The Gulf’s increasingly crowded skies

Overcrowding is likely to become an issue in the years ahead as the regional aviation industry continues its rapid growth, with new airlines being set up and existing carriers expanding their route network Published in MEED, 3 July 2014

For a few days in early June, Qatar became the centre of the global aviation industry. About 1,000 delegates were in Doha for the annual conference of the International Air Transport Association (Iata), an industry body representing 240 airlines. The timing was fortunate for Qatar, coming just a few weeks after its new airport, Hamad International, finally opened several years behind schedule.

Delegates arriving from other parts of the world would have been forgiven for looking enviously at the position of their hosts. Along with Dubai’s Emirates Airline and Abu Dhabi’s Etihad Airways, Qatar Airways is currently one of the strongest and fastest-growing carriers in the world. With new airports and terminals coming online in Dubai, Doha and Abu Dhabi, the position of this trio is only likely to strengthen.

For some other carriers in the region, however, the climate is far tougher. There has been a profusion of new airlines in recent years, as the trend for low-cost carriers has taken off. While the big three airlines are chasing lucrative, intercontinental fliers, these newer airlines are generally targeting travellers within the region. In the process, they are piling pressure on other legacy carriers, many of which are losing large sums of money. Some of the new airlines have themselves found the competition too great and have folded after just a few years of operations.

“The big Gulf carriers run on very commercial lines, but we do see failures where airlines have been set up more for national objectives or prestige rather than commercial logic, or have not been run by tight enough management,” says John Strickland, a director of JLS Consulting, a London-based transport consultancy. “There are existing flag carriers that are losing a lot of money, and smaller niche players that for a whole host of reasons – some political, some commercial – have failed.”

Among those to fade away have been RAK Airways in the UAE, Saudi Arabia’s Sama, Wataniya Airways in Kuwait, and Bahrain Air. Many others that are still in business have stayed small, such as Felix Airways in Yemen or Syphax in Tunisia, both of which operate just a few planes. But others have grown far more quickly, such as Flydubai and Air Arabia in the UAE and flynas in Saudi Arabia, all of which have about 30 aircraft in their fleets and more on the way. Qatar Airways has itself got involved in this trend by setting up a subsidiary in Saudi Arabia. Its new division, Al-Maha Airways, is due to launch services in November.

As they continue to seek opportunities for growth, some of the newer airlines have had to adapt their business models. FlyNas and FlyDubai, for example, started out as low-cost carriers, but both now offer business-class seats on their planes in the hope of enticing passengers willing to pay more for a few extra frills.

Privatisation strategy

In response to the new challengers, many of the legacy carriers and the governments that own them have had to rethink their approach too. In the case of Saudi Arabia and Kuwait, the answer they have hit on is privatisation.

Saudia’s catering division was the first part of the kingdom’s flag carrier to be privatised in June 2012, and its freight subsidiary, Saudi Airlines Cargo Company, is due to be sold next. Among the other units being lined up for privatisation are the ground services division and, eventually, the airline itself. As with most initial public offerings in the kingdom, the keen initial pricing of shares in Saudi Airlines Catering Company meant the flotation was heavily oversubscribed, with demand five times greater than supply. Since listing, the shares have performed well, rising from the initial offer price of SR54 ($14.4) a share to as high as SR186 in early June. That will offer further encouragement for the government to sell other parts of the group.

Meanwhile, the airline is doing its best to get into better shape. In March, it signed a SR7.2bn financing deal with local banks including Samba Financial Group, Banque Saudi Fransi and National Commercial Bank, which will allow it to buy 26 new aircraft and boost its network reach. Khaled bin Abdullah al-Molhem, director-general of Saudia, said at the time that the airline’s strategy was to develop its activities at the country’s main gateway, King Abdulaziz International Airport. “Saudia aims to build a strong hub in Jeddah as a major point for international air traffic,” he said.

It will be some time before the airline is ready to be sold off, but the privatisation of Kuwait Airways is likely to be an even slower process. The idea was first floated in 2008 and progress has been fitful at best since then. In January, the Kuwaiti parliament approved the latest draft of a law to sell the airline. Among other prerequisites, this requires the government to overhaul the carrier’s fleet before any sell-off, but that process has itself become mired in controversy. In November 2013, Communications Minister Essa al-Kanderi suspended the airline’s chairman Sami al-Nisf over a deal to buy five second-hand aircraft from India.

The following month, Al-Kanderi appointed Rasha Abdulaziz al-Roumi as the chairwoman. Since then, plans for the fleet overhaul have moved forward. In February, Kuwait Airways confirmed an order for 25 new aircraft from France’s Airbus, including 10 A350 planes for long-haul routes and 15 A320 aircraft for regional services. It is also due to lease 12 other planes, a mix of A330s and A320s.

“This is an important moment in the history of Kuwait Airways as it signals the start of a new stage that is meant to take the national carrier back to its flourishing days,” Al-Roumi said at the time. However, while the leased planes are due to arrive from December, the newly-purchased aircraft are not scheduled to enter service until 2019, so any privatisation may have to wait until then at the earliest.

If these moves are successful, other governments may be tempted to experiment with bringing in private ownership, something that businesses reliant on air transport are in favour of. “Privatisation equals flexibility and flexibility generates competitiveness, which in turn will have a good impact on the logistics industry,” says Safwan Tannir, chief freight officer at Aramex, a Dubai-listed logistics company.

The scrutiny that comes with being a publically listed firm is something many airlines might find uncomfortable, however. At present, financial data is not always available for the region’s flag carriers, but the information that is released shows many of them are loss-making. A combination of more competition and private ownership may help to improve efficiency at some of these airlines, but it will take time and political skill to deal with their expensive staff contracts and ageing fleets, which the likes of Emirates and Etihad do not have to worry about.

Better yields

Globally, the aviation industry makes about $18bn of profits, but given it carries more than 3 billion passengers a year, that equates to a profit of only $5.42 a passenger, according to Iata. Middle East airlines generally do far better, making a profit of $8.98 a passenger, putting them second only to their North American peers.

Those figures would look very different were it not for the big three Gulf airlines, the most profitable of which is Emirates. Even with all the changes in the region’s aviation sector, there seems to be little that will dent its rapid growth and that of its main two rivals in the immediate future. Emirates may have cancelled an order for 70 Airbus A350s in June, but it ordered 50 of the far larger A380 aircraft at the Dubai Airshow in November last year. Combined, the Gulf’s big three have orders and options for more than 800 new planes, which is more than the existing fleet of all the other major airlines in the Middle East and North Africa put together.

However, that growth may itself create some problems in the years to come. There are some in the industry who are starting to question whether there is enough room to accommodate all the aircraft flying into and out of the region’s ever-busier airports, particularly as 40-60 per cent of the Gulf’s airspace is reserved for the military. “In some ways, the Gulf region is a victim of its own success,” said Tony Tyler, Iata’s director-general, at the start of the Doha conference. “The airline industry is thriving and the region’s airports are among the best in the world, but with both airlines and airports undergoing ambitious expansion plans, air traffic management has become an issue. Airspace is a finite resource and in the narrow Gulf corridor, space is at a premium. Maximising efficiency is in everyone’s interest, but this will require heightened regional cooperation.”

Such cooperation between GCC states has not always been forthcoming in the past, so there are doubts over their ability to grapple effectively with this issue. The crunch point is probably a few years away, but ideally governments and regulators would start to put some plans into action well before then.

“For now they are fine, but there will be a problem in three to five years,” says Carter Stewart, managing director of US consultancy TWC Aviation. “The answer is a single Gulf skies initiative, like the Single European Sky. I think they are starting to take it seriously, but I don’t think they will get there before they hit the crisis. The reality is it takes five to 10 years to negotiate and get the technical centres working together in an efficient way, so it’s a 10-year programme for a three-to-five-year problem.”

The issue of managing rapid growth is the type of problem many of the delegates at the Iata meeting would be delighted to face. How well the regulators deal with it will determine whether delegates at future conferences in the region will be as envious of the big Gulf carriers.