Middle Eastern airlines hurting from regional turmoil; drop in tourism causes airlines to be more competitive.
» Tourism | Thursday, June 09, 2011 • Air News Times
The turmoil of the Middle East is hurting the region’s airlines even in places where calm prevails and economies and travel are booming.
The International Air Transport Association (IATA) said that the combined profits for Middle Eastern carriers will drop to just $100 million this year from $900 million in 2010. While all the world’s carriers are bracing for a year of plunging profits, the decline for the region’s airlines is nearly double the world average of 54% the IATA said. As recently as March the IATA had forecast combined profits at Mideast airlines at $700 million.
For countries like Egypt and Tunisia, caught up in the whirlwind of political instability, tourist arrivals have plunged, leaving more seats aboard carriers empty. But even in the Gulf, which has mostly avoided the Arab Spring unrest and whose economies are booming, airlines are likely to see profits slashed, said the IATA, which groups the world’s airlines.
“Natural disasters in Japan, unrest in the Middle East and North Africa, plus the sharp rise in oil prices have slashed global industry profit expectations to $4 billion this year. That we are making any money at all … is a result of a very fragile balance,” Giovanni Bisignani, the outgoing head of the IATA, told the group’s annual meeting in Singapore on Monday.
Aviation and travel play a key role in the region’s economy. In poorer countries, like Egypt, tourism is a major foreign currency earner and source of employment. In the Gulf, airlines like Emirates and Etihad have grown into global industry leaders and are playing a major role in diversifying economies away from oil.
Nevertheless, Peter Grimsditch, editorial director for the British consultancy Oxford Business Group, said he was confident that the biggest aviation centers of the region would bypass the worst effects of the turmoil and higher fuel costs.
“There are three places in the Middle East important to airline industry – Dubai, Doha and Istanbul. There haven’t been too many disturbances in these places,” he told The Media Line. “They may be tighter on profits simply because of fuel costs. But that’s something that’s going to affect everybody. The Gulf has the most fuel efficient airplanes in the world. Fuel prices are going to affect European and American airlines more.”
The biggest tourism casualty is Egypt, where arrivals were down 35% in April compared with the same month in 2010, according to Tourism Minister Mounir Fakhri Abdel-Nour.
In a bid to lure travelers back to the country, the national carrier Egypt Air announced this week it would double its baggage allowance, thereby becoming one of the few carriers anywhere in the world to allow two checked bags free of charge. “Because of the recent political movement, the airline lost its business considerably. This will be one incentive to travel to Egypt,” Medhat Nabil, the airline’s general manager, said.
Tunisair, Tunisia's national carrier saw passenger traffic plummet by about a fifth between the middle of January and the end of April, compared with a year earlier, because of Arab Spring turmoil in the Middle East, Habib Ben Slama, vice president for commercial affairs, told Reuters on Monday. With the country still struggling to right itself following mass protests and the ouster of its president in February, tourism revenues were down 50% in the January-May period.
The big Gulf carriers are also feeling a squeeze on their bottom lines because of higher fuel prices and expansion plans that are outpacing the growth in traffic, the IATA said.
It estimated that the average cost of a barrel of Brent crude oil, an industry benchmark, would be $110 in 2011, up 15% from its previous forecast. Fuel typically accounts for 30% of an airline’s costs, which get passed on to fliers in the form of higher fares. As a result, the IATA, global demand from travelers and cargo shippers will be lower than forecast in March by the IATA.
For the airlines of the Middle East, many of whom are undergoing major fleet expansions, it means capacity growth will outstrip demand by 15.5% to 14.6% this year, leaving planes a little emptier and pressuring profits, the IATA said.
Indeed, a mini-price war has broken out this summer between Emirates and Etihad even as the Gulf economies enjoy strong tourism. Air traffic across the UAE rose 6.7% in April from a year earlier with almost 56,000 take-offs and landings.
Even so, Etihad said last week it would match first or business-class fares provided by other airlines for families travelling together on most of its routes in and out of the United Arab Emirates. A few days later Emirates said it was offering 15% discounts on 30 routes for economy and business class passengers.
Philip Butterworth-Hayes, lead consultant at PMiMedia, a UK firm tracking the industry, said the prospects for the Gulf airlines remain good because their host economies have strong growth prospects. “There are political issues beyond their control, but the underlying economic factors and airline growth is really dependent on GDP growth,” he told The Media Line.
The ambitious growth plans for the Gulf’s carriers also face political resistance from their mostly European rivals, who have been fighting the growing market shares of Emirates and others on long-haul routes between Europe and Asia. Over the decade the region’s market share grew from 4% to 11%, according to the IATA.
The tensions have boiled over into diplomatic disputes and prompted the IATA’s Bisignani on Monday to urge the sides to settle disagreements without bringing their governments into the fight. At the end of last year, a dispute over landing rights flared up into a diplomatic tit-for-tat with Canada.
“Increasing tensions around the rapid growth of the Gulf carriers must be resolved. The solution to call in governments as advocates, or as referees, has not worked, and it won’t. As responsible leaders of this global industry, we must find a fair and reasonable way forward ourselves,” he told the IATA conference.
Butterworth-Hayes said he is optimistic that the dispute will be settled, if for no other reason than that airports in Europe have reached the limits of their physical expansion. That means that European airlines will have to develop hubs in the Middle East to serve growing passenger demand, he said.