us a bit about what you were hearing from some of the carriers in your region that were here.

Adrian Schofield:

Okay. Yeah. So, international recovery has come later for Asia-Pacific because a couple of the major markets like Japan and mainland China were slower to reopen borders, and they're pretty key markets in the region. But now, China's technically reopened, but there are still some hurdles to travel, there are still a few little regulatory frictions there.

But really, international demand is just surging way past supply. And one of the big things for airlines is, well, how do we tap into that demand, and so everyone's scrambling to lease more aircraft, hearing from Malaysia Airlines looking for A350s, Qantas to deal with Finnair to wet lease some A330s, Air New Zealand, Indigo wet leasing 777s from Turkish.

Then, the orders is something that I've been hearing a lot about. At the last AGM in Doha, our orders were starting to emerge, but a lot more this time. And the Qantas CEO, Alan Joyce, was saying that, talking to manufacturers, he's heard that, around the industry, there are 200 aircraft competitions underway at the moment, and everyone's looking at orders now.

So, Thai Airways is looking at a big widebody order, Malaysia Airlines are looking at a big narrowbody order, reportedly, according to Reuters, Indigo is looking at a massive order for 100s more aircraft, Qantas is looking at A330 replacements. So, that's one of the big issues. Then, just quickly, finally, there are still some concerns with some pretty major traffic flows, like Japan, in leisure outbound.

It's still a concern. It's a big deal to a lot of airlines. It's been very slow to recover. There are signs of improvement happening, but it's still lagging quite a lot. And just as I said, some of the remaining regulatory frictions in the China market, there's very limited, well, not limited, but there are some important countries that aren't on their approved list for outbound tour group travel, and that's a bit of a headache for some airlines.

Karen Walker:

Jens, you're based in Frankfurt. There was a good presence, I think, here from the European carriers. What were the key takeaways there?

Jens Flottau:

So, my personal takeaway was my first landing at the new Istanbul Airport. I landed at one of the, I don't know how many runways they have, and I counted, during taxi in, we crossed, I think at least two more, if not three more runways. Then, we went around the terminal and must have parked at the very last gate there somewhere. So, I think we were taxiing for half an hour.

I'm just saying this because I knew this airport existed, but I hadn't seen it before, and I was just stunned by how big it is. It must be, by area, 10 times Frankfurt Airport, since you mentioned I'm from Frankfurt. So, European carriers, looking at what Turkish Airlines are building up here, must just be very concerned the amount of space that's available, the support by the government that's available, the investment that Turkish appear to be putting into the airline.

They haven't closed the order that I had talked about yet, but anyway, it's sure it's coming. And speaking of support, that's probably exactly the opposite of what European Airlines are experiencing in their own home countries. We've talked a lot about the Amsterdam case where the Dutch government is trying to cap movements, we are hearing about a French government study looking at what a good way would be to limit movements at the three Paris airports.

We just talk to Tim Clark, the Emirates Airline President, this morning, and he said he's very concerned about these two examples becoming a trend for Europe. So, there's all these concerns about regulatory action that's getting worse from the airline perspective. There's also the question out there about European airline consolidation.

We've just heard Lufthansa is taking over ITA, TAP’s up for sale. But the big question that hangs over all of this is, will the European Commission actually approve those deals, and under what conditions? Will the conditions be tedious enough for airlines to call the deals off? So, that's the backdrop, obviously, like in the US, demand surging, not enough capacity available, but many headaches still.

Karen Walker:

Yeah. And again, we heard a lot of criticism of the European system, if you like, both the air traffic control, like, whenever is single European sky going to actually be implemented. And I think, again, Walsh referred today to greenwashing where they've got these policies of banning or reducing short-haul flights, but they're not addressing European single skies that would have, as he said, three or four times the effect in terms of reducing emissions.

So, there was a lot of that, a lot of frustration expressed about that, and about the ATC disruptions, the labor stuff. So, you're right, the European carriers are still struggling with a lot of that. Plus, the Russian airspace closures is affecting a lot of them, like Finnair is a classic example of they had these really important routes to Asia, they can't use them, but Chinese carriers are, so...

Jens Flottau:

And part of the Europeans are suffering from the Russian aerospace closures, in full transparency, others are benefiting, Turkish being one of these carriers. If you look at the Middle East profit figures that are expected for this year, 2 billion, not great, but at least a profit, part of that is the fact that they can fly over Russia, they can fly to Russia. So, a lot of the traffic that comes from anywhere into Russia is going through the Middle East, and there's money to be made from that.

Karen Walker:

Right. So, Lori, what about in terms of, even within the Americas, you've got very different things going on still, is that right, between North America and Latin America? As I said earlier, the American Airlines, or the Northern American Airlines are supposed to have a fairly decent profit. The margins will still be tough, but not the case in Latin America each. What were some of the key things that you were hearing from some of the airlines there?

Lori Ranson:

Well, I think demand still remains strong, and we know it's going to be a really strong summer in the Trans-Atlantic. I think the big question that airlines can't answer is, when does this pent-up demand end, when do you get back to a new reality? And US Airlines, North American Airlines, they don't particularly have an answer for that. So, some think it could last a couple of years, others don't think it could last that long. So I think that's something to watch out for in the next couple of years.

In Latin America demand is really strong. I think the loss this year is driven by a lot of things, currency fluctuation, obviously. A lot of airlines did not get help during the pandemic, so they're doing their own restructuring. Azul just completed their restructuring with lessors to be able to be in a better shape going forward. You've got a lot of taxes in Latin America, so airlines are pretty much fighting governments all the time.

So, those are the two different dynamics. But the good news is, demand in each region remains pretty strong. In North America you've got some pretty significant pay rates that are coming, pay hikes that are coming online very soon with these pilot deals. And the question that we have to ask ourselves or ask the carriers is, what happens in the next downturn? And I don't think anyone's willing to answer that at the moment, but it's something to think about.

Karen Walker:

Yeah, absolutely. So, some of the pilot unions, in particular in the Americas especially, have been very aggressive this year, really winning some big deals. So, all of those were conversations going on. But I did, over all, you just kept hearing, I don't know whether they were just enjoying all being back in a big room again together and things feeling normal, but people kept saying, "But I'm optimistic." So, despite all these things that we kept hearing of the troubles and challenges, which is how this industry is, they're still optimistic, people are still going to want to fly.

Adrian Schofield:

Yeah, absolutely. And particularly right now, it's easy to get seduced by this huge wave of demand that's exceeding supply. But Lorie's right, I wonder also, I'm sorry, I know I'm meant to be talking about optimism, but I also wonder about once the pent-up demand goes away and once more capacity comes back into the international market, what happens to demand? It is going to go down.

And I've heard people recognizing that the yields we are getting now, that's not going to last forever. So, I guess it's a case of doing what they can to leverage that now, but also keep an eye on the future, so don't over-commit. Do what you can to tap into that, but don't create problems for yourself down the line.

Karen Walker:

Yeah, because even though, as I said again and again, the margins are razor-thin. What's happening at the moment is that they've actually got high yields because there's such high demand on capacities and that... And they're all saying that they won't fall into that trap again, but everybody here in this room knows that we'll see those cycles again, and then the yields will get trashed. So, let me just quickly ask each of you, have you enjoyed this AGM, again, just to say, relative to all the AGMs you've been, have you enjoyed this one, Adrian?

Adrian Schofield:

Oh, absolutely. I love talking to the CEOs, and some of them I've seen a number of AGMs, so it's good to kind of catch up and just hear from them what's really going on in the industry, and getting some of that big-picture stuff that we hear in the main sessions. It's really in invaluable conference, both on the social side and on the professional side.

Karen Walker:

Lori?

Adrian Schofield:

I agree with Adrian. It's been really useful just to sit down and talk with some people and get their insight about what's happening, and meet different people from around the world and catch up with old friends.

Karen Walker:

Excellent. And Jens?

Jens Flottau:

I just hope the next venue has windows, but that's a small point of criticism. I hope Tim Clark listens to this.

Karen Walker:

Okay. But of course, you'll also be heading to the Paris Air Show later this month, and there's almost too many windows at that one, too much outside time, isn't there? That's a tough show on the feet. Lori, Adrian, Jens, thank you so much for, very enjoyable working with you here and for sharing your insights just now.

I know we'll be together again next year when the AGM will be in Dubai, hosted by Emirates. Thank you, also, to our producer, Guy Ferneyhough, and of course, thank you to our listeners. Make sure you don't miss each week by subscribing to the Window Seat Podcast on Apple Podcasts or wherever you listen. And until next week, this is Karen Walker disembarking from Window Seat.