By Fathi Buhazzi
Airline subsidies destroy competition and threaten the stability of the market, says Fathi Buhazza
The Gulf is investing heavily in infrastructure. Whether it’s governments building airports, airlines buying aircraft, or logistics companies constructing networks, the Middle East is establishing itself as the world’s aviation hub. By 2020, we will have capacity for some 400 million passengers and about 19 million tonnes of cargo in the Gulf Cooperation Council (GCC) countries alone.
It’s a great starting place from which to build a sustainable, long-term industry that will continue to boost the Middle East region and its position in the world for decades to come. We should be rightly proud.
One of the key benefits of this growth is that it makes the region attractive to global businesses. Our location in the geographical centre, with facilities that are second to none, makes the UAE a honeypot for the world’s carriers, which ultimately benefits us all – competition creates a healthy marketplace. A healthy sector also leads to longevity.
Yet the region’s carriers aren’t all working towards this goal. A piecemeal approach to growth, based on an individual airline’s access to subsidised goods and services cannot work. Yes, each company needs to make its own choices and create its unique proposition, but true sustainability across the region can only happen if the original cost bases are fair.
A reliance on subsidies leads to a lack of transparency that isn’t seen in other global hubs. EU carriers, naturally, are feeling intimidated by the amount of growth in the Gulf region and they are fearful of subsidised Middle Eastern carriers, knowing they will be unable to compete. Most of our region’s carriers are self-sustaining operators, but one or two are not and the perception that Gulf states unfairly subsidise their airlines tarnishes the reputation of us all.
Emirates fought back against this slur on its reputation with an independent report by Oxford Economics, showing that it is an efficient, customer-focused company which doesn’t enjoy subsidies. But some airlines are focused purely on gaining market share at any price – prices they can afford to pay because they enjoy state hand-outs.
Good sustainable businesses operate to make money, not market share. Bad, uneven competition will risk the benefits the region should gain from its aviation investments. Oxford Economics reports that the aviation sector will contribute $44.5bn to Dubai’s economy, representing about 22 percent of its employment by 2020.
Simply put, it’s distortion, it’s unfair, and it threatens the stability of the market in our region. Let’s take a look at the consequences of this. One carrier might enjoy heavily subsidised fuel prices, or government support with aircraft procurement, allowing it to flood the market with cheap capacity. As other carriers who don’t have the same support struggle to compete on price, they look to cut costs.
Where will these costs be cut from? Many of the best airlines here are already slim, trim and cost-focused. But having invested billions in their business, they will need to fight back, despite knowing that price wars are a fool’s game.
So where will the economies be found? Maintenance? Labour? Security? Safety? Something will have to be sacrificed, until ultimately the industry becomes less reliable, less safe, and the carrier with the deepest pockets wins. What then becomes of the market we’ve worked hard to build? It will fail consumers, fail the industry and fail the economy. There must be the same standards for all and although it’s a challenge, it’s certainly not impossible.
If you look at other markets, such as Europe, carriers are grouping together to build the best efficiencies. They are linking resources, strategies, networks and in turn are supported by the EU’s open market and by communication between nations and businesses, something which is largely absent in the Gulf region. Yet we do have the infrastructure to achieve better regulation and co-ordination. The GCC has managed to achieve much good in the region.
It has helped countries work together on a wide range of issues, from oil to education, to economics to security. It has a protocol that it will co-operate to achieve the best results for all. So why not use its expertise to co-ordinate competition among carriers in the region to ensure we are able to offer the very best? To protect the region’s investment?
The GCC carriers, under the umbrella of the Gulf Council, can work out how to develop the region, to co-ordinate strategies and ensure a level playing field. Competition is good, but unfair competition will merely amount to cannibalisation.
There are opportunities for airlines in every GCC country, but to ensure success across the board, it needs to be co-ordinated. Abdul Wahab Teffaha, secretary general of the Arab Air Carriers Organisation, has even warned that the growth throughout the region cannot continue beyond the next 10 years, and that carriers need to consolidate.
We need to ensure there is a win-win for all. Elsewhere, regulators need to ensure there is parity between companies − we do not. Why on earth would we let the Gulf region gain a reputation for unfair competition and market distortion? It will simply serve to destroy all that’s good here. We need consistency, co-ordination and an end to unfair practices to be a truly world-leading hub.
(Fathi Buhazza, is the president and CEO of Maximus Air Cargo. The opinions expressed are his own.)
Thank you for this excellent assessment of the current situation in the Gulf. The reluctance for carriers to work cooperatively as the industry built up in the region is quite understandable, however, as the region enters the consolidation phase in the business cycle, it is essential that Gulf (GCC) aviation is seen to demonstrate the highest professional standards. As pointed out, collaboration on the major commercial and ethical issues needs to be done if the Gulf is to be seen as a reliable and responsible member of the aviation community and to flourish in the future.