Gulf airlines stabilise at cruising height

Published in Gulf States News, 26 November 2015

This year’s Dubai Airshow was notable for a lack of new orders by the big Gulf carriers, but this may mark little more than a pause for breath as the region’s airlines digest huge recent orders.

More than 1,000 exhibitors from 61 countries turned up to the 8-12 November Dubai Airshow, which reflected in its global status to show off some 150 aircraft on the tarmac, from agile drones made by Abu Dhabibased Adcom Systems all the way up to lumbering Airbus A380s decked out in the liveries of Dubai’s Emirates Airline and Qatar Airways.

So far, so normal: what was unusual was the lack of big new orders. Abu Dhabi-based national UAE airline Etihad Airways exercised options for two Boeing 777 freighters, but that was part of an order for 199 planes announced in 2013. There were no equivalent new deals. Instead, the big manufacturers were left to make more prosaic announcements, such as Toulouse-based Airbus Group’s deal to upgrade the cabins of Oman Air’s A330s.

By comparison, the November 2013 show saw Abu Dhabi and Dubai-based airlines set new records, placing combined orders worth more than $170bn, with Emirates committing to an estimated $99bn spend, low-cost carrier flydubai placing an order worth $11.4bn and Etihad spending more than $67bn, while also announcing the acquisition of a 33.3% stake in Swiss carrier Darwin Airline.

The industry has been debating whether this year’s lack of orders represents a natural lull while the airlines digest huge recent orders, or something more significant. Aviation specialist JLS Consulting director John Strickland suggests the former: “I don’t think the lack of new orders was a surprise. The Gulf carriers – not only the big three, but also airlines like flydubai – already have a lot of orders on the books that haven’t been delivered yet. You can’t expect big orders all the time.”

Smaller Gulf airlines, including Dubai Aviation Corporation’s flydubai (see page 11), are still growing. The big three are also still expanding their networks via distinct growth strategies:

● Emirates is focused on organic growth, although it has a management contract for TAAG Angola Airlines and an important co-operation deal with Qantas;

● Qatar Airways places more emphasis on partnerships, being a member of the Oneworld alliance and a shareholder in International Airlines Group (IAG), the holding company of Aer Lingus, British Airways, Iberia and Vueling; and

● Etihad has the most challenging strategy of the three, with a jigsaw of stakes in smaller airlines such as Air Serbia and Airberlin.

Bahrain-based Gulf Air, seen as a poor cousin of the big three since its regional domination declined and the Qatar and UAE airlines grew, is adding new destinations, most recently with flights to Faisalabad and Multan in Pakistan in October. It is also overhauling its fleet: in September, Gulf Air said it would order up to 50 new Airbus aircraft. This deal seems likely to be signed in early 2016.

Gulf Air’s Bahraini senior management is working to turn around the airline’s fortunes. Maher Salman Al-Musallam joined as deputy chief executive (after a 35-year career with the Royal Bahraini Air Force) and has served as acting chief executive since Samer Majali stood down in 2012. Recently promoted to chief operating officer, Nasser Al-Salmi joined Gulf Air in 1988 as a cadet pilot, and rose to chief pilot and, from November 2008, director of flight operations. Among other second-tier airlines, Oman Air plans to expand its fleet to 70 aircraft by 2020, compared to 32 today. Kuwait Airways is working through an order for 37 Airbus aircraft made in February 2014.

Saudi Arabian Airlines (Saudia) is due to receive the first of eight Boeing 787 Dreamliners before year-end, as part of a modernisation programme, which director-general Saleh Bin Nasser Al-Jasser in late October said would include retiring 19 older planes from its fleet (15 Embraers and four Boeing 747 jumbo jets). Laying the cornerstone of Saudia’s new air operations building in Jeddah, Jasser said the airline’s fleet of 124 passenger aircraft was expected to rise to 200 by 2020. Some 50 new Airbuses are due in the period to 2018, 28 of them arriving in 2016, Jasser told another event, in Cairo.

In his most recent statement, General Authority of Civil Aviation president Suleiman Bin Abdullah Al-Hamdan (who is also Saudia chairman) has said the new King Abdelaziz International Airport will be completed in mid-2016, with a further year needed to test equipment before a 2017 opening.

Saudia is strengthening its presence in Egypt and has decided that women will be employed in administrative jobs. Jasser in late October also said the privatisation of Saudia’s catering company had “reached its final stages now, and will be put on the stock market for public subscription shortly”. He was also quoted saying the privatisation of ground services had reached its final stages.

Judging from the headlines, the region’s aviation industry is planning a bright future. However, the lack of detailed financial results issuing from many airlines makes it impossible to judge the viability of their strategies. Data included in GSN’s graphic may be the best available, but still subject to discrepancies.

Load factors, where they are published, generally look healthy enough, running at 79-80% for Etihad and Emirates and 81% for Sharjah-based Air Arabia (chaired by UAE-based Qatari businessman Abdullah Bin Mohammed Bin Ali Bin Abdullah Al-Thani). Oman Air is slightly lower at 74%.

A few issues are holding back growth. Deregulation of the Saudi domestic aviation industry appears to have stalled and, across the region as a whole, the rapid growth in traffic has highlighted the shortage of airspace open to commercial jets. As flydubai chief executive Gaith Al-Gaith has observed (see box), airlines are finding it difficult to break into new markets. The big three have been met by a wall of opposition from US carriers, while gaining further access to some European markets is also proving tricky.

On the plus side, Iran’s imminent opening up could offer an attractive nearby market to exploit. And low oil prices mean low fuel prices, at least for those airlines that did not order too much fuel when prices were high. Emirates says fuel made up 35% of its operating costs in 2014-15, compared to 39-40% in the previous three financial years.

Overall, barring any sudden shift in corporate strategies, a revival in aircraft orders is likely to happen before long. The big three Gulf carriers have some 876 aircraft on order, so there is still plenty of work for Boeing and Airbus. Add in the smaller airlines and the regional order book swells to 1,200. Airbus thinks the Middle East region will buy 2,460 more aircraft over the next 20 years, with 1,890 as a result of fleet expansion and 570 to replace aging planes. Boeing says it expects the region to need 3,180 new planes over the same period, worth an estimated $730bn.