Commercial aviation faces its most uncertain future in decades. COVID-depressed demand is now resurging, but there are many uncertainties and challenges for operators and manufacturers to manage.
The commercial aviation industry is facing a tidal wave of demand—passenger air travel has largely rebounded from COVID-19 lows, aircraft orders are being placed at an aggressive rate, and suppliers, operators, and OEMs are feeling pressure to deliver at a level that is straining production capacity and workforces.1
We hear a similar story from OEMs and operators. Major manufacturers have plans to ramp up production and are facing challenges in scaling capacity and supply chains. Operators want to capture surging demand but face shortfalls in pilots and ground personnel and are eager for new-generation, more fuel-efficient aircraft.
However, there are reasons to question the duration and magnitude of this increased demand. Inflation is at a level not seen in developed economies in decades, different economies are on divergent trajectories, and experts disagree on the effect of central bank measures to control inflation and their potential to overcorrect and cause a recession. Consumer confidence is taking a hit as economic pressures increase. Adding to the burden, high fuel and oil prices have increased costs for airline operators, which translates to higher ticket prices.
Beyond economic concerns, operators and manufacturers are grappling with other major disruptions: the effects of travel restrictions and the sudden reopening of borders in China, the war in Ukraine, and the resulting restricted airspace, labor shortages, and supply chain complications. Sustainability issues, for many years a secondary concern, are becoming more urgent, prompting and perhaps forcing operators and manufacturers to revise long-established practices.
The commercial aviation industry is facing an uncertain future with arguably more unknowns ahead than at any point in its history. In this environment, airline operators may find it more difficult than ever to forecast the demand for air travel. That, in turn, makes it challenging for manufacturers to confidently predict the long-term market for new aircraft and fleet upgrades and to ensure they will have the capacity, material, and labor to meet it.
Robust near-term demand and production challenges
Manufacturers currently have a firm order backlog for 9,400 passenger aircraft through 2027, of which the vast majority are narrow-body jets.
To fulfill this demand, OEMs have announced that they will scale up production capacity to historically high rates of 55 to 100 aircraft a month for the next five years. 2 This ramp-up will require managing risks in the supply chain, such as raw materials availability, inventory health, and workforce reliability.
Current uncertainty in the supply chain and labor markets could portend a continued, longer-term production challenge. If demand remains at levels similar to today, OEMs will need to find ways to become more productive or risk missing out on potential growth.
Historically, not all orders in the backlog come to fruition, but predicting when a softening might impact deliveries is difficult. OEMs need to balance near-term needs with some caution about overinvesting in capacity. Similarly, operators must guard against overinvesting in fleets and overhiring now while still seizing current opportunities.
To help visualize the uncertainty, we developed three scenarios for travel demand through 2027 and then projected the number of aircraft that would be needed in each case. In two of our scenarios, despite the current situation, the underlying demand for aircraft could be lower than the current backlog, which may have repercussions for the bottom lines of operators and manufacturers. However, several strategies can help both groups protect their markets and profitability.
Three scenarios for future air-travel demand
Many uncertainties within the airline industry are reflected in or are driven by global and regional GDP growth. For instance, high GDP growth tends to drive air travel, and high travel rates may benefit GDP. Factors that depress global GDP, such as high fuel prices, also hurt airline travel. We are also in a period of high macroeconomic uncertainty—will economies tip into a recession or manage to avoid it? Our three scenarios are primarily driven by GDP, with some associated factors.
Scenario A depicts resurgent growth as governments and businesses exercise robust monetary and fiscal responses to the current economic situation. It assumes that global energy markets and supply chains will become less volatile, travel demand in China will quickly resurge, and the consequences of the conflict in Ukraine will be contained.
In scenario B, the economy shows resilience, even as fiscal stimuli wind down and central banks raise interest rates. Consumers remain cautious but continue to spend moderately. Travel increases, partly because governments reduce remaining travel restrictions, including a gradual rollback to precrisis conditions in China. On the downside, some economic disruptions continue because of elevated and volatile energy prices and limited supply chain disruptions in certain regions.
Scenario C, the most negative, depicts a recession-driven slowdown in which global supply chain disruptions, slower reopening recovery in China, and higher interest rates to contain inflation combine to depress air-travel demand.
These scenarios imply a range of CAGRs through 2027 for global air travel, from 0.8 percent under scenario C, which anticipates a prolonged slowdown, to 3.8 percent for scenario A’s resurgent growth. Similarly, demand for available seat kilometers will vary. By 2027, it ranges from about 10.9 trillion in scenario C to 13.8 trillion in scenario A, a difference of 21 percent (Exhibit 1).
Increased passenger air-travel demand and the replacement of older aircraft will translate into demand for new passenger aircraft. Based on the numbers from our three scenarios, future demand for new aircraft would total between 5,200 and 11,600 through 2027 (Exhibit 2).
These scenarios show the significant impact of uncertainty on the balance of supply and demand in the industry. Scenario A represents a supply-constrained situation, likely resulting in extended retirement ages and continued ramp-up in production capacity, especially for narrow-body aircraft. Scenarios B and C indicate fewer aircraft deliveries to match demand than are currently in the order backlog. Unless airlines shift to historically high retirement rates to transition to new-generation fleets, in these scenarios, manufacturers might face long-term excess capacity despite the near-term production challenges.
For airlines, balancing available aircraft and crews with demand is a continuing challenge, and with greater uncertainties than before, they will need to prepare for agility in the coming years. A few distinctive ways to build an infrastructure for success, given the continued uncertainty of the air-travel environment, include taking appropriate measures in right-sizing fleet composition, preparing to meet travel demand by customer segment and route, and moving toward a vision for aviation of the future.
- Advanced network-planning capabilities to reflect ever-changing customer demand scenarios will be a critical component in managing uncertainty for operators.
- Passenger travel demand in all scenarios is developing more significantly within regions. Airlines can benefit from fleet composition strategies that accommodate this trend while optimizing operating-cost efficiencies.
- While developing fleet composition strategies, airlines can invest in and maintain a unique solution for customer experience, sustainability initiatives, and next-generation technology. To develop and deploy these strategic decisions, airlines can prioritize a cohesive vision that reflects the mission and values offered to the customer.
For manufacturers, uncertain travel demand translates to demand for aircraft, which has a ripple-down effect on the overall supply chain. All three demand scenarios require building production capacity in the short term, but the scale and continuity of additional capacity are uncertain. Aerospace manufacturers can prepare for an uncertain future by ensuring the health and resiliency of their supply chain, prioritizing strategies for flexibility in their workforce, and taking calculated steps toward modernizing manufacturing capabilities.
- To ensure supply chain health and resiliency, manufacturers can evaluate risk and the financial health of suppliers and consider redundancies and vertical integration for flexibility in scaling and descaling production.
- Efficient and flexible scaling or descaling of production relies not only on the supply chain but also on the availability and flexibility of the workforce. Manufacturers may be able to attract new talent by devising a hiring strategy that incorporates flexible and appealing working conditions.
- Manufacturers will want to balance strategies for managing uncertainty in the short term against their long-term capabilities. Integrating the best of digital innovation and investing in cutting-edge capabilities can build resiliency in the short term while enabling a unique product offering for years to come.
Creating a plan
The only certainty in commercial aerospace today is that no one can confidently predict anything. There is no set of actions that will help a company contain all its risks. But any company can examine its exposures, determine where they are greatest, and devise a plan to insulate them from the most damaging consequences.
For operators and manufacturers—and for the companies that supply them with materials and services—the situation will require a well-considered capital expenditure plan, a finger on the pulse of demand and the order backlog, and a strong operational strategy to increase resiliency and flexibility. As the tides rise in commercial aviation, players in the industry should prepare to grow together with transparent communication, data sharing, and a cohesive vision. Now is the time to set an agile strategy for success in the uncertain future of the commercial aviation environment.