Background
The International Air Transport Association (IATA) is forecasting a recovery in fixed wing passenger traffic to be in excess (103%) of 2019 figures by 2024 and for 2022 the traveller numbers are expected to be 83% of 2019 levels. The demand has also not been seriously impacted by the omicron variant. Although there are some early signs the Ukraine conflict is having a significant impact on certain fixed wing aircraft types, while the pandemic has left the rotary business relatively unscathed.
The fixed wing recovery has been principally affected by the current travel restrictions that governments place on travel (especially in Asia-Pacific). However, the influence of the pandemic on global recovery is far from over and the pandemic has caused significant global airline losses (aviation industry total losses are expected to be $201 Billion in 2020-2022 - IATA World Air Transport Statistics).
With a large proportion of the global fleet still on the ground, airlines have taken on significant capital debt in a fight for survival. A lot of companies are restructuring in an attempt to manage fleet costs and liquidity with lessor payment deferrals and handing back of older aircraft types. Fleet strategies are under review including reductions and a renewed focus on sale and lease back deals with lessors.
For Lessors, the current market environment has limited their options to transfer returned assets to new airline clients. With the global pandemic not behind us yet and the Ukraine conflict impact still to be fully understood, now is the time to give careful consideration to a number of key topics affecting fleet management of leased aircrafts.
Insurance Cover
While insurance is a requirement of any leasing agreement, the insurer wouldn’t have considered the risks of having large numbers of aircrafts in long term storage and the challenges associated with returning them to service at inception of the policy. But it could lead to significant number of unforeseen risks and associated costs.
The added operational risks involved in putting large numbers of aircrafts into long term storage are very real and sometimes not always obvious. So it is extremely the important to have full clarity on what is and isn’t covered. Aircrafts and their critical components and role equipment must be protected, monitored, inspected and stored in approved facilities. Plus, they should strictly adhere to the type certificate holders’ requirements or very significant additional risk and costs can happen. We should also not forget the additional ground risks that come with large numbers of aircrafts being parked up for long periods of time at airfields and storage facilities that were never designed for that purpose.
Make sure you check ‘Aircraft on Ground’ cover very carefully and start your insurance renewal review early.
Importance of Maintaining Existing Assets
At a time when there is an unprecedented number of aircrafts in storage and whilst we are operating in a market that’s still unpredictable, we must make sure they’re properly maintained, stored and the associated records are kept up to date. This is vital in avoiding potentially very costly component overhauls, repairs or failures, which could impact the availability of aircrafts needed to help recover the business.
Internal corrosion is still one of the primary reasons for unscheduled, in-service failures of critical engine, avionic and gearbox components. This can be the direct result of aircrafts or their components not being stored in a suitable manner or environment.
Availability of Parts and MRO suppliers
It's dangerous to assume that existing suppliers have enough stock and capacity to deal with the potential requirements of a large number of aircrafts returning to operation without due consideration being given to their immediate, short and medium term needs. This situation is likely to be made worse by the different types of non-essential maintenance, upgrades, and significant component interventions, which could lead to a backlog of heavy Maintenance and Repair Organisation (MRO) work when a significant number of aircrafts return to service.
With this in mind, it has probably never been more important to consider the short, medium and long term maintenance requirements, and to share those requirements with our key suppliers.
Asset values
Older wide-body aircrafts that are out of production or soon heading that way, will most likely suffer the most as a result of the pandemic. However, predictions from IATA and other industry bodies suggest that it will take between two to five years before demand for air travel will return to pre-pandemic levels. This means there will be a projected oversupply of aircrafts, which will drive down values across all ages and sizes. This should, however, only be in the short to medium term, with newer more economically and environmentally friendly narrow bodied aircrafts being the least affected. During the pandemic, some aircrafts were redeployed to the freight market to move large amounts of PPE and to combat the lack of cargo capacity. But now passenger operations are getting back to normal, these aircrafts will revert back to their original use. This will unfortunately have a negative effect on their value and may lead to incurring very significant cost to reconfigure them so they can be redeployed for scheduled operations.
Furthermore, after such a period of inaction, it’s important for businesses to review how they’re maintaining key life cycle cost drivers and if the coverage and values are still fit for purpose.
Closing thoughts
The aviation industry has dealt with the most challenging time in its history and the resilience of the entire sector is quite remarkable, which is a great credit to all that are part of this incredible business.
Now with the success of the vaccines and their rollout and how international governments are now easing travel restrictions, it looks like the worst is behind us. Combine this with the appetite for people to take to the skies seemingly undiminished, we can be cautiously optimistic about the future of the industry. And now start to very carefully plan how to return these idle assets to service in the most cost effective and safest way possible.
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