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

Qatar Today - - FRONT PAGE - BY V L SRINI­VASAN

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.

Grow­ing mar­ket

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.”

TONY TYLER

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.

Airspace frag­men­ta­tion

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.”

DUN­CAN WATSON

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.

Freight growth

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.

En­vi­ron­men­tal im­pact

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

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