It’s somehow always surprising to reach the mid-point of the year, but we are nearly halfway through 2025. As always, the aviation industry has been moving forward in many ways, so it seems appropriate at “half-term” in 2025 to review progress and perhaps speculate on what’s on the horizon for the aviation industry in the second half of the year.

Capacity Discipline Continues

Although many airlines are frustrated by supply chain challenges - which we will look at in more detail later - simple economics show that restricted supply leads to higher load factors, higher airfares and ultimately profitability for some.

Scheduled airline capacity this year is expected to have grown by 1.6% compared to last year and by 4.0% versus 2019.

Naturally there are some markets where growth has been strong in the last few years:

• South Asia, and specifically India, have raced ahead of many markets this year, with carriers such as IndiGo and Air India expanding their international networks.
• Meanwhile, in Africa, the growth in popularity of markets such as Morocco and Egypt has led to a 10% increase in capacity compared to 2019.
• More mature, developed markets such as North America and Europe have settled back into their normal rates of growth.
• Latin America has seen a period of strong capacity growth, driven by the low-cost airlines which were particularly badly hit by supply chain issues in the last two years.

However, some regions like Southeast Asia and the Southwest Pacific are still facing difficulties in their capacity recovery, and markets such as Indonesia continue to be challenged by supply side issues and weak demand.

Objectively, capacity discipline is good for airlines and allows those that are well managed to drive profitability, which has to be good for the whole industry. With signs of some improvement on aircraft deliveries, careful capacity growth will be important for the rest of 2025 and into next year.

Airline Profitability

For many years, airline profitability was cyclical in nature and for most was just something to dream about. However, recently airlines - and indeed many parts of the ecosystem - have become consistently profitable, which is necessary to support future investments - be that new aircraft, environmental improvements or more tailored service offerings. However, what we have noticed is wealthier airlines growing richer, while others continue to struggle.

• United Airlines, IAG, Delta Air Lines, Emirates, Ryanair and other household brands increase their margins, while many scheduled airlines are at best marginal performers and in many cases incurring losses.
• Justifying a loss-making airline as serving a national interest is a much-repeated story, but in today’s world seems unjustifiable for taxpayers.

While it seems that everyone is expecting a slowdown in the global economy, the first half of the year appears to have been better than many anticipated.

• IATA’s latest predictions for the year are for net profits of US$36 billion and a net profit margin of 3.7% - which still does seem ridiculously low for such a capital-intensive industry.
• Passenger revenues are expected to soften against the high-tide mark of 2024 as a little more competition comes to the market, although at the same time average load factors are expected to rise to 84% - so just hope that when travelling you are one of the lucky 16 with an empty seat beside you!

When evaluating airline profitability, it’s important to look at the industry as a whole, and industry-wide the expected margins for 2025 are no better than interest on a savings account. Obviously, congratulations to the small percentage of well-managed and very profitable airlines but they are indeed a small percentage of all airlines operating. As many of us in the industry have been saying for years, much work must be done to drag the poorest performers forward.

Geopolitical Influences

With ongoing tensions in various regions and the market vulnerable to political power plays, the whole aviation sector craves political stability and a calm market where politics are not considered a risk to operations and revenues. It seems, however, that there will always be external influences, and very rarely do they have a positive impact on the industry - but at some point surely things will change for the better?

The Supply Side Challenges

It seems that every part of the aviation industry is impacted by the supply of required resources.

The supply of new seats, galleys and even overhead storage bins are all delaying the introduction of new aircraft, but perhaps the most important supply chain shortage is the lack of human resources; as skilled pilots, engineers and management leave the industry,  resulting in a skills shortage. Overlay that challenge with new airline start-ups offering extremely attractive expatriate packages to buy in the required expertise, and there is a growing crisis which cannot be filled without years of training and on-the-job experience. With shortages of ATC controllers in both Europe and North America the pressures on the industry are very real and are not going to disappear before the end of the decade at the very earliest.

Supply issues also extend into available capacity, especially at some major airports around the world. While airports such as Singapore Changi are already in their next development phase, in Europe capacity constraints remain in many airports as a combination of physical and environmental restrictions limit future growth. And while those constraints are great for those airlines with dominant shares of capacity, it does limit competition and growth from new airlines. Whether the third runway at Heathrow will ever be built remains an open question heading into the second half of the year, and even a definite “yes” will see no new capacity before 2035 at the earliest.

The Global Economy

The global economy is expected to slow down through the rest of the year, with IATA predicting global GDP to fall to 2.5% compared to the 3.3% of 2024. There are already signs of a softening in demand across some markets, although how much of that is economic conditions or changing consumer sentiment towards certain markets is unclear.

Despite the expectations of an economic slowdown, traffic appears to be growing in many markets.

• The European market is robust this summer, and the Middle East market, with its mix of local and connecting demand, continues to perform strongly.
• The Latin American market also appears to be resilient to economic factors now.
• US domestic demand does look to have softened, and some capacity trimming has taken place with the ultra-low-cost carriers (ULCCs) feeling the brunt of that market slowdown.

For many airlines, the industry is based around the US dollar, and a weakening of the dollar is good news for all airlines. With the price of oil having been well below last year’s levels (though watch this space), the combination of these two factors provides a significant cost saving for airlines, just as demand may be slipping slightly. Significant cost savings flow straight through to the bottom line and will likely continue through the rest of the year.

Experience suggests that airlines can stimulate demand in times of an economic slowdown using price as a major part of their marketing activity. Adjustments in capacity can also be expected, with seasonal service perhaps being dropped earlier and premium capacity switched to stronger markets. While the global economy may slow down in the second half of the year, quarter three is the peak period, and we anticipate demand being stronger than some expect, and that will extend into the shoulder months of September and October. That just leaves two months of possible demand uncertainty.

In conclusion, at the half way stage of the year - despite all the challenges that the industry has faced - we believe that the market has probably performed better than anyone had expected at the beginning of January this year. Cost savings are currently offsetting any softening of demand and lower airfares. While the second half of the year will inevitably see some surprises, it feels as though the industry is well placed to handle any tremors in the global marketplace, and if 2025 is going to be as good as we expect despite the challenges, just how good could 2026 be?