The perfect storm

As analogies go, Giovanni Bisignani's assertion that the aviation industry is engulfed in a "perfect storm" couldn't be more apt.

The International Air Transport Association's CEO was referring to the rising fuel price, which has helped kill off 24 airlines during the past six months. He also said the aviation industry's losses this year could reach US$6.1 billion if oil remains $135 a barrel.

It's unclear whether the oil price will continue climbing, but even if it doesn't the current valuation is already too costly for some carriers. With several airlines going bust since January, it's likely others will follow suit in the coming months.

According to Bisignani, this latest crisis is potentially more threatening than SARS, terrorism and war combined. Considering fuel was $25 a barrel in 2002, it's hard to disagree. Nevertheless, while the outlook for the industry appears bleak, Middle East carriers have less to fear than most. Indeed, with several airlines in this region state-owned, rising fuel costs elicits less concern.

For years, some carriers operating in this region have never made a profit. Governments, however, are still pumping millions of dollars into their respective airlines to ensure they stay airborne.

Last year, Gulf Air's management admitted it was losing some $1 million a day, leading to redundancies, fewer routes and aircraft, and a damaged reputation. But despite it woes, the airline is still operational thanks to the Bahraini government's support.

Elsewhere, Qatar Airways' directors have always talked openly about making the carrier profitable by 2011. The airline still has three years to achieve this goal, although the state is always on hand should the cashflow ever run dry. It's a familiar story for other Middle Eastern operators, with their respective regimes ready to dig deep when required.

But even governments have their limits. While there is less chance of a state-owned carrier going bust in the Middle East, airline directors can still be replaced if all is not well.

Like shareholders of private operators, politicians expect results. A failure to deliver could lead to a management reshuffle and the airline's reputation suffering greatly. When that happens, governments need more than vast cash reserves to restore the carrier's credibility - as Gulf Air's board can testify.

Rob Morris is the editor of Aviation Business.

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