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Tue 28 Dec 2010 12:00 AM

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State of the industry

Booz & Co provides an end of year look at the state of the regional aviation industry\nAirports.

State of the industry
The rise of low cost carriers, like flydubai, is one factor in the Middle East’s massive passenger growth.


With the expansion of the Middle East’s
national carriers, regional governments are also investing in upgrading and building
new airports. In particular, the airports of the major airlines are becoming best-in-class
emerging global hubs: They make use of advanced technologies (such as electronic
immigration, navigation, and docking systems) to improve passenger flow and air
fleet operations, and their terminals are designed to facilitate access to retail
areas, maximising passenger spending.

in particular, has become the largest hub in the GCC region, on course to becoming
the fastest-growing airport worldwide, with 9.2 percent growth and a record 40.9
million passengers in 2009. In comparison, Heathrow and JFK had 66 million and 46
million passengers respectively.

Regional expansion is planned to continue, with proposed projects
to grow capacity for Abu Dhabi (from 7 million to
33 million), Doha (from 12 million to 38 million)
and Dubai (from
70 million to a remarkable 120 million with the new Al Maktoum Airport).

In parallel to growth in passenger traffic, airports in the Middle East are facing other emerging trends. Greater airline
focus on costs is leading to aggressive negotiations.

Passengers expect greater convenience and services, such as limousine
service, luxurious lounges, and a wide range of duty-free shopping. The difficulty
of finding qualified personnel to support growth and services is leading to operational

The regulatory and political environment has generated enhanced
security requirements, compromising service and convenience. Finally, increasing
competition between neighbouring airports is leading to significant oversupply.

The trends are spurring four major challenges: a need for improved
airport processes, such as upgraded security facilities; aeronautical revenues that
are not growing at the expected rate; the need to streamline passenger interfaces
and services; and the need to optimise costs through improved asset utilisation
and partnering models.

Consequently, airports will need to rethink their strategies
to achieve long-term sustainability, moving away from traditional aviation business
models and better incorporating private partnerships, promoting privatisation, and
driving non-aviation revenues.

By Fadi Majdalani, partner, and Tansel Kilicarslan, senior associate.

Civil Aviation

The year 2010 has been a challenging one for the Middle East’s aviation regulators, particularly in four areas:
flight safety, aviation security, environment, and market liberalisation.

The region’s record in aviation safety has reached worrisome
levels: The number of catastrophic accidents per million flights is 3.32, four times
the worldwide industry average.

The strong growth in traffic and fleet size requires more capable
industry oversight that makes more efficient use of regulators’ time and efforts.
CAAs should consider switching to smarter risk-based methodologies, which are the
foundation of ICAO’s State Safety Plan (SSP) program. Regional regulators should
focus on full implementation of the SSP, which most states have launched in some
fashion but none have yet taken to full operational implementation.

Concurrently, global aviation security was shaken in October
2010 by several unlawful actions targeting cargo aviation, which could have led
to a large-scale, multiple-attack catastrophe. They had a particular impact on regional
security, since the packages containing explosives originated in Yemen and one was routed through Doha and Dubai.
System inadequacies in identifying and tagging the weak links in the security chain
make it regulators’ top priority to implement risk-based intelligence and threat
assessment methodologies, which will enable co-ordination with the relevant national
security intelligence systems.

In terms of environment and emissions levels, IATA committed
in 2010 to carbon-neutral growth starting in 2020, with the goal of halving 2005
industry emissions by 2050.

Meanwhile, despite the Middle East’s young fleet, fuel efficiency
in the region continues to be poor, mainly because airspace requirements force airlines
to take longer routes than necessary, with more frequent ‘go-arounds’ prior to landing.

As such, environmental sustainability is a key challenge for
regional CAAs. They need clear national policies empowering them to regulate ground
and flight emissions, move towards a technologically and operationally harmonised
airspace, and influence the international ETS debate by expressing their respective
governments’ positions.

Finally, market liberalisation remains a long-standing priority
due to restrictions on air traffic rights, the lack of a uniform air traffic service,
constraints on free travel, and travel taxation. Regulators should focus on implementation of the 2004 Damascus
Convention to enable the region’s market to develop to its full potential.

By Alessandro Borgogna, principal, and Leonardo Monti, senior

Air freight

The Middle East air freight market accounts for approximately
8 percent of the 40-45 million tonne global market, and primarily serves volumes
originating from Europe and Asia Pacific. It was
the only region to show some growth in 2009.

for example, witnessed the year’s highest growth in air cargo movement, showing
an increase of 5.6 percent. As global air cargo traffic is recovering in 2010, we
expect steady growth in the region to resume at an average rate of 5 to 6 percent
per year.

The air cargo market will continue to develop in the Middle East, driven by the region’s strategic position at
the crossroads of global trade routes. Dubai
was the first mover in taking advantage of this strategic position and has already
become one of the world’s major re-export hubs; it now serves over 60 percent of
regional air cargo volumes.

The region, and Dubai in particular,
serves large volumes of cargo that originate from South East Asia by sea and is
then transported to Europe by air. Demand is also
on the rise from within the region, as nations continue to diversify into non-oil
sectors such as manufacturing, logistics, and construction, which have a need for
air freight services.

New infrastructure, especially Al Maktoum International Airport
with 16 cargo terminals and its integrated logistics capabilities, will further
boost the region’s position as a trans-shipment and cargo hub.

Also, Abu Dhabi, Qatar, Saudi Arabia,
Oman, Bahrain and Kuwait have continued to expand their
air freight capabilities and infrastructures to meet the growing demand. Although
the overall outlook is positive, the sector is likely to continue facing a number
of challenges.

Aggressive airport and fleet expansion plans may lead to overcapacity:
In addition to the expansion under way at Jebel Ali, there are substantial airport
expansions moving forward in Abu Dhabi, Doha, and Dubai,
with other, smaller expansions happening around the region.

The regional cargo fleet currently consists of more than 40 aircraft
and is expected to expand in the near future: Emirates SkyCargo alone currently
has 15 cargo planes on order. The sector will also need to work with governments
to address complicated customs regulations and procedures, which remain a major
impediment to cargo movements.

By Alessandro Borgogna, principal, and Ekaterina Arsenieva, senior


Although air travel all over the world has started to recover
from the global downturn, the growth of the Middle East’s
aviation industry has been notable. Passenger traffic was up 19 percent in the first
nine months of 2010, compared with 8 percent worldwide; freight traffic is up 31
percent, compared with 25 percent worldwide. This growth is mainly driven by three

The first is the growth of the network carriers, such as Emirates
Airlines, Etihad and Qatar Airways, which have capitalised on their strong network
and the region’s geo-centricity: Four billion people living within an eight-hour
flying zone.

The second is the growth of the budget carriers, such as Air
Arabia, Jazeera Airways, and Fly Dubai, which have drawn on the unprecedented boom
in point-to-point budget travel within the region.

The third factor is the massive influx of investments into the
region’s aviation system, including state-of-the-art and passenger-friendly airports;
the latest generation of aircraft, which can connect, non-stop, any two points on
the globe with lower operating costs than older aircraft; and award-winning products
and services that offer passengers an unparalleled travel experience.

Yet looks can be deceiving. The region’s rapid growth in aviation
masks some significant challenges. Middle East
carriers have more than 500 aircraft on order, posing the risk of overcapacity—particularly
since the region’s airlines have similar value propositions and considerable network
overlap, leading to a potential price war. Another critical challenge is the risk
of securing additional traffic rights in some markets to support their rapid growth,
as illustrated by the recent dispute between the UAE and Canada.

In light of new competitive circumstances and industry changes,
Middle Eastern carriers need to rethink their growth strategies. They should consider
global partnerships to further strengthen their network and access untapped and
bilaterally constrained markets. Local consolidation
could increase market share while maintaining healthy price levels. Finally, diversified
business models could generate new income streams.

By Fadi Majdalani, partner,
and Marwan Bejjani, associate.

Airspace Management

Airspace is one of the factors that most restricts the full development
of the Middle East civil aviation industry. Passenger
and cargo traffic growth in the first nine months of 2010 have been strong, at 19
percent and 31 percent respectively; by 2011, growth should be back to pre-crisis

Additionally, there is likely to be more traffic through the
Mediterranean routes as the Single European Sky (SES) doubles capacity, beginning
around 2012. All of this traffic is fighting for space within fragmented airspace
that is heavily restricted by the military, as well as burdened by varying air navigation
technologies and traffic management procedures.

These issues limit the industry’s capacity for traffic growth,
causing increased complexity and higher costs to air carriers. In this context,
three key areas should be of primary concern to Middle East
governments and their Air Navigation Service Providers (ANSPs).

Strategic Co-ordination: Despite IATA’s efforts, the region still
lacks a defined airspace master plan to guide its evolution in the next five to
10 years. Decision-making by the region’s ANSPs and regulators is still too individualistic;
more active and collaborative participation among the existing working groups is
needed to build a common vision of the region’s airspace future and structure. Military Restrictions: The region’s airspace is extensively restricted
by military no-fly zones.

As a result, airlines have to fly longer routes and burn more
fuel, while airspace capacity is reduced and congestion-induced flight safety risks
are increased. Middle Eastern governments should wait no longer to introduce flexible
use of airspace, whereby airspace is dynamically allocated to the military on an
as-required basis.

Operational Harmonisation and Consolidation: Due to the high
density of ANSPs in the region, airspace is fragmented and bottlenecked by the technology-limited
providers. Governments should therefore focus on harmonising technology and, more
important, look at consolidating ANSPs at national and international levels following
the European model.

Technology-limited providers should seek public and private financing
for their ANSPs; since these ANSPs have an impact not only on their own airspace
but on their neighbours’, wealthy neighbouring countries may also want to consider
investing in this infrastructure. Assigning peace-time military traffic control
to civil ANSPs is another highly recommended lever, as demonstrated by the successful
stories of several European countries.

By Alessandro Borgogna, principal, and Leonardo Monti, senior

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