Section 1: Forward and Executive Summary
Foreword
The rapidly evolving macroeconomic and geopolitical landscape and changing consumer preferences will continue to impact aviation passenger volume for the foreseeable future.
The outlook for aviation is complex and varies significantly around the world. Macroeconomic factors continue to affect disposable income, placing greater strain on consumer choice and spending prioritisation. Meanwhile, geopolitical developments and environmental regulations indirectly affect demand through increased fare prices. On the supply side, aircraft production constraints and industry-wide labour shortages continue to pressure the industry.
This report combines Teneo’s extensive experience in the global transportation industry with its proprietary aviation passenger forecasting model. The model can produce detailed forecasts for every major country and airline, taking into account a range of drivers and inhibitors. This paper presents Teneo’s aviation volume forecast up to the end of 2026 on a regional level.
The forecast considers consumer spending and ticket prices, macroeconomic conditions and business confidence, and longer-term trends around sustainability and regulation.
Executive Summary
Global aviation volume has largely recovered to its 2019 levels; however, in H2 2024 and beyond, the industry is expected to face headwinds as economies battle slowing growth. The growth picture beyond 2024 is complex and varies significantly by region.
Overall, 2023 saw a strong rebound in travel demand. Leisure travel led the recovery, as consumers exercised “revenge travel” to compensate for lost time due to COVID-19. However, future growth is mixed:
- In Europe, robust summer travel and the discharge of pent-up demand helped airlines recover lost revenues; we expect that pent-up demand will no longer impact the travel market and that long-term cost-of-living pressures will likely result in relatively slow growth.
- In North America, demand is expected to make a full recovery, partly driven by U.S. consumers’ prioritisation of travel spending, albeit at a slow rate due to cost of living pressures, election uncertainty and aircraft supply issues.
- In Asia, strong economic growth coupled with easing travel restrictions is expected to fuel aviation demand.
- In China, the economic slowdown caused by the real estate collapse is likely to constrain travel demand in the medium term.
- In Latin America, there has been a robust post-pandemic recovery, though headwinds lie ahead in the form of slowing growth in China, a key trading partner for most countries in the region and currency risks.
In addition to regional factors, several global drivers must be considered. Geopolitical conflicts will likely restrict airspace and increase fuel prices. Industry-wide supply chain issues are expected to continue in H2 2024. Lastly, concerns around sustainability and safety have been front-of-mind for consumers and legislators alike, leading to increased industry regulation.
Section 2: Key Themes Impacting Aviation Volume to 2026
We use a granular, bottom-up methodology to construct our proprietary aviation volume forecasting model.
Using 2019 passenger volumes and revenue as the base, historical volume is segmented by factors such as country, purpose of travel, passenger age, passenger income, airline and airport to provide a granular view of pre-pandemic volume.
Various growth and suppression factors are applied to each segment to account for factors such as macroeconomic conditions, the geopolitical environment (e.g., the Middle East conflict, the war in Ukraine), the regulatory landscape and industry capacity constraints.
Demand Drivers – Real Income
Real GDP growth, a key driver of passenger demand, is expected to make a gradual recovery in 2024 as several worldwide trends dampen growth prospects.
The global economy is expected to grow between 2.8% and 3.0% annually between 2024 and 2026. However, growth will remain subdued this year due to the lagged impact of monetary policy, restrictive financing costs and a downturn in trade and investment.
Emerging economies with solid fundamentals are likely to fare better than advanced economies as consumer spending, exports and investment surge in countries such as India and Indonesia.
Historically, income has been the fundamental driver of passenger growth (measured by RPK1). Generally, the income elasticity of demand for air travel is higher for developing economies, as demand is primarily driven by disposable income and the level of aviation infrastructure.
Demand Drivers – Consumer Economics
Inflation across both developed and developing economies is expected to decline over 2024, which will likely have positive effects on consumers’ willingness to spend on air travel in the medium term.
Demand Drivers – Geopolitical Flashpoints
Ongoing geopolitical conflicts are likely to continue putting upward pressure on costs and downward pressure on demand, exacerbated by key “flashpoints.”
Demand Drivers – Sustainability
Recent sustainability regulations will likely have negative cost impacts on airlines, potentially driving up costs and pricing. These are most prominent in the EU and North America.
Sustainability dominates the regulatory landscape, with reductions in free carbon allowances and the introduction of fuel blending mandates at the forefront of the EU’s efforts to make the aviation sector more sustainable. With bio-SAFs still costing 2-3 times more than conventional jet fuel, this could increase fare prices substantially as airlines pass on the costs to passengers. Tax credits have been employed in North America to incentivise airlines to adopt SAFs.
Demand Drivers – Safety
Safety continues to be a key concern for consumers and incidents in recent years could demand from certain passenger segments.
Aircraft Safety Incidents
Air travel is one of the safest modes of transportation available, yet accidents have a severe impact on consumer behaviour. A study conducted after the Malaysian Airlines MH17 accident highlighted that consumers perceive physical risk and avoidability of accidents as the most important factors in avoiding future air travel1.
More recently, the 737-MAX was granted clearance to fly in January 2024 following several safety incidents. Since then, consumer trust declined across most passenger segments and negative sentiment is likely to persist until safety concerns are fully addressed.
Airlines with large 737 MAX fleets, such as United Airlines and Southwest, have suffered losses following the incidents. Southwest reported over $800 million in losses from the 2019 grounding.
Supply Drivers – Labour Shortages
Aviation labour shortages look set to persist in the long run and will likely continue to negatively impact airlines’ capacities and cost bases.
In 2024, airlines will likely continue to see the impact of supply chain issues, leading to groundings and reductions in service frequencies. This includes aircrew and ground staff, whose numbers fell significantly during the COVID-19 pandemic and proved insufficient to handle the resurgence in demand last year. Labour supply issues will likely remain in the long run as technology cannot replace certain roles, such as aircrew and maintenance technicians.
Supply Drivers – New Aircraft Deliveries
High book-to-bill ratios1 indicate that aircraft production cannot keep up with the demand for new aircrafts.
Both Boeing and Airbus encountered record backlogs towards the end of 2023. Based on current production, the number of Boeing and Airbus aircrafts to be built and delivered is equivalent to 12.8- and 11.7-years’ worth of production at 2019 levels, respectively. These high backlog levels are driven by strong demand for new aircrafts and comparatively low production rates. Furthermore, shortages of key components and safety inspections have hampered Boeing’s and Airbus’s production schedules.
Behavioural Impact – Consumers
Consumer travel is expected to recover and exceed its pre-pandemic levels in 2024, however the leisure passenger profile is changing due to a variety of factors.
Demand growth for air travel will likely be uneven, with Asia and Europe leading the recovery. Similarly, growth between international and regional travel will be uneven – for instance, slowing economic growth in China will likely reduce demand for international travel.
Globally, the cost-of-living crisis, concerns around sustainability and climate change, and the collective impact of the COVID-19 pandemic have led to several consumer travel behaviours that are likely to persist in the medium term:
- Value for money is a priority for many consumers, causing them to look for special offers and loyalty programs for savings
- Consumers are looking for more authentic experiences, such as experiential travel
- Millennials are spending more on travel compared to other generations, marking a shift in demographics
- Rail has emerged as a popular alternative for short-haul travel due to greater climate consciousness
- Social media is having a much greater influence on travel decisions than in the past
Behavioural Impact – Businesses
Business travel is expected to make a full recovery to 2019 levels, albeit at a slower rate than leisure, and is experiencing behavioural change as companies and employees deploy greater scrutiny around business travel.
Business travel is expected to reach pre-pandemic levels in 2024, with robust recoveries in Latin America and North America.
Globally, corporate cost-cutting and sustainability efforts have led to selectivity around business travel, though these are offset by trends such as the recovery in face-to-face meetings. Several business travel behaviours are likely to persist in the medium term:
- Companies are more selective about business travel, shifting towards purposeful, targeted trips with specific objectives in mind
- Environmental concerns are causing companies to reduce air travel where possible to meet emissions targets
- Face-to-face meetings are recovering, as business travellers view them as valuable for maintaining relationships
- Business travel is more technology-driven, as corporate travel management platforms use AI to optimise trips
- Business travel is increasingly combined with leisure travel, made possible by greater flexibility in working patterns
Section 3: Regional Outlooks
Regional Outlook – Europe (incl. UK), 2019 – 2026F
Air travel in Europe is expected to surpass its pre-pandemic levels in 2024, driven by leisure travel via LCCs.
However, supply chain shortages and stricter regulation are expected to keep prices somewhat elevated as additional costs are imposed on airlines.
Furthermore, the ongoing Russia-Ukraine conflict has restricted air connectivity and contributed to uneven recovery across regions.
Cost of Living:
- Prolonged inflation has exacted downward pressure on real wages, which fell by 0.8% in 2023 across the EU
- This will force some consumers to make choices between travel and other discretionary activities
Russia-Ukraine War:
- The prolonged Russia-Ukraine conflict will indirectly keep interest rates high – the ECB rate is currently sitting at a record-high at 4%
- This is expected to contribute to relatively low GDP growth in Europe
Sustainable Regulations:
- Stricter environmental regulations, such as EU SAF blending requirements, will increase costs for airlines
- These will likely be passed on to consumers, increasing fares and dampening aviation demand
Regional Travel:
- Low-cost carriers and intra-Europe routes are leading the leisure travel recovery, with Ryanair forecasting a 9% rise in full-year traffic in 2024
- This comes as consumers continue to prioritise value for money
Regional Outlook – North America, 2019 – 2026F
Similarly to Europe, both regional and international North American air travel demand is expected to recover by 2024.
The impact of slowing growth and cost-of-living pressures will be mitigated as North American consumers prioritise spending on travel.
However, political tensions could adversely impact international travel. Aircraft supply issues may also limit airlines’ ability to meet demand and supply in-demand routes.
Cost of Living:
- The U.S. economy is experiencing slowing growth and negative cost-of-living pressures
- The proportion of U.S. consumers planning to take a summer vacation in 2024 is 53%, down from 63% last year, with affordability being the most frequently-cited reason
Travel Resurgence:
- Spending on international travel grew c.30% last year in North America, five times the rate of overall spending growth
- Consumers are expected to prioritise experiences, which includes travel, over physical products
U.S. Election Outcomes
- The result of the U.S. election may harm travel if it leads to an escalation in tensions with China or other regions
- During Trump’s presidency, his “travel ban” executive orders suspended or imposed strict travel restrictions on certain countries
Aircraft Supply:
- Limited aircraft supply is expected to limit capacity, with major U.S. airlines set to receive almost 50% fewer aircrafts in 2024, from Boeing and Airbus, than anticipated
- Airlines, including United, have already planned to reduce capacity in response
Regional Outlook – Asia (excl. China), 2019 – 2026F
Economic growth in Asian economies is likely to fuel a significant increase in air travel.
The easing of travel restrictions and growing real incomes among fast-growing economies, such as India and Indonesia, will likely fuel demand for air travel. Consequently, Asian economies, notably in North and Southeast Asia, are strategically investing in tourism to capture regional travel demand.
However, like other areas of the world, supply chain issues are impacting expansion. Simultaneously, the risk of escalation in critical conflicts in the Middle East and U.S.-China tensions overshadows the region’s recovery and risks, destabilising fuel prices.
Consumer Spending:
- Economic growth in Asian emerging economies is projected to support a 4% increase in consumer spending in 2024
Travel Resurgence:
- Travel will be supported by easing travel restrictions, particularly in South Asia
- India and Thailand recently eased visa rules for foreign tourists and increased average flight capacity by 43%
Investment:
- Strategic investments may drive tourism, especially in Northeast Asia – 2024 bookings are on track to significantly surpass pre-pandemic numbers
Geopolitical Risk:
- Geopolitical risk – namely U.S.-China, Taiwan, India-Pakistan, Korea and the Middle East – could adversely impact travel demand and disrupt flight routes
Aircraft Supply
- Supply chain issues continue to plague fleet renewal programs, potentially constraining capacity as older aircraft cannot be replaced effectively
Regional Outlook – China, 2019 – 2026F
Over the past few years, China’s economy has faced significant headwinds that will have a lasting effect on travel demand.
The recent real estate crisis and slow export growth have led to a forecasted slowdown in GDP growth in 2024 and 2025.
This is expected to impact air travel significantly as consumers opt to travel less often and closer to home. Geopolitical disputes with the West have exacerbated this, as companies with manufacturing bases in China may be incentivised to diversify to other low-cost manufacturing hubs such as Malaysia and Vietnam.
Economic Downturn:
- China’s GDP growth is projected to fall from 5.2% in 2023 to 4.6% in 2024 and 3.8% in 2026
- This will likely dampen the amount that consumers and businesses are willing to spend on travel
Trading-Down:
- Consumer emphasis on value-for-money introduces tailwinds for domestic travel
- Q1 2024 domestic travel was 17% higher than 2023, representing 1.4 billion trips in total
Geopolitical Risk:
- Geopolitical disputes with the West are ongoing
- The Biden administration recently introduced tariffs on $18bn worth of Chinese goods which could cause headwinds for leisure and business travel
Industry Tensions:
- Industrial disputes between Chinese airlines and international carriers remain
- U.S. airlines recently asked Biden not to approve new flight routes due to “anti-competitive” Chinese policies
Regional Outlook – Latin America, 2019 – 2026F
Overall, the region has seen a robust post-pandemic aviation demand recovery.
However, there has been significant variance across the region, with Mexico and Columbia leading the recovery while Uruguay and Peru struggle to reach pre-COVID-19 levels.
Subdued economic growth in China, a significant trading partner of the region, and weakened Latin American currencies will hinder the recovery. However, airline partnerships with U.S. carriers and the travel demands of the emerging middle class will at least partially offset this.
Chinese Trade:
- China is Latin America’s second-largest trading partner, with annual bilateral trade volume growth averaging 16% since 2000
- The Chinese economic slowdown may adversely affect incomes
Fuel Prices:
- Air fares are significantly impacted by fuel prices, which are paid in dollars and represent c.30-40% of airline costs
- Weakened currencies have increased ticket prices, with future volatility expected
Airline Partnerships:
- Carriers are adding capacity through commercial partnerships with U.S. carriers
- American Airlines (AA) signed an exclusive codeshare agreement with GOL in 2023, with AA investing c.$200m
Middle-Class Growth:
- Growth in household income is expected to lead to c.30% growth in the middle-class population by 2037
- This is expected to contribute to higher demand for both international and domestic leisure travel
Section 4: Previous Forecast Accuracy Review
Q2 2023 Teneo Forecast Compared to Actuals in Key Regions
Here, we compare the Teneo Q2 2023 forecast with the actual passenger numbers to test our modelling accuracy.
In some regions, Teneo slightly underestimated aviation recovery due primarily to the prevalence of pent-up demand, which supported strong bookings growth.
This supported most regions in recovering to or surpassing 2019 levels by March 2024, with the notable exception of international travel to and from China, which currently sits well below 2019 levels.
North America:
Forecasts and actuals were broadly in line with Teneo estimates, which pointed towards moderate growth based on weaker consumer confidence and stagnating real income. By November 2023, international travel was 104% (vs. 92% forecasted) and regional travel was 102% (vs. 102% forecasted).
Europe:
The region saw a peak in pent-up demand in summer 2023. A stronger-than-expected tourism rebound accounted for most of the discrepancy. By November 2023, international travel was 97% (vs. 68% forecasted) and regional travel was 94% (vs. 98% forecasted) of 2019 levels.
China:
The economic slowdown led to travellers seeking closer destinations. Recovery was led by domestic travel, which ended 2023 lower than expected due to high airfares and a weaker currency. By November 2023, international travel was 50% (vs. 60% forecasted) and domestic travel was 118% (vs. 93% forecasted) of 2019 levels.
Section 5: Data Tables
Forecast Data Tables – Europe (incl. UK), 2019 – 2026F
Source data for the 'Forecasted Europe (incl. UK) monthly passenger volume'
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Forecast Data Tables – North America, 2019 – 2026F
Source data for the 'Forecasted North America monthly passenger volume' chart
Forecast Data Tables – Asia (excl. China), 2019 – 2026F
Source data for the 'Forecasted Asia (excl. China) monthly passenger volume'
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Forecast Data Tables – China, 2019 – 2026F
Source data for the 'Forecasted China monthly passenger volume' chart
Forecast Data Tables – Latin America, 2019 – 2026F
Source data for the 'Forecasted Latin America monthly passenger volume' chart
