Chairman of Avia Solutions Group Gediminas Ziemelis: 3 key trends in ACMI leasing as we enter 2024

The year's end is always a good time to pause and take stock. And in this particular year, evaluating where we are and where we are going is especially important.

The aviation industry is experiencing an especially complex and turbulent moment. That is not to say everything is negative right now. In fact, there are many positives and a great deal of potential for much greater gains in the future. But to realize that potential, airlines will have to successfully navigate an uneven and fast-moving landscape.

Opportunity knocks

To be specific, the number one positive on the score sheet at the moment is the successful recovery of demand for air travel. Air traffic is up, with the IATA predicting 4.35 billion people will travel in 2023, which is almost level with the number who flew in 2019 – 4.5 billion.

Fast-moving AI developments in the aviation industry, another positive, can play an important role in helping airlines manage these high traveler numbers. For example, leveraging to better manage changing weather conditions is a smart way to minimize cancellations.

AI is also likely to have a positive impact. It has huge potential to improve efficiency, for example with monitoring parts and enabling more efficient maintenance. Advances in automation and robotization also continue to show promising potential in terms of accelerating production and optimizing maintenance.

So, in both the short-term and long-term there are reasons to be cheerful and opportunities to unlock.

Structural problems

However, airlines are faced with structural problems that make it difficult to take advantage of these opportunities. And these problems are not straightforward to overcome.

Labor shortages, financial limitations, supply side issues, and the ongoing challenge of managing seasonality are all potential obstacles in airlines' quest for growth.

In this article I will focus on key trends related to these challenges, sharing some insights on how ACMI can help airlines to handle them. In the end, the industry players that can successfully manage these challenges will be in pole position to enjoy the spoils that higher demand and long-term innovations have to offer.

Trend 1 - Wet leasing will help financially challenged airlines make the most of today's high-demand

While it appears that central bank interest rates may have peaked and we are entering a more stable period, we can rest assured that the era of low borrowing costs which lasted from 2008 to 2022 is over, at least for now.

And this presents a major challenge for airlines looking to take advantage of the booming demand we currently have. Many are already heavily leveraged, having borrowed during the COVID-19 pandemic to stay afloat. These airlines must now pay even higher rates to borrow more, and the leveling out of central bank interest rates will not change this reality any time soon.

Even for airlines who are in better financial health, borrowing to increase their fleet remains an unattractive choice right now. It is difficult to forecast whether the current surge in demand will be sustained in the long term, so taking on debt at still-high interest rates is a risky option.

On the other hand, failing to act is also not a viable alternative. Airlines hunting for much-needed revenue after the COVID-19 lockdowns will be leaving valuable business on the table if they are unable to scale up to meet demand.

Airlines do still have financial resources at their disposal. The IATA is forecasting a 1.2% net profit margin for the industry this year. Although still well down on the average annual net profit of 4.2% enjoyed between 2015 and 2019, this is still some much-needed good news.

ACMI is an effective way for airlines to use this small amount of financial room for maneuver. That is because ACMI is a financially viable solution for meeting the increasing demand we are seeing right now. It offers the flexibility airlines need to take advantage of today's positive market conditions without saddling them with unmanageable long-term debt.

This is especially important given the uncertainty as to whether the current uptick in demand is a long-term trend or a temporary blip. If it is the former, ACMI can bridge the short-term gap airlines are experiencing so they are well-positioned in the future. And if it is the latter, they can leverage ACMI to maximize their successes while the going is good.

I acknowledge that leasing rates are up at the moment, mostly due to manufacturing delays. Aviation data group Ishka estimates that the monthly lease cost for an Airbus A321neo is now marginally higher than it was pre-pandemic. Nevertheless, for many airlines borrowing to increase their capacity is either a complete non-starter (due to existing debt), or at the very least a substantial risk. What if they take on a loan at today's still high interest rates, only to see demand quickly peak and then subside?

Trend 2 - ACMI will offer a viable solution to attrition and labor shortages

2023 has been something of a perfect storm for airlines in terms of human resources.

First of all, we started to feel the impact of the cancellation of pilot cadet programs during the COVID-19 pandemic. With an annual pilot retirement rate of around 3%, the industry faces a constant need to replenish its talent, even in the best of times. It is estimated that there will be 484,000 active pilots in the industry by 2029, and that this will require the training up of and additional 264,000 pilots. Factor in the rapid surge in demand we have witnessed this year and the delay in new pilots coming into the workforce has been a major headache for airlines.

A second factor, also related to COVID-19, is high attrition rates within the industry. In 2022, companies had to take on new staff (or rehire old employees) at very high levels. However, retaining these staff has proved very difficult.

For example, Swissport has seen a 70% attrition rate from the 37,000 staff it recruited in 2022 as the industry reopened. In the US and Europe, this challenge is mainly attributed to a lack of desire to work in our sector as remote work with greater flexibility has become common in many sectors.

However, as Swissport have found, recruitment and retention issues are specific to certain regions and countries. This means wet leasing can be an effective solution. Large scale ACMI providers have widespread international networks, and this gives them an advantage in terms of the international talent pool they can draw from. Tapping into ACMI essentially means widening the pool of potential recruits you can hire, and gives you access to staff from regions where retention is a much lower problem.

Addressing labor shortages is a must, because this issue is causing two significant problems for airlines. It is adding to an ever-increasing cost burden. Recruitment is an expensive process (estimated at $4,000 per employee), and limited supply pushes up costs as well. And it is also making it difficult or impossible to adequately staff a growing number of routes. With social media ensuring customers are increasingly savvy when it comes to compensation for cancellations, this can be an extremely costly issue for airlines. Of course, this is particularly pertinent in relation to seasonality, where ACMI has always had an important role to play.

Trend 3 - ACMI will continue to solve seasonality and supply side challenges in innovative ways

Managing seasonality has traditionally been ACMI's main value proposition, and it is a particularly attractive one at the moment.

For example, Avion Express, one of Avia Solution Group's ACMI providers, delivered 2,054 flights for Germany's Eurowings this June, helping it successfully manage a large uptick in demand at the start of summer.

There is also an interesting potential trend for countries, regions, cities and even individual hotels to turn to ACMI as a way to capitalize on "revenge tourism" - customers being extra keen to take holidays after the lockdowns of the previous 2 years.

This trend is easy to explain. Many regions and countries are dependent on tourism and are therefore desperate to attract airline routes that could help to get tourist numbers back to 2019 levels. However, it takes years to negotiate with airlines to begin the operation of new routes, and most regions are looking for an immediate impact. Furthermore, with the cost challenges and labor shortages airlines are facing in 2023, this is a particularly difficult time to attract airlines to set up new routes. So, there have been some cases of governments turning to ACMI providers to help with meeting seasonal demand.

Of course, along with managing seasonality, ACMI is also a natural fit for airlines that need to absorb supply side shocks. And, unfortunately, these are all too common at the moment.

It was ACMI providers who helped to pick up the slack this summer when RTX's Pratt and Whitney experienced a problem with contaminated metal parts in their engines. And beyond the shocks, the record backlog of orders at Airbus and Boeing means supply issues continue to put a handbrake on airlines' recovery. It is still expected to take up to 4 years for the industry to recover to pre-COVID production levels, so this is not an issue that will be resolved soon.

Key Takeaway: ACMI can enable airlines to seize the opportunity

The key message of all the things I have mentioned is that ACMI is ready, in both the short-term and long-term, to enable airlines not only to survive but also to thrive in complicated circumstances. The industry is ready to provide the crew and aircraft that are in short supply at present, and to provide airlines with a financially sustainable way to make the most of the upsurge in demand.

My opinion has always been that a balanced mix where 6-15% of a fleet's aircraft is leased from an ACMI provider is optimal. This provides the flexibility airlines need without tying them down to unmanageable long-term financial commitments, which, as I mentioned above, are especially problematic at present.

Our fleet of 197 planes available for ACMI operations is set up so that 60% are available for long-term leasing, with 40% set aside for short term use. In other words, we are set up and ready to play our part in enabling airlines to survive the current challenges, seize the opportunities that higher demand offers, and be ideally positioned to thrive in the long-term.