Aviation Year in Review 2023

Our aviation team reflects on the themes and legal developments from 2023 in the context of the risks we have helped our clients to navigate in the aviation sector.

1. Technology risk

As an industry where safety and confidence are paramount, it is worth noting that 2023 was one of the safest years on record for aviation with no major fatal accidents involving large turbofan powered commercial aircraft. 

2023 has seen challenges with technology affecting multiple parties across the supply chain, notably with the recall of a significant number of Pratt & Whitney turbofan engines powering the Airbus A320Neo fleet and also the CRM Leap engine which led to the grounding of multiple aircraft as Original Equipment Manufacturers (OEM) investigate and replace parts that may have been contaminated due to potential faults in the manufacturing process. Clyde & Co has been supporting its clients in facing these challenges. 

These issues, together with MRO capacity shortages, new aircraft delivery delays and the latest issues with the Boeing 737 Max are contributing to a squeeze on aircraft availability in the used narrowbody aircraft market. This will continue to impact aircraft values and lease rates through the first half of 2024 and beyond, and will also continue to fuel the boom in the ACMI  market.

In terms of safety, this year saw the grounding of certain aircraft as a result of allegations of suspected fraud at a UK based aircraft parts supplier (AOG Technics), which is the subject of a Serious Fraud Office (SFO) investigation. Clearly, strong and swift action is needed to ensure aircraft parts are correctly certified and safe for use and to maintain confidence in the system.

Safety in aviation can never be taken for granted, as can be seen from two serious incidents at the start of 2024 with the loss of the Japan Airlines A350 on 2nd January following its collision at Tokyo Haneda Airport and the mid-flight damage to the fuselage of the Alaskan Airlines Boeing 737 Max 9 Aircraft on 5th January. 

Lessons should be learned from these incidents: in the Japan Airlines case, analysing the effectiveness of the evacuation and the factors involved in the first total loss by fire of an airliner made largely from carbon fibre and in the Alaskan Airlines case investigating the causes of the damage to the fuselage with OEM, aviation authorities and airlines taking all necessary action.

The aviation industry presents an “irresistible target” for cyber attacks according to a recent Eurocontrol Report, particularly as a high-profile industry involving multiple jurisdictions. The impact of cyber events are significant from an operational, reputational, financial and legal perspective and we have seen airlines faced with this challenge in the last year both suffering cyber-attacks themselves and facing the threat of penalties for not having adequate procedures in place. 

Our specialist cyber team has advised clients in the aviation sector, including providing specific UK and EU advice following an incident leading to the inadvertent disclosure of passenger details within the airline’s loyalty app. This included advising on specific UK and EU considerations, and assisting with regulatory filings in multiple jurisdictions in not only the UK and EU, but in other jurisdictions as well, including Asia-Pacific. We also advised a travel technology software company that supports the airline industry following a misconfiguration leading to the inadvertent disclosure of passenger personal data. This included advising on specific UK and EU considerations, and assisting with communicating the incident to airlines, passengers and regulators. 

At the same time, 2024 will continue to see the development of the use of AI technology, and this brings with it some difficult questions about how it can be controlled and the use and ownership of data.

2. Climate Change risk

2023 has seen an acceptance within the industry that aviation must accelerate positive action to meet its target of Net Zero by 2050.  As a “hard to abate” industry, there must be fundamental change to aviation in the coming decade. 

This was the year that Sustainable Aviation Fuels (SAF) took centre stage in the global debate with the first trans-Atlantic flight using 100% SAF taking place in November and the UK Government pledging to upscale production of SAF with plans for a revenue certainty mechanism and a proposed UK SAF mandate from 2025 requiring at least 10% of jet fuel to be made from SAF by 2030 and five SAF plants under construction in the UK by 2025. 

At the European Level, a new RefuelEU Regulation was adopted in September, as part of the “Fit for 55” package of measures to reduce emissions by at least 55% by 2030 compared with 1990 levels. This will set minimum share of SAF supplied at EU airports at 2% in 2025, increasing incrementally to 63% in 2050. 

SAF is not the only game in town in the drive to Net Zero and stakeholders are pressing ahead with other avenues such as alternative aircraft designs, carbon offsetting schemes and operational adjustments. 

At the finance level, sustainability and Environmental, Social and Governance (ESG) issues are becoming increasingly important with many lenders and operators watching industry developments as climate credentials will be crucial in attracting finance. The Draft Delegated Act was published this year, bringing aviation into the EU Taxonomy Regulations as a “transitional activity”, which recognises that certain aviation activities such as leasing, manufacturing and transport may be deemed to make a “substantial contribution” to climate change mitigation if they comply with the necessary criteria. It is expected more clarity on these criteria will be provided in the coming year.

The willingness of airlines to demonstrate their ESG and sustainability credentials should not obscure the potential dangers of overstating these claims as can be seen from the decisions by the UK Advertising Standards Agency (ASA) in 2023. In three cases brought against major airlines, the ASA struck out the offending advertising claims, stressing the need for robust evidence in substantiating any environmental claims which must not be misleading.

There are significant challenges ahead in the climate change transition, not least the need to produce enough SAF to meet demand, and Clyde & Co will continue to assist our clients in navigating this increasingly complex field.

3. Geopolitical risk

The Russian invasion of Ukraine and Israel/Hamas conflict have both had a significant impact on the aviation sector, with Clyde & Co playing a central role in the ongoing legal dispute over the Western leased aircraft stranded in Russia. Airlines have needed to react quickly to operational issues in potential conflict zones and overcome challenges with their supply chains effectively.

4. Economic risk

The global recovery from the Pandemic in 2023 meant passenger numbers have returned to pre Covid level in many jurisdictions. Aircraft orders are at record levels with strong demand demonstrated at the Dubai Air Show in November but the backlog remains an issue, with significant delays to deliveries as OEMs grapple with their own supply chain issues. 

Clyde & Co has been very active in assisting its client airlines with new orders and managing the challenges of delayed deliveries.

There have been liquidity challenges for airlines in 2023, with high fuel costs and inflation to contend with. Some of the additional costs faced by airlines have been passed to passengers and this is likely to continue in the coming year. 

5. Regulatory risk

The EU Corporate Sustainability Reporting Directive (CSRSD) was published in January 2023 and establishes an EU framework for ESG and financial reporting. It will soon be a legal requirement that airlines operating within the EU comply with the rules on sustainability reporting, as well as being important from a reputational and brand perspective. It is anticipated that compliance with CSRSD will involve additional costs, but this should have the benefit of demonstrating strong sustainability practices which may offer competitive advantage. The implementation is phased from 1 January 2024.

2023 also saw the unveiling of proposals for development in airport slot regulation, with the opening of a consultation with a view to reform of the slot system. The current slot system has evolved to allow historic slot rights to be held by the major airlines in the UK and the existing system has led to calls of unfairness and a lack of transparency. The reforms will need to balance the somewhat conflicting interests of various airlines and airports and has the potential to increase market competition. The UK Government believes that there is value in establishing a clear new legislative framework for secondary trading of slots to provide transparent, clear and fair rules for all parties. 

6. People risk

2023 has seen some alleviation of the staff shortages arising from the Pandemic although there have needed to be adjustments to services over the year. Industrial disputes in some regions also added to the challenges. 

This year saw much discussion of Artificial Intelligence and the leading airlines are already using AI to improve efficiencies in operations as well as to increase customer satisfaction. As with other industries, aviation will need to adapt the new technology to achieve a complementary relationship between machines and people with no compromise on safety.