Air Transport’s Outlook

Transcript

Abdul Wahab Teffaha:Good morning, everyone. It's extremely gratifying to be here after Peter and Paul. I feel like a Corinthian living in Rome. Let me start first by thanking the AACO commenting on what Peter said in his excellent presentation about the ugly part, which is the fuel prices. Now, there is a saying in the Arab world which goes like this: a monkey is a gazelle in the eyes of his mother. So in this story, The monkey is the oil price. The mother is the states in the Arab world. And of course, the oil price increase is considered a gazelle in our part of the world. It's not a monkey. It's not ugly at all. No offense to the monkeys, of course, because I love monkeys. Let me go quickly to where I want to share with you some thoughts that I have and lots of which I share with Peter and Paul. Economic update, I'm going to skim through this part because what Peter presented this morning is actually more than enough. The global air travel market and what's happening to it, The Arab air travel market, Arab airports, Arab airlines, and the Arab aviation outlook. You will find differences between the numbers which I will mention and the numbers that were mentioned by Peter. The reason is he's talking about the Middle East and I'm talking about the totality of the Arab world, which includes the Middle East plus the North African or the African part from the Arab world. Already Paul covered this point, but as you see, the gazelle is moving upward and therefore the Arab economy is moving upward. It's the contribution of the oil prices into the Arab economy is almost 65%. So this is why when the oil prices are going higher, although it's bad news for the airlines, including the airlines of the region, because they pay their fuel bills. It's good news for the economy of the region, and it means that greater disposable income is going to be available for aviation and tourism to benefit from. On the business confidence side, in aviation and in business as a whole, and as part of it, of course, is aviation and tourism. We see that in Saudi Arabia and the UAE, the business confidence is quite high because of better oil prices and some business activity mergers and acquisitions within the banking sector, especially in Saudi Arabia. We see that in the UAE, the extension of credit terms, of course, played a role in that part. What we see globally is lukewarm business confidence, which is a reflection of the politics and geopolitics of what's happening in the world. One day it's great, the other day it's gloom, so it's somewhere in the middle but still on the optimistic side. Now, we go to where problems are evident. The threat on tariffs, the threat of tariffs on automobile industry in Germany has really took a toll on the outlook. And of course, as always for the last 3 years, Brexit, which I don't think anyone, including the British, knows how it's going to play out. It's really, you know, an unknown factor, so anything, any comment on that is going to be crystal ball gazing. On the importance of air transport, which is something that always— I always try to underline, to highlight to regulators, to politicians, to stakeholders, that the air transport is a great contributor to the development and sustainable development of the economy of the world, more so in the Arab world. You look at the numbers— is this— yeah. You look at the numbers in the Arab world, the employment contributed by aviation is 5%. In the world, it's 2%. Economic multiplier in the Arab world, every dollar spent in aviation would actually induce $3 in the economy. Globally, it's $1, $2.1. I'll come back to that number and analyze why is it $2.1 and not the $3 that we enjoy in the region. The contribution in the GDP is 7.8% as an average in the Arab world from Morocco down to Oman, up to Iraq, while in the world globally it's 3.6%. Aviation as contributor and part and parcel of the economic growth in the region is something that nobody can deny. We look at the side of what's happening on the airlines. RPKs and ASKs, Peter has actually elaborated on that, and there are some clouds on the horizon. Economic slowdown, I have been hearing that for some time now. It hadn't happened yet except in a few parts of the world, but really the big big slump is not there yet. I hope it doesn't happen, but all indicators are pointing in that direction. Trade tensions and Brexit are playing a big part in that unknown. On the Arab air transport market, we see the same story that it's tampering, it's not going in the direction, and it's not because of maturity of the market that I will come back to that later on. Basically, it is because of geopolitical tensions. We have serious problem areas in, of course, Libya and Syria, Yemen. We have unstable situation in Sudan and Algeria. Iraq is not yet fully recovered from what happened in the previous years. That impacts, of course, Jordan, Lebanon. Egypt is back to growing correctly on the right side of the scale, but we are not there yet. We have not recovered from the— some people call it the Arab Spring. I call it Arab turmoil or Arab earthquake. I don't know. But it was a year that actually created such an instability in the region that its impact is still going on as we speak. On the international, and this is true on O&D travel to, from, and within the Arab world, we see some different numbers. Within the Arab world, the traffic is 3% down. The Arab world, to put it in perspective, the Arab world travel represents 21% of the total travel of the Arab airlines. So 21% of their market is within the Arab world, and that went down by 3%. Now, the good news, the other side of the coin, is that in a market which represents 35.5% of the Arab airlines' network, it grew by 11.2%. And in travel market, which represents 36.5%, it grew by 2.1%, which is with Asia. Sub-Saharan Africa grew very— in a healthy way by 8.6%, although it represents 3.8% of the Arab deployment of or travelers traveling with the Arab airlines. With the Americas, it grew by 4+%— it represents 3.3%. That is in perspective why the result of the Arab airlines is not as usual as it used to be in the past, or actually in the decade that preceded 2011. These are the forecasts for the future, and of course nobody knows what the future is. If things went in the wrong direction, we're looking at 2%. If things are as they are today, we're looking at 4.4%. If things became better, then we're looking at 8%. So it's really anyone's guess how things are going to evolve in the Arab world. Now, this slide is quite an indication of what Peter was saying. We look at the period between 2003 and 2007, the average growth of airports was 10.4%. The period 2008 to— till 2012, including of course the Arab turmoil of 2011, it went down to 8%. The period 2013 to 2017 inclusive, the average is 6.8%. Now, we have not reached maturity. Those— this declining level of growth is the result of external factors, and I'm— again, I'm going to talk about them a little bit later. The PLF, which is a reflection of the ASKs, RPKs, went down a little bit to 70— almost 74% from the high of 76%. The passenger numbers, and here, this slide, I show the true origin-destination numbers. International, which is growing, this is to and from the Arab world, it's the bases of the Arab airlines, it's about 2%. The domestic is growing a little bit, but the domestic prices are so suppressed. This is not a large contribution in the economic profile of the Arab airlines. The transit traffic is growing, of course, but it's growing better than the others, but it's still tapered off from the high of 2009. 15% growth. What are the Arab airlines doing? Because at the end of the day, it's an equation between capacity deployment and demand. Now, the good news is the Arab airlines are not pumping capacity in the way of the good old days. They are extremely conservative nowadays in what kind of capacity they acquire and what kind of capacity they withdraw from the market in order to match demand to capacity to the best extent possible, because we all know what will be the end result of overcapacity. It's declining yield and declining profitability. The beautiful scene which we see here is that the withdrawal of the aircraft from the Arab fleet are an average age of 13.3 years. The addition of the aircraft is an average age of 3.9 years. Which there is a number which I actually I should have put on the on this slide, which maintains the youth of the Arab fleet at this year at 7.8 years. Now this is still it used to be 7.2 now it's 7.8. This is still the youngest fleet in the world. Now with the rising Fuel costs. This is really timely and trying to manage the highest proportion of the cost, which is because of fuel, manage it in a way by maintaining a young fleet attractive to the customers, at the same time providing the best economies for operations. The Arab aviation outlook, I mentioned optimistic, pessimistic. Optimistic is more liberalization, peaceful resolution of some conflicts, stakeholders' consultation for user charges, and I will qualify that in a minute, and taxation that don't hinder tourism growth because unfortunately, Aviation is extremely taxed, and many of the governments would look at aviation as a complacent sector that if we tax that sector, nobody is going to go on strike, nobody is going to demonstrate, so we can tax it easily. The development of infrastructure, which was brilliantly talked about by Paul, Pessimistic restrictions on market access. Peter mentioned them under the guise of nationalism, patriotism, whatever you want to call that. Some people call it fair competition, but what is meant by fair, it's exactly like the monkey and the gazelle. It's in the eyes of the beholder. Expansion of instability. Hopefully not unchecked user charges, unchecked taxation policies, and limited development and infrastructure. I'm talking infrastructure on the ground and in the air. Now, let's see some examples of what liberalization did for a mature market like Europe. Pre-liberalization, 1978, 1987, the growth rate was 5%, the famous 5%. Because, you know, all forecasters, most forecasters would say, well, the growth rate is going to be 5%. It's an easy, safe zone figure that if it is 4%, I'm not too mistaken. If it is 6%, well, I underestimated. So usually forecasters would give you that number. Well, we forecast 5% as if it is, you know, something that was discovered. In 1988 to 1997, which is the first— actually, the packages, the 3 packages of liberalization in Europe, starting with 3rd and 4th, moving into the 5th, before the full-fledged liberalization and transforming the European market into a single aviation market. It rose from 5% to 6.5%. From 1998 to 2007, with the addition of the low-cost, flourishing of low-cost, expansion of low-cost, and meeting that by the network airlines, actually the growth was 8.1% in a mature market. That actually changed the European landscape market. From 500 million passengers to 1.1 billion passengers in a span of 20 years, which is unusual for a mature market. Very, very unusual. Now, the problem they are facing is infrastructure. This is what is actually keeping the growth to its full potential in check. And this is one of the reasons or a main reason why we see that after the full maturity of the liberalization process in Europe, we see that a decline in the level of growth rate. Now, the second component of optimistic, pessimistic, is instability. In the Arab world— oh, sorry. In the Arab world, we saw in the period— oh my God, you know, I'm trying to be ahead of myself. In the Arab world, the period between 2004 and 2010, we saw 11.7% average growth. In the travel market. In the period 2012 to 2018, we saw 7.6%. Now, the trick is here, is 2011. This is when things started to go out of normality. A 3rd component of pessimistic, optimistic, user charges. Now, some people underestimate actually the effect of the user charges. Wrong user charges, and this is a European example. Airline ticket in 2006 used to be previously 7% airport passenger charges and 3% taxes, 90% the airfare. Or 2016, it's 15% user charges, 6% taxes, and 79% the fare. Airlines have absorbed a lot of taxation and user charges increases, but ultimately it's the passenger who is paying this. Now, what is the actual effect? I mentioned earlier that in the Arab world, $1 in aviation means $3 in the economy. That was the case in 2016 in Europe. It became in 2017, $1 equals $2.50. In 2018, $1 equals $2.10. This is the effect of overtaxation and overregulation. Or leniency in imposing user charges. Infrastructure, best practices. Dubai Airport is probably an example of how the infrastructure needs to be looked at, needs to be planned. You do the development before it reaches the capacity, the throughput reaches bottlenecks. And this is the story of the Dubai Airport and part of its success. It reached 10 million, which was equal to the capacity. Immediately there was a development to 23 million capacity, and the traffic continues to go up. Now it's 93 million capacity with almost 90 million throughput in passenger numbers. Now, this is a best practice in terms of infrastructure development. I can give many, many examples where it's the reverse, where capacity of the airport did not grow with the demand, and what it reached is choking point where everybody is being hurt. The economy is being hurt, tourism is being hurt, the vaults of the government are being hurt because of the less taxes and so on, and most importantly, passengers are being penalized because of that. Now, conclusion: in spite of the cloudy picture, aviation proved to be very resilient. Maturity in the Arab market is still nowhere near what we are talking about. We still have a lot of potential for growth because the— and the suppressed levels of growth nowadays, it's because of reasons out of the control of the airlines. Government policies are actually critical to expand the air transport contribution to sustainable development. Now let me leave you with this thought. Here we learned in this part of the world not to wait for the storm to pass. We learned and excelled in dancing in the rain. Thank you very much. That was a great ending. Any questions for Abdul Wahab? Yeah. Thanks, Nikki. Good morning. Do you think the privatization airport in Arab airport would add or would have an impact on the maturity of the aviation business in the airport? Definitely, privatization is something that every government is looking at, especially at airports, because for a number of reasons. They look at airports as possible revenue generators. They look at concessions. They look at how investment in the airport can be avoided by the government and be moved onto the shoulders of the private sector, which is fine. This is the right of every government to look at its economic outlets and see how to manage them in order to alleviate the burden, the financial burden on the government, and move it onto a profit-making tool. Or machinery. However, there is a caveat. It's extremely important for the government to involve all the stakeholders in the design of that recovery of the investment, because for the private sector, usually they want to get a return on investment as quickly as possible. The easiest way, and since airports are in limited supply, so there is no basically competition in airports except globally. So if there is a city where— a major city where you have one airport, if the prices, the user charges are going to get too high, nobody is going to build another airport to compete with the first one so that, you know, to continue to offer better prices. And this is where the government needs to be extremely careful. In designing how this return on investment needs to be involving stakeholders like the airlines, the airport would-be operator, and how that return on investment and recovery of the capital is going to be done over which period of time. Because actually experience has shown us that Being hasty and moving away an airport or infrastructure into the private hands without providing proper oversight of how much the user charges are going to be is going— footing oneself— shooting oneself in the foot because the private sector is going to impose whatever user charges The biggest one which will be hurt is the airline which has its base in that city, which is basically a national airline regardless whether it is owned by the private sector or it is owned by the government, and the prices are going to be jacked up. Then what will happen is that travelers are going to avoid that airport. We've seen that in many locations, and the best way to handle it is not to say don't privatize, but to say privatize but with due diligence about how can you actually have this privatization, have this airport operational, built, and properly with the proper user charges that will not hinder or deter travel to the city that has that airport. Thank you. You showed a nice graphic about the Dubai Airport success and the infrastructure development. How much of the home-based airline, the flag carriers, are capacity growth do you attribute to the activity and to— how much of it is the infrastructure development? How much of it is the airline? It goes hand in hand. Let me give you the opposite picture. If the airport did not expand the infrastructure, Emirates Airline would not have been able to achieve its current status on the world stage as a global connector. No airline can achieve a status of global connector without the proper infrastructure. We talk about Istanbul Airport. You know, somebody mentioned the case for Istanbul Airport. Istanbul Airport reached like a crushing point of bottleneck for around 2, 3 years, and that actually created problems primarily for Turkish. It created problems for Turkey as a whole because I heard it from so many airlines. Turkish wanted to expand, to add frequency and so on. In return, the other airlines, when they wanted to add frequencies because of the growth of the market, the response from Turkey was, we don't have slots in the Atatürk Airport. That created disputes, that created some tension between between states. No, we will not give Turkish until you give us a slot. So with the new airport, this restriction has been removed. So without the proper infrastructure, that choking point of bottleneck is going to impact all the airlines. It's going to impact more the economy and the flow of passengers and the ease of that flow. Transiting Atatürk Airport in the last few years was like going in a demonstration. It's a crowd over crowd, people over people. It was really, really hectic. It wasn't easy. Infrastructure goes in the same direction of whether you want to support the plans of the national airline or more importantly support the plan of the state itself in expanding the aviation and tourism sector as a contributor in its economy. And one last question. Thanks. We better— come on, Nikki, faster. Peter Shawsmith, Aviation International News. How optimistic are you about the development of new airlines and airports in Saudi Arabia today? I am optimistic about it because it's not a micro-drive. Airports and infrastructure in Saudi Arabia is not being looked at from the micro standpoint in isolation of the other development in Saudi Arabia. With the Vision 2030, it's a total vision and all of these components need to work in tandem. If one of them actually falls behind, and we've seen recently retributions being impacted when delays are there. And action being taken. I'm quite optimistic with the way the Saudis— Saudi government is handling how this Vision 2030 in all of its components is moving together in order to deliver on the promise of that vision. Thank you very much.

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