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Sat 21 Nov 2009 04:00 AM

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Flying in the face of adversity

The downturn has clipped the wings of the Middle East region's once soaring aerospace sector.

Flying in the face of adversity
Flying in the face of adversity
Statistics from the International Air Transport Association (IATA) showed that the Middle East is the only region to see air traffic growth stay in the black.

While the Middle East is one of the only markets in the world where passenger traffic numbers are still growing, the downturn has clipped the wings of the once soaring aerospace sector.

Traffic is a great litmus test of any event in Dubai. On the morning of this year's Cityscape Dubai traffic seemed to flow perfectly as normal. The lack of headline grabbing launches and a lacklustre property sector led many visitors and exhibitors to give the event a miss.

The organisers of the Dubai Airshow 2009 however, boasted that space had increased ten percent on 2008, nearly 900 exhibitors were attending, 130 aircraft would be on show and 50,000 visitors were expected.

Official attendance was not available at the time of going to press but exhibitors did indeed complain of traffic congestion and taxi queues were back to levels that haven't been seen in a long time.

Would this year's show bring in the big deals or would it prove to disappoint like the Paris show before it?

In his welcome speech at the 11th Dubai Airshow, HH Sheikh Ahmed bin Saeed Al Maktoum, chairman of Emirates Airline and chairman of Dubai Airports, was bullish about the show's prospects and the region's future.

"The airshow comes at an important time for the aerospace industry as the world begins to see a revival in fortunes.

"During the past two years, the business has experienced unprecedented turbulence. However, I am very pleased that many of the organisations at the show this year were among those that continued to invest in the industry during the worst of times.

"It is the Middle East - and the GCC in particular - that has seen a growth in air transport, while elsewhere there have been falling passenger numbers," he added.

The Middle East region has indeed managed to buck global trends. Dubai International Airport reported that passenger traffic rose 11.7 percent in October, the fifth consecutive month of double digit growth and a rise so far this year of 8.3 percent compared to the same period last year.

On a global scale, statistics from the International Air Transport Association (IATA) showed that the Middle East is the only region in the world to see air traffic growth stay in the black.

Overall, global revenue per passenger per kilometre measures for the first nine months of 2009 fell 5.3 percent, in Asia/Pacific the figure was down 8.8 percent and in North America it declined 6.7 percent, while the Middle East has surged forward 9.4 percent. The region is literally going in the opposite direction to the rest of the world.

As a result, Airbus's Global Market Forecast predicts that Middle East-based carriers will need more than 1,418 new aircraft, valued at around $243bn, over the next twenty years.

"The Middle East market encompasses all aircraft segments and is a barometre for the rest of the world. The recovery begins here," John Leahy, Airbus chief operating officer - customers said at the Dubai Airshow.

Airbus' main rival Boeing forecast its twenty year regional requirement slightly higher at 1,580 aircraft worth $260bn, however while it is confident about the long-term future of the region it does see difficulties in the short-term.

"This is a very important market for us... and is one that will continue to have very good growth prospects," Jim Albaugh, president and CEO of commercial airplanes, told Arabian Business at a roundtable discussion at the Dubai Airshow.

The Middle East makes up about 25 percent of Boeing's backlog and about 19 to 20 percent of its revenue. However Albaugh said he does not see the region being immune from the global economic slowdown and that orders in the region will slow "dramatically over the next several years".

"A lot of customers who haven't been able to cover the cost of capital [are] being very careful about how they enter the market again," he added.

However, Sheikh Ahmed said at the Dubai Airshow launch press conference that he was "not happy" with aircraft delays and later revealed that Emirates was in discussions with both Airbus and Boeing about possibly increasing its fleet, which is already running flat out.

Emirates Airline is currently the world's largest operator of the Boeing 777 and it has reported that profits rose 165 percent to $205m during the first half of this year.

Canadian jet maker Bombardier arrived at Dubai to try and secure its first CSeries Middle Eastern jet customer and reported that it had so far received a lot of interest.

On a global scale, the manufacturer is still feeling the impact of the global downturn. "We are not bringing in orders fast enough to offset our production rates," Gary Scott, president of commercial aircraft at Bombardier told Arabian Business.While the market is growing in the region and bucking world trends, Scott was realistic about the size and influence of the market on the global stage.

"North America still accounts for roughly 50 percent of the world's commercial aircraft and even though they are not growing at all it is still a big base and the Middle East is growing but off a smaller base," he said, adding that while the company has around 2,500 commercial aircraft flying and a few hundred on order, the Middle East only accounts for approximately 160 of these.

"It is a relatively small but important [market] and certainly we want to make it a bigger piece."

Scott believes the global aviation market will only recover when the giants of Europe and North America begin to see a turnaround.

"I have been in this business for 36 years now. I have gone in and out of four cycles and fully intend to come out of the fifth."

However, Scott believes this current downturn has been handled a lot better by the airlines. "The airlines adjusted better to this one, in that they were more prudent in pulling out capacity, parking aircraft and keeping their yields up. Their practice in the past was to cut fares to keep airplanes flying, which led to more blood-letting."

One way for the Middle East to increase its dominance is to take a more proactive approach and this was highlighted by a number of announcements at the airshow.

At the opening press conference, Sheikh Ahmed said he would like to see more manufacturing taking place in the region.

During the show, Abu Dhabi's Mubadala made two announcements. It confirmed that the company is stepping up construction of its first aerostructures factory at Al Ain, which will make parts for Airbus, and it signed an agreement with Boeing to develop joint ventures together.

Financing is another issue which Dubai is pushing ahead with. Dubai-based national cargo carrier Midex Airlines announced it has launched a $500m fund to invest in the aviation industry.

Issam Khairallah, president of Midex Airlines, told Arabian Business in an interview at the Dubai Airshow that the fund will be wholly self-financed, will be operated for a maximum of five years and aims to generate "a little over" 6.5 percent return.

"Our target is other companies who would also like to launch in the aviation industry in the emirates. We are today the largest privately owned cargo operator in the Middle East and Europe and many people are coming to us either to purchase or lease aircraft for them," Khairallah said.

Launching a new ‘Sharklet' device which reduces aircraft fuel burn by up to 3.5 percent, Airbus COO John Leahy pointed out that carriers outside the Middle East were often suspicious of the region's dramatic success.

"The idea that you pay less for fuel in the Middle East is more of a rumour spread by competitors," Leahy told Arabian Business.

The Middle East may be reporting healthy figures but comments at last month's Arab Air Carriers Organisation AGM by Giovanni Bisignani, director general and CEO of the IATA do sound alarm bells.

"Passenger demand in this region is up 8 percent... [but] that growth has not yet translated into profitability. Some are making money, but many others are in the red. Growth is good but if it does not generate profits, the business is not sustainable."

However, he did see some hope: "I see some encouraging signs. The region's wide-body fleet will expand by 8 percent this year, in line with demand growth.

"And aircraft utilisation in this region is improving at a time when other parts of the world are adjusting capacity by using their fleet less efficiently."

Low-cost carrier Air Arabia, which is the largest listed Arab airline by market value, reported its first drop in quarterly profit and said it believes difficult market conditions will extend into the second quarter of next year.

There were some large deals at this year's Middle Eastern showcase, such as Etihad Airways' $750m investment in fleet advances, but there were none of the big headliner deals from previous years.

There were signs around the airshow advertising that prices for space at the 2011 show have been frozen at 2009 levels, which appears to have been the prevailing mood at this year's Dubai Airshow. Things will continue to be challenging and harsh in the short-term but the industry will pull through and is looking at long-term survival.