Airline Turbulence: How are GCC air carriers piloting their way out?
The 2017 edition of the Dubai Airshow featured a number of new deals struck by global and local aerospace industry players, with the order book standing at almost $113.8bn.
Airbus managed a $49.5bn deal with Indigo Partners to purchase 430 aircraft in its A320 Neo family.
Boeing inked a $27bn deal with carrier flydubai for 225 aircraft in its 737 MAX family, the largest-ever single-aisle jet order – by number of airplanes and total value – from a Middle East carrier.
Emirates Airline signed a $15.1bn with Boeing to purchase 40 Boeing 787-10 Dreamliners on the first day of the exhibition.
Increasing demand for air travel will push jetliner sales to reach more than 34,000 worldwide in the next 20 years, according to Airbus’s 2017 global market forecast.
The size of these deals is bewildering, especially knowing that the sector has been struggling to take off on a strong footing in 2017, following a really bad year in 2016.
Could the struggles be behind these buys?
Stall your engines
Air travel is one of the most lucrative industries worldwide, but the GCC aviation sector has had a rough time in both 2016 and 2017, suffering from a number of factors ranging from the 2017 electronic bans to the geopolitical situation in the region.
The US government issued in March 2017 an order banning electronics beyond the size of a mobile phone on carry-on luggage for direct flights departing from ten major airports in the Middle East.
Moreover, the UAE, Saudi Arabia, Bahrain and Egypt put an end to diplomatic ties with Qatar and cut off air routes with Doha after accusing it of helping fund terrorism.
Terrorist attacks across Europe and political tension over migrants and security in the US have also hit airlines businesses hard.
According to a study released in September 2017 by the Financial Times, the impact of this instability is directly affecting earnings.
“Profits for all airlines in the Middle East are forecast to more than halve, from $1.1bn in 2016 to $400m this year,” according to IATA, the global airline trade association.
The region’s carriers will make an average $1.78 per passenger in 2017, compared with a global average of $7.69,” it said.
What is the strategy adopted by airlines to offset this loss?
Fly in formation – “Mergers”
The Financial Times revealed that the Gulf airlines were facing competition from low-cost long-haul airlines, such as Norwegian Air Shuttle and Singapore-based Scoot, which are luring customers with cheap fares on some of the same routes between Europe and the US and Asia.
It said that the Gulf carriers were adapting their businesses in the face of tougher conditions.
“Emirates has agreed a tie-up with its low-cost sister airline flydubai, which will see the two airlines align systems and operations at their Dubai hub,” it said.
There were also rumors recently that the Emirates and Etihad would work closely in the coming period of time.
“The president of Emirates has not ruled out a future merger with rival airlines Etihad, saying the United Arab Emirates carriers would benefit if they worked more closely together,” according to DW, Germany’s international broadcaster.
Buy Buy: “Acquisitions”
Saj Ahmad, Chief Analyst, StrategicAero Research, told AMEinfo that airlines were effectively investing in new products, but also mitigating against fluctuating oil and fuel prices as well as the competitive pressure from other rivals.
“To stay ahead of the curve, new investment in aircraft is necessary because passengers want value for money as well as being able to fly on jets that have modern amenities like Wi-Fi and other features,” he said.
Amenities on airplanes may range from flying nanny program, to television screens with free channels, or the possibility of taking a refreshing shower.
The tourism sector is exponentially growing in the region, with the arrival of important events, namely Expo 2020 and 2022 World Cup in Qatar, but also with mega city-by-the-sea developments in Saudi, such as the $500bn NEOM and 50 offshore virgin red sea islands, among other projects in the GCC.
Airlines need to cater to this rising demand for flights.
Expo 2020, which will open on October 20, 2020 until April 2021, is set to attract 25 million visitors, and up to 1.3 million football fans are expected to turn out for the 2022 World Cup in Qatar, according to Doha News.
“Airlines have to be agile to market changes and adapt to the market demands of passengers as well as moves by rivals – whether it be pricing, services or routes,” he said.
He also noted that airlines were buying more airplanes to cater to the rising demand for flights by passengers.