In for a hard landing

02 November 2001

This year's aerospace extravaganza in the Middle East is expected to be a somewhat subdued affair. And understandably so. Exhibitors at the Dubai International Air Show have seen the industry's fortunes take a dive since 11 September. The attacks on New York and Washington have cast a long shadow over the future of air passenger transport - and depressed the positive atmosphere that usually accompanies such events.

Not since the early 1990s and the Iraqi invasion of Kuwait has the industry suffered such a severe downturn in confidence. Then, international airlines posted collective losses of more than $10,000 million and the industry took the best part of three years to begin its recovery. Similarly, since 11 September, passenger confidence has waned and empty seats have prompted international carriers to act swiftly, cutting flights, grounding aircraft and announcing a raft of redundancies.

The International Air Transport Association (IATA) has estimated that the global airline industry stands to lose up to $7,000 million this year and take at least 12 months to recover. However, many analysts believe the downturn could be much deeper. 'The Gulf war does provide some avenue of guidance in trying to deal with this situation but this is several times worse than what happened then,' says a senior industry source. 'This is a bigger dip and it is more immediate than what we experienced in the early 1990s. On the other hand, the industry will eventually crawl out of this. All the aircraft that are being mothballed will come back on to the radar screen.'

Hard times were already on the cards for the world's airlines prior to the attacks. IATA was expecting its 275 members to post losses of up to $2,500 million this year. In the months prior to September, passenger traffic growth on international scheduled services fell from a year-on-year rate of about 10 per cent in January, to just over 1 per cent in June. Hard-pressed airlines are now facing the uncertain prospect of negative growth.

'These figures point to a worrisome evaporation of traffic growth,' IATA director-general Pierre Jeanniot warned in August. 'Unless IATA members are able to drastically curtail their capacity growth during the next few months and further control their costs, all prospect of profitability for the year 2001 will quickly disappear.'

The events of 11 September and the US response in Afghanistan have simply hastened the decline. In the past six weeks, the fall in passenger numbers has been estimated at between 10 and 35 per cent, depending on the region, with North Atlantic routes and some international flights into the Middle East being among the worst affected. 'I can't visit clients in the region because we have a company-wide ban on business trips abroad,' says one London-based banker. 'The bank cannot insure us for foreign travel.'

In response to the downturn, US and European airlines have so far announced plans to ground about 1,150 aircraft. Europe's biggest carrier, British Airways (BA), has already withdrawn 20 aircraft from service and cut its schedule by 10 per cent. Flights to North America are among the worst affected. In the US, the AMR Corporation, which owns American Airlines (AA) and a number of domestic carriers, has shed 20,000 employees. AA cut its flight schedule by 20 per cent. So severe is the US downturn that Washington has offered the airlines a $15,000 million bail-out package.

European airlines are also calling for state aid. BA has cut back key routes to the Middle East: its Gulf services from Heathrow to Jeddah, Dubai, Bahrain, Doha, Abu Dhabi, Muscat and Kuwait have all been reduced.

Its German competitor Lufthansa is also retrenching: it has grounded 28 aircraft and is reviewing its Middle East schedule, which includes flights to Muscat, Dubai and Saudi Arabia. The airline, which has experienced a 20 per cent drop in earnings, only reopened services from Frankfurt to Riyadh and Dammam at the end of September.

Regional airlines are not escaping unscathed. Leading carriers - Saudi Arabian Airlines (Saudi Arabian), Dubai-based Emirates, EgyptAir, Bahrain-based Gulf Air and Royal Air Maroc - have all been hit by the downturn in traffic to the region, which in the worst cases has fallen by as much as 35 per cent. Hardest hit have been those that now fall into the international airline category.

Emirates, which serves 57 destinations worldwide, is planning to reduce its flights for a two-week period to Bahrain, Muscat, Doha, Karachi, Hyderabad, Hong Kong, London, Duesseldorf and Zurich. The airline, one of the most modern in the region, has embarked on an ambitious fleet expansion programme, which could see the number of aircraft it operates triple by 2010. At present, Emirates says it has no plans to reduce its existing fleet of 36 aircraft and is moving ahead with orders for about $4,000 million worth of new jets.

By comparison, Gulf Air, which has been in financial difficulty, is taking steps to rein in costs. In October, president and chief executive Ibrahim al-Hamer announced the reduction of the airline's operational fleet from 30 aircraft to 26. Gulf Air has also brought forward its planned Ramadan timetable, so reducing its flight schedule by 15 per cent. The airline has been in negotiations with Royal Jordanian Airlines about operating joint flights on long-haul routes in order to save costs incurred by the increase in third-party insurance premiums.

'Travel into and out of the Middle East from the US, Europe or Asia will remain significantly down for the next 12 months,' says Sash Tusa, aerospace analyst at Goldman Sachs. 'This should trigger a flight to balance sheet strength in the industry. Companies with already weak balance sheets on the operations side are going to find life a lot more difficult.'

Even the smaller carriers in the region - although they are not so reliant on international business - are feeling the pinch. Following the opening of the US-led air campaign in Afghanistan, Oman Air cut back its flights from Seeb International Airport. However, Qatar Airways, which predominantly flies into India and Asia, says it has experienced just an 8-10 per cent drop in passenger numbers since 11 September.

The next 12 months promise to be a testing time for the international air transport industry. Everyone, from aircraft manufacturers to airports and passenger airlines, will be affected by the downturn. Operators in the Middle East with ambitions to internationalise may have to rethink their long-term strategies, while those that were struggling prior to 11 September will be forced to seek state aid or disappear from the market place altogether.

Andy Critchlow

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