Trouble in the skies

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James Hogan, Etihad CEO.

Like a large majority of sectors in the region, the Middle East's aviation industry has set its sights very high. Earlier this month, at the MENA AirFinance conference in Dubai, the director of marketing for Boeing Commercial Airplanes told delegates that Middle East airlines would need at least 1110 airplanes by 2027, in order to meet increasing demand. Some US$160bn worth of new aircraft will soon be rolling across Middle East tarmac, Drew Magill suggested, as the region's carriers continue to build on their recent successes and carve out a significant slice of the world's commercial flight market for themselves.

Last week, however, a report by the International Air Transport Association (IATA) revealed that the net profits of the Middle East's airlines will be less than half last year's forecast. In 2006, the IATA anticipated that the region's airlines would rake in a cool US$500m in 2007 profits - now that figure has dropped dramatically to US$200m.

Chillingly, the figures would be a great deal worse were it not for the strength of a single airline's results. Indeed, the performance of Dubai-based Emirates Airline has single-handedly pulled the region into the black. While Emirates earned US$674m in net profit last year, the Middle East as a whole posted a US$200m profit, suggesting widespread losses among other airlines.

"Emirates, the leaders, is doing extremely well, but there are some loss-making airlines in the region that are pulling the total down," Brian Pearce, the IATA's chief economist, tells Arabian Business, adding that the sharp drop is due to the revision of original statistics provided by the International Civil Aviation Organisation (ICAO).

"It seems that there were more losses made in 2006 than we had reckoned on, which automatically pulls down the starting point," he explains. "The move from US$500m to US$200m for 2007 is entirely down to that weaker starting point."

Emirates, of course, is waging a one-carrier war against this weakness. It is the Middle East's largest airline, with nearly 2350 flights each week, serving 93 cities in 59 countries in Europe, North America, the Middle East, Africa, India, Asia-Pacific and the competitive ‘kangaroo route' between Europe and Oceania. More than 50% of all flight movements in and out of Dubai International Airport are Emirates aircraft, and by 2010, that figure is expected to rise to 70%.

During the 2006/07 financial year, Emirates carried 17.5 million passengers and 1.2 million tonnes of cargo. It aims to build a fleet of 180 aircraft flying to more than 110 destinations that could make it the world's largest international carrier by 2015, and it has also ordered more Airbus A380 ‘superjumbos' than any other carrier. However, it could be this rapid expansion that is hitting other Middle East carriers' bottom lines, and pushing so many of them deep into the red. "There's an enormous amount of capacity arriving in the industry, and that's one of the reasons that profitability is depressed from where it might otherwise have been," explains Pearce. "Often when this capacity arrives, it's quite difficult to deploy that effectively, and it takes a while to establish new markets and compete against new carriers."

In addition to this concern, airlines are also facing the twin threats of the stagnant air freight market, and rising costs.

"The cargo market is not doing very well globally, as a lot more air freight is going by sea, via containerised shipping," explains Pearce. "For the major passenger airlines, cargo in the belly is an important source of revenue - so even while passenger numbers may be high, cargo load factors are falling dramatically."

Naturally, the rising oil price has led to climbing costs for airlines, and in an increasingly competitive market, carriers' profit margins are the first to feel the pinch. Moreover, Pearce explains, the booming economies of the Gulf have led to very tight labour markets. The industry is already short of pilots and skilled engineers, and so carriers are forced to compete more fiercely than ever for suitable candidates. Never has the pressure on carriers' management processes been more intense.

"It may be the case that airlines are rushing into buying new aircraft and equipment, and expanding the business before they have the right business model," suggests Ammar Balkar, president & CEO of the Middle East Business Aviation Association (MEBAA). "It's a difficult game to play, and they have to get it right."

Gulf governments are, of course, paying close attention to the performance of their airlines' management teams. Government-owned or supported airlines are high-profile operations, and failure is not an option for many of the emerging economies of the region. Yet while Emirates enjoys global recognition as one of the world's finest carriers, as well as managing to take home a tidy profit, others are less flush. The trick lies in the planning, and also in the patience of the appropriate paymasters.

Abu Dhabi-based Etihad Airways is the national airline of the UAE. It is also operating in the red, but has a clear, and apparently achievable goal to break even by 2010. "Above all, hitting that target is important to my shareholder," James Hogan, Etihad CEO, tells Arabian Business. "The shareholder has taken the view that the investment support is there to enable the airline to hit break-even in 2010, so as the management team it's our job to make sure that we achieve that."

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