How the aviation sector is returning to its former strength

Very few sectors were as directly and as profoundly impacted by the global Corona pandemic than the aviation sector. As air travel was brought to an abrupt halt at the onset of the Covid-19 pandemic, the aviation sector will remember 2020 as the worst year in history for air travel. Airlines globally are estimated to have incurred losses of USD 160bn in 2020, followed by a loss for the sector of USD 42bn in 2021 underpinning the pandemic was a crisis of unprecedented proportions. The impact was not limited to airlines only, airports, travel agencies, aircraft leasing companies, tour operators and many other players in the wide eco-system of the aviation sector suffered as well.

But fortunately, we are now witnessing an unprecedented recovery as travel restrictions were lifted and demand for air travel did not fade. Industry organization IATA forecasts that travel demand will have nearly recovered to 95% of pre-pandemic levels by the end of 2023. This applies to German air traffic as well. According to the German Aviation Association, passenger numbers at German airports rose to a total of 87.7 million in the first six months of 2023. Compared to pre-Corona levels in 2019, air travel to, from and within Germany now reaches a level of 74 percent. The increased demand for air travel will continue in the coming months. The German Aviation Association expects passenger numbers to increase by 10 to 15 percent between August 2023 and February 2024 compared with the respective months of the previous year.[1] Airlines have used the crisis to realign themselves structurally and operationally, supporting their rapid return to profitability. In addition, the situation around clearly noticeable waiting lines and delays due to personnel shortages of airlines and airport operators are improving in a similar way. With the difficulties of the pandemic now behind us, there are however further challenges requiring strong efforts of the industry.

Bouncing back from difficult times

In 2018, already prior to the pandemic, Boeing could not deliver its 737-Max variant, which is one of the industry’s widely sold work horses, due to safety issues for that aircraft type. During the pandemic, airlines generally preferred to defer scheduled aircraft deliveries in their order books. In addition. aircraft manufacturers increasingly started to experience supply chain constraints. As a result, the ramp up of aircraft production capacity is proving to be difficult now that the demand for next-generation aircraft is bouncing back strongly. It is estimated that since 2018 until now, manufacturers have globally delivered around 3,000 aircraft less compared to production levels prior to 2018.  And for aircraft that are produced, airlines can face delivery delays of a few months due to supply chain issues. Delays of new aircraft variants such as the Boeing 777-X have reached several years now.

The biggest challenge of the aviation sector, however, is the sustainable transformation to a less emission-intensive sector.

In 2019, before Corona, aviation was responsible for around three percent of global CO₂ emissions, while it decreased to around two percent during the pandemic. The transport sector as a whole accounts for around 20 percent of all CO2 emissions. Although three percent does not sound much, the industry is well aware of its responsibility to drive sustainable change also in light of globally increasing passenger numbers and accordingly intends to achieve net zero emissions by 2050. Government actions in addition drive the change for a greener sector, for example the European Union’s “Fit for 55” initiative which with its revision on the Emission Trading System, a mandate to increase the uptake of Sustainable Aviation Fuels (“SAF”), and the revision of the Energy Taxation Directive introducing tax on fuel for business and leisure flights includes three direct measures affecting the aviation industry.

Compared with most other sectors, the incremental costs of decarbonization in the aviation industry are likely to be the among the highest. Research and development cycles are very long, making the development of a new aircraft a very lengthy affair. For example, the Boeing 787 Dreamliner is one of Boeing's most fuel-efficient models on the market. The first studies for this model series were made in the mid-1990s, and the first aircraft entered commercial service in 2011 - more than a decade later. At the same time, the development of a new aircraft generation from scratch is an highly capital-intensive undertaking and involves costs in the billions. The nature of aviation makes it comparatively difficult to develop and implement new technologies. Take the issue of safety for example; aircraft cannot easily be equipped with hydrogen propulsion systems, even if this would technically be possible as extremely high safety regulations need to be observed.

Innovation is taking off

Nonetheless, manufacturers are researching and implementing sustainability-improving technologies such as ultra-high-bypass engines and open-rotor concepts, as well as novel ideas such as the water-enhanced turbofan or innovative wings. The industry can point towards steady progress. For example, Airbus' next-generation A320neo series already consumes about 15-20 percent less fuel than its predecessor. And as recently as June 2023, Airbus announced its intention to develop a new model series by 2035 that would be another 20 to 25 percent more fuel-efficient. This is complemented by constantly ongoing, incremental improvements during the operating life of an aircraft type.

Besides technological advancements, a significant role in the objective to reduce emissions will be played by SAF, which essentially is a non-carbon based alternative to conventional jet fuel, which results in substantially low CO2 emissions. As airlines commit themselves to decarbonize, demand for SAF has accordingly increased significantly, meeting however so far limited production capacity. As such, SAF application is substantially more expensive than conventional jet fuel due to aforementioned supply-demand mismatch andthe still costly production. In 2023, sustainable fuels accounted for less than one percent of the total amount of fuel produced. While increasingly commitments are made by suppliers and airlines to increase the production and achieve 10% SAF share by 2030, high additional investments are still necessary.

Creating real impact

Through regular and constructive discussions with our clients, we promote the increased usage and SAF and are evaluating the support of SAF production projects through financing. Besides that and as part of ING’s Terra approach, we transparently assess  the alignment of our secured aircraft financing portfolio of around EUR 3.3bn outstanding with the 1.5°C climate target of the Paris Agreement.

Our main financing focus are hereby latest generation of aircraft, which are up to 20 percent more fuel-efficient. Accordingly, in 2022 just over 60% of our aircraft financing portfolio were related to such next-generation aircraft, and our overall portfolio's emission intensity was below the NZE2050 target for 2022.  Next to such activities, ING initiated and co-founded "impact", a not-for-profit organization with currently around 40 prominent members globally from the a.o. the financial sector, aircraft leasing, consultancy and academics. Impact aims to define effective and transparent standards of sustainable financing and has published two well-received white papers outlining the KPIs and milestones for this. It has set up a number of collaborations to facilitate the sustainable change of the industry through their implementation further.

Flying is an inevitable part of the fabric of advanced societies, however,  a transformation of the industry is essential. As such, ING takes responsibility and walks the talk. We procure sustainable aviation fuels for our own corporate travel measures which is in line with our sustainability strategy committed to support such change.

Society is transitioning to a low-carbon economy. So are our clients, and so is ING. We finance a lot of sustainable activities, but we still finance more that’s not. See how we’re progressing on ing.com/climate

[1] https://www.bdl.aero/de/presse/pressemitteilungen/bdl-zieht-bilanz-zur-entwicklung-des-luftverkehrs-im-1-halbjahr-2023/