Preparing for a period of slower growth was one of the key topics on the agenda as airline chiefs met in Kuwait for the recent Arab Air Carriers’ Organization annual general meeting.
Preparing for a period of slower growth was one of the key topics on the agenda as airline chiefs met in Kuwait for the recent Arab Air Carriers’ Organization annual general meeting.
In keeping with other regions, the Middle East and North Africa are feeling the impact of slowing demand as the economic climate tightens. That comes amid the impact on demand of trade wars – particularly hard felt in the cargo sector – and a yield market in which airlines are finding it increasingly tough to raise revenues enough to offset higher cost pressures.
Arab carriers have faced further challenges. While the global economy has enjoyed a record run without recession, the dependence of many Arab economies on oil prices creates an extra dimension. The volatility of those prices means Arab GDP growth fell – for example to 2.6% in 2018 – in line with mature markets, rather than at the level expected among emerging economies, AACO secretary general Abdul Wahab Teffaha explains.
Emirates
“In addition to the economic pressures, this region is facing several crises and conflicts that exacerbate the economic pressure and lead to a significant economic decline in the countries facing crises, thus curbing their contribution to the region’s economic growth,” he says.
Financial fortunes for the Middle East airline sector as a whole have faltered – IATA estimating that carriers in the region would make a collective loss of $1.1 billion in 2019, after a $1 billion loss in 2018.
That in part reflects specific challenges facing some of the major Gulf players. Etihad Airways, for example, remains in major restructuring mode while Qatar Airways is still challenged by the closure of airspace in several neighbouring states.
The region’s biggest operator Emirates also found its results tightened against this backdrop. It has just announced a small rise in half-year group profits, and notably a sharp improvement in profitability at the airline. That was driven largely by lower fuel costs and careful capacity management. But its profits remain at about half the level they were at the same stage two years ago, illustrating the more challenging market it is operating within.
“There is a compendium of short-, medium- and long-term events which are affecting demand for air travel,” Emirates Airline president Tim Clark told FlightGlobal during a wide-ranging interview in September. “I would see a diminishing growth of air travel – that will not go negative but I do see a possible couple of percentage points fall over the next three to five years.
“We’ve been smarter about aligning capacity to the situation, we haven’t had large numbers of aircraft being delivered. We have been adapting our network on a prudent and immediate basis,” Clark says.
A recovering oil price and greater stability in North African markets – helping to boost the key tourism sector – has aided some carriers in the region. EgyptAir ended its last financial year to June 2019 in the black for the first time in almost a decade, Royal Jordanian’s turnaround efforts see it on course to improve profits in 2019, and Air Arabia is enjoying strong returns so far this year.
But wider challenges remain. “The direction of the global economy is uncertain,” notes IATA director general Alexandre de Juniac, addressing delegates at the AGM. “Airlines have been in the black for a decade – an industry first. But many airlines are still struggling, and it is unclear when an economic downtown will happen.”
CAN ARAB CARRIERS RIDE OUT THE CRISES?
Teffaha believes economic development is going to be the biggest challenge for carriers in the region. “The airlines are not in control of the policy-making when it comes to economic policies or political decisions, and therefore, the only thing they can do is to persevere, to try to ride the crisis.
“We have to go back to where can we cut costs, rationalise and maximise operations. I believe the airline industry is doing the right thing now. They are now more ready to deal with such issues because the capacity is not much higher than demand. We can see that by the [global] level of load factor of 82%.”
Arab carrier traffic has grown at an annual rate in excess of 10% since 2010, outpacing the industry average.
“However, this is becoming more difficult at the moment with the decline in global economic growth and the crises facing our region,” Teffaha says. “The indicators for the near future do not forecast the high growth levels we have recorded in the Arab air transport industry in previous years.
“On top of that we have our own issues. We have some countries which are unfortunately going through periods of very severe instability. We have other countries that are facing economic problems, we have disputes in the region. With that kind of impact, the airlines need to manage on a day-to-day basis,” he says.
De Juniac adds: “This region is at the nexus of conflicting geopolitical forces with real consequences for aviation. The recent attack on Saudi oil infrastructure reminds us of the vulnerabilities in the oil price and supply.
“Airspace constraints in the Middle East region have become more extreme as a result of diplomatic tensions. And it could get a lot worse if the situation with Iran deteriorates – potentially putting nearly half the region’s airspace at risk of closure.”
While in Europe the tightening of conditions has seen heightened consolidation – both through airline failures and acquisitions – the dynamics of the Arab market make this unlikely to be repeated across the region.
The lack of a single air transport market makes cross-border mergers and acquisitions impractical, though the greater collaboration between Emirates and sister carrier Flydubai, and the planned Abu Dhabi joint venture recently announced between UAE operators Etihad and Air Arabia, point to carriers warming to the idea of greater co-operation.
Given the number of state-owned carriers in the region, it is also unlikely that there will be as many market exits as have been seen in Europe.
But Teffaha is encouraged by signs that airlines are keeping capacity in check. “The good news is that Arab airlines are effectively managing capacity on the individual levels to meet the fluctuations in demand. As a result we have witnessed in recent years a slowdown in the number of new aircraft introduced into new fleets.”
He notes that while 214 aircraft have been added over the past two years, 194 have been removed from service – supporting “good capacity management”.