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Sat 16 Jan 2010 04:00 AM

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2010 market outlook

What does the future hold for Middle East airlines?

2010 market outlook
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2010 market outlook
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2010 market outlook
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2010 market outlook
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What does the future hold for Middle East airlines?

Towards the end of 2008, it became evident that the Middle East was unlikely to be spared from the devastating affect of the global recession. Aviation experts argued that, in this region at least, we would see an impact on the bottom end of the aviation market, while the legacy carriers would be afforded the foresight of cutting costs pre-emotively.

But, quite the opposite has occurred. While the legacy carriers continued to tough out the economic downturn, it was the low-cost carriers that saw a healthy growth in their figures during 2009.

Take Air Arabia for example. During the first nine months of 2009, the company registered a turnover of US$400 million. That is just 2% lower than the figure recorded during the same period last year. Not a bad result considering the critics' argument that the region's low-cost carriers would be the first to flounder as the financial crisis took hold.

The sharp economic downturn has devastated airlines in other parts of the world however, and due to the recession, the future is uncertain, even in the oil rich countries of the Middle East.

"In times where the entire industry is consolidating, most of today's airlines are facing the challenge of survival," explains Oryx Aviation managing director Sebastian König,  "and navigating through the rough waters of stiff competition requires a mixed skill-set.

"A significant drop in demand paired with a constant growth of low-frills carriers and a higher volatility in oil prices have all resulted in a situation where the industry's fundamental problems are being disclosed," he adds.

But a handful of airlines have managed to handle their cost base expertly, and despite the hard times, have increased their shareholder value. So why have some carriers survived, while others have failed? "A common feature of those successful airlines is that all of them persistently lowered their cost base without jeopardising the core of their business, meaning that the art of cost cutting lies in the ability to reduce expenditures along the service value-chain where it doesn't show to the customer," König explains.

"Having talked to several senior executives in the Middle East, as well as in other regions across the world," he adds, "the majority emphasised that the exercise of relentless cost cutting has to dissolve into each and every departmental function, eventually resulting in a substantial paradigm shift of an airline's employees."

A case in point, it seems, is Gulf Air. The airline's CEO, Samer Majali is making it his priority to adapt the troubled airline according to changeable market conditions. The decision to fly to five cities in Iraq has been hailed by experts as an "excellent one", and Majali remains adamant that there needs to be a change of culture within the airline in order to establish itself in a profitable position. "Altering the mindset of the staff could take a long time - maybe even a generation - so we have to ask them to give more than 100%," he told Aviation Business in October.

König argues that quite often, where airlines fail however, is in conveying the sense of urgency needed to cut costs.

"Very often, cost cutting schemes simply lack the profound structure required to tackle this issue in a holistic and sustainable manner, meaning that they are either not aligned with a company's overall business strategy, or, rather, they focus on quick-fix solutions in order to present short-term success to the shareholders."

But the biggest contributor to an airline's downfall, König says, is a lack of support from the board of management. "In other words, just a few months down the line, many executives tend to question the viability of their cost cutting programme and eventually, may refrain from executing it."

But how should an airline go about establishing a comprehensive and yet detailed cost reduction scheme? "Like all other strategic decision-making processes, the initial step is to set the scene", says König, which implies to accurately evaluate the company's status quo.

"Widely used theories that support these efforts are the SWOT (Strengths - Weaknesses - Opportunities - Threats) model, Porter's Five Forces and the so-called Gap Analysis. Properly deployed, they all serve the purpose of obtaining a profound ‘helicopter view' on the company's starting position, with a view to benchmarking it against the competition.

"An implementation team must be formed, quarterly or bi-annual review meetings have to be scheduled, and operational results must be measured," König says. "It is then up to senior management to set a strategic direction, taking into consideration the company's long-term plans, cost cutting goals, future trends and, of course, constraints. Finally, the delivery of the action plan has to be ensured."

Unfortunately, cost reduction is only one part of the business, however. In times of increasingly fierce competition, yields also have to be maintained in order to secure positive operational results at the end of an airline's financial year, and as transparent and easy as all of this may sound, most companies fail to execute their cost cutting plans, simply because of poor internal communications, or a lack of trust in the board of management, König adds.

Read on to find out what 2010 holds for some key Middle East airlines. Emirates Airline

In terms of the recession, HH Sheikh Ahmed bin Saeed Al Maktoum, chairman and chief executive of Emirates Airline & Group, says that the global meltdown has really tested the carrier's mettle during 2009.

However, recent figures show Emirates net profit jumped 165%, at US$205 million, during its current financial year ending September 30, 2009, compared to $77 million for the same period in 2008.

But it is not all good news. Revenue for the same period totals $5.4 billion, 13.5% lower compared with $6.2 billion recorded last year, largely reflecting lower passenger and cargo yields.

Despite the tricky market conditions, between March and September, the airline carried more than 13 million passengers and more thsn 700,000 tonnes of cargo. In addition, it added eight new aircraft to its fleet, launched two new destinations and upped its route frequencies.

Looking ahead, Sheikh Ahmed, who is widely regarded as one of the most astute airline bosses in the business, is gearing up to celebrate Emirates Airline's 25th year of operation this year.

He recalls the instructions he received leading up to the launch date of the airline, back in 1985.

"His Highness Sheikh Mohammed said, ‘we have nine months to prepare'. It was a big job. People think you buy a plane and fly it where you like. It's not that simple." Saudi Arabian Airlines

Having received its first Airbus A320 towards the end of last year, Saudi Arabian Airlines (Saudia) is well underway with its fleet modernisation plan.

Saudia director general Khalid Almolhem says the new aircraft will be deployed on routes to Europe and to the Indian subcontinent from the airline's hubs in Riyadh and Jeddah.

Saudia has a promising future due to the country's three main international airports being turned into ‘airport cities'.

Up to 30 private aviation firms will develop Jeddah, Riyadh, and Dammam and the land around them into international gateway airports with plans for huge commercial offices, malls, hotels, conference halls, and service agencies to be established. Jazeera Airways

In 2009, Kuwaiti airline, Jazeera Airways, became the fastest growing airline in the Middle East, according to the latest passenger figures released by Dnata.

As the 10th largest carrier operating from Dubai International Airport, the airline carried 582,490 passengers in the third quarter of 2009, an increase of 65% on the 352,572 passengers flown during the same period last year.

The increase was reflected in the airline's profits for the quarter, when it booked US$56 million in revenues and recorded a profit of $2.7 million.

Since taking over as CEO in June, Stefan Pichler has been working to develop the brand into becoming the leading network carrier in the Middle East. In October, he told Aviation Business that the airline's strategy would be to chase the highest revenues available, the business sector.

"Our airline currently has the highest on-time performance with 93% in the Middle East, which is very significant to the business traveller."

In 2010, the strategy will focus on frequency increases that will benefit the network as a whole, he says,  making the airline more sustainable during the downturn.

"We will continue to strengthen our network and gain market share in 2010, but will focus on sustainable profitability."

With 30 aircraft on order, the next one will join Jazeera's fleet this month. Air Arabia

Air Arabia group CEO Adel Ali predicts 2010 to be a year of consolidation.

"The global wave of mergers and acquisitions began to take shape even before the economic downturn started, and will probably gather further pace in 2010," Ali tells Aviation Business.

He believes this ‘healthy trend' in mergers and acquisitions will stabilise the market and indicate its increasing maturity.

But, a lack of stability is not something the Middle East's first low-cost carrier need worry about. It has recently announced a net profit for the first nine months of 2009 of US$92 million, an increase of 6% compared to the same period in 2008.

Not only that, during the first nine months of 2009, the company registered a turnover of $400 million, just 2% lower than the figure recorded during the same period last year.

The airline served more than 2.96 million passengers during the abovementioned period, an increase of 14% compared to 2.6 million passengers during the same period last year.

But it is Air Arabia's average seat load factor that remains impressive, which from March to September, 2009 - stood at a strong 79%, and, for the industry as a whole, there remain significant grounds for optimism, he adds.

"The recovery will come early to the region - and the collective future for the industry is secure. In its place regional carriers will have to turn their attention to environmental issues, including reduced emissions and improved fuel efficiency."

Despite the challenges that lie ahead, Air Arabia's future is bright. From March, its third hub in Egypt will serve Europe, the Middle East and Africa and its 300-room hotel in Sharjah will be complete by April 2010. OmanAir

The final quarter of 2009, was a busy time for Oman Air's CEO, Peter Hill. The airline chief led the carrier into five new markets in Europe and the Indian Ocean, ordered five Embraer 175 aircraft - one of which will be operated by the Royal Omani Police - signed multi million dollar MRO and technology contracts, and launched a US$10 million advertising campaign.

Prior to these events, the airline had already launched its new business and first class products that it claims are superior to those in its competitive set, showing that 2010 could be a significant year for the Muscat-based carrier. QatarAirways

Qatar Airways' CEO could be taking the tough line on aircraft deliveries in 2010.

In November, Akbar Al Baker said he would cancel orders with Boeing if the delivery dates of its troubled 787 Dreamliner aircraft slipped further. The airline chief has been less than impressed with the way Boeing has handled customers that are waiting for the 787 to join their fleets, saying, "if this is the way they treat customers as they have tried to treat us then ... yes, they will not only lose me but they will lose others."

On a positive note, 2009 was a good year for the airline in terms of new routes, and the network development is set to continue into 2010. Two points in Europe are planned and a second Australian route is expected to begin this year. Gulf Air

Gulf Air will kick off its realignment programme in 2010, with the aim of becoming a commercially viable business by 2012.

The airline's CEO made 2009 the year to begin turning the troubled company into a financial success.

In his first three months as Gulf Air's chief executive (he joined the airline in August, 2009), Samer Majali executed a ‘structural review', which has seen the airline re-entering the Iraq market and streamlining its operational costs.

However, the Bahrain-based business remains reliant on government support in order to stay afloat and in a major step toward becoming self-sufficient, Majali has released details of his three year strategy plan, beginning this year.

"For the first time, Gulf Air will focus specifically on Bahrain, serving the Kingdom with higher frequency, non-stop services to more destinations across three continents," Majali explains. "We will also provide better services to some of the world's leading financial markets, helping to support Bahrain's significant financial services sector."

Its international network is also being re-worked with the business expanding its operations to more than 20 new destinations in the Middle East, Africa, Asia and Europe. Majali adds however, that up to 15 other routes and a number of overseas stations that are currently draining the carrier's coffers will be suspended or closed, including the airline's current operations to Shanghai, Hyderabad and Bangalore.

In terms of aircraft investment, Majali said the airline will focus primarily on narrow-body aircraft and regional jets, including a number of long-range, narrow-body aircraft which will connect Bahrain to key financial centres in Europe and Asia. The carrier is considering selling five of its Airbus A340 aircraft, along with other unstipulated types.

Majali adds that throughout the re-alignment process, a number of redundancies will be inevitable.

"This programme will require some tough decisions as we look to address what remains a challenging and volatile marketplace. We will be reviewing all cost elements that do not provide equivalent or greater value and within that context we will be looking to significantly re-size our workforce over this three-year period, therefore some redundancies will be inevitable." Etihad Airways

It seems the UAE's national carrier, Etihad Airways is set to maintain its steady growth in 2010. Currently, the Abu Dhabi-based airline has more than 50 aircraft and a flight network of 58 destinations, which, in the first quarter of this year, will expand to include the Japanese cities of Nagoya and Narita.

Product enhancements in all three cabins and new code share agreements complete Etihad's strategy for 2010.

The airline's CEO remains cautious of the year ahead, however. "We are already starting to see signs of an upturn in 2010, but the next twelve months will still be tough for airlines as they strive to recover from one of the toughest periods the industry has ever encountered. While we can expect to see people's appetite for flying return - and therefore healthy seat factors - pressure is likely to remain on yields.

"Competition for customers remains intense but Etihad is in a much stronger position than many other carriers. Its recent investment and product innovation will ensure its survival," he adds. Royal Jordanian

Royal Jordanian's new CEO, Hussein Dabbas has picked up where Samer Majali left off, and recorded a net profit of US$36 million in the first nine months of this year, helped, in part, to a 20% reduction in operational costs.

Looking ahead, Dabbas says the airline has exhausted the region in terms of new route launches, so it is a case of improving schedules and increasing frequencies. But the growth plans do not end there.

The airline is on the hunt for a merger deal, and further codeshare agreements could see it entering new markets.

Dabbas has not ruled out the possibility of RJ merging with a European airline as carriers such as Lufthansa German Airlines threaten to topple Middle Eastern carriers.

"We would like to find an airline that fits our ambitions. In order to grow we need to share operational costs, such as fuel sharing and catering costs, etc. Consolidation is the future and we will use alliances as a means of facilitating travel," he says.