Demand for U.S air travel is increasingly encouraging. Numbers of travellers passing through TSA checkpoints on 13th June 2021 surpassed 2 million for the first time since early March 2020.
With just over half of the U.S. population having had at least one vaccine dose as of mid-June, key statistics around airlines and airports are promising as we move towards the Independence Day weekend.
As with other key markets, domestic travel is leading recovery in the U.S. IBA expects the overwhelming majority of travel to remain domestic in Q3 of 2021. Whilst selected international flights to the likes of Los Cabos and Cancun have plateaued at reasonable levels in recent months, we believe the widespread continuation of border restrictions and quarantine requirements will limit any meaningful increase in international services. Current levels of international travel are at around 55% relative to 2019. As the chart below highlights, the gulf between international and domestic recovery has grown from 10% in mid-February to 28% by mid-June. The bullish view of key stakeholders in the U.S. regarding 4th July plans suggests this delta may widen further as we move through Q3.
As with other widely observed holidays, air travel volumes tend to sharply reduce on the Independence Day holiday itself. Flight data from IBA’s InsightIQ intelligence platform shows flight volumes on recent Independence Day holidays range from 9% to 24% lower compared to the day prior, followed by a sharp rebound as the summer season progresses.
Source: IBA InsightIQ Flight data
OAG data indicates domestic U.S. capacity (as measured by seats) will reach ~90% of 2019 levels in this year over the seven days surrounding 4th July. This represents a marked improvement over the 48% we saw in 2020. With TSA checkpoint volumes inching higher as traveller confidence builds, we would look to a base case scenario of around 1.9-2.0 million passengers per day passing through TSA checkpoints over the 27th June-11th July period. Our bullish scenario would see this figure closer to 2.2-2.3 million per day, with load factors around 90%. While this may seem high given the difficulties the industry is still facing globally, predictions from carriers are equally optimistic, with Southwest Airlines anticipating a June load factor of 85%.
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There are various strategies lessors can adopt to reduce their fleets’ carbon emissions and, in doing so, potentially benefit from lower financing costs, strengthen their investor relations’ story and develop a greater competitive advantage with lessees. IBA outlines two key strategies: purchasing new technology planes with lower emissions levels and committing to offsetting a proportion of the emissions their lessees generate. 1. Buying new technology planes with lower emissions Airframe and engine OEMs are working on many initiatives that will improve technology and produce more efficient and potentially carbon free aircraft, but this is evidently a longer-term proposal. In the medium term, buying new gen technology planes will potentially provide a good investor relations story, fit with many airlines long term strategies and also potentially provide a ‘Greenium’ benefit, with access to lower cost finance. 2. Offsetting proportions of carbon emissions generated by the lessee There are three offsetting options, the impact of which can be calculated using rich intelligence from the InsightIQ platform and newly launched Carbon Emissions Calculator (CEC). Voluntary offset schemes at $3/tonne High quality offset schemes at $13/tonne Buying and holding emissions allowances from the EU Emissions Trading Scheme (ETS) Source: IBA InsightIQ CEC Read the full case study here Based on calculations and analysis from InsightIQ CEC, we conclude that buying and holding Emissions Allowances from the EU ETS may be the most efficient carbon reduction strategy for lessors. Although upfront costs are higher, buying emissions allowances at the start of a lease and holding them until lease end is an investment. Current market expectation is that these assets will appreciate in value by 70% - 75% by 2030. Investors will therefore have an opportunity to profit from their re-sale at lease end. Emissions trading also enjoys high environmental integrity as a regulated market. To understand the maths behind this conclusion, we have created the following Case Study: Case study- Airbus A321 neo (Non-ACF/ACTs) with LEAP-1A33 Engine A lessor can commit to offset emissions as a competitive differentiator in a bid to win a lessee. Using the example of a new A321neo narrowbody bought in April 2021 for US$ 56M and offered on a 12-year notional US$ 360K monthly rental, its residual asset value will be US$ 35M at lease end. We can mine the emissions information our CEC generates to calculate the following CO2 outcomes to calculate the offset costs and impact on IRR. All Data used and displayed in this article is derived from IBA’s proprietary data platform IBA InsightIQ. If you have any further questions or comments please contact: Ian Beaumont Sign up for a demo
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