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Thu 19 Nov 2009 04:00 AM

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What role do European airlines play in the Middle East aviation market?

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Albert Henschel, UAE manager, SAS.
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Peter Pollak, USE general manager and Gulf director, Lufthansa.

What role do European airlines play in the Middle East aviation market?

Like all regions worldwide, European airlines have been hard hit by falling passenger traffic figures during 2008/09. According to the International Air Transport Association (IATA), European carriers are still seeing demand fall by nearly 3% compared to September 2008, although this is a small improvement on the figures recorded earlier in the year. Middle Eastern carriers, on the other hand, show year-on-year growth with demand increasing more than 10% in September.

Where European airlines become a driving force however is within the airline consolidation arena. Take Lufthansa German Airlines for example; a merger with both SWISS and Austrian Airlines and most recently the purchase of a holding stake in BMI, equips the carrier with the necessary tools to expand without limits. But how do moves such as these made by large European airlines affect the Middle East's air travel market?

Lufthansa's UAE general manager and Gulf director Peter Pollak says that the airline is adopting a multi-brand and multi-hub approach. "While Lufthansa German Airlines concentrates on its hub airports in Frankfurt and Munich (Germany), SWISS operates via its hub in Zurich/Switzerland, Austrian Airlines via its Vienna hub and Brussels Airlines via its hub in the capital of Belgium.

In addition, BMI has a strong market position in London-Heathrow. This gives customers maximum travel flexibility and allows them to combine outbound travel via one hub and homebound travel via the other hub, whichever is more convenient to them. In the Middle East we continuously expand our schedule and the new partners allow us to offer an even more comprehensive product."

The end of October marked the switch to Lufthansa's winter schedule, which meant a substantial capacity increase on its Dubai to Munich route. "This route will be upgraded to an Airbus A340-600 with 306 seats - eight seats in first class, 60 seats in business class and 238 seats in economy class. Compared with today's A340-300 - which seats 221 passengers - this is a capacity increase of 38%.

This year, Lufthansa also upgraded its offers from Bahrain, Muscat in Oman, and Riyadh and Jeddah in Saudi Arabia, with all flights operating daily to Frankfurt. In addition, Abu Dhabi has been served non-stop since spring.

Scandinavian Airlines (SAS), the combined multi-national airline of Denmark, Sweden and Norway began operating flights to Dubai in 2007. The service continues to run three times a week from Copenhagen although SAS manager for the UAE Albert Henschel admits the airline has recorded a drop in passengers during the past season."SAS had a drop for the past season compared to the first, but this was in line with the general downwards trend that practically all airlines are experiencing due to the global recession. For this coming third season, SAS expects to be able to perform better than last season and it is my personal ambition to definitely increase sales here in the UAE."

Currently, SAS has no major competitor on its route from Dubai to Scandinavia. Neither Emirates Airline nor Etihad Airways fly to northern Europe. Instead, many Nordic expats use stopover flights belonging to Lufthansa or KLM, for example, to reach their home countries. Henschel is confident therefore that SAS - although it has a limited traffic programme in Dubai - offers an interesting alternative to the market.

Pollak also recognises the growth constraints affecting the market as passenger traffic remains depressed. In response, Lufthansa has launched special fares from the UAE, Kuwait, Doha and Oman to over 40 destinations in Europe. A round-trip flight from the UAE to Europe, for example, can be booked for as little as AED990 (US$270).

When it comes to managing its capacity, Lufthansa is aided by the great flexibility in its largely unencumbered fleet. "Lufthansa is therefore equally prepared for a further drop in demand and for the opportunities which would arise if competitors left the market," says Pollak.

In addition to the existing capacity and cost-cutting measures, Lufthansa has set up a new programme - CLIMB 2011 - to ensure its lasting competitiveness. "The goal of CLIMB 2011 is to achieve EUR1 billion ($1.5 billion) in sustainable earnings improvements by 2011 at the latest, by means of cost reductions." explains Pollak.

The process of which includes generating efficiency gains in staffing and administration, and a review of the timetable for aircraft deliveries. "The concrete form this will take is to be developed successively over the coming weeks, but altogether the segment is expecting a sharp fall in revenue," he adds.

Similarly, the SAS Group is currently implementing a new strategic approach. "Core SAS aims to secure a future profitable SAS," explains Henschel. "The strategy includes cost initiatives of about US$680 million as well as a 20% reduction in capacity. The implementation is well on track with an additional US$130 million cost savings initiated in August 2009."

The savings aim for a simplified organisational structure with a clear customer-focused corporate culture, Henschel adds. "Outsourcing of non-core units and staff reductions are the main contributors to the cost savings."

Despite the difficult market conditions however, European carriers still believe there is a place for them in the Middle East. "The Middle East is one of the most dynamic economic regions in the world and there is a natural and growing traffic flow between Europe and the region," says Pollak.

SAS also recognises that the Middle East will grow more than other regions in the world. "SAS's presence here in the UAE is important," Henschel says. "However, since the market continues to be unpredictable there are, at present no concrete plans for expansion."