The past two years have been a torrid period for the global aviation industry. Already reeling from the impact of record fuel prices in 2008, the market was dealt a huge blow by the global recession.

Plummeting passenger numbers were hit further by fears of a swine flu pandemic last year, as economy and business-class travellers stayed at home and holidays were abruptly cancelled.

Key fact

The Middle East will need more than 1,700 new aircraft worth $300bn over the next 20 years

Source: Boeing

In 2010, despite tentative signs of recovery, there have been new setbacks as a result of the volcanic ash cloud from Iceland, which hit air traffic in and out of western Europe, and the civil unrest in Thailand.

Stable region

Against this backdrop, the Middle East aviation industry has fared better than most. Figures from the International Air Transport Association (Iata) show that although passenger numbers in the region dropped during the early part of 2009, they soon stabilised, while markets in Europe and the US continued to struggle.

People just didn’t travel. Forward bookings evaporated, which put huge pressure on yields

James Hogan, CEO, Etihad Airways

During the second half of 2009, the Middle East was one of the few regions in the world to show consistent growth. Despite this, the excess capacity in the international market, coupled with a steady increase in fuel prices, meant that making money from each seat sold remained difficult for the region’s carriers. As the swine flu scare hit the travel market some carriers reported a drop in yields of up to 10 per cent.

“People just didn’t travel,” James Hogan, chief executive officer (CEO) of Abu Dhabi’s Etihad Airways, tells MEED.

“Forward bookings evaporated, which put huge pressure on yields. Seat load factors weren’t bad, but the pandemic hit all classes from the front cabin [first and business class] through to economy.”

By the end of last year, signs of a global recovery were taking hold, but while the aviation industry as a whole recorded a 3.5 per cent fall in passenger numbers in 2009, the Middle East registered growth of 11.2 per cent.

The lack of open skies affects us. We are forced to sell at the same price as national carriers … We want totally open skies

Adel Ali, CEO, Air Arabia

“The Gulf was affected throughout last year and there was also the hit from swine flu, which was dramatic,” says Samer Majali, CEO of Gulf Air.

“But since the beginning of the year, things have started to improve. Yields have started to pick up, premium traffic has shown some improvement and cargo volumes have bounced back as people start to restock.”

Airline industry net profit
($bn) 2007 2008 2009e 2010f
North America 3.7 -9.6 -2.7 1.9
Europe 6.4 0 -4.3 -2.8
Asia-Pacific 3 -4.7 -2.7 2.2
Middle East -0.1 -0.3 -0.6 0.1
Latin America 0.1 -1.4 0.5 0.9
Africa -0.2 -0.1 -0.1 0.1
Source: IATA

The aviation industry remains at the mercy of global events, and recent weeks have proven how fragile early signs of recovery can be. The steady improvement since the start of the year has been tempered by flight cancellations in Western Europe as the volcanic ash cloud from Iceland shut down operations on key routes.

Iata estimates that the suspension of flights in April cost the industry as a whole $1.7bn and caused a 2.4 per cent drop in global traffic. Middle Eastern carriers were also hit hard. Emirates announced it was losing about $10m a day and Hogan says the cancellations cost Etihad Airways up to $50m. Even Gulf Air, which has trimmed its network in western Europe to the principal hubs of London, Paris and Frankfurt, incurred losses of $10m during this period.

“The first quarter was promising. Out of Europe and Asia we are seeing business travel coming back. First class is taking longer and economy was tracking well until the volcano and Bangkok. This is the industry we’re in,” says Hogan.

Ticket sales during the peak summer season will be a key indicator of economic confidence. With the global recovery still very uneven and the European debt crisis impacting on a core travel market, it is clear the aviation sector remains only part of the way through its recovery cycle.

The country cannot afford to continue supporting a loss-making business. There are other priorities

Samer Majali, CEO, Gulf Air

But Iata, in its latest forecast published in June, predicts the commercial airline industry to return to profitability in 2011, led by a strong rebound in North America and Asia-Pacific. Carriers in the Middle East are already reporting tangible signs the upswing is gaining strength.

“Aviation is a global business and holidays are not a priority at times like this. But in the Middle East we have seen all carriers begin to improve,” says Adel Ali, CEO of Air Arabia.

“The recovery here will be much faster as well. There is always a balance to be struck in this region with the oil price. Too high and it hurts the [aviation] industry, but too low and the regional economy slows down. Somewhere between $75 and $80 is good for both.”

Hogan agrees that the peak season is beginning to gain momentum.

“The summer looks promising. We are seeing the Middle East starting to book now as people plan to get away to Europe and the main holiday destinations around the region, such as Beirut and Cairo, are also filling up,” he says.

The recent troubles are just the latest chapter in the region’s aviation history. A recent report by Boeing on the outlook for the aviation industry underlines how much more diverse the Middle East market has become in the past 10 years. In 2000, when the manufacturer took a cross-section of market share by available seat capacity, the industry was still dominated by older legacy carriers.

Changing fortunes

Saudi Arabian Airlines held the largest share, followed by Egyptair, Gulf Air and Iran Air. Emirates, which had been operating for 15 years at this stage, held only a 9 per cent share.

By August 2009, when Boeing again studied the industry, a number of newer carriers had broken into the market. Emirates had taken top spot with its aggressive expansion during Dubai’s boom years, while Qatar Airways has grabbed a 10 per cent share. Etihad Airways, which has only been in operation for six years, held a 6 per cent share.

The other key new entrants to the market in the survey were the region’s low-cost carriers. As of August 2009, they held a combined 9 per cent market share.

But in reality, the fortunes of these individual budget carriers varies dramatically. The oldest and largest, Air Arabia, has established itself as a major presence in the region. In June, the Sharjah-based airline launched its new hub in Alexandria, Egypt.

Flydubai, a sister carrier to Emirates with the advantage of being based at the region’s largest airport, has also performed strongly since its launch in mid-2008.

Others, such as Bahrain Air, have struggled during the downturn, while Saudi Arabia’s two budget carriers, Sama and Nasair, remain hampered by a government-imposed cap on ticket prices that has meant they have been unable to pass on soaring fuel costs to their customers.

Some governments and national carriers have been unsettled by the emergence of the low-cost carriers across their regional networks. As a result, moves towards truly open skies around the Middle East are being hindered with prices controlled to support the national airlines. Many flag carriers simply could not compete on price or service if these restrictions were lifted.

“The lack of open skies affects us. We are forced to sell at the same price as national carriers and we can’t fly to all the destinations we want,” says Ali.

“We want totally open skies in the region and to India and Pakistan, and secondary airports open to serve new markets, not just capital cities. Despite this protectionism, there has been huge progress in the past three to four years. Four years ago we flew seven flights a week to India. Now it is more than 100. In other markets worldwide, low-cost carriers have 15 per cent market share, so there is great room for growth.”

The protection offered to national carriers by some governments around the region underlines the speed with which the industry has changed across the Middle East, and how quickly some national carriers are being left behind.

The ongoing industrial action at the UK’s British Airways demonstrates the difficulties that older carriers in the US and Europe encounter as they seek to modernise their legacy systems and practices. Several of their counterparts in the Middle East are just as cumbersome.

By contrast, the leading airlines across the Middle East are aligned with the ambition of their government, rolling out young fleets that offer superior service across their expanding networks.

Aggressive strategy

“The advantage we have here is we are only six years old … We are aggressively building a strong portfolio of code-share partners. We have a mandate to be best in class, support the ambitions of Abu Dhabi and also to move into profitability and stay there,” says Hogan.

Etihad Airways expects to break even for the first time in 2011, but not all the region’s carriers have shared in the good times over the past decade. Many of the Middle East’s older national carriers continue to struggle. Overstaffed and bogged down in local bureaucracy, they have become a drain on the resources of even oil-rich governments.

Kuwait Airways recently reported a $189m loss for 2009. Still fighting its 20-year battle with Iraqi Airways for $1.2bn in compensation, dating back to Saddam Hussein’s invasion in 1990, the Kuwaiti flag carrier has only returned an annual profit once in the past two decades.

Other national carriers in the region, which do not release financial statements, are also believed to make substantial losses and are propped up by their governments.

The diversification and modernisation of the industry led by the newest carriers has laid down a challenge to those airlines left behind. Governments can continue to bail out their national airlines to keep the flag flying, but without urgent steps to move the business onto a commercial footing the gap in quality of service and revenue will continue to widen.

Business realignment

Bahrain is one country that appears reconciled to the fact that its flag carrier, Gulf Air, can no longer compete at the top table of Middle East aviation. Instead the government has determined to concentrate on re-establishing the airline as a profitable business.

Gulf Air has been losing up to $1m a day but until now, Manama resisted the efforts of previous CEOs to make the cuts they saw as necessary to turn the company around. With the appointment of Majali from Royal Jordanian last year – the company’s fourth CEO in three years – the government has given its blessing to a realignment of the business.

“This involves some hard decisions, routes have to close, processes have to change, but rather than shut down the airline the King wants to continue Gulf Air’s great legacy,” says Majali.

“The level of support I’m enjoying now is greater than previous [CEOs], but the country cannot afford to continue supporting a loss-making business. There are other priorities. There is no way that Bahrain should be funding the carrier. Other countries have other priorities. Each has to make its own decision.”

Majali has initiated a voluntary redundancy programme throughout the business and has cut up to 600 staff from the payroll already, by tightening up human resources strategy. A similar approach is now being planned at Saudi Arabian Airlines, where the company is preparing to part-privatise the carrier (see page 34).

Bodies such as the Beirut-based Arab Air Carriers Organisation have advocated a phase of consolidation across the region, but there appears to be no appetite among the Middle East’s governments for their flag carrier to be the first to be folded into another.

Instead, the talk is of further expansion, with new routes planned and new aircraft due to arrive. Boeing estimates that the Middle East will need more than 1,700 new aircraft worth $300bn over the next 20 years. These planes will be required to cater for anticipated average passenger growth of 6.6 per cent.

“The Gulf has defined itself by excess capacity and too many airlines. States have been looking to satisfy their desire for a national carrier,” says Majali. “It does not allow for the healthy development of the industry in the region.”

Analysts have long warned that this excess capacity will hurt profitability. Although the Middle East outstripped the rest of the world in terms of passenger growth last year, passenger load factors in the region still trailed the global average.

Etihad Airways for one is using 2010 and 2011 to consolidate. After taking delivery of 11 new aircraft last year despite the downturn, the Abu Dhabi carrier’s order book for 2010 is more modest – two passenger aircraft and two freighters – with a further seven planes to come next year.

“This year and into 2011 we will be growing into scale. We want to get to the scale where we manage our investment in those aircraft,” says Hogan.

“We plan to break even next year and … want to build depth and frequency, and to go double-daily on our strongest routes. It takes three years for routes to break even, and we are still building market presence.”

The past decade has been a period of extraordinary growth for Middle East aviation, but it is still only the beginning. If economic recovery can be secured in 2010, then the coming years will see a new wave of expansion by the main players in the market. But this will mean the pressure on struggling carriers, for true competition, for open skies, for consolidation, will become greater. Boeing’s next cross-section of the market in a further 10 years should make interesting reading.