Low oil price has mixed impact on UAE aviation

15 November 2016

It is still too early to judge if the economic problems will translate into a full-blown slowdown

Dubai’s Emirates Group recently reported a 64 per cent decline in net profit in the first half of its 2016-17 fiscal year, which coincides with the second and third quarters of 2016.

At $364m, the group’s net profit for the first half of the fiscal year corresponds to less than one-fifth of the total net profit made in the previous fiscal year.

The group’s cash position also dramatically dropped from AED23.5bn ($6.4bn) in March to AED14.9bn by the end of September due to ongoing investments into new aircraft, business acquisitions and the repayment of bonds, loans and lease liabilities.

In contrast, low-cost carrier Air Arabia reported a 26 per cent growth in net profit in the third quarter of 2016, at $80.9m, compared with the same period in 2015.

While both airlines operate within similar environments, characterised mainly by a strong US dollar and political instability in key regions, they have very different business models.

If the trend in profitability holds for both companies until the end of the calendar or fiscal year, it means the low-cost carrier industry is less vulnerable to the impact of the low oil price and slower economic and trade growth in key regions, which together have dampened global air travel demand.

That said, $364m is still a lot to go around for the Emirates Group’s owners, although it is small compared with the group’s historical profit levels.

Broadly, however, this trend shows that most enterprises in the region will now have – if they have not yet – to adjust their fiscal forecasts to align with lower revenues or more modest profits, or worse in anticipating potential losses. Turning to technology and innovation to optimise operational efficiency is likely to be the main tool that business leaders will adopt in order to sustain or improve their fiscal performance in addition to other cost-cutting measures.

For the aviation sector in particular, there is concern that president-elect Donald Trump might reconsider the US Department of Transportation (DoT) decision made under the outgoing administration that ruled out reviewing the Open Skies agreement between Washington and the UAE and Qatari governments.

The US’ Big Three carriers – Delta, United and American – filed an Open Skies dispute against UAE and Qatari carriers in early 2015, alleging Emirates, Abu Dhabi’s Etihad Airways and Qatar Airways received unfair subsidies from their home governments in violation of the existing Open Skies agreement. Apart from a review of the agreement, they requested the US government, and were denied, to look into limiting Gulf carriers’ access to the US market.

The US Big Three are understood to be counting on Trump’s protectionist stance to potentially review the decision. Any move by the upcoming government to overturn the DoT decision will not bode well for the Gulf’s Big Three, who together have more than 800 aircraft, with an estimated value of $240bn, on firm order. 

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