Aviation in the Middle East

The world’s major economies may be being buffeted in these turbulent times but the Middle East’s aviation industry is one sector that appears to be soaring, along with its profits. However, is this growth sustainable or are the airlines veering towards a bumpy landing? Business Management investigates.

““Despite a slump in sales across Europe and North America, the Middle East aviation sector seemed to perform better than other sectors worldwide"”
-Nadejda Popova, Euromonitor International

Last year was one of the most difficult 12 months for the global airline industry with airlines collectively racking up losses in excess of US$11 billion. Passenger travel contracted by 3.5 percent while cargo movement fell sharply by 10.1 percent. But after the doom and gloom of 2009, the outlook is looking brighter in the aviation industry, especially in the Middle East where many of the carriers have been reporting double-digit growth. The Gulf’s favourable geographic position, combined with the strong regional economies and consumer purchasing power are key ingredients in the aviation sector’s positive forecasts for 2010 and beyond. “Despite a slump in sales across Europe and North America, the Middle East aviation sector seemed to perform better than other sectors worldwide,” says Nadejda Popova, a travel and tourism analyst at Euromonitor International. “The industry [in the Middle East] was faced with slowing growth rather than a widespread contraction. Competition between commercial carriers remained upbeat in the region mainly due to a strong overcapacity in the market.”

According to the International Air Transport Association (IATA), airlines in the region are predicted to post a profit of US$100 million in 2010 – their first since 2005. This positive forecast is a dramatic U-turn from the IATA’s earlier projected US$400 million loss for the year following the US$600 million losses in 2009. The association puts the reversal in fortunes down to GDP growth of 4.3 percent in the Gulf outstripping global averages as well as the airlines grabbing market share through their hubs for Europe to Asia-Pacific.

Regional powerhouses

The rapid ascent of government-backed heavyweights like Etihad Airways, Emirates Airline and Qatar Airways has shaken up the global aviation scene in recent years. All three fly to more than 240 destinations and have around 600 aircraft on order. New routes are being added to their expanding networks with all three launching new flights to regions with strong growth potential such Asia and South America. “They are all entering new markets like China and we have seen Qatar Airways going into South America so they are taking advantage of their geography in order to do this,” explains John Strickland, Director of aviation consultancy JLC Consulting. “So provided they have the schedule, the price and the service quality, they can tap into these traffic flows.”

The strong cash reserves of the major players in the Gulf have helped them to ride out the storm of the past two years – rocketing fuel prices closely followed by the credit crunch and subsequent nosedive in passenger numbers. “The recession has also caused a seismic shift in the airline industry with a loss of demand and revenues previously unimaginable,” says Popova when assessing the effects globally. “Airlines have been forced to rethink policy and airline alliances have become increasingly important as a means of maintaining existing customers,” says Popova.

Emirates Airline is the Arab world’s largest airline and part of The Emirates Group, which includes air travel services supplier Dnata. The group recently posted a record annual profit of US$1.1 billion – an increase of a staggering 248 percent. “This is a stunning rise,” remarks Strickland. “This massive increase in profits reflects their growth strategy.” Emirates Airlines, which has an order book worth over US$48 billion, saw revenue rise by 17 percent in 2009 and maintained its share of premium traffic – a stark contrast to the fact that 30 carriers across the world that went to the wall. Capitalising on its success, the Dubai-based carrier is also boosting its fleet of Airbus 380 ‘super-jumbos’ by 32 (worth US$11.5 billion). Another 58 A380s are already on order. And a recruitment drive will see 700 pilots hired to cover the new routes, the company announced.

To cater for the enormous influx of tourists and business travellers to the region, multi-billion dollar airports are being built and existing ones upgraded. The UAE alone, which recorded 46 million passengers passing thought its six airports last year (a four percent rise), is set for further air travel expansion.

The impressive Al Makhtoum International Airport in Jebel Ali, Dubai, is due for completion in 2017. These airports are forecast to handle 240 million passengers a year. Likewise, Kuwait, Saudi Arabia, Oman, Qatar and Bahrain are expanding and renovating airport facilities that will result in increasing arrivals by at least 300 percent.

The new Doha International Airport is set to open in 2012 and will have the capacity to accommodate 25 million passengers and there are also plans to build a metro system for Doha. “The MENA region has invested heavily, spending more than US$50 billion on infrastructure and US$178 billion on aircraft developments,” says Popova. The development of Abu Dhabi, Dubai and Doaha airports as major hubs for customers passing through on their way from Europe to Asia Pacific and vice versa is why the big three have so many planes on order. Their global reach brings travellers directly to the Middle East, which can benefit local carriers’ business.

Popova, says regional travel has played its part in the boom in business. “In an effort to encourage growth of international tourist arrivals, many commercial airlines increased their efforts to attract more regional travellers from countries such as Saudi Arabia and Kuwait, in addition to lobbying with hotels and other travel accommodation outlets to keep prices down and introduce attractive price offers and discounts to dispel negative perceptions about the region’s elevated costs and prices.”

On a budget

While the big three – Emirates, Etihad and Qatar Airways – have ruled the skies in recent years, the emergence of budget carriers has shaken up the market. The likes of Air Arabia, Jazeera Airways and flydubai have been the rising stars as cost-conscious travellers look for no-thrills means of getting around the MENA region, particularly in these times of economic uncertainty. “Travellers are feeling the pinch and trading down so that’s why we have seen big traffic developments in this area and profitability from companies like Air Arabia and early growth from players like flydubai,” Strickland explains. “The big pool of ethnic workers from countries like India, Pakistan and the Philippines want to go home as often as they can and they can’t afford more than a low fare.” On top of this, carriers like government-owned flydubai are entering riskier territories in the hopes these markets are air travel’s sleeping giants, says Strickland. “flydubai that is taking opportunities that maybe others wouldn’t necessarily see, such as  getting into Iraq or Afghanistan – countries that, hopefully, are going to see good stability for the future. By getting in at the bottom rung straightaway, they are taking advantage.” Air Arabia too has recently announced flights to Iraq’s city of Najaf, 100 miles south of the capital, Baghdad. But despite budget airlines flourishing in the Middle East, they still represent just five percent of air traffic, compared with 35 percent in Europe. It’s a segment of the market ripe for expansion. There is an appetite for growth and demand there but the low-cost airlines need to ensure high standards of efficiency. “flydubai is only a year old but it is growing – we’re not talking about it being profitable yet but it’s still following a key expansion plan,” suggests Strickland.  

While the future for legacy and low-cost carriers across the Gulf is looking good for 2010 and beyond, there are challenges that need addressing. The major hubs like Dubai, Abu Dhabi and Doha may be creating 21st century transportation between cities and the airports but the infrastructure everywhere needs improvement. “Dubai’s had its problem with gridlocked roads. It’s now got the Metro system but we probably need to see more developments of that kind,” says Strickland. For the airlines themselves, trade sources highlight a shortage of commercial pilots in the region, which threatens any further expansion plans, Popova reveals.
“The number of pilots required in the UAE and other Middle East countries is expected to increase by 75 percent by 2020, which needs to be addressed by the local industry and governments.” She adds: “Also, quality and efficiency levels must be improved in order for the region to compete on an international level. Deregulation policies must be implemented, which can further boost route frequency and widening of destination offerings.” Then there are the environmental issues and carbon offsetting that needs to be addressed by the industry in the region, according to Popova.

The threat of rising fuel prices will have a profound effect on any airline’s bottom line. Then, of course, comes the expected crises like the swine flu (H1N1) outbreak restricting travel or the volcanic ash cloud paralysing air space and grounding passengers for days, as over 100,000 flights were cancelled. Indeed, the ash cloud is one of the main reasons for the IATA forecasting the European airlines to lose US$2.8 billion this year. For the Middle East’s burgeoning aviation sector, though, things are really taking off.

State-owned Iraqi Airways dissolved amid row with Kuwait

Like a phoenix rising from the ashes, Iraq’s national carrier, Iraqi Airways, was back in the skies over the Middle East and beyond after being grounded following crippling sanctions and the US-led invasion of the Arab state. Flights between Baghdad and London had even been resumed after 20 years. However, the government has taken the unusual decision to declare the company bankrupt over war reparations with Kuwait stretching back to Saddam Hussein’s reign. Kuwait Airways claims Iraq’s national carrier owes about US$1.2 billion for 10 planes and millions of spare parts taken during Iraq’s invasion into its oil rich neighbour in 1990. Ali al-Mosawi, an Iraqi government spokesman, told The Times: “The decision was made by the council of ministers to dissolve Iraqi Airways because of debts the company cannot pay. They don’t have the money.” A Kuwaiti official was quoted as saying his nation’s flag carrier won’t give up in its pursuit for compensation.  Lawyers claim that Iraqi Government is now liable for the debts. When Iraq’s CEO Kafah Hussan arrived in London recently he had his passport seized and the plane he arrived on was impounded.

Emirates Airline’s bulging order book

• 90 A380s
• 70 A350s
• 18 Boeing 777-300s
• 7 air freighters