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“State of the Regions: Middle East” – ISTAT Jetrader magazine

Market

One could easily be forgiven for thinking that the Middle East region was one of the world’s largest for air transport given the high profile media attention constantly focused on the ‘Big 3’ airlines (Emirates AL, Qatar AW and Etihad AW) domiciled in countries within the Gulf Cooperation Council (“GCC”). Hardly a day goes by without speculation as to when Dubai International Airport (“DXB”) will overtake London Heathrow (“LHR”) as the world’s largest international hub or how long it will take for Emirates to become the biggest operator of yet another aircraft type alongside the B777-300ER and A380-800. 

The rather harsher reality, of course, is that there are two sub-regions within the Middle East that are experiencing rather differing political and economic fortunes and the one containing the GCC airlines is in a totally different operating environment to the other one that includes the troubled lands located between Iran and the Mediterranean. Even though the relative population sizes of Qatar and the United Arab Emirates are small, the very large expatriate communities in these countries and the ‘one stop anywhere’ connectivity strategy through the home hub airports of the Big 3 has fuelled sustained growth in aircraft numbers and traffic over many years.

The latest IATA statistics show that growth for the Middle East region as a whole is surging far above the world average. In July 2014, ASK passenger capacity rose by 8.1% versus July 2013 and the freight AFTK output was 7.8% higher than the prior year month. These figures compare favourably with the world average of 5.3% and 2.9% respectively. More importantly, demand exceeded the additional capacity introduced in both passenger and freight classes facilitating a boost to passenger (78.2%) and cargo (43.4%) load factors. As it turns out, July 2014 was a relatively quiet month for travel in the Middle East, probably due to the timing of Ramadan, as year-to-date figures show a stronger RPK performance of 12.3% and FTKs up by 9.8% against the average of 5.8% and 4.4%. 

Despite impressive traffic and capacity figures, the airlines of the Middle East region only appear to be generating very modest returns according to IATA’s latest financial forecast, although this is spread over a relatively small number of airlines. In fact, the US$1bn in net profit achieved in both 2012 and 2013 can, arguably, be attributed to just one carrier. According to Emirates’ latest annual report, the net profit generated was AED3.25bn or US$900m. In which case, all the other airlines in the region were simply off-setting each other’s net profits and losses. 

The interesting corollary to the absolute figure, however, is that the Middle East region is forecast by IATA to produce a net profit of US$8.98 per passenger in 2014 which is second only to North America at US$11.09 and way above the Europe (US$3.23) and Asia-Pacific (US$2.98) regions. There are a number of reasons for this relatively high unit profitability but the mainly long-haul network and widebody equipped full-service model of the Big 3 facilitates the provision of award winning quality service that is especially attractive to premium travellers. 

Much to the annoyance, no doubt, of some very long-established flag-carriers in Europe and Asia, the Big 3 Middle East airlines have been adept in securing quite a lucrative share in the premium market and their focus appears to be towards enhancing this with, for example, delivery delays announced until new aircraft types conform to the lavishly superior branding now demanded by these ‘world-class’ airlines that wish to maintain their elevated reputations. With premium traffic only accounting for 10% of passengers but more than 40% of revenues on flights between the Middle East and Europe, it is no surprise that the first A380 sectors for Emirates, Qatar and Etihad have been/will be to London. 

Infrastructure

Airlines can’t grow without a corresponding expansion of infrastructure and the Middle East is again the pace-setter with airport developments in key ‘money no object’ locations coupled with a rapid decision making political system allowing huge growth potential to be exploited. This is happening in Doha, Dubai and Abu Dhabi where there is plenty of under-utilised land that can be turned into the mega-hubs of the future. Dubai’s (DXB) International airport was the fastest growing top 10 airport during 2013 in terms of total passengers, according to Airports Council International (“ACI”), with year-on-year growth of 15.2%. In the first half of 2014, DXB went from 7th to 4th place with a further 6.2% growth, even though this was constrained by runway maintenance during May and June. 

Similarly, Abu Dhabi airport has just announced a 24.8% annual growth rate for August and Doha’s new Hamad International airport has twice the capacity of the former Doha International. Although it’s just the other side of the regional border, Istanbul and THY are also playing the Big 3 at their own game with rapid expansion and a transfer traffic philosophy using a strategically convenient global hub with, in this case, the added advantage of a reasonably large domestic population. Istanbul was another star performer in ACI’s top airports survey with 2013 growth of 13.6% and 18th place in the world ranking. 

Fleet

The ‘smaller than you might think’ tag in the title of this article alludes to the fact that airlines in the Middle East only account for approximately 4% of the world’s airliners according to the latest survey by Flightglobal. It is easy to forget that the Big 3 airlines have all been around for less than 30 years and all evolved in one way or another from the pioneering Gulf Air multi-national partnership. The combined fleets of the Big 3 at 443 aircraft account for about 45% of these 4% so their dominant impact on the region’s air transport statistics is understandable and growing. Looking at the order books for Airbus and Boeing alone, the Middle East carriers have made a serious declaration as to future intent which will have many of the world’s long-haul airlines, in particular, sitting up and taking note. 

On the single-aisle side, the backlog for A320 family (ceo & neo) and B737 (NG & Max) aircraft is in proportion to the existing aircraft population at a fraction under 4%. However, in the twin-aisle category, the region’s airlines have an aggregate interest in more than 50% of the largest existing and proposed twin-aisle and very large aircraft currently on order. It’s worth remembering at this point that the 2013 human population of the Middle East (excluding Egypt, Turkey and Iran) was 164 million or 2.3% of the world total. The fact that Middle East carriers (and the Big 3 in particular) have ordered more high capacity aircraft than the rest of the world combined is bound to increase the volume and frequency of complaints from airline industry CEOs. In fact, the strategic thinking of the protagonists might have to be even more esoteric in order to circumvent the ensuing vitriol.

The Rest

A lot of coverage so far has been given to the three major airlines of the region but the Middle East has a long history of air transport throughout even if it is the GCC’s economic development that has benefitted most from aviation. The human tragedy unfolding in Iraq and countries of the Levant has obviously curtailed air transport growth in the northern and eastern part of the Middle East but there is a strong catch-up potential here once the political environment has normalised. 

As the most populous nation and the centre of the dominant religion, Saudi Arabia and its flag-carrier have enjoyed a privileged position in the Middle East air transport arena but, perhaps, the complacency this brings has failed to keep Saudia in the same league as the airlines of its smaller neighbours. Some long overdue (but modest) liberalisation could help to rejuvenate this under-developed market and its main participant.

The Future

The Big 3 Middle East carriers have the financial and operational resources to carry on growing their global market shares although, with the law of diminishing returns in mind, it is likely to get increasingly difficult to maintain historic rates of growth as political resistance increases. Already there is a divergence in strategy between the three airlines on how to by-pass this issue with Emirates trying to become a one airline global alliance, Qatar joining the oneworld global alliance and Etihad buying its own global alliance. Can they all be right?

Who knows, one day soon the Middle East region could just be a little bit bigger than you might think.

Novus Aviation Capital

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