Carriers in the Arab world fared better than expected last year, but capacity growth and new carrier developments in the wealthy Gulf countries is causing concern to their neighbours
The recent meeting in Muscat of the chief executives of the airlines from the Arab Air Carrier Organisation (AACO) was a surprisingly cheerful affair, given the market conditions the member carriers had battled over the course of the previous year. Yet, beneath the surface there were also signs of a developing family rift within the Arab airline community.
Even as AACO secretary general Abdul Wahab Teffaha celebrated the role played by Arab brotherhood in the successful battle to overcome the effects of SARS and the war in neighbouring Iraq, others were highlighting the growing gap between the fortunes of carriers in the petroleum-rich Gulf region and their counterparts in the less buoyant economies of the Middle East and North Africa. As the Gulf aviation market continues to boom, airlines in the Middle East have begun to voice complaints against their fast-expanding southern neighbours, hinting at predatory pricing and warning of a rising threat to their own survival.
The expansion that continues at Emirates, Gulf Air and Qatar Airways is clearly a far cry from the austerity being imposed by airlines in the Middle East. Lebanese flag-carrier Middle East Airlines (MEA) is case in point. Although it posted its first full-year profit in 26 years in 2002, that only came after enduring a painful process of slashing routes, aircraft and staff.
By contrast, Qatar Airways, which has undertaken a dramatic expansion from just six aircraft in 1996 to 27 today, says it has only just got started. Chief executive Akbar Al-Baker says 13 new, mostly widebody, aircraft will land in Doha in the next 12 months, and by 2008 its fleet will stand at 52 airliners.
Meanwhile, multi-national Gulf Air plans to double its fleet of 30 aircraft by 2009, while Dubai's Emirates counts its order for 45 Airbus A380s - over 37% of the total firm orders Airbus has received for the 550-seat type - as only one part of its overall aircraft acquisition programme.
Capacity gulf
If most capacity increases are localised in the Gulf region, their effects ripple north, often in the form of downward pressure on yields. This feature is especially pronounced in the sixth freedom transfer markets on which most AACO carriers rely, owing to their small home markets. MEA chief executive Mohammed El-Hout looks at the levels of new seats coming into the market and shakes his head, warning that: "Capacity increases in the Arab world will lead to unsustainable fares."
At last year's AACO meeting El-Hout called for the merger of his airline with Royal Jordanian and Syrian Arab Airlines. Similarly, at this year's Muscat gathering, head of Royal Jordanian Samer Majali said that if services to Amman could be guaranteed, the Jordanian government would consider the dissolution of its flag carrier, which he describes as stuck "between Iraq and a hard place".
But at the same time as the Middle-East flag-carriers talk of consolidation, a host of new start-ups have been springing up in the Arab world, almost all of which are to be found in the Gulf. Launched or proposed new airlines include Air Arabia, MenaJet and Trans Gulf Express in the emirate of Sharjah, National Air Services in Saudi Arabia and Etihad in Abu Dhabi. The establishment of Etihad is especially telling.
Abu Dhabi competition
Abu Dhabi, with some 900,000 residents, already receives intercontinental and regional service by Gulf Air, in which the government is a one-third partner, joining the governments of Bahrain and Oman. So the formation of Etihad surprised many. The new carrier, which started operations to Beirut and Cairo in November, began its life with two A330-200s and will add four more next year. Regional experts say the development does not bode well for Gulf Air, which lost Qatar's support only last year.
Newly revitalised under the leadership of Australian James Hogan, Gulf Air's leadership arrived in Muscat to announce that the airline - widely thought to be at death's door only two years ago - was ahead of plan in its three-year programme to bring the carrier back to break-even.
But Abu Dhabi investment in a venture that will compete with Gulf Air on such key routes as Beirut, London, Mumbai and Bangkok has some recalling the Qatar defection and making predictions on when the carrier will be left with only Bahraini and Omani support.
For his part, Hogan brushes off such speculation. "We're looking forward to co-ordinating with Etihad as we successfully do with Oman Air," he says, adding that nothing should be read into similarities with the Qatar situation. The rulers of Abu Dhabi have pledged their continued commitment to Gulf Air, itself a vastly different enterprise than the troubled carrier of a few years ago, he says.
Whatever the outcome for Gulf Air, the implications of more airlines will be felt throughout the Arab world. MEA's El-Hout insists that such developments are not positive and urges AACO countries to follow the example set by the Air France-KLM merger.
"Look at the size of the markets," he says. "There should be one or two major Arab airlines, maximum - one in the Gulf, and one for the Middle East and North Africa. It used to be that there was Gulf Air for four countries. Now those four countries have seven airlines, plus Gulf Air. There are too many carriers."
AACO secretary general Abdul Wahab Teffaha only partially agrees. "There is room for consolidation in the Middle East and North Africa," he says, although adding that there is "not yet a political or economic environment" for consolidation in the Gulf region where, rising oil prices have re-energised the local economy.
Teffaha adds that, given the benefits which carriers generate for a national social network, perhaps starting and subsidising an airline is not so inappropriate for a country that can afford it.
The situation, however, does harm AACO's less advantaged members to the north. El-Hout says a key to MEA's turn-around has been to forsake transfer traffic and mould itself into a small but high-yield niche carrier, which focuses almost exclusively on origin-and-destination passengers in Beirut. But, even with such traffic now accounting for 97% of its income, the capacity increases in the Gulf still hurt MEA.
Predatory pricing
El-Hout complains that since the Lebanese government unilaterally declared open skies, his carrier has faced increased - and often unfair - competition from within the AACO region. He cites one case in which MEA was forced from a market by a competitor charging fares well below cost - fares that rose once MEA left the route.
Majali agrees, saying that the influx of more and bigger carriers in the Gulf leaves Royal Jordanian needing to resort to an unfortunate market defence mechanism. As his carrier is unable to compete with carriers unconstrained by market conditions, it has had to ask Jordan's civil aviation authority to limit its exposure to them.
"The unfair playing field has put us and other reform-minded airlines in the paradoxical position of actually delaying liberalisation, while the subsidised carriers push for it," Majali adds.
REPORT BY RICHARD PINKHAM
Source: Airline Business
