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The Middle East continues powerfully on thanks to the Gulf carriers, despite some setbacks

16-Apr-2012

The Gulf carriers continued to go from strength to strength in 2011; Etihad made its first (narrow) profit and Emirates again returned the strongest result of any airline globally, even though it was substantially affected by increased fuel prices.

The three major sixth freedom hubs in the Middle EastAbu Dhabi, Doha and Dubai – added 7.7 million passengers between them in 2011, continuing strong growth, despite the regional disruptions. Much of this is testament to the strength of the home carriers, the industry-aligned development policies pursued at each airport and the vision of local governments to transform their cities into major aviation centres. (The contrast with European governments is extreme, as they meanwhile continue to see the sector as a taxation target, to the great detriment of the industry there.)

 Combined, the three Gulf hubs averaged a passenger traffic growth rate of 10.5%, notably stronger than the rest of the Middle East, where international traffic expanded 8.9% through 2011. Doha, home to Qatar Airways, managed a creditable 15.2% increase, to 18.1 million passengers. Closely tied to growth from each hub’s main carriers, all three airports have already announced significant expansion in the near future.

Emirates’ expansion will be the most rapid over the coming two years, with 49 Boeing 777s and A380s to be delivered, greatly adding to its network strength. In contrast, Etihad, previously the fastest growing on a percentage basis, is slowing its expansion rate, reflecting a quite different strategy from its larger neighbour. Etihad, and Qatar similarly, are much more active in seeking out partnership opportunities as a means to expand their reach, although Qatar has plans to expand its network to 170 destinations in four years, adding about 15 new routes per year.

Etihad increased its shareholding in airberlin to 29.9% in Dec-2011, preparing the way for a raft of codeshares and enhanced access to European markets behind the German (former) LCC’s gateway. Coupled with the subsequent codeshare arrangement in Mar-2012 with Air France on Paris-Abu Dhabi routes, these represent a substantial invasion of the European market, a bastion of opposition to the expansion of the Gulf carriers.

This intrusion into hostile territory will become increasingly entrenched as the new Berlin Airport opens on 03-Jun-2012 and as airberlin’s codeshares with Etihad are expanded. It looks now as if the defences of European resistance to the Gulf airlines may have been breached, at least slightly, but with the potential for the trickle to become a torrent – with major implications for the global industry.

The region’s standout LCC success story, Air Arabia, might have been expected to falter in 2012, given its exposure to the more unstable markets of the region. But instead it has continued its successful march, recording a reduced but still healthy net profit of USD74.6 million for 2011. Faced with higher fuel costs and the continued ripples for its operations in Alexandria and Casablanca, the airline’s operations could have proved vulnerable, but over the past few years Air Arabia has built an operation with sufficient mass and flexibility to ride out the worst of the regional troubles. The carrier will add six new aircraft this year, expanding its Casablanca and Alexandria bases. A particular route target is the expanding markets of the CIS.

But with the effects of the Arab Spring and changes in the industry’s competitive structure, not all Middle East airlines fared so well. 2011 was not an easy year for Royal Jordanian. After its net profit dropped by two thirds in 2010, the airline had been anticipating a year of modest profit in 2011, but unrest across the Middle East and North Africa – forcing it temporarily to suspend services to Lebanon, Libya, Iraq, Iran and Egypt during the early months of 2011 – as well as the European economic downturn and the increasing price of fuel, struck the carrier hard.

Over the year, Royal Jordanian suffered four consecutive quarterly losses, reporting a full-year loss of JOD57.8 million (USD81.4 million). This is its heaviest ever annual loss, more than wiping out the profits made in 2009 and 2010.

Gulf Air, once the region’s leading airline, was even more deeply affected, with a range of difficult problems to confront. The airline, which lost more than USD1 billion between 2008 and 2010, suffered further deep losses last year exacerbated by the region’s unrest, directly Bahrain itself. The exact scale of the losses has not been disclosed, but it is clear the carrier’s multi-year turnaround and plan to break even has suffered a major setback.

A decade ago, Gulf Air was one of the largest players in Middle East aviation. As its multi-national ownership disintegrated due to various governments choosing to focus on their own national carriers, Bahrain was left as the sole owner. Locked out of its old hubs, Gulf Air faced a new and increasingly hostile competitive environment. It has also suffered from high fuel prices, poor traffic demand and the recent unstable local and regional political situation, which continues to rumble on in Bahrain. 2012 will be a vital period for the carrier’s future. The rise of Bahrain Air has not helped in this process either, raising the possibility of a merger between the two.

Gulf Air’s owners, the Bahrain Government, are looking at another major shake-up of the airline, with perhaps another major funding injection or a significant downsizing of its operations.

For other carriers, what a difference two years can make! Jazeera Airways underwent one of the most comprehensive industry restructurings ever. After a dismal 2009 and 2010, the carrier spent the next 24 months transforming its results from deep losses to record profits and marking out a clear path for a sustainable future. This was aided in no small part by its higher-margin Sahaab leasing division that generated 52% of profits in 2011 and by the failure of local competitor Wataniya Airways early in the year. The company’s share price has improved by a remarkable factor of 500% over the past 12 months.

Following expansion and development since the carrier launched in Oct-2005, Jazeera had been forced to abandon its second base at Dubai and was struggling in its home market at Kuwait. The local market, opened up by the Kuwait Government with its open skies policy, was characterised by overcapacity, low load factors and stagnant yields. During 2009, 44% of all seats operating into Kuwait were unfilled; in 2010, 51% were empty.

At a national level, the transformation of Iraq’s aviation scene has been remarkable, continuing what began as a trickle of airlines and a handful of routes in 2008. More than 20 airlines have added services to Iraq over the past three years. In the past six months alone, flydubai, Etihad Airways, Emirates, EgyptAir, Pegasus Airlines, Turkish Airlines and (now defunct) Viking Hellas all added new services or extra capacity into the country. Qatar Airways and Jazeera Airways are set to enter the Iraqi market in the next few months.

Iraq’s main hub at Baghdad International Airport now sees regular scheduled operations from two dozen foreign carriers, more than half of which have added Iraq to their networks since 2009.

Even Saudi Arabia may finally start to move ahead. Faced with staid growth in its aviation sector, the Government is opening up a number of possible avenues to breathe more life into its civil aviation industry. The latest move, announced in early Nov-2011, was to create a new and independent civil aviation authority, separating civil aviation responsibilities from the Ministry of Defence and Aviation. The Saudi Arabian General Authority for Civil Aviation (GACA) will now have full oversight of the industry, under the direct control of the Prime Minister. Part of the remit of the newly independent GACA will be to restructure Saudi Arabian Airlines, an until-now tortuous process begun in 2006.

The continuing overhang for the region is instability. Recent turbulence could pale into insignificance if the worst scenarios emerge from current crises involving Iran and, in a different way, Syria; and the Arab Spring nations have also to find a new path to stability. This is not a happy background to what is an industry that, with strong demand, airline growth and increasing liberalisation, has such a bright future. If stability is preserved, 2012 could be for many airlines a very positive year, with expanding access and a number of strong models now well established.


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