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Tue 13 Jan 2009 04:00 AM

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Market outlook

What does the future hold for Middle East airlines?

What does the future hold for Middle East airlines?

Despite the sharp economic downturn which has devastated airlines in other parts of the world, Niko Hermann, aviation expert for Oliver Wyman, believes the industry will continue to grow in this region.

"The growth may be slightly affected in 2009 and it may be a slower year than in the past but I still think it will continue. If you look at British Airways just having announced a fourth daily flight to Dubai, clearly the local market is still expanding even though it's slowed down."

According to Hermann the geographical position of Dubai and the surrounding countries is a huge advantage. "The Middle East airports act as transit hubs for pretty much most of the world's major traffic," he points out.

In addition many carriers in the area have undergone huge fleet expansions and aircraft need to be filled. "The larger carriers in the Middle East are taking deliveries of anywhere between one and two aircraft a month on average," explains Hermann.

"These planes need passengers so I think they will be very aggressive in marketing, promoting and pricing in order to stimulate the growth the best they can."

In terms of recession the future is uncertain, even in the oil rich countries of the Middle East. "I'm not sure if we will see negative growth here. It's really hard to tell because the verdict is not in on whether this is really a depression or if, at the end of 2009, the economy will pick up again."

If the economy does improve before the end of 2009, the region is likely to be spared from recession and continue its expansion. However, Hermann warns that if growth fails to accelerate globally the area will suffer.

"A lot depends on the oil price as well," he adds. "It's to do with whether it stabilises or whether it goes up again, because obviously fuel's a large part of the economy."Despite lower fuel prices, which have dropped considerably from US$148 per barrel last summer, airlines are not in the clear.

"If you look at the price of fuel six months ago versus now there are billion dollar savings being made. But the question is, will demand fall faster than the oil price?"

As the economic slump overcomes European countries there is a danger that long-haul travel to the region will slow, leading to financial decline amongst Middle Eastern airlines.

"I think for a lot of the western legacy carriers they've been very prudent this time around to cut capacity early on. A lot of carriers are experiencing a dramatic fall in traffic, in some cases an 8% reduction in overall traffic in key lanes, but their load factors have remained the same," points out Hermann.

"A lot of smaller and mid-sized airlines haven't been able to afford that foresight of cutting costs pre-emotively. I think in the Middle East you will see an impact on the bottom end of the market. The low cost carriers might see a serious dent in their growth patterns. They depend heavily on filling the seats of those aircraft."

While critics argue that low cost carriers will be the first to flounder, Hermann insists there are two sides to the coin. "There are two arguments with low cost really," he explains.

"One is that people trade down and try to fly cheaper...on the other hand a lot of  low cost travellers are essentially discretionary spending and it's pure luxury. When the economy turns they cut out that fun weekend in Oman or that quick trip to see friends in Kuwait- that's the first thing to go."

Jazeera

Kuwaiti airline, Jazeera, has announced that in the first nine months of 2008, revenues increased by 50% and profits by 43%.

By the end of the third quarter the airline had recorded profits of US$5.4 million, compared with 3.7 million during the same period in the previous year.Jazeera Airways chairman and CEO, Marwan Boodai, regards the achievement as ‘remarkable', considering the astronomical fuel costs earlier in the year.

"We managed these results on the back of yield improvement of 11% and reducing our Cost per ASK by 20%. We have worked hard to bring our CASK excluding fuel down to US 3.5 cents by a robust cost management program."

In terms of the future outlook, Boodai is positive. "Fuel has decreased by more than 50% and we expect a robust performance this year following some of the busiest months."

Etihad

It seems the UAE's national carrier, Etihad Airways is maintaining its steady growth rates, with 35% profit increases reported in the first nine months of 2008.

The airline carried some 4.4 million passengers across its network of 48 destinations, compared to 3.3 million for the same period the previous year.

Peter Baumgartner, vice president of product marketing, remains confident the airline will continue its success this year.

"We are watching our numbers carefully and as an airline you can always predict the future and we have forward bookings for the next few months. We are very fortunate that we are not seeing too much impact. We are managing to sail through the storm quite smoothly so far, with supply and demand still relatively high," he explains.

"We'll still be launching new routes, in the next few months; these will include Lagos in Nigeria and Melbourne, Australia." Emirates

A recent report showed Emirates net profits were down 88% from the same period in 2007. This year the airline produced a net profit of US$77 million for the first six months of its current financial year, ending September 2008.

The carrier, which made some $643 million profit during the same period in the previous year, has been suffering from the after effects of high oil prices.

Crude oil prices averaged $122 per barrel for the first six months of the financial year, up from an average of $67 for the same period last year.

Meanwhile the differential between crude and aviation fuel was also up from an average of $16 per barrel to $28.

Overall, Emirates' fuel costs exceeded its budget by some $469 million.

HH Sheikh Ahmed bin Saeed Al-Maktoum, chairman and chief executive of the airline says that although it has been a difficult year, Emirates will recover.

"The first half of the year has been very tough for the airline industry, with record fuel prices forcing many carriers to shut shop or consolidate. Emirates has worked hard to manage the impact of high fuel prices on our unit costs, while continuing to grow our business and provide our customers with a quality product and service," he says.

"Our business fundamentals are solid, and providing there is no further fall-out from the current global financial situation, we anticipate a robust second half of the financial year."Since April this year, the carrier has launched passenger services to three new destinations including Calicut, Guangzhou, Los Angeles and San Francisco, bringing its global network to 100 cities across six continents.

Air Arabia

The Middle East's first low cost carrier, Air Arabia, has recently announced a 30% increase on its third quarter profits, compared with 2007.

The company's net profits stood at US$58 million, compared with $45 million for the previous year.

During this three months, which coincided with the fuel crisis, the airline served some 978,800 passengers and averaged an impressive load factor of 87%.

"Air Arabia is extremely proud to announce such positive results, which demonstrate our ability to deliver sustained growth and excellent returns to our investors," explains Adel Ali, the carrier's CEO.

"This quarter has been busy and special, and with its conclusion came the start of our five-year anniversary celebratory month. As we look ahead toward the next five years, we intend to continue in the same vein - to grow our fleet of aircraft, expand our network of destinations and continue to offer the very best value-for-money service throughout the regions we serve and beyond."

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