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Fri 16 Jan 2009 04:00 AM

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Keeping the faith

The region's airline chiefs remain upbeat despite expectations of falling passenger figures.

With plummeting profits and declining passenger figures expected to hit Middle Eastern legacy carriers in 2009, the industry outlook is anything but rosy. Even so, the region's airline chiefs remain upbeat about the months ahead.

The aviation industry may be suffering amid the worst global economic crisis in recent history, but the gloomy outlook hasn't dampened collective spirits among the Middle East's legacy carrier chiefs.

In December, airline trade body the International Air Travel Association (IATA) predicted turbulent times for local carriers, with the region's profits expected to plummet $200m in 2009. The organisation also said lower passenger demand and the credit crunch will hit the industry hard as global aviation enters the "worst revenue environment in 50 years."

Abu Dhabi-based Etihad Airways has predicted a strong year after reporting record passenger figures in 2008.

Local airline chiefs could be forgiven for wallowing in despair after reading IATA's damning forecast. After all, 2008 wasn't a complete breeze for Middle Eastern carriers as rising oil prices, which surpassed $147 a barrel in July, heavily reduced revenues (the figure has since dropped to $37 at the time of writing).

But despite the crippling costs, some CEOs claim their respective legacy carriers - large airlines that fly long-haul to several international destinations - experienced growth last year. And most believe this trend will continue in 2009, albeit on a much smaller scale than in previous years.

Last week, Qatar Airways' (QA) executive vice president Ali Al Rais insisted the Doha-based carrier will forge ahead with its expansion plans, as he unveiled the airline's new Houston route. He also claims QA is on course to satisfy its long-term goal of breaking even by 2011, despite the adverse economic conditions.

"We have gone through various challenges in the world [over the years] and I see in a very positive way that airlines here will do well because without transportation, the world would just come to an absolute stop," says Al Rais. "There are still reasons for travel and shipping goods, so the airline industry is in quite good shape."

Other factors contributing to Al Rais' positive outlook include QA's fleet, route and airport expansion strategy. The airline has invested billions of dollars in Boeing and Airbus aircraft, with plans to eventually extend the fleet to 120 planes. Elsewhere, QA is ploughing $500m into its existing airport before moving to a new hub by 2011, and launching new services this year to undisclosed destinations.

Whether such targets will be achieved in the current climate remains to be seen. But Al Rais is confident the carrier can stay airborne amid the economic storm. "Although we all hear about the credit crunch and downturn in the economy worldwide, we are used to such environments because we operate in various markets, such as emerging and developing ones," he says.

Al Rais is also unconcerned about IATA's forecast of declining passenger traffic across the region. "The Middle East is still holding; we did drop about two notches and the expectation was to grow 6 percent but it's dropped to 4 percent," he admits. "But being an airline, you can manoeuvre your asset [and fly to] where the demand is, which gives you more control than in other businesses where your asset is absolutely in one place."

Qatar Airways isn't the only carrier making positive noises about 2009. In recent months, UAE carrier Emirates Airline said the downturn will not affect its growth strategy, despite posting an 88 percent profit drop to $77m in the first half of 2008 and reducing fares.

A spokesperson for the Dubai-based airline told Arabian Business that it will receive new aircraft in 2009 and "has no plans" to scale back its route network or operations. The airline has 143 Airbus and Boeing aircraft on order, including 11 A380s, and it recently added San Francisco to the route network, as well as increasing services to Saudi Arabia and Jordan.

Elsewhere, Abu Dhabi-based Etihad Airways has predicted a strong year after reporting record passenger figures in 2008. More than 6 million passengers flew on the airline, with average seat factors rising to 75 percent from 68 percent. During the same period, Etihad received nine new aircraft, increasing its fleet to 42, and ordered 205 Airbus and Boeing planes worth $43bn at the Farnborough International Airshow.The coming months will reveal whether the region's legacy carriers can buck the global aviation industry downturn in 2009. But some analysts have already cast doubt over the market's stability in the current climate. Brian Pearce, chief economist at IATA, believes some Middle Eastern carriers will struggle more than others as the financial crisis takes full effect.

"It will be a very difficult year, not just for Middle East aviation but globally because of the worldwide recession," he warns. "In terms of major airlines, a lot of the aircraft on order books and waiting to be delivered are aimed at serving long-haul markets.

Usually Middle East airports expect passengers from Europe to Asia, and both of those end markets are in deep recession, while places like Japan, China and India are very weak. In North America and Europe, economists are predicting the deepest recession we've seen in the post-war period."

The Middle East will perform substantially better than the aviation industry in other parts of the world because it is, to some degree, insulated to the global economic slump.

British Airways is already feeling the pinch, with passenger traffic figures for business and first-class seats down 12.1 percent in December 2008 compared to the previous month. The carrier, which operates frequent flights to the Middle East, also reported a 1.7 percent drop in economy class during the same period. On the upside, figures for the Middle East and Africa increased slightly.

For Pearce, BA's declining passenger figures are indicative of the global industry depression. He does, however, believe Middle Eastern carriers are more likely than airlines from other regions to report a slight increase in traffic this year. "If you look at our [IATA's] forecasts, the Middle East is the region where we would expect to see some growth in traffic," he says.

"But we are talking about growth of between 1-2 percent in 2009. Not so long ago it was expanding at rates of 20 percent a year."

Niko Hermann, aviation expert for management consultancy Oliver Wyman, is more upbeat about the region's prospects in 2009. "The Middle East will perform substantially better than the aviation industry in other parts of the world because it is, to some degree, insulated to the global economic slump," he says.

The downturn will clearly have an impact on demand and financing, but in the short to medium-term this region will do well, given that growth has been impressive in recent years."

Aside from the region's resilience to the economic downturn, Hermann also believes strong cashflows and government backing will help legacy carriers pull through the depression. Whether he's right is unclear, but Hermann insists airlines can adapt their strategies if the going gets tough. "Work intelligently on reducing the cost base and rethink some of the markets that the aircraft is being deployed in," he suggests.

Despite his positive outlook, Hermann concedes passenger growth will not increase as substantially in 2009.

"It certainly won't be the strong double-digit growth that the Middle East has seen in recent years," he states. "It might even be negative growth if the economy really goes pear-shaped."

Neither Hermann nor Pearce believe any Middle Eastern legacy carriers will suffer greatly this year. But both mention mergers as a potential solution should a local airline unexpectedly hit hard times. "Airlines are going to have to look at all options to reduce their cost base to match this reduced revenue outlook and, for some airlines, consolidation may well be the way forward," Pearce says.

Whatever happens in the coming months, it's likely local CEOs will remain upbeat about their respective legacy carriers' long-term plans - even if 2009 proves to be a tougher year than hoped for the Middle East aviation industry.

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