Print
Email
Discuss this article ( Comments)
zoom
When Silverjet suspended its operations in May, it became the third business class-only carrier to close within the last six months. With fuel costs soaring and heavily subsidised competition, the Gulf's non-state-owned airlines could be next to face turbulent times.
While the news might have come as a shock to hundreds of passengers left stranded in New York, London and Dubai, analysts weren't so surprised when business class-only carrier Silverjet suspended its operations two months ago.
Like Maxjet Airways and Eos, the business class-only airline collapsed within the last six months, crippled by soaring fuel prices and reduced consumer confidence. Now the budget airlines of the Middle East are facing mounting cost pressure as they struggle to compete with state-supported carriers.
The global aviation industry is braced for at least US$2.3 billion losses this year if the price of crude oil remains at current levels, with analysts particularly concerned about the Middle East's low-cost carriers.
"A large part of the budget airlines passenger segment is much more price sensitive," says Brian Pearce, chief economist for the International Air Transport Association (IATA). "If budget airlines try to recover the increase in fuel costs they are going to lose more passengers. Fuel also makes up a much larger proportion of their costs than for network airlines."
Silverjet launched routes between London and New York in January 2007, adding its London-Dubai route in November amid great fanfare. It offered a unique selling point: a ticket on an all-business class carrier for two thirds cheaper than a traditional carrier's business-class seat.
Despite the offer, Silverjet struggled from the start. During its first year the carrier's market value plunged from US$155 million to US$21 million. In January alone shares plunged 28% after a broker gave the airline a "0 pence" valuation, saying it was "likely to fail".
In November, property tycoons David and Simon Reuben agreed to loan the airline US$19.4 million, convertible into shares. However, the brothers later declined to convert the loan, blaming market conditions. "Having seen the other two airlines in this category fail already, it looked increasingly like the writing was on the wall for Silverjet," says John Strickland, director of the aviation specialist company, JLS Consulting.
The carrier fought to the last, and just two months ago Hunt assured reporters that Silverjet would survive. The CEO thought he had secured a US$8.4 million loan facility from Abu Dhabi-based investment house Viceroy Holdings, which would secure the carrier's immediate future.
However, the deal never materialised and Silverjet suspended its operations. It entered administration, forcing disappointed customers to seek refunds from their credit card or travel companies.
"The airline business is a very risky, low-margin business, so you have to spread your revenue sources," says Paul Griffiths, former executive director of Virgin Atlantic and current CEO of Dubai Airports. "When you get a carrier that is purely basing its revenues on a fairly narrow sector of the market, then it is even more exposed to variances in that market without any cushion.
"Because of the huge cutback in the banking sector and the dire straits that the economies of the US and Europe are now in, unfortunately Silverjet was exposed to extremely weak markets where it just couldn't sustain the level of revenue required in order to offset the increase in the cost of fuel."
