What Are The Big Issues Facing Middle East Carriers And Where Does The Future Lie?

Transcript

Peter Harbison:Abdul Wahab, as the guardian of the Middle East carriers, as you've been for many years, big picture, what are the issues at the moment? Where are we heading in the next 3 or 4 years?

Abdul Wahab Teffaha:Definitely, when you look at the region, I mean, the geopolitical situation in the region is definitely a concern for everyone. Now, we try to avoid talking about it because it has too many sensitivities and we just try to describe it as it is. But having, you know, unrest and civil wars in Syria and Libya, in Yemen, having a regional conflict, Israel, Palestine, the Arabs as a whole, having an added regional disparity, Iran and the rest, Iraq and so on. I can name many. I mean, if you want really to list what kind of crises do they exist in the world now, Probably 90% of them exist in our region. In spite of that, in spite of that concern and this, this worry that, that exists in everyone's mind in the region, the airlines are focusing on what really matters, which is being a force for good, connecting people, playing a greater role in trade. This is why the airlines of the region have been able to continue, continue their growth, although it's not at the levels that we have been seeing previously, and trying to, to adjust the way they are doing their business, taking into account those regional instabilities. Especially when it comes to restrictions on flying over certain routes, over certain countries, in between countries, and, and facing, of course, one of the, you know, I know the world all over is facing the terrorism threat. But let's not forget that the biggest, the biggest casualties of terrorism are still in the, in the Arab region. So with all of that, airlines are focusing on, on growth, on delivering value for money to the customer, on, on reaching out to the customer and trying to convince the customer that we are there, we are service industry, we're serving them, they are our bosses, and we will continue to do that in the future.

Peter Harbison:Yeah, I think it's quite extraordinary when you, when you list all of the, the headwinds that exist in the Middle East, to imagine in fact there is still quite significant growth, both between regions but also within the region. Just imagine what it would be like if we did have a little more placid environment to work in. When we, when we talk about, generally speaking, the Middle East carriers, the reflex is to think about the Gulf carriers because they've had the biggest impact on the world outside, in recent years anyway. But of course, there's a lot more happening now, isn't there? Saudi is transforming itself in many ways, and we've seen the revival of Gulf, but they're not the only carriers, are they? There's a lot more going on in the within your organization?

Abdul Wahab Teffaha:Definitely. You know, if I look at the region of the— during the last 50-plus years, you know, the growth and the performance of the airlines was never linear because of the peculiar circumstances that the region faces. Actually, you would see that traffic growth, although it was growing, the trend was always upward. It is going up and down, up and down every year. It's like an EKG if you look at it in hindsight. Previously, the situation was as such, you know, 20 years ago and before that, the regional traffic used to represent the cushion when there was an international crisis, then when there was a downturn, financial crunch, financial crises, epidemics, and so on. The regional traffic, which is composed mainly of VFR tourism and religious traffic, which is very important in the region, it used to represent the cushion because it was always there and it will move. Even religious traffic. I joke and talk to my friends in Saudi Arabian Airlines, you're lucky because When times are good, people go and pray. When times are bad, people go and pray even more. We had that cushion. Now, in fact, the cushion for the region's airlines exists actually in the global reach. This is why the whole region is growing, but that doesn't say that we have disparity between levels of growth, type of challenges, The set of challenges that are faced by the likes of Emirates, Etihad, Qatar Airways are totally different than the ones that are smaller, but the level of success is no different. I'll give you an example. Middle East Airlines is probably one of the smallest airlines in the region. Middle East Airlines, since its restructuring in 2001, has been consistent in delivering profits year in, year out. We're talking about 8% profit-to-revenue ratio, 8% to 10%. This is one of the examples of the really good examples of how airlines of the region have adapted to a situation which is totally unpredictable. How did they do that? How did they succeed in adapting to a situation? Usually airlines, you know, airlines are very susceptible, very exposed to any kind of shift in politics or shift in economics by focusing on actually where are the— where is the traffic going? What kind of value that we deliver to the passenger that the passenger actually would decide to choose us over anybody else. And this is really the kind of focus that, that is across the board, that is not different between one airline to the other. But of course, sizes are different and types of challenges are different. But again, the focus on the customer and the value of the customer and what kind of value do we deliver to that customer is something that is across the whole region and across all airlines.

Peter Harbison:Yeah, it's a very interesting point in that sort of adversity. An airline that's had to adjust quite enormously over the last 2 or 3 decades has been Gulf Air, which used to fly to Australia, of course, not so long ago. But that was before the split of the different Gulf states and the creation of their own airlines. You're now making something of a revival. How's that working and how effective is it going to be?

Krešimir Kučko:Well, of course, we're not going to get to that point.

Peter Harbison:You're not coming back to Australia?

Krešimir Kučko:Well, hopefully, inshallah. But at this point, no, we make a clear new strategy and as my colleague was mentioning, the focus is on the customer. Our, one of the strategy goals was, is also to be best in class. And the latest acquiring of our aircraft, which begins with the new Dreamliner, basically by industry standards just confirms that. This is— we are talking actually first-class seat in business class. That is maybe something new on the market. Economy, it is around premium economy, not quite maybe as per industry standard, but but business class definitely is. We did benchmark with the first-class seats of the old carriers flying to the region, and it's in the top 3 to 4, let's say. But of course, the restructuring, optimization of the processes, this is something that is typical more for all airlines, except maybe here we need to pay more attention to the broader interest than airline itself.

Peter Harbison:We were talking before about airports in the region. Europe's not the only place that has infrastructure constraints of one kind or another. They're a bit different in the Middle East, but I mean, how do you see that evolving, particularly in Bahrain?

Krešimir Kučko:In the region, you see, there are airports that are built to accommodate the growth of all airlines in the region, like It's Bahrain, new airport next year, going to open new terminal, then it's Dubai. There are airports that more concentrate on national carriers like Etihad. In Abu Dhabi, special terminal. But you have also example of low-cost carrier in Kuwait where Jazeera will build basically their own terminal. So, overall, fortunately, that is the one problem at least that it's not that concern of airlines. Airport support is Okay, slot policy, it's favorable.

Peter Harbison:And your home base, you're quite happy? Sorry, in Bahrain, you're quite happy with the way things work there?

Krešimir Kučko:Yes, we are, man. We are more than 60% of the traffic, and with this new terminal, idea is to be the fastest connecting airport in the region and hopefully globally.

Peter Harbison:So what is your network strategy? I mean, you're surrounded— not surrounded, but you've got some very large long-haul hub carriers next to you.

Krešimir Kučko:Well, we do first— what we did is consolidation of the home base. This is GCC and MENA region. We did add additional routes. We increased number of frequencies to existing ones. We are flying now 8 times to Dubai a day, for example. And then we also, second phase, strengthened the strongest points of our network, which is India subcontinent, and at the same time slowly and carefully spread, let's say, the wings a bit outside the region. So we're opening Casablanca, Baku this year. Next year, going to be focus Europe in order to build sustainable base for ultra-long destinations.

Peter Harbison:How do you differentiate then from, from Dubai, Abu Dhabi, and Qatar in terms of their hub carriers. I mean, you're competing with some pretty serious contenders.

Krešimir Kučko:Well, it's not only them actually, it's low-cost. It's— we see it at the moment maybe as a bigger threat even. The growths are great. All the low-cost carriers in the region, I mean, almost every year a new low-cost carrier is founded. But as I said, it's the only way you can do it is, I think, if you are by size smaller aircraft airline, is by quality of service and try to provide to our customers as seamless as possible travel. That is, that's where we see also the help of the airport, new airport, who's supposed to be the really fast connection airport.

Peter Harbison:So you're very much a transfer, 6th freedom operator. Yeah, like, like they are. Yeah, I think that's, that's, that's a big sea to swim in, isn't it?

Krešimir Kučko:Well, definitely.

Peter Harbison:I mean, we see Oman Air, for example, looking to, to revise its strategy to compete in that market. How do you, how do you rank yourself with Oman Air, for example?

Krešimir Kučko:Well, we did with them actually quite, quite well. Actually, we take over the majority of the capacity between between Muscat and Bahrain. Of course, we have a commercial cooperation and code sharing, and this is basically something that we want to apply with the other, with the Big 3, in fact. So probably, you know, to just release that, that can raise their capacity from our hub and to find the synergy in that sense.

Abdul Wahab Teffaha:Peter, there is something I would like to add to what Simir said, something that is specific to all emerging aviation regions. We do not have the situation of a mature market like in Europe and in the US. In Europe and the US, with the introduction of new business models, you would see a big structural shift in how the airlines do business because, because it's a mature market. So the pie has already been identified and the size of the pie is almost constant, but it organically grows a little bit more every year. And the situation of the Middle East or the situation of Asia, for that matter, The pie itself did not reach its full potential. So if you take, for instance, the Arab region, almost 20 years ago, the ratio of passengers to population used to be 1 to 3. Now the ratio is actually almost 0.6 to 1. So imagine what happened during those last 20 almost 20 years. What happened is that the market has expanded exponentially, and this is what gives the opportunity for the airlines. And not, you know, again, I go back to Middle East Airlines because I know a lot about what's happening in Beirut because I live there. You know, for instance, Emirates, Etihad, Qatar Airways, They operate widebodies, sometimes narrowbodies in the case of Qatar Airways, almost like 15 flights a day as opposed to a maximum of 6 flights a day to these destinations by Middle East airlines. Everybody is happy because the market has grown to the extent that it is supplying that demand which corresponds to to the capacity. This is no different than in the case of other airlines. There is still a huge potential in the market. If we look at the population dynamics, almost 60% of the Arab population is below 30 years old. Millennials, they constitute around 50%. So you're talking about the potential of continuation of exponential growth in the region. You said it first. Imagine if the situation in the region is placid. That kind of potential is going— actually, it's going to require more airlines, more aircraft. And I am sure that the region is capable of providing those airlines with the fuel They need to continue their growth in the region. There is no alternative for air transport. It's so vast. And the lack of, you know, viable alternative infrastructure would make the use of aviation as a necessity rather than as a luxury. In Europe, you can go use high-speed rail. Europe is small, so really the potential fuels that kind of tampers a lot the level of competition or the pressures of competition that you are alluding to when it comes to Gulf Air or Oman Air as opposed to the big 3 that are neighbors.

Peter Harbison:There's another constraint, of course, on growth in within your region, and it's one that you've been pushing for a long time, and that is market access. There still tends to be very restrictive market access regimes. How much is that changing and how do you see that going?

Abdul Wahab Teffaha:You know, I won't say it publicly so you didn't hear it from me, because I try with other colleagues and the industry and the CEOs of the airlines to continue to push for more liberalization. But I have to give credit where credit is due. Governments of the region have been listening, have been actually easing market access. They did not go the full extent where we were trying through the, you know, the Damascus Convention, which was done in 2004, to really emulate what happened in Europe to create a single aviation market. It didn't happen as yet, but I think there is no government today, no government official today that would tell you, no, actually protectionism is better. So this is a great improvement. While other governments in the world are falling back to some sort of protectionism in the region, All the officials are convinced that liberalized market access is actually a must. The question is, they tell you, okay, for me it's a matter of infrastructure. I don't have enough, you know, the proper airport for me to be able to really open up the market, which is more of an alibi rather than actual justification. Because, you know, when the demand comes, when the economic stimulus of that kind of the, you know, aviation creates, it puts pressure on the governments to, to invest in the infrastructure. Going back to Beirut, you know, I really am— you know, I've been here for 4 days. I already miss Beirut. Going back to Beirut issue, they built an airport 20 years ago. With the aim of we will have 6 million passenger capacity. Then the Prime Minister was actually criticized. Why 6 million? Who needs 6 million? Who will actually— 3 years ago, Beirut Airport reached 7 million. So now there is pressure on the government to expand the airport. So liberalization is a must for everyone, and it has proven without any doubt that it is an economic stimulus, that they need to do it. Any kind of justification needs to be put aside because at the end of the day, aviation is such a great driver for economic growth. It was proven already that no government official now can actually admit that, no, I'm against liberalization, which is a good, good It's a good place to be.

Peter Harbison:One of the other interesting developments on that front is that the EU is talking now with the GCC states to liberalize on a bilateral basis. How's that progressing? Is Bahrain involved in that? Is that part of the process?

Krešimir Kučko:Yes, actually. I can use some protection actually from my government.

Peter Harbison:He'd like a bit of protection.

Krešimir Kučko:Some protection. Everything that's extreme, not good, to a certain extent.

Abdul Wahab Teffaha:This is not strange. Airline CEOs usually are, we support liberalization, but they say, when it comes to the other one, not to me. That's fine. Ultimately, the relationship with the EU is definitely moving forward, but let's not forget that already In between the Arab countries and European countries, there exist very liberal agreements.

Peter Harbison:More liberal than between the states themselves in many cases.

Abdul Wahab Teffaha:Legally speaking, yes, but practically speaking, very few governments now deny airlines traffic rights to add to their frequencies. Sometimes they say to the airline, okay, not this airport, the other airport, but it is moving in the right direction. I think the dialogue which happened between the Gulf countries and the EU is extremely constructive. I believe that it has to lead to a better relationship between the 2 regions. They are the most the closest regions to each other. I believe it will add value to both regions. Now, there are issues that we need to address when it comes to the EU, you know, such as the EU applies the horizontal agreement, which means that any European airline, irrespective of its nationality, can operate from anywhere in Europe to third countries. Which is something we would like to see reciprocated, that any Arab airline also can operate from any Arab point to a third country. But I think the dialogue is going in the right direction, and I think hopefully it will culminate in 2 regions which are closer together in aviation. That's very positive.

Peter Harbison:That's a good note to be ending on. I'm sorry, we do have to abbreviate this. Any other reflections, Krešimir, that you have on the big issues that are confronting you? You would like a bit of protection, but at the same time you're expanding.

Krešimir Kučko:I was not planning to talk about it, but since he was mentioning, there is some issues. For example, this 5th freedom that can— I mean, Cathay's flying to Bahrain and then to Dubai, so they don't need to really sell tickets between Bahrain and Dubai, that kind of protection. I was thinking of more. Well, I mean, we are burdened with the same challenges as the rest of the world. We have fuel, we have overcapacity, low-cost carriers. You have now what is lately happening, a consolidation on air manufacturer base, so that will also probably, to a certain degree, affect our plans and strategy. In terms of fleet, there is always, you know, the distribution costs which are still in our business model extremely high. And lately we finally managed to keep the good relations with GDSs, but at the same time find alternatives to protect our revenue as well. So this is more or less, yeah.

Peter Harbison:Well, I do wish you luck. Gulf Air is a A renowned old carrier, venerable old carrier, which is undertaking a new lease of life, which is good to see.

Krešimir Kučko:We have a good name, we have a tradition, and we still have. Yes, yes, I said we have, we have, yeah.

Peter Harbison:So good luck with it. Thank you very much. Gentlemen, thank you very much for this short discussion. We could talk a lot more about it, obviously.

Abdul Wahab Teffaha:You should give us an award, actually. We were the only ones who were on time. Spot on time.

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