Oil boom fuels growth in Gulf aviation

10 July 2008
Liberalisation of the airline sector throughout the region has provided major growth opportunities, with more privatisations expected despite high fuel costs.

The International Air Transport Association expects the Middle East to gain 30 million air passengers a year between 2006 and 2011, based on average annual growth of 6.8 per cent. Regional airline growth is being driven by the traditional transit of cargo and passengers through regional airports, but also by growth in home-grown tourism, business travel and cargo demand.

While the national carriers of the oil-rich Gulf are not immune to the effects of soaring fuel costs, their government ownership gives them some protection from the pressures facing privately owned carriers.

But even regional carriers have felt the pinch from the past 18 months’ threefold increase in air fuel costs. Earlier this year, Akbar al-Baker, chief executive officer (CEO) of Qatar Airways, told a conference in Doha that but for these rising costs, the carrier would have been profitable this year. In the short term, however, the oil boom is boosting demand for regional travel and cargo transport.

“IATA’s figures show that demand grew by 11 per cent in the Middle East, compared to 1.6 per cent in Europe and 2.6 per cent in Asia,” says a spokesman for Etihad, the Abu Dhabi-based carrier. “The irony is that high fuel costs are also bringing a lot of additional cash into the local Gulf economies.

“High fuel costs are a challenge, but as a new carrier, Etihad does not have a legacy of high costs. We have frozen recruitment of non-operational staff, and we expect to keep meeting our performance targets through rigid cost control, and by keeping our cost base low compared to most full-service carriers.”

Moves to liberalise regional aviation have opened the door to several new low-cost carriers such as Sharjah-based Air Arabia, Kuwait’s Jazeera Airways, Saudi Arabia’s Nas Air and Sama, and Kuwaiti premium carrier Wataniyah. And while new airlines are being launched, state-owned carriers are being privatised.

The first Arab carrier to be privatised was Royal Jordanian, back in 2001. Today, the government retains only a 29 per cent stake. The carrier positions itself to offer hub services across the Levant and into Iraq, and last year its passenger traffic increased by 18 per cent. It expects growth to reach 17 per cent this year.

In January, Yemen’s ailing state-owned airline handed over its domestic routes to a new carrier, Felix Airways, a joint venture of Islamic Corporation for Development of the Private Sector (ICD) of Jeddah and Yemenia, established with an initial capital of $80m.

Despite soaring fuel costs, the launches continue. Wataniya, an upscale, low-density carrier, is being launched by Kuwait National Airways (KNA) in January. The launch strategy is to outsource all services beyond services to passengers, to offer a premium service on A320 aircraft, offering the lowest possible seat density at a competitive cost.

The airine says strategic thinking and an upmarket clientele will overcome the challenge of rising fuel costs. “Wataniya is anything but a no-frills carrier,” says KNA CEO George Cooper. “But tight control over costs will be built into our service from the outset - things like flight planning software.

“The other benefit we have is that we are starting out as a short-haul operator. It is the long-haul operators - players such as Eos, Silverjet and Maxjet - that have been hit hardest by soaring fuel prices.

“If an airline is operating in the low-priced market and the fuel price rise leads to a surcharge of $10 on a basic $20 ticket price, that is a huge increase. It is less so for a carrier whose ticket price is $60. The segment that we will target is less price sensitive. Our customers will come from the top end of the economy.”

While these are uneasy times for the global airline industry, Cooper remains bullish about the prospects for Wataniya, and for the regional airline industry in general.

“Because the Gulf countries are petrodollar economies, although carriers’ costs are going up, more money is coming into the economy,” he says. “High oil prices are a double-edged sword for regional carriers.”

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