The global economy is facing increasingly complex and impactful risks due to the rapidly accelerating political and economic crises worldwide, affecting all economic sectors. The aviation industry, in particular, is grappling with a multitude of challenges that extend beyond traditional issues like demand fluctuations and regulatory policy changes. The ongoing effects of the COVID-19 pandemic continue to impact the sector, compounded by the current complex political and economic landscape. Among the most significant risks confronting the aviation industry are the substantial fluctuations in aviation fuel prices and the closure of airspace in numerous countries, stemming from wars and geopolitical tensions across the globe. To navigate these difficult conditions and ensure its sustainability and resilience, the aviation sector must adopt flexible and innovative strategies.

Ongoing Recovery

The global aviation sector continues to recover at a rapid pace following the extensive operational losses incurred due to the COVID-19 pandemic-induced global economic shutdown in 2020. In 2023, the world witnessed a significant rebound in demand for international travel, as travelers sought to make up for lost time through what became known as "revenge travel."

According to the International Air Transport Association (IATA), this recovery trend persisted into 2024, with international passenger traffic growing by 10.1% year-on-year in July. This growth continues the positive trajectory that began in January of the same year, although the pace has been slowing since April 2021. Despite this deceleration, the industry's key performance indicator, the revenue passenger kilometers (RPK) index, reached 94.1% of 2019 levels, clearly demonstrating substantial progress. However, it is worth noting that a full return to pre-2020 levels may still take some time.

Figure: Global aviation revenues (in billions of dollars)

Source: International Air Transport Association

The revenue passenger kilometer index achieved a strong growth of 8% year-on-year in July 2024, while the available seat kilometers (ASK) recorded a 7.4% increase during the same period. These indicators collectively reflect a significant rise in demand for air travel.

Concurrently, international airlines have successfully rebounded from the losses incurred during the COVID-19 pandemic. They reported net profits of $27.4 billion in 2023, a substantial increase from $6.9 billion in 2022. North American and European companies emerged as the most profitable among global airlines, benefiting from the robust momentum in travel to and from these regions since 2022.

New Risks

The global aviation sector, while on a path to recovery, is currently navigating through a complex landscape of unprecedented risks stemming from a series of unfavorable geopolitical and economic developments over the past two years. The ongoing war in Ukraine and the escalating tensions in the Middle East have significantly contributed to increased global political and economic uncertainty.

The outbreak of the Ukrainian war in February 2022 had immediate consequences for the aviation industry, resulting in the closure of airspace between the two involved countries. Furthermore, the imposition of Western economic sanctions on Russia compelled most European airlines to bypass Russian airspace, forcing them to adopt more costly flight paths.

In a similar vein, the escalation of political tensions in the Middle East, triggered by the Gaza war in October 2023, has had far-reaching effects on the aviation sector. This conflict has led to the closure of airspace in several countries across the region and the cancellation of numerous international flights. Consequently, these tensions have resulted in a reduction of available seats and a significant decline in airline revenue.

The situation has been further exacerbated by recent developments, particularly the escalation of hostilities between Iran and Hezbollah on one side, and Israel on the other. This heightened tension has prompted more global airlines to take precautionary measures, either by suspending flights altogether or by avoiding areas of high tension within the region.

In addition to the turbulent geopolitical situation, the global economy continues to face significant challenges. These include rising debt levels, unprecedented inflation rates in developing countries, and the possibility of a long-term slowdown in the growth of major economies, particularly China and European Union countries. These issues stem from the aftermath of the COVID-19 pandemic and the aforementioned widespread geopolitical tensions around the world.

These multifaceted challenges have created new obstacles for the operational processes of the global aviation sector. Most notably, governments are struggling to convert foreign currency into local currency for international airlines. However, this is not the only problem plaguing the industry. Airline revenues are projected to decline in some geographic regions, such as the Middle East, where many individuals are less able to allocate funds for leisure and travel due to declining real incomes and increasing inflationary pressures.

Furthermore, airlines are facing significant cost increases due to the rise in fuel prices since 2022, a direct consequence of the Russian-Ukrainian war. While some airlines have succeeded in hedging against price fluctuations by purchasing fuel in fixed quantities and at set prices, other international carriers, including some US airlines, have not resorted to this strategy. Consequently, these airlines are left 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 last two decades, with its impact still reverberating today. According to the International Air Transport Association, the crisis erased nearly 20 years of passenger traffic growth, and traffic is projected to remain 6% below previous forecasts until 2040.

This unprecedented situation has created ongoing challenges in managing airline operations, primarily due to a shortage of skilled labor. Global Market Insights reports a scarcity of essential personnel, including pilots, engineers, air traffic controllers, and maintenance technicians. Paradoxically, this shortage coincides with the emergence of around 50 new global air routes, highlighting the complex dynamics at play in the industry's recovery.

The two years of global economic shutdown and travel restrictions have had far-reaching consequences. Supply chains have been severely disrupted, leading to significant delays in aircraft delivery times from manufacturers to international airlines. Moreover, airlines are grappling with difficulties in obtaining spare parts, a situation exacerbated by the bankruptcy of many manufacturers and a shortage of basic raw materials such as wires, electronics, and aluminum.

 Future Outlook

The aviation sector is navigating towards the future while grappling with increasing challenges stemming from unfavorable political and economic conditions. Despite these hurdles, forecasts from the International Air Transport Association suggest that the sector's performance will remain resilient, even in the face of mounting short-term risks. Global airline industry profitability is projected to improve in 2024, reaching $30.5 billion compared to $27.4 billion in 2023. This expected growth in profits coincides with forecasts of an increase in the industry's total revenue to $996 billion by the end of 2024, up from $908 billion in 2023.

However, it is worth noting that the revenue from air cargo activity is anticipated to decline significantly, dropping to $120 billion in 2024 from $138 billion in 2023. This decrease may reflect, among other factors, the waning reliance on air transportation that surged during the COVID-19 pandemic.

Despite the notable recovery of the aviation sector in terms of passenger traffic and revenue, performance varies significantly across geographic regions. The Asia-Pacific region is expected to contribute half of the global growth in the revenue per passenger kilometer index this year, driven by the continued recovery of domestic markets in China, Japan, and Australia. In contrast, the Middle East region is likely to be the most affected by global political and economic risks.

The aviation sector in the Middle East is anticipated to maintain its growth trajectory, albeit at a slower pace, due to the escalation of geopolitical risks, particularly the possibility of regional tensions escalating into a comprehensive conflict. Meanwhile, the European aviation sector is poised for recovery, contingent upon strong demand persisting throughout the current year and the resolution of supply chain problems. However, the potential negative impact of the ongoing Ukraine war on European aviation markets cannot be overlooked.

The global aviation sector is experiencing a rapid recovery, approaching pre-COVID-19 pandemic performance levels in terms of passenger numbers and airline profitability. Despite this positive trend, geopolitical and economic risks loom on the horizon, particularly affecting international airlines operating across Middle Eastern air routes. These challenges are likely to impede the full restoration of passenger traffic to pre-pandemic levels, thereby slowing the sector's overall recovery.