Middle East Aviation Outlook 2019: Saudia shifts the balance
DESPITE THE near-mediaeval nature of aviation's regulatory structure, it is only relatively rarely that politics intervenes to disrupt airline connections. Perhaps it is the socio-humanitarian nature of the industry's role that often places mere political differences in the shade.
A trade war between the US and China scarcely ruffles the waters of the airline relations between the two great powers (although China has been known to use the might of its outbound tourism value occasionally to dampen traffic flows, when Korea or Japan was being castigated for one reason or another). Generally, frosty political relations tend not to overflow into air services.
Commercial roadblocks are frequently applied, for example Russia's imposition of overflight charges, or many countries' selective use of slot shortages; yet these scarcely discriminate on political grounds.
But nowhere has politics made such inroads into efficient air service operations as in the Middle East. Israel, for example, has for many years been selected for traffic restrictions by many of its neighbours, and some other bilateral animosities have limited mutual services.
Just as Iran, with an educated population of 80 million and a wide diaspora, appeared set to recapture its former place in global aviation, the US withdrew from the Joint Comprehensive Plan of Action (JCPOA), confining Iran and its airlines to a minimal role. And the impact of the Saudi Arabia/UAE/Bahrain/Egypt blockade of Qatar has reverberated in the air as well as on the ground.
Hopefully these developments will not become precedents for aviation policy elsewhere.
Middle East seat growth slowed in 2018
The Middle East experienced its slowest airline seat growth for at least a decade in 2018.
According to data from OAG Schedules Analyser, total seat numbers to/from/within the region increased by just 3.8% year on year, slowing down from 6.6% in 2017 and double digit rates in each of the years 2014 to 2016.}International capacity, which accounted for 84% of the total in 2018, grew by only 2.8%, while domestic capacity increased by a more lively 9.4% (but this was much lower than 2017's 23.3%).
LCCs had another year of double digit growth in seat capacity, 12.2% in 2018, while legacy airline capacity grew by only 3.3%.
The Gulf three grew capacity by only 2% in 2018…
The big three Gulf super connectors had another year of collective low growth in 2018, growing their combined seat count by just 2% (Source: OAG Schedules Analyser).
Emirates and Qatar Airways grew at low to mid single digit rates and Etihad cut capacity last year, but may accelerate a little in 2019.
According to the CAPA Fleet Database, the three are expected to take delivery of 60 aircraft in total between them in 2019, or 10% of their combined fleet at 07-Jan-2019 (this does not take account of any exits from their fleets), the bulk of which are destined for Qatar Airways. This is a clear indication of a significantly reduced rate of growth for the big three.
Summary
- Middle East seat growth slowed in 2018. The Gulf three grew capacity by only 2% and may feel increased competitive pressure from Turkish Airlines.
- Qatar Airways is leading big three growth and investing in other airlines. Etihad is shrinking as its partnership strategy unfolds. Emirates is in low growth mode.
- Saudia's transformation will be the story of 2019. Its LCC subsidiary flyadeal was the Middle East's fastest growing airline in 2018.
…and may feel increased competitive pressure from Turkish Airlines
Istanbul based Turkish Airlines (THY) is not technically a Middle East airline, but operates a global connecting strategy that competes with the Gulf three. THY is bigger than all three of them (75 million passengers versus 59 million for Emirates in 2018) and still growing at double digit rates (+10% in 2018).
The new Istanbul Airport, opened in Oct-2018, gives it a hub with vast expansion potential (although the full transfer of THY's Ataturk operations to its new home has been delayed past its end of 2018 target, possibly to Mar-2019).
For THY, the large Turkish domestic market is an additional advantage, which also feeds into its international network. And Turkish continues to grow its fleet at a healthy rate, with around 100 aircraft due for delivery in 2019/2020.
Qatar Airways is leading big three growth, in spite of the blockade…
Qatar Airways is currently growing the fastest of the three. It was forced to cut capacity in the first half of 2018 due to the Saudi Arabia-led blockade, but returned to growth in the second half and is currently growing winter capacity at a double digit rate.
Qatar Airways is adding routes monthly and promotes plans to continue to do so in 2019. Its aircraft deliveries are expected to amount to 37 this year, the highest of the big three and 17% of its current fleet number.
…and investing in other airlines
In addition, Qatar Airways continues to invest in other airlines, announcing in Jan-2019 that it had added a 5% stake in China Southern to the 10% stake it holds in Cathay Pacific, a 49% stake in Air Italy, a 20% stake in IAG and 10% of LATAM Group.
Fellow oneworld member American Airlines is also a shareholder in China Southern, but American remains antagonistic towards Qatar Airways. Renewed anti-Gulf rhetoric from the big three US airlines, catalysed by Air Italy's growth on North Atlantic routes, may resurface in 2019.
Etihad is cutting capacity as its partnership strategy unfolds
Etihad, which has been stagnating since 2016, cut its seat capacity by 2% in 2018. Following the unravelling of its partnership strategy, a new management team implemented workforce reductions but struggled through 2018 to develop a new direction.
In this confused situation, talk led among other things to a series of rumours of an unlikely hook-up between the UAE's "national carrier" and its Dubai neighbour Emirates, a possibility forcefully debunked by Emirates Airline's President Sir Tim Clark.
Major investments in India's Jet Airways, Alitalia and airberlin unravelled; controversy in India, union resistance and bankruptcy in Alitalia and the bankruptcy of airberlin created massive losses that even the oil rich Abu Dhabi owners had found too much to tolerate.
The troubles persisted. As recently as Dec-2018, airberlin's insolvency administrator filed a lawsuit against the airline, arguing Etihad had reneged on its promise in Apr-2017 to provide financial support to airberlin over an 18 month period, in order to allow its subsidiary to fulfil its financial obligations.
The administrator sought payment of EUR500 million and a ruling from the court requiring Etihad to pay further damages. The court has provisionally set the case's value at EUR2 billion.
Etihad is cutting seat numbers by 4% year on year this winter. It is set to receive just eight new aircraft through 2019, only 7% of its existing fleet size.
Middle East: annual growth in total airline seat capacity by business model
Emirates remains number one, but is in low growth mode
Emirates remains comfortably the Middle East's largest airline by seats, traffic and fleet, but it has been in low growth mode for the past two years. It is developing its commercial relationship with LCC flydubai, a factor in its more restrained capacity growth.
In winter 2018/2019 Emirates' capacity growth is set to pick up, a little, to 6% year on year. It is due to receive 15 new aircraft in 2019, 6% of its existing fleet.
Saudia is the fourth large Gulf airline
The Middle East is known for the Gulf three, but, based on size, the region really has a big four. Saudi Arabia's flag carrier Saudia was Middle East's number two airline by total seats in 2018, behind Emirates and just ahead of Qatar Airways (source: OAG Schedules Analyser).
However, there are clear strategic differences between Saudia and the other three.
By contrast with the exclusively international networks of the Gulf super connectors, Saudia has a large domestic market, which accounts for almost half its seats. Moreover, sixth freedom transit traffic accounts for only 4% to 5% of Saudia's international traffic.
Saudia's transformation will be the story of 2019
The big regional story in 2018 - and extending well into 2019 - has been the transformation of Saudia in a newly liberalised marketplace.
It has accelerated international growth at the parent, full service, brand and has been using its new LCC subsidiary flyadeal to hasten growth in the domestic market.
Turkish Airlines aircraft delivery schedule
Qatar Airways aircraft delivery schedule
Saudia has grown substantially since 2013, growing seat numbers by 62% over five years. It took delivery of 77 aircraft in the three years 2016-2018 alone, more than any other Middle Eastern airline (52 of these aircraft were replacements for older equipment, but contributed some growth through utilisation and seat density).
The parent airline, Saudia, is pausing for breath, growing seats by only 4% in 2018. It is due to take only four aircraft deliveries in 2019, just 5% of its fleet, according to the CAPA Fleet Database.
Looking further out, it will take over the 11 A320ceos currently operated by flyadeal (which has ordered 30 Boeing 737 MAX 8s) and is also acquiring at least 30 A320neo family aircraft.
flyadeal was the Middle East's fastest growing airline in 2018
Its low cost subsidiary, flyadeal, has assumed the role of prime growth engine for the group since its Sep-2017 launch. It grew seat capacity by more than 13 times in 2018, faster than any other Middle Eastern airline, operating only in the domestic market.
From a standing start in 2017, flyadeal was the Middle East's fourth largest LCC by seats in 2018, after flydubai, Air Arabia and the Saudi LCC hybrid flynas. It expects to carry 3.5 to four million passengers in 2019.
Its growth has allowed the Saudia Group to reverse a declining trend in domestic seat share, climbing from 70% in 2017 to 75% in 2018 (it had fallen from 92% in 2012).
flyadeal's Dec-2018 order for 30 Boeing 737 MAX 8s, and options for another 20, signals the strength of its future ambitions not only to continue to grow in the domestic market but also to expand internationally.
flyadeal could launch international services in 2H2019 but even if this happens, its international passenger traffic for the year will be very small.
Saudia is among the world's top 15 airline groups
Saudia has joined the 30 largest airlines in the world and is now also among the top 25 airline groups (based on seat capacity).
The Saudia Group's scheduled weekly seat capacity will exceed one million in 2019 and its scheduled passenger traffic should reach 40 million. In 2015, just prior to the start of the transformation programme, Saudia carried only 28 million passengers.
Overall the Saudi market has gained in vibrancy. As the market was progressively liberalised both Nesma and SaudiGulf launched in Oct-2016, nearly one year before flyadeal, but flyadeal has expanded much faster.
SaudiGulf currently has approximately a 4% share of the domestic seat capacity and Nesma has a 2% share (based on OAG schedules in Dec-2018).
Flydubai is Middle East's biggest LCC, but growth is slow
Flydubai remained the biggest LCC in the region and was also again the number five airline overall, but its growth was only a low single digit percentage in 2018 and its capacity has remained virtually unchanged since 2016.
Middle East: top five airlines by seats, 2018
It is due to take delivery of 20 new aircraft in 2019, equivalent to 31% of its current fleet. However, this is unlikely to translate into capacity growth this year (the airline has at least eight aircraft leases expiring by Feb-2020). OAG data indicate a seat count reduction of 3% this winter for flydubai.
Its codeshare with Emirates carried more than one million passengers on combined itineraries and covered 206 destinations in 2018, with 240 planned by 2022. The relationship with Emirates is growing closer and this should continue to focus both airlines on capacity efficiency more than growth.
Oman Air may outgrow all the other big airlines
Oman Air is the only other Middle East legacy airline with a double digit million annual seat count in 2018 (ranking just outside the top five, with 12.6 million seats).
It looks set to outgrow all of the Middle East big four this year. It took delivery of eight aircraft and grew its fleet by 13% in 2018. Its seat capacity this winter is growing by 17% and it is due to receive 14 new aircraft in 2019, which represents 26% of its current fleet.
Muscat International Airport's new international terminal opened in Nov-2018, giving Oman Air at least a decade of growth capacity at its hub. The airline and airport have been grouped under the same organisation and some form of privatisation is under consideration.
The Middle East airline industry is undergoing significant change…
The collective slowing of growth by the Gulf three is reducing their market share in global connecting traffic, particularly to the still fast growing Turkish Airlines.
Within the three, Qatar Airways is doggedly adding routes and expanding its global portfolio of investments in other airlines. By contrast, Etihad is shrinking and has significantly reversed its equity investment strategy (this tended to focus on financially struggling airlines, whereas Qatar Airways has tended to invest more selectively when it comes to financial performance).
Emirates is growing, but modestly compared with its past rates of expansion. Its commercial partnership with flydubai is growing but is unlikely to develop into an equity relationship. Emirates is also not keen to invest in fellow UAE airline Etihad, although the pressure may grow to develop some commercial cooperation.
Outside the high profile Gulf three, the Saudia Group is expanding rapidly and the order for 30 737 MAX 8s for its LCC subsidiary flyadeal is starting to bring the increasing dynamism of the Saudi Arabian market to wider global attention.
The briefly reawakening Iran market now looks to be confined to its more habitual role as a sleeping giant. Seat numbers to/from/within Iran jumped by 78% between 2015 and 2017, but there was growth of only 4% in 2018.
Israel, geographically part of the Middle East, but for political and cultural reasons a separate aviation market with a focus on European links, continues to be more dynamic in growth terms.
Seat numbers to/from/within Israel grew by 17% in 2018, the third successive year of double digit growth. The positive impact of an open skies agreement with the European Union is taking full effect and European LCCs are pouring in at the expense of El Al's market share.
Aircraft in service versus on order by global region
…and is still the world's most ambitious aviation region
The Middle East region is a patchwork of different markets and driving forces. It is also the world's smallest aviation region by number of aircraft in service.
However, its ambition for the future can be seen in a simple comparison of the number of aircraft orders with the number of aircraft in service for each global region.
With 1509 aircraft on order compared with 1650 in service at 07-Jan-2019, the Middle East has by far the highest ratio of orders to fleet in service of any region in the world.