The global aviation industry is estimated to have suffered accumulated losses of $30 billion since 2001, following one of the deepest crisis ever to hit the sector. A series of blows starting with events of Sept. 11, 2001, followed by the war on terror, the SARS outbreak, the war on Iraq and coupled with rising fuel and insurance costs have all left their negative impact on the aviation industry. Several airlines worldwide have been battling for survival, others have retrenched, restructured and downsized in order to remain in business.
Despite the global slump, the aviation sector in the Arab region fared better than most. According to the International Air Transport Association (IATA), the sector’s growth rate in the Middle East was 1% in 2001 and 7% in 2002. Despite an overall travel decline in the region of 30% during the period March-April 2003 due to the war on Iraq, nevertheless for the year as a whole, the sector recorded a passenger growth rate of 10% and freight at 15%, driven by a 20% jump in inter-regional traffic. Most Arab airline companies were able to reroute flights and organize their fleet distribution to service higher demand generated from within the region. The upward trend is expected to continue. According to IATA, by 2007 regional passenger traffic is forecast to rise by 27%, with travel to and from the Gulf recording the highest annual growth rate of 6%-10%.
The growth picture is reflected as well in projections from the leading aircraft manufacturers. Airbus company predicts that Arab carriers would require 520 additional planes by 2020, while Boeing is forecasting that the total fleet of passenger airplanes in the region will more than double during this period from 409 to 833. The largest plane purchase in history has recently been made not by a major international airline but by state-owned Emirates Air, who placed orders worth $25 billion for 45 large Airbus planes A380 and A340 and 26 Boeing 777-300 (the extra-long range aircraft). Qatar Airways has signed recently a $5.1 billion deal for the purchase of 32 Airbus planes and is planning to double the size of its fleet over the next five years. Middle East Airlines has bought and leased new airplanes and has today the youngest fleet in the region. Gulf Air, Tunis Air, Royal Air Maroc and Air Algiers are all buying and leasing new planes, while Royal Jordanian is exploring the best option to upgrade its fleet as well.
Several important factors underpin this trend toward expansion and upgrading of aircraft. The first is the expected growth in the regional airline industry as a whole, especially in the Gulf. Restrictions imposed on Arab visitors abroad after Sept. 11, caused a reduction of Arab tourist traffic to the US and Europe, while the SARS epidemic reflected negatively on the movement of passengers to Asian destinations. Inter-regional traffic increased substantially and tourism to such destinations as Beirut, Cairo, Amman and Dubai picked up considerably. This trend is likely to continue given the strong regional economic growth expected for 2004-2005.
The opening of Iraq will likely turn the surrounding Arab countries into important entry points to carry the massive inflow of people, goods and equipments into the country over the coming few years. The expected increase will be centered around business travel and air freight service. On the other hand, the growing importance of Dubai as a tourist and a business hub in the region, the strong economic growth of Qatar and the gradual opening up of the Saudi market to attract year round religious tourism are all signs that inter-regional traffic has strong growth prospects.
Two novel developments in regional air aviation took place last year: the introduction of a premium airline and a low cost one. These will undoubtedly increase competition for business among the region’s existing carriers and raise questions about their sustainability and future profitability. The Etihad Airways, owned by the government of Abu Dhabi has been designated the national flag carrier of UAE, competing directly with Gulf Air and Emirates Airline. It redefined the class system altogether, with even its least luxurious class described as a “superior economy”. At the other end of the scale, a low cost airline, Air Arabia, based in Sharjah, UAE began operations last November. Its strategy is to cater for millions of expatriate workers, typically in low paid jobs, mainly from the Indian subcontinent who travel to and from the region each year. To cut costs, Air Arabia is focusing on Internet booking and is providing in-flight snacks and refreshments on sale basis.
Gulf Air, which is in the process of turning itself around following the heavy losses suffered in 2001 and 2002, has also spotted the potential of high demand for cheaper flights, but has responded with a different model. In June 2003, its all-economy Gulf Traveler subsidiary was launched, flying to 17 destinations, mainly in the Gulf and the Indian subcontinent from Gulf Air’s Abu Dhabi base.
In Europe, the UK-based low cost airline, easyJet and Ireland’s Ryanair have been showing impressive profits and recording spectacular growth. In the US, economy carriers such as JetBlue, Song of Delta, Ted of United and the low-cost pioneer South West have so far been profitable. It is not yet clear if the low-cost airlines are likely to do well in the region as they did in Europe and the US. Such a business model requires the existence of a large middle class that takes yearly vacations abroad and shops for the lowest possible bargain air fare independent of comfort and frequency of flights, a structure that does not exist in the region. The business passengers are the ones that had generated most of the profits in the past and are likely to continue to generate more than 50% of revenues for the regional airlines. The business traffic is best served by small aircraft that fly from one destination to another without connections or stopover, and provide luxury service to the passengers with minimal delays. With the notable exception of Emirates, which saw net profits jump by 50% last year, profitability remains elusive for the vast majority of regional carriers. Lebanon’s Middle East Airlines (MEA) managed to turn its first profit for 25 years in 2002. Royal Jordanian showed operational profits for 2002, but remained in the red because of provisions. For others, the breakeven point is still some way off. Even Qatar Airways, which has seen passenger numbers rise by an average annual rate of 35% over the past five years, does not expect to post profits until 2006 at the earliest.
The outlook remains promising for Arab airline companies, supported by strong regional economic growth and an expanding inter-regional tourism market. The major challenges facing these companies is to attain higher profitability levels through both cost cutting and improving their competitiveness. Arab carriers should opt in their expansion plans for one type of aircraft, either Airbus or Boeing planes, in order to reduce maintenance and training costs, increase flexibility and attain economies of scale. They should form alliances with other airline companies, both from within the region and outside it. Cutting costs include as well debt restructuring, closing unprofitable destinations, addressing the usually bloated payroll of Arab airlines and moving strongly toward using the internet for reservations and e-ticketing.
