Battle FOR THE Skies
THE REGION IS INCREASINGLY BECOMING A COMPETITIVE MARKET WITH EXISTING REGIONAL CARRIERS AND INTERNATIONAL PLAYERS VYING FOR A LARGER SHARE OF AIR TRAFFIC. QATAR TODAY FINDS OUT WHETHER THE COMPETITION WILL LEAD TO AN OVERCAPACITY IN AIRCRAFT, AIR TRAFFIC
Middle Eastern airlines fear the space congestion that grows with each new aircraft delivered.
“To date, 156 orders for 787 Dreamliners have been made by Middle Eastern customers, of which 30 were by Qatar Airways alone. The other customers for the aircraft include Saudi Arabian Airlines, Royal Jordanian, Oman Air, Gulf Air, Etihad Airways and Iraqi Airways.”
MARTY BENTROTT Vice President (Sales) for Middle East, Russia & Central Asia Boeing Commercial Airplanes
Rising fuel prices and a struggling global economy have dented the growth of the global aviation sector but it has been quite the opposite when it comes to the GCC aviation industry, if the developments in the past few years are any indication.
GCC is sort of a meeting point for Asia, Africa and Europe, connecting two-thirds of the world's population within a flying distance of eight hours and some 400 million passengers are expected to touch the region's airports by 2020. This growth, undoubtedly, is spurred by three major airlines in the region: Emirates, Etihad and Qatar Airways.
To cater for the ever-growing passenger and cargo traffic, the GCC member states have taken up construction of new airports and expanding the existing ones, placing orders for new aircraft to replace the old fleet as well as improving airport infrastructure to enhance the passenger experience at an estimated cost of more than QR1.1 trillion ($300 billion) in the coming years.
Qatar is spending QR58.24 billion ($16 billion), the UAE investing QR83.72 billion ($23 billion), Saudi Arabia QR26.20 billion ($7.2 billion), Oman QR22.20 billion ($6.1 billion) and Bahrain QR3.64 billion ($1 billion) on developing airport infrastructure alone.
In its report on the GCC Aviation Industry, Alpen Capital says the Middle East aviation market is expected to take the delivery of 2,610 aircrafts between 2012 and 2032, valued at over QR2 trillion ($550 billion). As a result, the total fleet size in the region is expected to increase at a 4.7% compounded annual growth rate (CAGR) to reach 2850 aircrafts in 2032.
Owning a business jet was viewed as a luxury, a symbol of prestige and affluence untill a few years ago but it has become a necessity for businessmen in the GCC region. The business jet fleet size is expected to grow from the present 500 to 1375 by 2020. Though MENA accounts for 6% of the global private jet market, the UAE and Saudi Arabia have a 70% share in the region.
According to the Private Jet Charter (PJC), one of the world's largest independent private jet charter consultants, the UAE businessman flies between 100 and 150 hours per year in a private jet, while his counterparts from Saudi Arabia spends between 150 and 200 hours in the air due to that country's vibrant economy and vast size. Qatari businessmen on average make six charter flights a year, holding around 10% of the Middle East air charter business, the PJC says.
Even a forecast by aircraft manufacturer Boeing says one-third of the projected demand – 900 aeroplanes – will replace the present day's fleets and the rest is expected to be driven by the rapid fleet expansion in the region. Twin-aisle aircraft, such as the Boeing 777 and 787, will account for more than half of the region's new aeroplane deliveries, compared with only 24% globally, the forecast says.
For Boeing and other companies engaged in manufacturing commercial planes, the Middle East continues to be a key market due to their ability to provide the airlines with innovative products as well as its increased focus on building partnerships and relationships with the customers. The Boeing, which has been operating in the region for more than 65 years, has delivered over 500 planes to regional carriers including Qatar Airways.
“To date, 156 orders for 787 Dreamliners have been ordered by Middle East customers of which 30 were ordered by Qatar Airways alone. The other customers for Dreamliners include Saudi Arabian Airlines, Royal Jordanian, Oman Air, Gulf Air, Etihad Airways and Iraqi Airways,” says Marty Bentrott, Vice President (Sales)
for Middle East, Russia & Central Asia, of Boeing Commercial Airplanes.
Expressing confidence that the company is well placed to meet the growing demand for aircraft across the region, Bentrott says they are in touch with their customers and partners in the region and work closely with them to ensure that aircraft are delivered within agreed schedules.
As far as the GCC is concerned, Emirates Airline, Etihad Airways, and Qatar Airways placed huge orders for new aircraft in the Dubai Air Show held in November 2013. The total order-book of Emirates Airline at that time was estimated at QR604.24 billion ($166 billion). At the recently-held Dubai Air Show, Etihad Airways and Qatar Airways placed orders for aircraft worth QR243.88 billion ($67 billion) and QR182 billion ($50 billion) respectively.
The GCC airlines are also eyeing mergers and acquisitions of airlines in Europe as well as in Asia. While Etihad has brought stakes in Air Berlin, is looking to buy 49% shares in the loss-making Alitalia, to expand its tentacles in Europe, and it has acquired 24% stakes in Jet Airways in India, Qatar Airways is keen on investing in the low budget operators – Spicejet and IndiGo – in India.
The success of GCC airlines, however, is proving to be an irritant to their rivals in Europe who are accusing the three big airlines in the region – Qatar Airways, Etihad and Emirates – receiving aid from their respective governments. This, no doubt, has certainly helped the three airlines to take fast decisions as far as investments are concerned.
Hitting out at the European authorities, Qatar Airways CEO Akbar Al Baker says that they were indulging in doublespeak when it came to state aid and investment in airlines. “It's a disgrace for them to talk about us when in their own backyard they see airlines getting state aid,” he says.
Justifying the aid provided to the three airlines which were owned by the respective governments, Al Baker says: “State aid is only an excuse for them to stop someone who they don't like while allowing it with their own airlines.”
“Punching above their weight”
With their strong outlooks, the Gulf airlines are driving much of the growth for the Middle East region and air traffic in the Middle East is outperforming the industry as a whole. While the global passenger traffic is expected to increase by 5.8% in 2014, the Middle East airlines will more than double that at 13%.
Coming to earnings, the Gulf carriers are also “punching above their weight” as the outlook for the Middle East region projects a profit of over QR8 billion ($2.2 billion) in 2014. This represents nearly 12% of forecast global profits of QR68.06 billion ($18.7 billion), while the Middle East region's share of global traffic is just 9%, according to a report from International Air Transport Association (IATA).
The competition in the skies, which was hitherto between the GCC and rest of the world, particularly the West, has now turned inward as the airlines in the region are vying with each other in expanding networks, augmenting their fleet strength, improving airport infrastructure, opening new airports and also offering better services to the passengers as well as improving their safety.
Bahrain's national carrier, Gulf Air, which used to be the only airline for all Trucial States (Sheikhdoms in the Persian Gulf ) and Qatar and which led the aviation industry in GCC by being the only Flight Information Region (FIR) for the entire Arabian Peninsula a decade ago, fell way behind as it could not compete with its counterparts in the region.
Gulf Air's latest attempts at a turn around, launched in late 2012, appear to be yielding concrete results for the struggling Bahraini national carrier. The latest in a long line of revival attempts, the plan has dramatically downsized the Gulf's oldest airline in an attempt to end years of heavy
“The Gulf region is a bright spot as the governments here understand the important economic contribution that aviation makes. And, in general, they have created a business environment that is supportive of the industry's success.”
Chief Executive Officer International Air Transport Association
“Qatar Airways has been using GTL fuel for all of its flights coming from Doha. Besides being eco-friendly jet fuel, GTL gives a huge burn fuel benefit to the airline and additional range for the same quantity of fuel that is utilised in our airplanes.”
AKBAR AL BAKER Chief Executive Officer Qatar Airways
losses. Some of the other measures taken to curb mounting losses include scrapping eight routes, reducing manpower by 27%, and also launching new services to five destinations last year.
Reasons for growth
The gusto with which the GCC airlines have been marching ahead can be attributed to many reasons. The developmental activities in the UAE, Qatar, Saudi Arabia and Kuwait, where billions of dollars are being invested in various projects in sectors such as road transportation, power, oil and gas and to hold events like the World Expo in Dubai in 2020 and the FIFA World Cup in Qatar in 2022, have propelled the industry's growth.
A limited rail network and lack of any other easy and efficient mode of transport in the Gulf is pushing up the demand for aviation services and the GCC member states have also pursued liberalised and progressive aviation policies over the past few years to enhance the transparency and competitiveness of the sector.
The other reasons for the unhindered growth of the sector include steady economic growth pushing up disposable incomes, fuelling air travel to meet the growing demand for business and leisure tourism in the region, growing urbanisation, influx of expatriates and supply of fuel to the airlines at cheaper rates by the local governments compared with their competitors in other countries.
Middle East-based airlines currently account for 8% of the global air transport industry and this share is expected to grow further. The region has the greatest number of aircraft on order in the world, to match the ever-increasing demand.
IATA Chief Executive Officer Tony Tylor says carriers in the Middle East region have led global traffic growth in three of the last four years and are expected to do so again this year. Over the last decade, the global market share of Middle East airlines has increased from 4% to 9%. And much of this has been driven by the robust growth in the Gulf.
“The Gulf region is a bright spot as the governments here understand the important economic contribution that aviation makes. And, in general, they have created a business environment that is supportive of the industry's success,” he says.
A classic example is Qatar, which is one of the fastest growing aviation markets in the Middle East. The country's national carrier Qatar Airways made a modest beginning two decades ago and has turned into a world class airline touching over 115 destinations around the world. It plans to add 10-15 new destinations every year.
Qatar Airways' success also helped the passenger and cargo traffic at the Doha International Airport to register a compounded annual growth rate (CAGR) of 14.6% and 19.2%, respectively, between 2008 and 2012. As this growth has been unabated, Qatar has built a new airport – Hamad International Airport – and opened the first of the three phases on April 30, 2014. Upon completion, the airport's capacity is expected to increase to around 70 million passengers per year from the existing capacity of around 4.2 million passengers.
Cathay Pacific Manager in Qatar, Nick Brooks asserts that Qatar is on its way to becoming the aviation hub of the region. “The relocation of all the airlines there will no doubt further help develop Qatar's regional aviation hub status,” he says.
Miles to fly
Does this mean that the GCC aviation industry has no hurdles to cross in the coming years?
Doha-based Alpen Capital Investment Bank's Managing Director, Sanjay Bhatia, says the region is increasingly becoming a competitive market with the existing regional carriers competing among themselves and with international players vying for a larger share of air traffic.
While competition is everywhere, it is more pronounced in the GCC aviation market due to the deep pockets of the players involved. However, such competition may lead to an overcapacity in aircraft, and impact profitability to the advantage of the passengers.
Another concern is airspace fragmentation. The Arabian Peninsula was operated as one FIR from Bahrain in the past but there are six FIRs in each of the six countries in the region today. Airlines need to go from point A to point B as smoothly as possible and the challenge for the air navigation service providers is to work together to make that happen across six FIRs as seamlessly as if there were only one.
The congestion is due to the increasing air traffic across the Gulf, which is not only slowing down the industry's growth but also results in increased operating costs and flight delays. What has complicated the matter further is that the defence ministries in the region have restricted up to 50% of the airspace for commercial use.
In fact, air traffic management is today's buzzword in the GCC region and the stakeholders are aware that something has to be done to alleviate congestion and delays arising from poor management. The aircraft movements in the GCC are expected to touch 2.3 million by 2025.
Air Arabia Group CEO Adel Ali says the lingering political instability in the region, combined with the currency depreciation in some markets, all impacted the sector in 2013 and continues to pose challenges.
“More broadly, although the current oil price levels are comforting, fuel price volatility remains a concern. Perhaps the single biggest challenge facing the sector, however, is the absence of true open-skies policies and the lack of privatisation in the Arab world, which act as real barriers to progress,” Ali says.
Another major deterrent to growth, from the low-cost carriers' point of view, is the high handling costs at secondary airports. A key element for LCCs globally has been secondary airports and avoiding head-tohead competition at airports where big full service airlines fly to, and where landing fees and associated infrastructure costs are high.
“In the Arab world, on the contrary, the handling costs in secondary airports are much more expensive than operating from main airports, with the exception of a few. They cost more in handling, landing, the fuel cost is higher and that is one of the policies that gets applied to protect the national carriers who operate from the main airport,” Ali says.
“Cooperation between the civil and military air traffic management could result is a way out for effective utilisation of the available airspace. It is critical that
“The continued expansion and development of airport facilities across the region is also driving growth, once again particularly in the countries mentioned, as well as Oman and Jordan. A thriving and growing consumer society with spare capital to invest, and a growing tourist industry are all signs of on-going positive momentum for growth.”
Vice President Cargo Commercial Operations (MEA) Emirates Airline
“Air congestion is a common challenge experienced across the industry. The application of efficient air traffic control systems will help improve this issue over time.”
NICK BROOKS Manager Cathay Pacific Qatar
governments of the Gulf work together to address this issue promptly to ensure the smooth functioning of the industry. Further, as the Gulf-based carriers expand their footprint internationally, securing landing slots at some international airports may become difficult,” Bhatia says.
Sharing similar views, Tony Taylor feels that aviation stakeholders need to work together to address this. One solution that has been identified is to develop partnerships and trust with the military in order to open more flexible use zones.
“Airspace is physically finite. So efficiency is the only way to increase capacity. IATA is working with stakeholders in the region to promote cooperation and efficiency that will create win-win solutions. We are seeing some progress. But the pace needs to accelerate to avoid bottlenecks,” Tyler adds.
Cathay Pacific's Nick Brooks too says air congestion is a common challenge experienced across the industry. The application of efficient air traffic control systems will help improve this issue over time.
Ali feels more can be done to increase the efficiency of operations in the skies and on the ground. Despite faster aeroplanes, aerospace restrictions can significantly increase journey times, which add to costs and leads to delays. “The modernisation of aerospace and following what mature markets have done in terms of single aerospace policy such as Europe can solve the congestion problem. Initiating such solutions will require close collaboration between airlines and regulators, but it is certainly achievable,” Ali adds.
Low Cost Carriers (LCCs)
The successful launch of low cost carrier (LCC) Air Arabia by Sharjah in 2003 has spurred other countries in GCC, whose population is around 40 million, to follow suit in this market segment.
While Saudi Arabia has started Nas Air, Kuwait began Jazeera Airways, flydubai by Dubai and Bahrain Air by Bahrain, to meet the growing demand of passengers for short haul flights within the region as well to nearby Asian countries.
The demand for LCCs is on the rise due to the ever expanding price sensitive expat population which seeks affordable means of regular travel, but the LCCs have to compete directly with their “big brothers” due to insufficient secondary airports.
Alarmed at the growing market share of the LCCs, the full service carriers (FSCs) started further improving their services to retain customers and justify the high fares they charge but the race is never-ending.
The popularity of the LCCs has been so great that they have succeeded in capturing a sizeable portion of the short and medium-haul traffic by garnering more than 7% of the market share within 10 years and they are growing stronger with each passing year, posing a challenge to the FSCs in the region.
The other reasons for the LCCs' rising ascendancy in the business are their pointto-point service, rapid turnaround, strong value proposition, simplified networks and above all, the low prices offered to the customers, who are mostly low-salaried expatriates who travel to their native countries and also those flying to nearby countries within the region.
Countries like Bahrain and Saudi Arabia have pursued liberalised policies and allowed the private sector to operate services, but the national carriers view the presence of more players as a threat to their monopoly in the industry and as such, customers are losing the benefits of competition.
“The LCC segment in the Middle East saw a robust average annual growth of 52% in the last decade, compared to 7% growth of the traditional FSCs during the same period, in terms of scheduled capacity. The budget carriers now enjoy a respectable market share on the GCC's important routes,” says Bhatia.
Currently, the market penetration of LCCs in the Middle East aviation sector in terms of numbers of seats has increased to 13.5% from negligible levels a decade ago. However, this is still markedly low compared to Europe (38%) and North America (30%), inferring stellar growth prospects.
The budget operators in the Middle East and international markets are well placed for strong and consistent growth, and the
recent growth trends further supports that claim. The most telling indicator has been the impressive growth thus far in LCC airlines' fleet size and route network.
“We operate a young fleet of 37 A320 aircraft with more on the way, serving nearly 100 destinations across the MENA region, Europe, and the Indian Subcontinent. Moreover, over the past decade, we have been extremely successful in tapping markets which the legacy carriers considered unfeasible. Pioneered by Air Arabia, the LCC carriers have emerged as major players in the region's skies, rapidly increasing their share of the market,” Ali says.
Regarding monopolisation, where a handful of regional airlines are controlling airfares, especially in sectors that have maximum loads, Bhatia says such sectors are generally serviced by more than one airline, and in most cases they include budget airlines, which puts a check on the cost and provides options for travelers.
“Monopoly situations are more likely to arise in local/domestic routes within a GCC country; however, the situation is likely to change as new airlines come to market and are the route networks of the current airlines is expanded,” Bhatia says.
A spokesperson for flydubai says that the Middle East LCCs currently account for just over 13% of total passenger traffic, compared to other mature markets, such as Europe, where it stands at 36% or so, see great potential for growth.
“The region also has the greatest number of aircraft on order in the world to match the ever-increasing demand. flydubai has provided easier access for our passengers, creating free flows of trade and tourism, to support Dubai's economic development,” the spokesperson adds.
“The two biggest challenges GCC aviation industry faces are airspace congestion and protectionism in some of the international markets the GCC airlines fly to,” says Vikram Krishnan, aviation expert and partner with Oliver Wyman.
He says Dubai already witnesses flow control during peak periods and the number of approved flight paths over countries like Saudi Arabia are limited. The GCC countries can address this by working together, but the interests of all member countries may not be aligned in this regard.
“In addition, the GCC carriers sometimes struggle to obtain bilateral rights to operate in some international markets, especially Germany and Canada. For instance, Emirates has faced opposition to its flights from Italy to the US recently,” Krishnan says.
While the GCC Open Skies policy has been in discussion for years, its implementation has been slow due to a lack of economic and political integration in the region, and the cautious attitude of the national carriers. Having a GCC Open Skies Policy in place would open up new routes in the region and translate to additional revenue for the airline operators.
“Considering that the Arab region has a population of approximately 350 million, if we open our skies to each other and allow the free flow of passengers, the size of the aviation sector here will be equal to America. The implementation of a full
“The two biggest challenges GCC aviation industry faces are airspace congestion and protectionism in some of the international markets the GCC airlines fly to.”
VIKRAM KRISHNAN Aviation expert and partner Oliver Wyman
“The LCC segment in the Middle East saw a robust average annual growth of 52% in the last decade, compared to 7% growth of the traditional FSCs during the same period, in terms of scheduled capacity. The budget carriers now enjoy a respectable market share on the GCC's important routes.”
SANJAY BHATIA Managing Director Alpen Capital Investment Bank
open skies policy will further encourage intra-regional tourism, enabling regional airlines to achieve growth rates that could outpace carriers from North America and Europe. Significant progress has been made in this regard, but there's still room for improvement,” Adel Ali adds.
According to Bhatia, the economic meltdown of 2008-09 affected the air cargo segment globally with Freight Tonne Kilometers (FTK) witnessing negative growth in those years. In contrast, the Middle East region experienced sound FTK growth of 6.3% and 3.9% during the same period.
Recovering from the effect of the global economic slowdown, global cargo traffic experienced sharp growth in 2010, but slid again in 2011 and 2012 as a result of the economic turmoil in the Euro-zone. In contrast, the Middle East continued to record FTK growth during the same period. Even in the first half of 2013, global air freight traffic was flat in most regions compared to the same period in the previous year. On the other hand, Middle East airports experienced a growth of 6.1% in the first half of 2013.
“The Middle East growth can be explained as follows: during the last decade, Asian countries such as China and India have emerged as outsourced manufacturing centres for the western markets. As a result, the Gulf countries, which are nearly equidistant from Europe and Asia, have become the global transit hub for air cargo traffic,” Bhatia says.
The UAE in particular, accounted for around 63% of the GCC's air freight volume in 2012, leveraging on its airport infrastructure. GCC countries are primarily import-based economies (excluding oil and gas) the ongoing extensive expansion of key airports in the Gulf is expected to increase their contribution to global air freight volumes, Bhatia adds.
Emirates Airline Vice President for Cargo Commercial Operations (Middle East and Africa) Duncan Watson says the cargo market in the region has been buoyant with ongoing investment and expansion by regional players supporting the continued flow of cargo volumes both into and through the key markets in the Middle East.
“Infrastructure developments in the GCC continue to drive the need for materials and supporting logistics. This is particularly noticeable in the UAE, Saudi Arabia and Qatar. The continued expansion and development of airport facilities across the region is also driving growth, once again particularly in the countries mentioned, as well as Oman and Jordan. A thriving and growing consumer society with spare capital to invest, and a growing tourist industry are all signs of ongoing positive momentum for growth,” Watson adds.
Even Brentrott sees strong potential in the Middle East cargo market as it has historically served as a bridge between East and West markets. He says the number of freighters will more than double from 90 freighters in 2013 to 190 by 2032.
“The region has invested heavily in the infrastructure to succeed in the cargo market in coming years with expansions to the cargo handling capacity in Dubai, Doha, and Abu Dhabi. All three of the airports already rank among the top 30 airports globally for freight loaded and unloaded. Growth in the region is likely to continue as airline service to and from the region expands and the economies within the Middle East continue to diversify,” he adds.
Aware of the harm the industry's growth could pose to the environment, Qatar has been at the forefront in developing Gas to Liquid (GTL) fuel, which is one of the innovative technologies, to reduce the environment impact of air travel. Besides Qatar, other countries too are exploring different types of alternative fuels, including GTL, as depending on what types of fuel sources and feed stocks are available locally.
Akbar Al Baker says the airline has been using GTL fuel for all of its flights coming from Doha. “Besides being eco-friendly jet fuel, GTL gives a huge burn fuel benefit to the airline and additional range for the same quantity of fuel that is utilised in our airplanes.”
When asked why other airlines were not using GTL, he says that the airline companies getting fuel from Doha may not realise that they were using jet fuel mixed with GTL. “It was the same thing with us (Qatar Airways) as we were getting GTL-mixed jet fuel in South Africa from Sasol; they were fueling our airplanes with GTL for a very
long time,” Al Baker says.
Even the European Union and other countries have locked horns over the former's proposal to have an emissions trading system (ETS) to contain the industry's impact on environment.
“The biggest challenge for the industry is to reduce the cost of alternative fuels because right now they are simply too expensive for mass adoption by airlines. For that to occur, we need governments to play a larger role in making alternative fuels a viable solution,” Tony Tyler says.
As to the standoff between the EU and other countries over ETS, Tyler says the industry agreed on a common position to ask for a global mandatory carbon offset scheme. Governments, through ICAO, agreed to develop the framework for a global market based measure by 2016 to be im- plemented from 2020. And Europe recently agreed to keep the clock stopped on its ETS proposal until after 2016.
“So there is a broad alignment between the industry and governments on the way forward. There is still a lot of work to do. And IATA will be fully engaged to help governments come to a conclusion on market based measures by 2016,” Tyler says.
Tyler also feels that partnerships among the airlines, whether in the GCC or other regions, are important for their strategy. “The big three Gulf carriers have chosen different means of cooperation to achieve global coverage. We see bilateral arrangements, alliance participation and equity-driven partnerships. Each airline makes arrangements it sees as in its best interest and that of its customers,” Tyler adds
“The implementation of full open skies policy will further encourage intraregional tourism, enabling regional airlines to achieve growth rates that could outpace carriers from North America and Europe. Significant progress has been made in this regard, but there's still room for improvement.”
ADEL ALI Group CEO Air Arabia