Fasten your seat belts

04 March 2003
Passengers on Qatar Airways (QA) flight QR001 from Doha to London got a nasty shock on 22 February when a bombscare forced their aircraft to make an emergency landing in Damascus. At about the same time ground staff preparing another QA aircraft for take-off from Cairo discovered a bomb warning scribbled on a note. Both incidents were hoaxes, but within hours airlines in the region, already preparing for the outbreak of conflict in Iraq, were issuing statements to reassure passengers and investors.

Addressing both issues, QA chief executive officer Akbar al-Baker told a hastily arranged press conference: 'We have already made it clear that we will have no problems flying. Qatar is one of the safest places in the region and QA is a very safe airline.'

Just a week earlier, Al-Baker had given the clearest indication yet that Middle East carriers were in for a bumpy ride, when he announced that in the event of a war QA would relocate its hub services from Doha to Sharjah in the UAE.

Kuwait Airways Corporation (KAC) followed suit when it announced that it too planned to relocate services to the northern emirate in the eventuality of war. 'We will follow our routine security procedures whatever the circumstances,' says KAC director general Sheikh Talal Mubarak al-Ahmed al-Sabah. 'We have a strict security screening system onboard as well as on the ground so we don't intend to take any extra measures following the QA scare. We have an understanding to move our headquarters to a nearby station and Sharjah is one of the points on the compass.'

Further from Baghdad, other Gulf airlines are expressing concern without wanting to appear too alarmed. Bahrain-based Gulf Air hinted it would re-route flights via Abu Dhabi and Oman if military operations in the northern Gulf were to shut down its domestic airspace, while Dubai-based Emirates says it will abide by the diktats of the International Air Traffic Association (IATA) on re-routing its flights away from high-risk areas.

'Emirates did not miss a single flight during the first Gulf war and we intend to follow that pattern,' says group managing director Maurice Flanagan. 'Safety is paramount. We will not fly any route which will be regarded as in any way unsafe.'

Likewise, international carriers serving the region have wasted little time in taking action. British Airways has redirected its flights to the Gulf via Larnaca in Cyprus and halved the number of services it plans to fly to the region. Flights to Muscat have been suspended indefinitely. Other international carriers are expected to follow BA's lead by scaling back their services as the situation unfolds.

IATA, which represents 98 per cent of international scheduled air traffic, is responsible for assessing where it is safe for airlines to fly. 'We have already concluded a contingency plan for airlines in conjunction with the ICAO [International Civil Aviation Organisation] and various countries in the region to map out alternative air routes away from the possible war zone,' says IATA regional director Majdi Sabri. 'But in terms of closing down airspace, a great deal will depend on when hostilities start and the duration and intensity of any conflict.'

What is less in doubt is that any conflict will have a profound affect on the number of travellers flying to - and within - the region. During the 1990-91 Gulf war, IATA estimates traffic fell on average by more than 50 per cent and the initial indications are that another war will result in a similar drop-off in business. And this will not just be isolated to the Gulf. Many regional carriers outside the immediate war zone are already preparing to bite the bullet.

Egypt Air, which is highly dependent on tourist traffic, is a case in point. 'Egypt Air could be hit harder than any other airline in the region by the outbreak of a war in Iraq,' says chief executive Captain Ahmed el-Nady. 'We rely on tourism from Europe and Japan, which will be hit very badly. This will of course affect revenue. However, we have only just started to build a picture on the possible impact of a war, and based on this we intend to move quickly to limit our losses by reducing capacity and cutting back on some routes.'

The Egyptian flag carrier's predicament is symptomatic of the dilemma facing all airlines in the region. Dwindling revenue streams as business and leisure travellers choose not to fly will result in redundant aircraft, which are expensive assets for airlines to sustain indefinitely. In addition, operating costs on flights that do remain in service will go through the roof as airlines are forced to stump up for extra war risk insurance and pay more for jet fuel, which has already been hiked by exorbitant crude prices. The result is likely to be higher ticket prices and more government subsidies for most of the region's airlines, which are still heavily reliant on hand-outs from state coffers.

IATA estimates that the uncertainty may have already cost the industry globally as much as $800 million. The figure rises dramatically if conflict breaks out. According to IATA, if a war was to last between one and three months the cost to the industry could top almost $6,000 million.

Naturally, airlines in the Middle East, which are closest to the action, will be among the hardest hit. 'In 1991, our traffic fell by almost 60 per cent but this is only a rough guide as the situation is a little different this time. We expect the cancellation of routes to start in early March and we have already begun scaling back our services to Japan,' says El-Nady.

Declining traffic could coincide with rising fuel costs. Globally, airlines spend $40,000 million a year on fuel and the Middle East is estimated to account for 6 per cent of this market. When crude is trading in the $18-25-a-barrel bracket, jet fuel accounts for about 15 per cent of an airline's operating costs. However, when crude reaches its present levels of between $30-35 a barrel the effect is dramatic. Fuel is now estimated to account for between 20-25 per cent of operating costs and this will increase incrementally if crude prices rise further in the event of a war.

'There is very little scope for suppliers to cut prices to help the airlines any further,' says Mike Lumley, Shell Markets' Middle East, South Asia and North Africa sales manager. 'We are already constrained by low margins and since the price of crude began to rise suppliers have had to strip profits to the bone by negotiating fixed price agreements with the carriers. The only elements of flexibility remaining are in service charges and the spread.'

For the airlines, a 1 per cent a gallon increase in the cost of A1 jet fuel over the year could suck a further $600 million from the industry's bottom line. Since the beginning of February, Arab Gulf jet fuel lifted on a freight-on-board basis has increased 20 per cent to just over $36 a barrel, according to the London-based Platt's.

Some are already factoring these costs into their planning. Emirates is among the first to levy a surcharge on fuel for its cargo services to help offset rising expenses in the passenger business. 'Of course high oil prices will be reflected in the increase on jet fuel and we have already taken this into account in our planning. In any case, we buy fuel forward but this will not be sufficient to cover the extent to which fuel prices have increased and continue to increase,' says Flanagan.

Airlines are also sensitive about the prospect of paying more for insurance. Carriers in the GCC already club together in a consortium to place their hull and all-risk liabilities to get the best price. Premiums account for about $100 million of operating costs annually in the Gulf, which buys airlines approximately $1,500 million in third-party liability for any one occurrence.

'If the entire Middle East is considered a war zone there could be higher premiums but we are working with our brokers to reduce this. Any increase in premiums will ultimately be reflected in ticket costs,' says El-Nady.

However, following the significant spike in insurance that airlines were forced to pick up following the 11 September attacks in the US, brokers believe carriers in the region are adequately covered for almost any eventuality. The only exception would be the use of weapons of mass destruction. And if a nuclear weapon were deployed, insurance cover globally would be cancelled and no aircraft could take off.

'The market is extremely volatile at present,' says a London-based aviation insurance broker. 'However, I don't see any additional premiums being incurred if a war breaks out in Iraq. After the 11 September attacks and the Sri Lankan Airlines incident, the market hiked up its hull war risk premiums significantly and there is now enough money in the insurance market to cover most liabilities. If there is an increase in liabilities it will be against passengers and that is likely to be reflected in ticket prices.'

'What you may find is that airspace will be shut down in the immediate war zone covering Kuwait, Syria, Jordan, Turkey, Qatar and Bahrain. In this case airlines will be grounded and there will be no requirement for additional war risk cover,' says the broker.

After two of the toughest years in living memory for the international civil aviation industry, a war will come as heavy blow for some hard-pressed airlines. Over this period the region's carriers have fared better than most. In 2002, the Middle East bucked the trend by posting an 8 per cent increase in traffic on the previous year. However, the pendulum is likely to swing in the opposite direction should a war seriously disrupt flights.

'Traffic from Europe is already dwindling and I expect that pure tourist traffic will also shy away,' says Edward Grauvogl, Oman Air's director of commercial and strategic planning. 'Operators flying international routes from the region will suffer the most, but we should come through relatively unscathed as our core services to Africa and the Indian subcontinent should be unaffected.'

Others could be harder hit. For example, Gulf Air - which is rebuilding its business following the withdrawal of Qatar from its stakeholding consortium - may have to ask for further financial aid. The airline has already tapped its remaining backers, namely Oman, Abu Dhabi and Bahrain, for $345 million in extra funding this year.

In contrast, the likes of QA and Emirates may have to prune their ambitious plans to join the exclusive club of top 20 international carriers. Both airlines have invested vast sums to expand their fleets, buying long-range aircraft to service new routes opening into North America and Asia. However, any significant drop-off in business arising from a conflict will certainly test their resolve to continue.

'Dubai as a hub will continue to grow and I don't see a war having any lasting long-term affect,' says a senior industry executive. 'However, at some point Dubai will hit a glass ceiling because it does not have a big domestic market on its doorstep to sustain its present rate of growth. Emirates could find itself in a similar position to Singapore Airlines, which is scratching around for a merger because its domestic hub has stopped growing. This is a bigger concern for them in the long term.'

In the near term, however, Arab carriers are focusing on their preparations for the impact of war.

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