Flydubai results highlight aviation woes

06 September 2018
Flydubai’s first-half loss demonstrates industry’s vulnerability to rising fuel prices

The first half of 2018 has been a difficult period for low-cost carrier Flydubai.

The Dubai-based airline more than doubled its loss to AED316.8m ($86.3m) between June and January 2018 compared to corresponding period last year, when oil prices were much lower.

The carrier admitted that the 35 per cent increase in the average Brent Crude oil prices between January and June this year “resulted in a price impact equivalent to AED175m”.

This informs the regional market that, as elsewhere, the aviation industry will continue to face difficult times ahead because of rising jet fuel prices, which account for their largest operating cost.

While lower jet fuel prices over the past two to three years have allowed most airlines to bring down airfares to stimulate demand, these also affected yields especially for airlines like Flydubai that have been expanding their capacity.

The difficulty is that oil prices began recovering shortly after most airlines in the region started slowing down or delaying the delivery of new aircraft in order to rein in capacity and improve yields.

As expected, higher oil prices bought with it a different set of challenges: higher operating costs and potentially lower demand due to higher airfares.

This means most GCC airlines’ performance this year and in 2019, when the global forecast looks even bleaker, will rely mainly on how well their strategies work.

Sharjah-based Air Arabia, which has been performing significantly better than its Dubai-based rival – it made $180m profits in 2017 compared to Flydubai’s $10m - has since last year attributed its financial performance to cost-control measures and network expansion strategy.

It is also said that Air Arabia’s strategy to operate four hubs, including in the region’s traditional tourist centres such as Morocco and Egypt’s Borg el-Arab airport, offers strong advantages.

However, Air Arabia’s strategy is not without a flaw. According to Saj Ahmad, chief analyst at UK-based StrategicAero Research, Air Arabia’s profitability hinges primarily on its conservative fleet expansion strategy - at least, relative to FlyDubai’s. That means Air Arabia will either have to wait to get new jets or lease them at higher rates to compete with Flydubai.

Indeed, it appears that 2018 should or would be the year when the region’s airlines create a long-term strategy that works in spite of the unpleasant realities influencing their business such as geopolitical conflicts, strong dollar and fluctuating oil prices, not to mention excessive competition. The specific initiatives supporting these strategies should also be flexible enough to respond quickly to constantly changing market conditions.

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