Could private equity be low-cost air travel’s unlikely saviour?
Air fares for passengers in Europe have spiked 23 per cent over the last year, propelled by lack of competitiveness in the sector and issues regarding the supply of new aircraft from major manufacturers Boeing and Airbus.
In what were well-publicised comments at the time, budget airline Ryanair’s CEO Michael O’Leary proclaimed in August that the era of cheap flights was over, following the pandemic.
Earlier this month, the International Air Transport Association (IATA), said that air fares were likely to continue climbing over the next decade, as the sector preps for a record period of demand over the summer.
Ticket fares have largely been impacted by the continued drive to net zero, which has seen the adoption of high cost jet-fuel alternatives such as Sustainable Aviation Fuels (SAF) as well as aircraft supply chain issues, which have pummelled Boeing and Airbus.
However, newly-launched investment firm AIP Capital – the aviation asset arm of Miami-based 777 partners – says that private equity has a significant role to play in reducing fares, by alleviating supply chain issues and propping up airlines and manufacturers in the lower rung of the market.
Adam Weiss, 777 Partners’ vice president, told CityAM that investing in startup carriers and smaller airlines, who are not credit worthy and “don’t have the capital to place large orders” from manufacturers like Boeing, would boost competition and “democratise” the sector.
“We look for a really greenfield market,” Weiss said, with the company aiming to support “challenger low cost airlines that make airfares more accessible,” and reduce the monopolies held by larger, more established airlines.
Flair – an ultra low-cost carrier based in Canada who work with AIP – scaled up its operations from one aircraft to 19 in 18 months, according to Weiss.
Investment can also be used to alleviate supply chain issues, caused by high interest rates and labour shortages, that have hit Boeing and Airbus deliveries and helped keep ticket prices high.
Through this investment, pressures on supply chains are being alleviated, AIP say, with the “hope of accelerating the delivery of aircraft for low-cost carriers.”
Weiss said “we raised a fund to invest in suppliers, small and medium aerospace suppliers that have difficulty in the current environment, particularly regarding supply chain.”
“These suppliers are at the lower rung of the supply chain and we’ve designated capital to invest in them to help support their rebound to help alleviate the high labour costs and interest rates that have affected them,” he added.
Jared Ailstock, managing partner of AIP, agreed that investment decisions can help to “ease some of the strains in the supply chain right now,” adding that cash injections boost manufacturers’ ability to deliver aircrafts and “really ramp up production.”
It comes as supply chain problems are forecast to continue hampering the sector into 2024, with Boeing boss David Calhoun recently telling an event in Doha that “we have to resolve the supply chain issues and the surprise associated with it… That is not a short-term job. It sounds like it might be, but I think it could take all of this year and probably all of next year.”
At its launch announcement last month, AIP managed 30 aircrafts, alongside a Boeing MAX orderbook of an estimated 68 aircrafts. The firm recently raised $230m to finance the delivery of seven Boeing 737s.