Middle East Battleground

Emirates recently made known its plans to assist in the yet-to-be-named low cost airline that will soon take to the skies over the Persian Gulf and beyond. Habib Fekih, Airbus’ Middle East President predicted it could end up ordering up to 70 airplanes over the next five years.

Already the region is a battleground for O&D traffic and market share.

Awash with Emirates, Etihad Airways, Gulf Air, Air Arabia, Bahrain Air, Nas Air, Saudi Arabian Airlines, Kuwait Airways, Jazeera Airways, Oman Air, , Yemenia, Royal Jordanian, Syrianair, Middle East Airlines and Qatar Airways, analysts are increasingly worried about both Airbus and Boeing’s exposure in the region.

Of the above named carriers (aside from Emirates, Yemenia and Oman Air), most operate mixed A320 fleets.

Airbus’ outstanding orders overall in the region are higher than that of its US rival.

“…Airbus has a 65% share of the total Mideast backlog by value. Mideast orders comprise 9% of Boeing’s backlog and 13% of its twin aisle backlog. But the Mideast market accounts for 19% of Airbus’s total backlog by value and an astonishing 33% of Airbus’s total twin aisle backlog,” says Teal Group’s Richard Aboulafia.

Image courtesy of Emirates

As Randy Tinseth pointed out in his journal just a couple of months ago, over the last five years, Airbus has seen a higher rate of cancellations. Arguably, the European plane maker has just as much risk as it does benefit if orders fail to materialise into actual deliveries.

No bad thing, but with the big three, Emirates, Etihad and Qatar Airways increasing the size of their fleets over the next 5-10 years, just how much traffic is there to go around between the key hubs of Dubai International Airport, Al-Maktoum International, Abu Dhabi International Airport, Bahrain International Airport, Doha International Airport and the New Doha International Airport?

“…If Emirates and its wannabes are attacking legacy airline traffic with cheap A380s and A350s subsidized in part by EU development aid, and if the Mideast carriers are being favored with EU airport market access, then is Europe basically hurting its big international airlines to boost Airbus? Perhaps Air France/KLM, Lufthansa, and BA will start to notice,” Aboulafia notes.

The region is already suffering from a chronic shortage of pilots. Qatar Airways in particular is struggling to recruit given that its home hub of Doha is nowhere near as appealing or glamorous compared to other cities in the peninsula.

Think “Middle East” or “Persian Gulf” and the words “Dubai“, “Abu Dhabi” “Oman” and “Bahrain” immediately stick out.

For all its natural gas reserves and oil industry, Qatar is not a place where one “must” travel to, let alone pass through.

Even its new airport (once completed) will cater for less traffic than the 75 million the current Dubai International is gearing towards.

The airline has deliberately not inducted new Boeing 777’s as quickly as rival Emirates simply because the lure of Dubai has seen 777 pilots swarm there, not Doha.

Image courtesy of Qatar Airways

So it is equally an anti-climatic event to see Qatar Airways CEO Akbar Al Baker declare that he too wants to join the wave of creating a new MidEast low cost airline.

“Personally, I am still against the idea of a low-cost carrier. But joining the bandwagon would not be because I am for the idea.“

“The model does not actually work in our region,” he went on to say. Of course this begs the question of “why bother”, considering the healthy list of low cost airlines noted already above.

In the heat of the Arabian summer making its presence felt across the Persian Gulf, in the coastal UAE Emirate of Dubai, Airbus’ Fekih was speaking at a recent travel conference.

Quoting a Reuters report, he stated that orders from the Middle East would fall in 2008.

“It’s less than last year, because last year was exceptional,” he said.

Conversely, he also went on to say that low cost carriers placing orders could mean that the tally could rise.

So which is it? Lower, or higher?

Given the exposure to junk credit rating airlines, such as the recently departed Skybus Airlines, the recent global credit crunch may invariably hit the Gulf region too. There is no immediate prospect of any Arab carrier crashing out of the marketplace - rather, they seem to be bucking the trend - whether that is sustainable is questionable given the risk of overcapacity.

Since key hubs like Abu Dhabi, Dubai, Bahrain and Doha rely heavily on O&D traffic, of their domestic populace, these cities have high numbers of low paid migrant workers who can often ill afford the luxury of being able to travel back to their countries of origin. In the cold reality of the 21st century, one terrorist atrocity in the Arabian peninsula frequented by non GCC visitors could signal the start of a crashing spiral for demand to fly to the region.

Emirates itself has big plans.

Chairman HRH Sheikh Ahmed Bin Saeed Al Maktoum envisages 450 airplanes in his fleet by 2020. It’s no surprise that none of the big three Arab carriers has joined any of the three major alliances either.

“When we adjust for the impact of the leap year, passenger demand increased by 4-5% while freight was even more sluggish in the 2-3% range. Demand is still growing. But clearly we are in a different league from the 7.4% and 4.3% growth that we saw in 2007 for passenger and freight respectively. Things are slowing down,” says Giovanni Bisignani, IATA’s Director General and CEO.

Image courtesy of Jazeera Airways

For the Middle East, growth may yet be there to be absorbed by the plethora of carriers, but the reality is that if the industry slowdown-come-downturn presses harder on the brake pedal, ultimately the risk of deferrals of new airplanes will rise dramatically - especially for Airbus.

Already grappling with currency woes and strike action due to controversial plant sales, the risks of airlines deferring deliveries on the heavy backlog of the ageing A320 family will threaten any development of its eventual successor.

“Over the next twenty years, that’s a $1.2 trillion market [for 737's/A320's] and you just can’t get it wrong,” says Randy Tinseth.

Nominally, Boeing expects to have a 737 replacement in service by 2015 or 2016 with Airbus earmarking 2017-2020 time frame to replace the A320.

For the here and now, consolidation is finally the buzz word of the US airline industry as Delta eyes Northwest Airlines.

The Persian Gulf region has a plethora of airlines carrying a plethora of orders for new airplanes at a time when oil prices are continually spiralling upwards.

Just what will it take to get consolidation under way in the region and how long can it carry this excessive capacity forward?

2 comments May 9th, 2008