Middle East Aviation Outlook 2020: Growth to resume, modestly

Summary:

• Middle East seat capacity has been reduced by 1.6% in 2019.
• LCC capacity is up, but flydubai's growth has been hit by 737 MAX delays.
• Emirates and Etihad are cutting capacity in 2019, while Qatar Airways is the sole Gulf three airline with positive growth in 2019.
• Saudia's growth has levelled out, but its LCC subsidiary flyadeal is still growing fast.
• In 2020 seat growth is likely to resume, but only at low to mid-single digit rates.

Middle East capacity is falling in 2019

After slowing to its lowest growth rate for at least a decade in 2018, airline seat capacity in the Middle East has dropped in 2019, according to data from OAG Schedules Analyser (the source for all capacity data in this report).

The unprecedented 1.6% drop in seat numbers compares with growth of 3.8% in 2018, which was itself a considerable slowdown from 6.6% in 2017 and double digit rates in each of the years 2014 to 2016.

International capacity, which accounted for 85.8% of the total in 2019, is almost flat (-0.1%), but domestic capacity has been reduced by 10.2%.

But LCC capacity grew again as the balance shifts

LCCs have had another year of robust growth in seat capacity in 2019, increasing by 9.3%, albeit that is a slower rate than the double digit rates that had been enjoyed for many years previously, and legacy airline capacity has been lowered by 3.5%.

LCC share of total seat capacity in the Middle East has increased to 16.5% in 2019, from 14.9% in 2018.

Emirates cut capacity in 2019 as it transitions fleet…

Emirates remains comfortably the Middle East's largest airline by seats, traffic and fleet. However, after slowing its growth in 2017 and 2018, the airline slipped into reverse in 2019 for the first time in its history, cutting its Middle East capacity by 2.3%.

In winter 2019/2020 Emirates is returning to capacity growth, just, with an increase in seat numbers of 0.5%. However, the CAPA Fleet Database (the source for all fleet and orders data in this report) records only six aircraft deliveries due in 2020, compared with 13 made in 2019 and between 20 and 27 deliveries expected in each of 2021 to 2026.

Emirates is pausing its growth as it moves its fleet composition towards new technology widebodies, and the size of its order book indicates that expansion is likely to resume.

Its 277 orders (confirmed and unconfirmed) are the highest number in the Middle East and exceed its current fleet size of 268 aircraft. Its orders include 35 Boeing 777-8Xs, 115 777-9Xs, 30 A350-900s and 40 787-10s (plus 11 A380s and six 777-300ERs) as at 22-Oct-2019.

…and develops its relationship with flydubai, which was hit by 737 MAX grounding

Emirates' developing commercial relationship with the LCC flydubai has also been a factor in its slowing growth in recent years as the two airlines have increased their level of coordination, leading to some rationalisation of capacity.

However flydubai, ranked number six by Middle East seats, was hit by the grounding of the Boeing 737 MAX in 2019. Its growth has also gone into reverse, its capacity having been cut by 16.8% in 2019.

Flydubai's winter capacity is set to fall by 5.3%, although its seat numbers will grow by 3.7% in the portion of the winter season that falls into calendar 2020. Flydubai expects 27 aircraft deliveries in 2020, conditional on the resumption of 737 MAX deliveries.

The LCC's 237 aircraft orders (as at 22-Oct-2019) are the second highest among airlines in the Middle East and dwarf its current fleet of 56 (including 14 grounded MAX aircraft).

The Emirates/flydubai partnership has further potential

In the year to Mar-2019, Emirates and flydubai jointly handled 3.4 million codeshare passengers and - 737 MAX issues notwithstanding - this number is likely to grow over time.

The evolution of flydubai's business model from pure LCC to a more hybrid approach, together with the migration of its fleet towards new technology longer range narrowbodies, has helped it to fit better into its commercial partnership with Emirates.

Between 27% and 30% of flydubai's traffic is transit passengers, 10% of those with Emirates.

Qatar Airways is the sole Gulf big three airline with positive growth in 2019

Qatar Airways is the only one of the three Gulf super-connectors to increase its capacity in 2019, with growth of 7.2%.

This growth was the fastest among the top 10 airlines ranked by seats in the Middle East, in spite of the MAX grounding (Qatar has 55 737 MAX 8s on order, with four due in Dec-2019 if deliveries resume, and six in 2020).

By Middle East seat numbers in 2019, this has taken Qatar above Saudia to second place, up from third in 2018. Qatar is growing winter 2019/2020 capacity by 5.3%, so it too is showing some signs of slowing its growth.

Qatar Airways has 54 aircraft deliveries scheduled for 2020 - double the combined number for Emirates and Etihad and its highest ever annual total.

The airline has 234 outstanding aircraft orders at 22-Oct-2019, compared with an existing fleet of 230. The 2020 deliveries represent 23% of its current fleet, suggesting continued strong growth, even if a significant proportion are for replacement.

Qatar Airways continues its equity partnership strategy

Qatar Airways signalled its continuing commitment to its strategy of airline partnerships when it expanded its codeshare agreement with LATAM, less than a month after the Latin American airline group signed a new partnership with Delta Air Lines in Oct-2019.

Delta - which has been a leading mouthpiece for anti-Gulf airline rhetoric for a number of years - agreed to take a 20% stake in LATAM, in which Qatar Airways already has 10%. Delta's announcement delivered Qatar a 50% windfall on paper, as the share price soared in Oct-2019 from its previous two year low.

Qatar Airways' strategy of taking equity stakes, which also embraces a 5% stake in China Southern, 10% of Cathay Pacific, 49% of Air Italy and a 20% stake in IAG, is set to extend to airports.

A 2018 agreement by Qatar Airways to buy 25% of Moscow Vnukovo Airport could move to completion in late 2019 or 2020.

Etihad again cut capacity in 2019, but is growing slowly in winter 2019/20

Following a 2.4% cut in 2018, Etihad, ranked fourth by Middle East seats, is cutting its capacity by 2.9% in 2019. After slowing, and then reversing, its historically high growth rates, the airline is operating 2019 seat numbers that are back to their 2015 level.

It has particularly reduced its winter capacity over the past two years, giving its schedule a greater summer bias than before.

This winter, Etihad is making a tentative return to growth, with seat numbers up by 1.3% year-on-year, but this is very slow compared with the regular double digit growth it pursued until 2015.

Etihad aims to restore profit in 2023 and continues with codeshare strategy

The failure of Etihad's equity strategy and heavy losses led to management changes, restructuring and capacity rationalisation. It is now midway through a five year turnaround plan to restore profits by 2023.

Etihad has 14 aircraft due to be delivered in 2020, up from 11 in 2019, and this will rise to 22 in 2021 then 30 in 2022. Its total of 102 orders as at 22-Oct-2019 is the fourth highest in the Middle East.

Although Etihad's equity investment strategy has largely unravelled over recent years (bankruptcies for airberlin, Alitalia, Jet Airways, Etihad Regional), the airline continues with a strongly partnership-based approach.

Its total of 54 codeshare partners is higher than for any Middle East airline (Emirates has (24), Qatar Airways (22), Oman Air (17) and Saudia (13)).

Among these relationships, expanded agreements with TAP Air Portugal, Gulf Air and EgyptAir took effect in Oct-2019 and will feed into Etihad for a full year for the first time in 2020.

Etihad and Air Arabia plan a new LCC for Abu Dhabi

In a bolder strategic move, in Oct-2019 Etihad and Air Arabia announced plans to launch a joint venture company that will be Abu Dhabi's first low cost airline.

To be named Air Arabia Abu Dhabi, the new airline will "complement" Etihad's services and will have a board of directors nominated by both of its parent companies.

Full details and the planned timeline for the LCC have yet to be announced.

Etihad and Emirates have a closer working relationship than ever before

Although recurrent speculation about a tie-up between Etihad and Emirates has frequently been denied by both, the slowing of growth by the two UAE airlines seems to have engendered a greater spirit of cooperation.

Emirates president Sir Tim Clark has said that he has a closer working relationship with Etihad and its group CEO Tony Douglas than ever before. Areas for potential further cooperation include MRO, supply chain, and even fleet management.

Saudia's growth has levelled out…

Saudia is the region's third largest airline by seats and more than twice as big as Etihad, but receives less attention from industry watchers than the Gulf Three.

Based in the Middle East's largest market, Saudia has resembled an awakening giant in recent years, although its seat capacity is flat in 2019 (in fact, reduced by 0.1%), after several years of growth.

Its winter 2019/2020 capacity plans are also flat year-on-year and it has just six aircraft deliveries due in 2020 out of total orders of 79 as at 22-Oct-2019.

Saudia's order book is dominated by new technology narrowbody types (A320neo family), with which it can cover the Middle East, South Asia and much of Africa, even if it does not have the same long haul ambitions as the Gulf three.

…but Saudia's LCC subsidiary flyadeal is still growing fast

The growth mantle in the Saudia Group is still tightly gripped by the rapidly expanding flyadeal, which only launched in Oct-2017 but is the region's 15th largest airline by seats in 2019.

Saudia's LCC subsidiary's capacity growth of 78.1% in 2019 is faster than any other airline ranking in the top 50 in the Middle East. In absolute terms, it contributed the second highest number of incremental seats to the region in 2019, only behind the much larger Qatar Airways.

Flyadeal plans seat growth of 21.4% in winter 2019/2020 and, having cancelled earlier plans to acquire 737 MAXs, has 30 A320neos on order, with delivery expected from 2021. It has also reportedly been discussing an ACMI agreement with IAG's Vueling to supply it with domestic capacity.

Oman Air's growth is slowing due to 737 MAX delays

Oman Air has taken fifth place from flydubai in 2019, after growing its Middle East seat numbers by 3.3%. However, this is slower than its 8.7% of 2018 and its seat capacity this winter is growing by only 0.8%. Oman Air is due to receive nine new aircraft in 2020 - the same as in 2019.

Muscat International Airport's new international terminal opened in Nov-2018, giving Oman Air at least a decade of growth capacity at its hub.

However, the grounding of the 737 MAX has caused the airline to pause its growth for now. It has five MAX aircraft already (at 22-Oct-2019), making up one sixth of its narrowbody fleet, and a further 23 on order. It expects nine aircraft deliveries in 2020 (seven MAX 8s and two 787-9s).

2020 outlook:

Modest growth to resume

At some point, slower growth in the Middle East was perhaps inevitable. There had been over two decades of strong growth, particularly by the Gulf three, and this was always likely to lead to a period of consolidation while the market digested all that capacity.

A combination of (at least some) overexpansion, Etihad's unfortunate equity investment strategy, the lower oil price since 2015 and a slowing global economy have all contributed to the Middle East's capacity slowdown, with the MAX grounding an additional feature in 2019.

The CAPA Fleet Database projects 179 aircraft deliveries in the Middle East in 2020, representing 11% of the current fleet and 12% of current seat capacity. MAX aircraft currently grounded would add a further 1% to seat capacity.

However, a significant proportion of these deliveries will be used for replacement of retired aircraft. This proportion is difficult to predict, but the average fleet age in the Middle East is 11 years, which implies that 9% of the fleet is replaced every year.

Boeing 737 MAX aircraft account for 40 of these projected deliveries, representing around 2% of current fleet and capacity. Any further delay in MAX deliveries would reduce growth in 2020.

The outlook for the Middle East in 2020 is that seat growth is likely to resume, but only at low to mid-single digit rates, depending on retirements and the return of the MAX. Broadly, expect another year in which the market consolidates and digests after its long historic growth binge.

The dawning of a new decade brings a new, narrowbody era for Middle East airlines

At the same time, a new evolution is already under way. The advent of new longer haul narrowbody aircraft and their obvious attraction for airlines like flydubai and flyadeal - and perhaps Air Arabia Abu Dhabi - presents a new scenario for the mid-2020s.

Where to some extent Air Arabia and flydubai are already in the business of linking South Asia with European and north African points, the potential for expansion of these connections is enormous, as hundreds of new long haul narrowbodies arrive. These 150-200 seat aircraft, with widebody economies, will help connect much smaller cities than has previously been possible, creating multiple new permutations.

Each of these airlines help complement their larger full service siblings and perhaps point the way to a much broader capability for the Gulf-based airlines. Add to that the other geographically fortunate independents like Oman Air and the scope potentially widens further.