The news headline in the global aviation industry last week was, “strong profits continue”. But not for the Middle East.
In this region, airline profits are forecast to more than halve, from $1.1bn last year to just $400m this year, according to the International Air Transport Association’s (IATA) updated forecast, released last week.
The buffer between red and black is now as thin as a piece of paper, with the region’s airlines expected to make just $1.78 per passenger in 2017, compared to the world average of $7.69. Middle Eastern airlines have one of the lowest breakeven load factors and while average yields are low, unit costs are even lower, IATA said.
For all the admiration heaped on some of the GCC airlines in recent years, they are now facing the most difficult period of their young lives.
The challenges are myriad and are causing their business models, which over the past decade have helped to shift the global aviation network, to be questioned. Nearly three years of slow economic growth, and thus demand for travel, has improved (the region is expected to see 7 percent growth in demand this year, slightly outpacing 6.9 percent growth in capacity), but airspace congestion is only worsening and IATA says there is growing evidence that the US electronics ban implemented in March is taking a toll on routes between the US and affected Middle Eastern countries, including the UAE and Qatar. Not only have many services been cancelled, but the load factor on those remaining has fallen, and the airlines have had to incur extra costs associated with attempts to minimise the inconvenience to passengers, such as lending devices onboard and security checking at the gate.
Yet, while some US carriers claim unfair practices by Gulf airlines and attempt to cancel an open skies agreement, all North American carriers will reap half of the entire global aviation profits for 2017, according to IATA (much of this is generated domestically). While Middle Eastern airlines scrape through, barely making money from each passenger, North American airlines are expected to make $16.32 per passenger this year.
In total, they will record $15.4bn in profit, IATA says.
Director-general and CEO Alexandre de Juniac reiterated IATA’s anti-protectionist stance during its annual general meeting in Cancun, Mexico last week. “Nothing should stand in the way of aviation—the business of freedom. Aviation is globalisation at its very best. But to deliver aviation’s many benefits we need borders that are open to people and trade.”
So true that is.
Adding to airline profitability pressure is rising fuel, labour and maintenance expenses. They already accelerated in the first quarter of this year and IATA predicts an extra $44bn in costs across the industry in 2017 compared to 2016.
Qatar Airways will no doubt also incur costs from the political fallout between its government and those of Saudi Arabia, the UAE and Bahrain, who last week banned the carrier from their airspace. The cost of re-routing aircraft and grounding others, as well as changes to rostering, are still being calculated but the long-term effect on customer sentiment will be even harder to determine.
That goes, too, for the other GCC carriers with long-haul routes. Coupled with security risks and the US laptop ban, many foreigners who use the region as a thoroughfare to their destination – the key plank of GCC airlines’ business models - are likely to avoid the Gulf altogether. Why should they try to understand the nuances of the region’s politics when they can choose another route, another airline?
With profits down, costs rising and sentiment slipping, it will not be an easy flight path for the region’s airline bosses this year.
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