Commercial airlines are having to wake up to the competitive threat private jets are posing in the battle for the lucrative high-net-worth individual (HNWI) market in the Gulf.

Abu Dhabi flag carrier Etihad Airways’ recent announcement of its exclusive three-room The Residence offering looks like a transparent bid by one of the region’s largest airlines to take on the growing private aviation market. The Residence suite provides ultra-HNWIs on its A380 service to Heathrow with boutique-style accommodation at 35,000 feet, with a full concierge service and butler.

Etihad will be charging heavily for the privilege of allowing two passengers to enjoy the high-end luxury of The Residence when the first flight takes off this December, reportedly priced upwards of $20,000 a head.

Niche advantages

For private jet operators and charter firms, the encroachment into their market of a heavyweight such as Etihad might be a cause for consternation. Yet private aviation providers appear relaxed about the challenge.

They maintain they have a distinct advantage over larger carriers, even well-financed state airlines such as Etihad. These operators offer a full-service, private jet operation in which customers can decide when to take off and exactly where to travel – even to the smallest regional airport. That they can do this at a substantially lower price than Etihad’s service should be able to insulate them from any significant market share erosion.

“Executive, niche carriers can make a killing by providing door-to-door customised services, with drop-offs and pick-ups. Why pay more money and still have to share a plane with hundreds of other passengers?” says Saj Ahmed, an aviation analyst at London-based Strategic AeroResearch. “For the carriers like Etihad revamping their first-class product, they have to cater for a clientele that is hard to impress, and they may have to discount heavily to entice more users.”

Private charter forms a growing part of the overall aviation market in the Gulf region, tapping into its sizeable pool of wealthy individuals and business users, from royalty to company CEOs.

Demand for corporate aviation is burgeoning, with annual revenues estimated at $500m, and more than 30 jet providers competing for business. Key privately focused hubs are showing increases in year-on-year volumes.

Al-Bateen Executive Airport, the dedicated business aviation wing of Abu Dhabi Airports, showed an 18 per cent increase in visiting aircraft traffic in 2013.

“There are a high number of HNWIs, royal families and even corporate clients who are users of private jets on a regular basis,” says Ross Kelly, Middle East managing director of Private Jet Charter (PJC), an independent private charter consultant. “Whether they own or charter, they use private jets for business and pleasure.” 

The Gulf is well suited to private aviation. Saudi Arabia, with its vast geographical terrain, is less practical for commercial operators. The kingdom is the clear leader in the GCC in driving private aviation demand, focused on Riyadh and Jeddah airports, followed closely by Abu Dhabi and Dubai. Kuwait, Qatar and Bahrain are also growing markets. 

Demand is coming from oil, gas and mining companies, says Mehdi Dialmy, head of Middle East flight operations at PrivateFly, an operator that boasts a global fleet of more than 7,000 aircraft.

“In a sign of the strength of the Middle East market, PrivateFly’s clients in the [region] fly three times more hours a year than our European customers. This is mainly due to more frequent trips within the GCC plus bi-annual long-range trips to Europe, Asia or the US,” says Dialmy.

Time savings

Offerings, such as Etihad’s The Residence, may appeal to the Middle East HNWIs’ sense of luxury, but most private aviation providers say the real reason people choose private jets is simple: better economics.

“It is about saving time,” says Kelly. “A CEO can fly in from their corporate HQ in the US first class to Dubai. He can then take a private jet to Riyadh, Jeddah and back to Dubai all in the same day. So for a CEO with a hectic schedule, he can be easily in and out all in the same day, something he could never do commercially.”

Another advantage is flexibility with timings. If a client is travelling by private jet, he can arrive at the airport just minutes before a flight; and the timing and duration of meetings can be very adaptable. “This is not possible with an airline flight,” says Dialmy. “Even on the most advanced ultra-first-class VIP service, you are still confined to someone else’s schedule. Having your own private aircraft on stand-by, ready to depart at its own preferred time is a major asset for businessmen.”

Cultural issues are another driver. “The business culture in the [region] is driving the use of private aviation. Face-to-face meetings are very important and these often require last-minute travel and flexibility in timings,” says Dialmy.

In the Middle East, mid-size jets and larger aircraft are the most widely available and widely chartered, says Dialmy. “As in Africa, there is a lack of small jets. Since the recession, depreciation and financing of larger aircraft has become more attractive,” he says.

As a global network, PrivateFly offers access to aircraft from Europe, Asia and the US, which it says can offer competitive prices, especially for one-way transcontinental trips. 

Zurich-headquartered ExecuJet services the Middle Eastern market through two fixed-base operations (FBOs) in Riyadh and Dubai, with a fully managed fleet of 19 aircraft.

“Generally, we see visiting aircraft coming back into the region, which certainly drives our aircraft maintenance, repair and operations (MRO) support and FBO operations,” says Mike Berry, managing director, Execujet Middle East.

Organic growth

The growth of the market was disrupted by the 2008-09 recession, but Berry says the company was able to grow the business organically. It did this by taking on additional MRO capabilities, adding a full range of corporate aircraft with the adoption of Embraer and Gulfstream jets.

“We have taken on ground-handling services so we have been able to continuously grow the business, even during quiet periods,” says Berry.

Execujet has this year opened an FBO lounge at Al-Maktoum International airport at Dubai World Central to support the expected increase in traffic at the airport over the coming months.

“This makes sense due to restricted parking and slots as Emirates every month takes delivery of additional aircraft, which is squeezing capacity at Dubai International,” says Berry. “We have an FBO presence in Dubai World Central and the long-term goal is to replicate what we have at Dubai International.”

Private-aviation providers believe new destinations will open up in the coming years. They hope Tehran will once again feature more prominently for corporate travellers if the economic sanctions on the country are lifted.

Cairo and Tripoli, which have suffered immense political turmoil over the past few years, are also expected to revive as potentially significant private-aviation destinations.

Last year, the Middle East Business Aviation Association (MEBAA) published data showing that from Egypt accounted for 16.7 per cent of business aviation aircraft movements traffic in North Africa in the first quarter of 2013. Libya accounted for 5.3 per cent, while Morocco was the biggest market by far, with 55.7 per cent, Tunisia accounted for 9.9 per cent and Algeria 9.6 per cent.

There is strong confidence among private-aviation providers that they can continue to grow their footprint, having largely withstood competition from the fractional jet ownership model as pioneered by the US’ NetJets. This model works by offering the various ‘owners’ of a jet the purchase of a share of the aircraft.

However, NetJets terminated its franchise agreement in Saudi Arabia with NAS in 2011, after 11 years.

“The partial ownership model never really took off, which is why NetJets withdrew from Saudi Arabia,” says one private jet operator. “The culture here is more of a case of not wanting to share an asset of that value. [HNWIs] are happy to acquire it, but they don’t want joint ownership. Owning a jet outright is economically justifiable for only a tiny proportion of individuals, though this still appeals to some ultra-HNWIs.

Saudi Arabia accounts for 35 per cent of all registered private jets in the Middle East, according to MEBAA. Traffic from the kingdom to Europe and North Africa rose 9.9 per cent between 2012 and 2013. The top destinations were Geneva in Switzerland, Le Bourget in France and Istanbul in Turkey.

Jet charter is generally a more economical form of air travel, with no overhead costs, no crews to pay, no aircraft depreciation and few risks involved.

“One aircraft very rarely fits all needs,” says Dialmy. “Charter allows flexibility and more cost control in the type of aircraft hired for each occasion, based on the number of passengers, destination and specific luggage needs. Fractional ownership hasn’t done well in the Middle East, and this is directly linked to the flexibility and cost control that jet charter offers.”

Exclusive market

Etihad and its main regional rivals, Emirates and Qatar Airways, will doubtless be keeping tabs on the private aviation market, aware that its success is potentially drawing away revenues from the highest end of the market. Qatar Airways is planning its own entry into the HNWI market with the launch of a 400-seat business-class-only service from Doha to London on a reconfigured Airbus A319.

For many seasoned aviation analysts, however, private jet charter firms have nothing to fear from the Gulf carriers mimicking their VIP services on a larger scale. “For not much more than the price of a single ticket on Etihad’s Abu Dhabi to Heathrow service, people can enjoy the exclusivity of a private jet,” says Ahmed. “But while The Residence may not to be everyone’s taste, the fact that Etihad has launched it suggests there is robust demand out there.”

The private aviation sector’s growth potential will also hinge on the region’s geopolitics. “It depends on how the political situations in Syria, Egypt, Iraq and Libya pan out,” says Kelly. “All these countries, especially Iraq and Libya, have potential to grow the amount of private jets based in the region.”

For the more stable countries, such as the UAE and Saudi Arabia, market growth seems assured. Even if there is another economic downturn, the Middle East is still shielded by its substantial population of HNWIs, which is the best demographic a private jet firm could hope for.