Huge sums pour into region's aviation sector

Published in MEED, 29 June 2015

The region’s airports and airlines are being expanded to fuel further growth.

The Middle East aviation sector remains in a state of rapid development. The region’s carriers are adding more routes and expanding their fleets, while, on the ground, new airports are being opened and existing ones expanded. Partnership deals with other airlines are also proliferating.

The regional market is dominated by the big three Gulf carriers – Emirates, Qatar Airways and Etihad Airways – and their hubs in Dubai, Doha and Abu Dhabi. Although they have expanded rapidly over the past decade, the potential exists for them to keep growing. The US’ Boeing estimates that 80 per cent of the world’s population is within an eight-hour flight of the Gulf, while French rival Airbus says its A380 ‘superjumbo’ can reach 99.9 per cent of the global urban population via a direct flight from Abu Dhabi.

Rapid expansion

Although all three airlines are growing at breakneck speed, they have been doing so in different ways. The largest of the three, Emirates, has tended to concentrate on expanding organically, although it does have codeshare agreements with the likes of Australia’s Qantas and Air Mauritius. Emirates flies to 144 cities in 81 countries with a fleet of more than 230 aircraft. Last year, its planes carried 49.3 million passengers.

Qatar Airways has been more willing to form alliances. It joined the Oneworld group in 2013 and has codeshare deals with 14 airlines. In January, it took a 9.9 per cent stake in IAG, the holding company for British Airways and Iberia. More recently, in May, it formed a code-sharing alliance with Royal Air Maroc, which improves its reach into Africa.

The youngest of the big three, Etihad, has been the most active in buying shares in other airlines. It has minority stakes in eight carriers, with the most recent deal completed in December, when it bought 49 per cent of Italy’s Alitalia. Etihad says its codeshare and equity partnerships resulted in more than 3.5 million passengers being carried last year.

However, the big three do not have the market entirely to themselves. Low-cost rivals such as Fly dubai and Air Arabia are providing ever stiffer competition. The share of available seat kilometres operated by low-cost carriers in the region was increased from 2 per cent in 2003 to 23 per cent by 2013, according to Airbus.

Some second-tier national carriers are also expanding. Oman Air took delivery of seven new aircraft last year, taking its fleet to 32. It plans to expand this to 70 planes by 2020. Kuwait Airways has also been renewing its fleet, adding four new Airbus A320s already this year and signing a deal with Boeing to buy 10 777 aircraft.

Bahrain’s Gulf Air has been restructuring and reported revenues up 14 per cent last year to BD349m ($927m), helped by increased passenger volumes.

In Saudi Arabia, two new airlines will soon upset the current duopoly enjoyed by Saudi Arabian Airlines and flynas. SaudiGulf and Al-Maha Airways, a subsidiary of Qatar Airways, received their licences in 2012. Recent reports suggest SaudiGulf could start flying in November.

All this activity means the number of aircraft being flown from the Middle East has been rising steadily. Airbus says the proportion of the global fleet operated by the region’s airlines increased from 6 per cent in 2003 to 15 per cent in 2013.

The big three Gulf carriers currently have orders for more than 800 aircraft, but that number is likely to swell over the coming years. Boeing estimates that 2,950 new aircraft will be ordered by Middle East carriers between now and 2033, worth $120bn at list prices.

US allegations

There are some issues that the Gulf airlines will need to deal with if their expansion plans are to stay on track. US rivals American Airlines, Delta Air Lines and United Airlines have accused them of receiving unfair state subsidies and have called on Washington to review their access to the US market. The allegations have been refuted by the regional carriers, but may yet present a problem as they try to expand in North America.

Closer to home, some important structural issues also need to be addressed. A significant portion of the Gulf’s airspace is devoted to military use, which reduces the amount of space for passenger jets, leading to congestion and delays. In addition, the region’s air traffic control system is very fragmented, leading to more inefficient journeys. Both issues require the involvement of GCC governments if they are to be solved.

The difficulties for Egypt’s aviation sector are even more serious. The market has been in the doldrums since 2011 because of the country’s political instability. It is showing signs of recovery this year, with airlines adding an additional 600,000 seats on flights this summer, according to data provider OAG Schedules Analyser. However, national carrier EgyptAir is struggling to maintain its market share.

“Overseas carriers are taking an increasing share of the overall capacity,” says John Grant, executive vice-president at OAG. “Turkish Airlines doubled its capacity from the summer of 2011 to the summer of 2015. Emirates has grown by about 50 per cent.”

The Egyptian market is also hampered by the historic lack of investment in many of its airports, although this is also starting to change. In March, the Islamic Development Bank said it would provide $457m to improve Sharm el-Sheikh’s international airport. The plan is to increase the capacity at what is Africa’s third-busiest hub from 8 million passengers a year to 18 million by 2025.

According to regional projects tracker MEED Projects, $1.6bn-worth of airport projects are planned or under way in Egypt. They include a $350m expansion of Hurghada International airport and a $170m terminal for low-cost airlines at Borg el-Arab International in Alexandria.

An entirely new airport has also been mooted for Cairo as part of the capital city project. Whether that development goes ahead remains to be seen, but even if it does there are doubts over whether Egypt can revive its status as a regional hub.

“It’s extremely challenging for them to get back to having a strong hub,” says Grant. “Turkish Airlines have grown their exposure in Africa, which takes away one of the markets that EgyptAir was able to play at one stage. A lot of traffic from emerging Chinese destinations flows through the Middle East into Africa as well.”

Gulf airports

In the Gulf, huge sums are being poured into airport projects. MEED Projects estimates that $112bn-worth are planned or under way across the GCC, most of them in Saudi Arabia and the UAE.

In September, Dubai Airports announced that Al-Maktoum International will undergo a $32bn, eight-year expansion to take its capacity from 6 million passengers a year to more than 220 million. On the other side of the city, a runway upgrade at Dubai International last year helped to improve its capacity and efficiency. Also in the UAE, work is ongoing on a $6.2bn programme at Abu Dhabi International airport, which includes the new Midfield Terminal.

In Saudi Arabia, the General Authority of Civil Aviation is spending some $35.7bn upgrading the country’s airports. Among the biggest projects are the $28bn investment in King Abdulaziz International Airport in Jeddah and the $3.5bn expansion of King Khalid International in Riyadh.

Elsewhere in the Gulf, the first phase of Doha’s Hamad International airport opened in May 2014, but more phases are in the offing. Once complete, it will be able to handle up to 50 million passengers a year.

In Kuwait, the Directorate General of Civil Aviation recently invited companies to submit prequalification documents for a new passenger building at Kuwait International. There are plans for a $6bn expansion of the airport, which will include extending the two existing runways.

In Oman, Muscat International airport is undergoing a $5.2bn upgrade as part of plans to increase capacity to 12 million passengers a year, a figure that could eventually rise to 48 million. A new terminal is also being built at Salalah International to handle 1 million passengers a year. Last year, new airports opened in Duqm and Sohar. And in Bahrain, the main international airport is undergoing a $630m upgrade to boost capacity from 9 million to 15 million passengers a year.

Job creation

While overcapacity is a risk, all this investment could be sustainable as long as the region’s economies continue to grow. According to Airbus, people in the Middle East took an average of 0.38 trips by air in 2013. Airbus predicts this will increase to 0.92 trips per capita by 2033.

However, the ultimate prize is job creation and economic diversification. UK research firm Oxford Economics estimates the aviation sector contributed $26.7bn to Dubai’s economy in 2013 and directly and indirectly supported 416,500 jobs. By 2020, it thinks the industry will support more than 750,000 jobs.

This employment is not just created by Emirates airline; it also emerges in the wider ecosystem that grows up around an airport. About 57,000 people are directly employed by Emirates, which is only 16 per cent of the jobs that Oxford Economics estimates the industry supports.

Smaller markets can also benefit. Oman Air claims that it made a contribution of RO420m ($1.1bn) to the sultanate’s economy in 2014. Such numbers tend to carry weight in the region, which means that, unless there is a major shock to the system, high levels of investment are likely to continue in the future, particularly in the richer Gulf countries.

“Solid infrastructure is a key component to support economic growth,” says one industry executive. “This comes with the need to invest in the expansion of new and existing airports, aircrafts and at times new airlines.”

Egypt’s aviation sector benefits from renewed focus

Many of Egypt’s airports have been operating beyond their design capacity for years. Now funds are at last being ploughed into expanding them. Published in MEED, 24 May 2015

Few travellers to Sharm el-Sheikh seem to enjoy their experience at the airport, if the reviews on websites such as Skytrax are anything to go by. Stories abound of chaotic check-in procedures, impolite staff and poorly organised baggage reclaim systems.

Perhaps some of the delegates to the Egypt Economic Development Conference, which was held in the resort town in March, suffered with similar problems. By the end of the conference, the Islamic Development Bank (IDB) had agreed to provide $457m to improve the airport. A month later, the African Development Bank (AfDB) approved a $140m loan for the same purpose. The $670m expansion project involves the construction of a new terminal, runway and control tower.

Stretched infrastructure

Sharm el-Sheikh has an important position in Egypt’s tourism industry and the investment in its airport will increase its capacity from 8 million passengers a year to 18 million by 2025. The money is badly needed. The airport is Africa’s third-busiest, according to the AfDB, but it has been operating beyond its design capacity for years.

The investment is, however, only part of what is needed to bring the country’s aviation sector up to scratch. Some other airports have also been getting an overhaul. According to regional projects tracker MEED Projects, $1.4bn-worth of airport projects are being studied, designed or built at the moment. In December, a $350m overhaul of Hurghada International airport on the Red Sea coast, another important tourist resort, was completed, lifting capacity to 13 million passengers a year from 4.6 million, through the construction of a new terminal and runway.

Other projects include a new terminal for low-cost airlines at Borg el-Arab International in Alexandria. The scheme has a budget of $170m and a main contract award is expected in July next year.

A new passenger terminal is also planned for El-Nozha airport, also in Alexandria, and work is in theory still ongoing to renovate Terminal 2 at Cairo International. A new Cairo airport has also been earmarked as part of the new capital city project unveiled at the Sharm el-Sheikh conference, although whether that ever gets built remains in question.

Most of the major airports in Egypt are controlled by the state-owned Egyptian Holding Company for Airports & Air Navigation, through two subsidiaries: Cairo Airport Company and Egyptian Airports Company. The latter’s remit covers 18 international and domestic airports.

In addition, two airports are operated by private companies under build-operate-transfer (BOT) contracts. Marsa Alam International on the Red Sea coast is run by EMAK Marsa Alam for Management & Operation of Airports, a subsidiary of Kuwait’s MA Kharafi Group. El-Alamein International, on the Mediterranean coast, is run by International Airport Company, part of the local Kato Investment group.

Such BOT contracts are used in other parts of the country’s transport system. For example, tenders were issued last year for new shipping terminals at Damietta, Safaga, El-Tor and Alexandria, all to be built under BOT contracts. However, they have not been used in recent times for airports, and few expect that to change in the near term, given the ongoing difficulties in Egypt.

“Maybe in the medium-to-long term there will be more BOT contracts, but I wouldn’t have said there would be a great deal of appetite among investors in the short term,” says John Strickland, director of JLS Consulting, an independent transport consultancy.

Along with expanding airports, changes are needed at the nation’s main airlines. Tourists and business travellers alike have been put off by the political turmoil over recent years and EgyptAir and its domestic subsidiary EgyptAir Express have been feeling the pain.

According to the Washington-based World Bank, the number of passengers flying on Egyptian-registered airlines fell by 19 per cent in 2011, the year President Hosni Mubarak was unseated, and it is taking time for the situation to improve. OAG, an airline industry data provider, says there was little growth in airline capacity to Egypt between 2011 to 2014, although a recovery of sorts is under way this year, with airlines adding more than 600,000 seats.

International carriers

Most of the growth is coming from international carriers, with the likes of Qatar Airways, Dubai’s Emirates Airline, Turkish Airlines and Russia’s Transaero Airlines all expanding fast. In contrast, EgyptAir has cut 60,000 seats this year in a clear sign that even if the sector as a whole is recovering, not everyone will benefit.

“It’s an interesting picture of overseas carriers putting more capacity on, whereas local carriers are actually reducing capacity,” says John Grant, executive vice-president at OAG.

Egypt’s national carrier needs to reform if it is to compete. Although it was consistently profitable before the revolution, the airline has been making heavy losses in recent years, ending 2011/12 with a £E3.1bn ($406m) deficit and posting a further loss of £E1.9bn the following year.

Other parts of the wider EgyptAir Holding Group are profitable, including the cargo, maintenance, and ground services divisions, and EgyptAir Express, which returned to profit in 2012/13. However, their contributions are nowhere near enough to offset the losses at the main airline.

A process of reform is under way. In December, the airline signed a deal with US travel consultancy Sabre to develop and implement a programme of changes designed to increase revenues and improve efficiency. At the time, Sameh el-Hefny, chairman and CEO of EgyptAir Holding, said the aim was to return the airline to profitability by the end of the fiscal year 2015/16. Doing so will not be easy, although the current low oil price environment should help.

“The losses at EgyptAir are coming down, but they’re still quite high,” says Hatem Alaa, an analyst at local bank EFG Hermes. “This year, with low oil prices, there’s a good chance we’ll see some improvements. Tourism is picking up and fare prices have not come down as much as oil prices, so there’s a chance there will be an improvement.”

Increasing competition

The problem is that pressure from nimbler, better-funded airlines in the Gulf and Turkey is only likely to increase. As well as the likes of Abu Dhabi’s Etihad Airways and Turkish Airlines, these include low-cost airlines such as Air Arabia and Flydubai. To the south, Ethiopian Airlines and Kenya Airways have better reputations and better structured hub operations than EgyptAir these days.

“EgyptAir is surrounded by very good global hubs and airlines with good products and competitive prices,” says Grant. “It could return to profit, but it has got to be commercially oriented. It may be profitable again, but perhaps not at the size they are at today.”

The best option for the airline, according to Strickland, could be to focus its activities on key destinations where there is heavy demand from business travellers, tourists and Egyptian expatriates.

There may also be gains to be found in opening up more to Africa. In a report published in July last year, research firm InterVistas looked at the impact that liberalising the market between 12 major African economies would have, including Egypt. It suggested an additional 318,000 passengers could pass through Egyptian airports as a result of Open Skies deals with the likes of Algeria, Nigeria and South Africa, creating 11,000 jobs and $114m in GDP in the process.

Even so, the country may simply have to accept that it can no longer sustain as large an aviation sector as it might once have hoped.

“Many people see aviation as an economic catalyst and generator of jobs,” says Grant. “Undoubtedly in Sharm el-Sheikh and Hurghada that is the case. But on a country level, continually investing in something such as EgyptAir to try and get it right is going to be a hard task to support.”