Turbulence Ahead for Middle East Private Aviation

The private aviation industry in the Middle East is still recovering from the economic crisis. But even as it climbs out of that slump, storm clouds are gathering on the horizon. Published in Bloomberg Businessweek, 16 November 2014

Having to fly on a regular basis for work may feel like a chore at times but it is at least getting more comfortable, if your employer is willing to pay for a premium ticket that is. On the ground, airlines are trying to out-do each other with their lounges and terminals while the in-flight service in business and first class keeps improving, particularly in the latest generation of planes like the Boeing 777 (B777) and Airbus 380 (A380).

But even a first-class passenger might feel a twinge of envy if they look out the window as they taxi towards the runway and see the private jets on the tarmac below.

Flying private means avoiding fixed departure times, impersonal check-in desks and long security queues and, for the status conscious, it offers an unparalleled sense of exclusivity. In the past such jets were used in the Middle East by royalty or elected political leaders. Industry executives say that is changing.

“If you look at business aviation 25 years back in this region, it was mainly a tool for royal families and presidents. There was very little on the business or corporate side,” says Raghed Talih, regional sales director for Honeywell Aerospace, a technology provider to the industry. “In the past five to 10 years, we’ve seen a major shift in corporate use. They see it as a tool to conduct business, save time and be more flexible.”

That is not to say luxury is not still important. Consider, for example, a package offered by the Abu Dhabi-based operator Royal Jet to the Milan Fashion Week in September. For a mere AED150,000 ($40,800) per person, customers were offered private jet flights, private shopping at the likes of Prada and Versace and access to the prêt-à-porter shows. Such treats for the super-rich will not fill all the planes that are expected to come into the region in the coming years, however. Bombardier expects the region’s fleet to grow from 395 in 2013 to 745 by 2023 and to 1,405 by 2033. So these days the industry is intent on expanding its customer base.

“We are trying to change perceptions,” says Ali Al-Naqbi, chairman of the Middle East Business Aviation Association (MEBAA).

“People always believe that business aviation is for luxury, for use by high- net-worth individuals. We are working with our peers in the US and Europe to change that. It’s not only for luxury, it’s also a business tool.”

That argument is already widely accepted in the two countries that dominate the regional market, Saudi Arabia and the UAE, although there are some nuances to their positions.

“The highest concentration of business aircraft [in the region] is located in Saudi Arabia and the UAE and I don’t see that changing in the next few years,” says Talih. “Saudi Arabia has the biggest population in the Gulf and the largest number of high-net-worth individuals, businessmen and royal family members that are willing to invest in business aircraft. The UAE plays a similar role but it is also the regional hub for maintenance and operations.”

Overall, however, the Gulf is not performing as well as it could be. Honeywell predicts that 9,450 new private planes worth $280 billion will be delivered over the next 10 years, with 23 per cent of the global fleet being replaced in the next five years alone. In the Middle East and Africa, the five-year replacement rate is 18 per cent.

The Middle East market has been dented by a combination of regional political shocks and the global economic crisis that began in 2008, undermining demand from business users and wealthy individuals. To some extent these factors are still at play, but the industry does at least have the advantage that its assets are easy to move.

“Business aviation is almost non-existent in those countries that have been affected by uprisings, like Yemen, Syria and Libya. Most of the planes that were once based in Egypt were relocated to Saudi Arabia or the UAE or other parts of the region,” says Al-Naqbi. “There are a lot of flights to areas where people think there is a business opportunity. Last year, there was huge demand to northern Iraq, but that has reduced this year because of the situation there. Now you see a lot of movement to Egypt where the situation is returning to normal.” There are some other issues which, at times, make life harder for the private aviation sector, not least congestion at some of the region’s big airports, where they have to compete for landing and take-off slots with the likes of Emirates, Etihad Airways and Qatar Airways.

“Commercial and business aviation generally don’t mix well,” says Josh Stewart, chief executive of X-Jet, which manages jets for customers in the US and is soon to launch services in the Middle East. “At Dubai [International Airport], Emirates obviously receives preference for an A380 with hundreds of people versus a business jet with one person.”

Some measures have been taken to separate the two strands. In Abu Dhabi, Al-Bateen airport is now used exclusively by private jets, while in Dubai, services are being moved from Dubai International to Al-Maktoum International at Dubai World Central (DWC). The industry has generally welcomed this, although some operators say they would like to keep a presence in Dubai International.

“It’s clear with the commercial traffic growth at Dubai International that general aviation has a short lifespan left there,” says Mike Berry, vice-president for the Middle East at ExecuJet. “The long-term plan is no more general aviation at Dubai International, but we like to think the situation could change. We’d like to keep a footprint at both airports.”

DWC will host the Middle East Business Aviation (MEBA) show from 8 to 10 December. Organisers expect 8,000 delegates will come to visit the 420 exhibitors. During the rest of the year, the space available at the new airport continues to make it an attractive option. Indeed, it is starting to attract companies offering some innovative business models. For example, when X-Jet launches its services next year it will offer what it calls a ‘club’ membership deal for around 25 wealthy individuals who want someone to look after all aspects of their jets for a fixed annual fee.

“We’re moving our global headquarters to Dubai. The business model suits it,” says Stewart. “There is a shortage of hangar facilities in Dubai. So when we build ours I think we’ll attract members from surrounding GCC countries. We have already identified key members we’ll be approaching.”

Some other airports are rather less accommodating or attractive, particularly those that are more geared up for the big commercial airlines.

Despite its importance to the private aviation sector, for example, Saudi Arabia’s airports are often criticised for their private jet facilities. What might help is if there were more airports like Al-Bateen that were reserved for private aviation services.

There is the opportunity to replicate that in other cities, not least in Riyadh where the air base in the city centre could make an attractive location. Whether that happens or not, MEBAA says it is keen to explore the potential for more private aviation airports.

“In Morocco, they’ve dedicated one airport they were using as a military airport between Rabat and Casablanca for business aviation,” says Al-Naqbi. “In Amman, there is a dedicated airport. In Saudi Arabia, they’re working on giving up one of the small airports for business aviation. So more airports are coming up and we’re trying to discuss the issues with governments.”

The rising importance of private aviation is characterised by the number of subsidiaries being launched by the region’s major airlines. Emirates has its Emirates Executive service, Qatar Airways has Qatar Executive and Saudi Airlines has Saudia Private Aviation. Etihad has opted for a different set-up by partnering with Royal Jet.

As with the independent operators, some of these services are doing well. In mid-October, Qatar Executive signed a memorandum of understanding with Gulfstream Aerospace to buy up to 20 aircraft, including the G500 model, which can fly non-stop from Doha to London and the G650ER, which can reach Los Angeles.

That highlights one of the more notable features of the regional market, which is its preference for large jets. Compared to other regions, Middle East buyers are far more likely to buy long-range jets that can whisk passengers along on inter-continental journeys.

“We are seeing a trend toward larger aircraft in the Middle East,” says Steve Taylor, president of Boeing Business Jets (BBJ). “The Middle East represents the largest hub for 747s used by governments and private individuals. In addition, the majority of the 747-8 VIP orders have been placed in this region. The Middle East represents the largest combined market for BBJs.”

The preference for larger aircraft is partly because some Middle East clientele like to travel with big entourages. However, a more important factor is the desire among these VIPs to fly longer distances in private.

Operators say that while hops between Saudi Arabia and the UAE are common, the majority of their flights are to destinations outside the region, most often in Europe and North America. The likes of Airbus and Boeing are of course more than happy to meet this demand, but there is a supply squeeze looming in another part of the industry in terms of pilots. This is in fact an industry-wide problem, affecting commercial airlines just as much as private jet operators.

“There are two kinds of pilots,” explains Marwan Atalla, chief executive of Jordanian flight training academy Ayla Aviation. “There are ‘direct entry’ pilots who are experienced and are already flying commercially with airlines. This category is in high demand and this is where the shortage is today.

“The second kind is newly trained captains and they are abundant. Private jet owners tend to prefer to hire experienced pilots. They are less comfortable with fresh graduates. So they will feel the pressure.”

The issue of congestion is another problem that will need to be addressed. This is not simply a question of landing slots and places to park on the apron. There are also problems around the use of air space, which is becoming increasingly crowded as the big airlines launch more routes.

The situation is exacerbated by the fact that so much airspace is reserved for military use. The International Air Transport Association and the Arab Air Carriers Association have both been pushing for changes on behalf of the commercial airlines, but it is also a problem for private aviation.

The best solution would be for more air space to be freed up for commercial use and for the skies over the Gulf to be managed as a single block, rather than each country looking after its own zone, as currently occurs. Few expect either of these things to happen quickly, but it is starting to become a big problem.

“Air traffic is a big concern and could be a potential threat to the future growth of the industry in the region,” says Vinodh Ramani, a senior research analyst at Frost & Sullivan, a consultancy. “Within two years, carriers might face a regular 45 minute delay to flight departures and arrivals if steps are not taken. The key issue is the absence of a central navigation system.”

Such problems are of course symptoms of success more than anything else, so no-one is complaining too loudly right now. But, if the industry is to maintain its current growth trajectory and indeed reach its full potential in the future, then it will have to find solutions to such issues. For now, however, most in the industry seem to prefer to focus on the potential upside.

“The Middle East was one of the fastest growing regions prior to the 2008/09 economic downturn,” says Berry. “The recovery is not where we would like to see it, but certainly we’ve seen positive signs in the market. Confidence is coming back. I still think [the Middle East] will be one of the fastest growth regions when things get back on track again.”