In light of the rapid political and economic crises facing the world today, the risks threatening the global economy have become increasingly complex and impactful, affecting all economic sectors. In addition to traditional challenges such as demand fluctuations and changes in regulatory policies, the global aviation sector is facing heightened operational difficulties due to the lingering effects of the COVID-19 pandemic, compounded by the intricate political and economic conditions currently in play. Among the most significant risks confronting the sector today are the notable fluctuations in fuel prices and the closure of airspace in many countries due to wars and geopolitical tensions worldwide. The aviation sector must adopt flexible and innovative strategies to ensure its sustainability and resilience in the face of these challenging circumstances.
Ongoing Recovery
The global aviation sector continues to recover at a rapid pace after suffering extensive operational losses due to the global economic shutdown resulting from the COVID-19 pandemic in 2020. In 2023, there has been a marked resurgence in demand for international travel as travelers seek to make up for lost time during the pandemic, a phenomenon often referred to as “revenge travel.”
According to the International Air Transport Association (IATA), international passenger traffic saw an increase of 10.1% year-on-year in July 2024, maintaining the positive trend that began in January of this year. However, growth has started to slow since April 2021, and it may take longer for the sector to return to pre-2020 levels. This is clearly illustrated by the rise in the revenue per passenger kilometer—a key metric for tracking industry performance—to 94.1% of the 2019 levels.
The revenue per passenger kilometer experienced a strong annual increase of 8% in July 2024. At the same time, another key indicator, available seat kilometers, grew by 7.4% year-on-year in July, reflecting an undeniable increase in demand for air travel.
Moreover, international airlines have successfully compensated for the losses incurred during the COVID-19 pandemic, achieving a net profit of $27.4 billion in 2023, compared to $6.9 billion in 2022. Notably, airlines from North America and Europe have emerged as the leading profitable companies globally, experiencing strong momentum in travel to and from these regions following 2022.
Emerging Risks
As the global aviation sector continues to recover, it now faces unprecedented emerging risks resulting from a series of unfavorable geopolitical and economic developments over the past two years. On the geopolitical front, the ongoing war in Ukraine and escalating tensions in the Middle East have contributed to increased global political and economic uncertainty.
The outbreak of war between Russia and Ukraine in February 2022 led to the closure of airspace between the two countries and the imposition of Western economic sanctions on Russia. Consequently, the majority of European airlines were forced to reroute their flights, opting for longer and costlier air routes. Similarly, the intensification of political tensions in the Middle East, particularly following the outbreak of the Gaza conflict in October 2023, has resulted in the closure of airspace in several countries in the region and the cancellation of numerous international flights.
These tensions in the Middle East have reduced the number of available seats, causing a significant decline in airline revenues. The situation has been further exacerbated by escalating hostilities between Iran and Hezbollah on one side and Israel on the other, leading many international airlines to suspend flights or avoid the more volatile areas of the region.
In addition to these tumultuous geopolitical circumstances, the global economy continues to grapple with significant challenges, reflected in rising debt levels and unprecedented inflation rates in developing countries. Furthermore, the prospect of a prolonged slowdown in major economies, particularly in China and the European Union, looms large, driven by the lingering effects of the COVID-19 pandemic and widespread geopolitical tensions.
These challenges have created new operational difficulties for the global aviation sector, most notably the struggle for governments to convert international airlines’ foreign currency receivables. This is not the only issue; airline revenues are also likely to decline in certain geographical areas, particularly in the Middle East. Many individuals are becoming less able to allocate funds for discretionary spending on travel and leisure due to falling real incomes and increasing inflationary pressures.
On another front, airlines are facing significant increases in operational costs due to rising fuel prices since 2022, a consequence of the Russian-Ukrainian war. While some airlines have managed to hedge against price fluctuations by purchasing fuel in bulk at fixed prices, others, including some U.S. carriers, have not adopted this strategy, leaving them to bear unprecedented additional costs.
Ongoing Constraints
The COVID-19 pandemic has been one of the most significant crises for the global aviation sector in the past two decades, and its impact continues to be felt today. The International Air Transport Association (IATA) estimates that the crisis has erased nearly 20 years of passenger traffic growth, and it is expected that traffic levels will remain 6% below previous forecasts until 2040.
The pandemic has created ongoing difficulties in managing airline operations, primarily due to supply chain disruptions and a shortage of skilled labor. This situation coincides with the emergence of around 50 new air routes globally that are expected to meet specific demand. Two years of global economic shutdown and travel restrictions have severely disrupted supply chains and slowed aircraft delivery times from manufacturers to international airlines.
In addition to these challenges, airlines are experiencing delays in receiving spare parts due to the bankruptcy of many manufacturing companies and a shortage of essential materials such as wiring, electronics, and aluminum. The aviation industry is also facing a significant workforce shortage since the pandemic, affecting a wide range of roles, including pilots, engineers, air traffic controllers, and maintenance technicians, according to Global Market Insights.
Future Outlook
As the aviation sector looks toward the future, it confronts increasing challenges stemming from the current unfavorable political and economic conditions. Nevertheless, projections from the IATA indicate that the sector’s performance will remain resilient even in the face of rising short-term risks. It is expected that global airline profitability will improve to $30.5 billion in 2024, up from $27.4 billion in 2023.
This anticipated growth in profits comes alongside projections for total industry revenues to rise to $996 billion by the end of 2024, compared to $908 billion in 2023. However, it is noteworthy that revenues from air freight activities are expected to decline sharply from $138 billion in 2023 to $120 billion in 2024. This decline may reflect, among other reasons, the waning demand for transport services that surged during the pandemic.
Despite the significant recovery of the global aviation sector in terms of both passenger traffic and revenues, geographic performance is expected to vary considerably. While the Asia-Pacific region is projected to contribute half of the global growth in revenue per passenger kilometer this year—particularly as local markets in China, Japan, and Australia continue to recover—the Middle East region is likely to be the hardest hit due to global political and economic risks.
The Middle East aviation sector is expected to maintain growth, albeit at a slower pace, due to escalating geopolitical risks, particularly the potential for tensions to escalate into a broader regional conflict. Similarly, the aviation sector in Europe is expected to recover, provided that strong demand persists throughout the year and supply chain issues are resolved. However, the potential negative impact of the Ukrainian war on European aviation markets cannot be overlooked.
In conclusion, the global aviation sector is rapidly recovering, nearing pre-pandemic performance levels in terms of passenger numbers and airline profitability. However, geopolitical and economic risks are likely to affect the operational processes of many international airlines, especially those operating on air routes in the Middle East, which may slow the return of passenger traffic to pre-pandemic levels.
