Chairman of Avia Solutions Group on aviation and how ACMI can create opportunity.
Gediminas Ziemelis, Chairman of Avia Solutions Group; the ACMI provider gave his insight for 2024 on aviation and how ACMI can create opportunity.
Opportunity Knocks
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 2024, which is almost level with the number who flew in 2019 – 4.5 billion.
Fast-moving AI developments in the aviation industry 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 has huge potential to improve efficiency, for example by 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.
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Structural Problems
However, airlines are faced with structural problems that make it difficult to take advantage of these opportunities. 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.
Trend 1
The era of low borrowing costs which lasted from 2008 to 2022 is over, even while it appears that central bank interest rates may have peaked and we are entering a more stable period.
The airlines which had heavily borrowed during the COVID-19 pandemic to stay afloat, now must pay even higher rates to borrow more, and the leveling out of central bank interest rates will not change this reality any time soon, to serve to increasing demand.
Whereas, the airlines that are in better financial position can better avoid borrowing more, considering the uncertainty of how long will this surge in demand stay.
“I acknowledge that leasing rates are up at the moment, mostly due to manufacturing delays. What if they take on a loan at today’s still high-interest rates, only to see demand quickly peak and then subside?”
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.
Trend 2
2023 proved to be turbulent for the HR department in airlines.
The industry faced the impact of the cancellation of the pilot cadet program 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 of an 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.
“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.
Trend 3
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. 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”.
ACMI can prove beneficial 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.
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