Saturday, August 28, 2010

Airlines of the Middle East lead in Capacity and Demand ...... Why Not?

IATA published the airline industry July 2010 results (click here to see the figures) and it showed the Middle East Region leading the world in terms of demand and capacity. The notion that this increase is because the Middle Eastern airlines are all owned and/or subsidized by governments is incorrect.

It is true that most airlines are owned by governments but it also true that several countries have fiercely competitive markets like UAE, Kuwait, Jordan, Egypt and Bahrain with several airlines competing in a limited market with no subsidies. In Saudi Arabia, Saudia gets subsidies and part of these subsidies was to keep domestic air fares low something that has not changed with the entrance of 2 LCCs. Kuwait subsidizes Kuwait Airways which is the worst performer in their market. One could say the Etihad and Qatar Airways are owned by rich governments and therefore have access to money.

But then why gripe about subsidies; Ryan Air derives 22% of its revenue from subsidies paid by secondary airports. Airlines like Iberia, Alitalia, Japan Airlines and Air France to name a few were propped up by money injection from their governments. In the USA the Essential Air Service Program compensated airlines for flying into communities that lost air services after deregulation. Similarly, in France airlines were paid for the losses incurred while providing air services to capitals of ex colonies or French Territories.

Why should the region be different?

Even though the ME region generated the highest capacity it also generated the highest demand and we are seeing passenger load factor of 81% in July 2010 compared to 75.9% July year to date in comparison to 2009. There is pent up intra regional demand and we have seen similar capacity increases after 9/11 and Pandemics like SARS and H1N1. The region is slowly embracing open skies and their is demand to be satisfied not only in the ME, but for travel into India, China, South East Asia and South and North America. The demand is as such that Emirates is thinking of adding another daily flight to LA and Houston. Qatar Airways opened up Sao Paolo and Buenos Aires and they were instant success.

The fact that USA carriers increased capacity by 1% for the period up to July 2010 compared to the same period in 2009 is not a bench mark, their capacity in July 2010 increased by 5.8% compared to July 2009. The strict control over capacity has resulted in improved margins and yields because Air Fares increased in some cases by 20%, so did passenger load factors hitting 87.2%. Load factors in the high 80s, translates into passengers being turned away on certain city pairs and forced to use a competitor service or inconvenienced into changing the date of travel. There will come a point where the traveling public will find it cheaper and more time efficient to drive or take a bus for distances up to 500 miles, especially families going on holiday. The 5.8% increase in capacity in July 2010 is caused by the potential unsatisfied demand.

A lot of critics forget that in the Middle East region there are airlines with great business models and provide great service. Emirates, Etihad and Qatar Airways rank among the top ten. Royal Jordanian and Egypt Air joined One World and Star Alliance, putting them in the same league as the other partners in service and product delivery. Air Arabia, Flydubai and Jazeera Airways are leading LCCs in the region.

The Middle East region leads in capacity and demand because there is demand and because its carriers negotiate great prices from manufacturers when they buy at times their critics are either unable to secure financing or are too risk averse.


  1. A bit too non critical.

    Jazeera is in a financial mess and has (last i read) 6 A320s grounded. Its Dubai hub was closed as FlyDubai emerged. Sama shut down last week in KSA. AirArabia is strong. It is also publicly traded so its numbers are known. Too early to tell ref FlyDubai which publishes no financial or performance info.

    You also omit two other key reason for the success on the ME carriers.

    1. Geography. The ME is at the US/Europe to the Far East crossroads. The business is hub and spoke transit traffic. Maybe less than 15% of pax actually get on and off at Dubai - they are all going somewhere else. Same for Qatar and Etihad.

    If India had a half decent large international airline the ME airline model would be jeopardised. EK is the airline of choice for most Indians traveling to Europe/Canada/USA.

    This is similar to the model that launched SQ. No one was going to SIN - they were all in transit. But AUH/DXB/DOH are much better situated than SIN for that east-west transit traffic.

    2. Low costs. The ME carriers are young. No legacy costs. No unions. 3 year staff contracts. They are the original LCCs are i suspect that EKs costs for instance are close on a per seat km/mile basis to the best of the LCCs.

    The problem that these carriers will have is one of aging. As the airline grows and ages costs can creep up. And product and service inconsistency can drive pax away. Compare the economy service and seat on an old A330 to a new A380.

    Pax loyalty does not last long. Many of the transit passengers heading through the ME are looking for the lowest fare from a reliable carrier. If Qatar is cheaper than EK to BKK they will take Qatar.

    The longer term question is whether the UAE can sustain both EK and EY. I suspect when JBX finally is up and running the answer will be one very big airline from one very big airport.

  2. Thank you for your thoughtful comments Robert

    I agree geography helps, I suppose being from the Middle East I sometimes take that for granted. Airlines of the region ran hub and spoke hubs way before it was popular in the USA or Europe. You are correct about the number of passengers that get off at Dubai or at any other hub. the Jordan market was around 19% of Royal Jordanian's traffic.

    EK maybe the preferred airline for Indians traveling to North America and Europe, but then every other non Indian carrier does the same. The Indian market is potentially so large it can sustain several airlines.

    Most of the region's airlines have newer aircraft, regardless of the age of the airline and we do have some old ones RJ is 40+, MEA is the same, Egypt Air is in its 60s even EK is 20+. most had fleet renewals in the last 5 years.

    Finally, whether the UAE can sustain 2 airlines is a political question more than an economical one.

    Thanks again for taking the time to comment.



1 Goal 2010 2012 2013 9/11 AA Abu Dhabi ADAC Air Arabia Air Canada Air India Airberlin aircraft airlines airports ambitions American Airlines Amman aviation AVOD AWST B707-300C B767 B777 B787 BA Bahrain Bahrain Air BangaloreAviation Boeing branding British Airways Business Aviation Cabin Crew Canada change chapter 11 CO Commercials communication community compliance contingency continuity Continuous Improvement cost effective creativity Culture curricula Customer Service Delta Detroit Metro DFW Doha DTW Dubai Dubai Air Show DWC efficiency emergency Emergency Response Emirates employees environment ET409 Etihad ETS EU FA FAA family Flight Attendants flight(s) Flightglobal flydubai GACA Galaxy Tablet GAMCO GCC globalisation GOL Greece Green Gulf Air Hala Hamburg happy health home Hopenhagen Human Resources IFE India Iran Iraq Iraqi Airways Jaffa Jazeera Airways Jet Airways Jordan Just Culture Kuwait Airways LA LCC leadership low cost maintenance management manpower MEA MEBAA MENA Michigan motivation MRO MROAM Oneworld Palestine passengers passion people Philadelphia planet earth Privatization professional QAIA Qantas Qatar Qatar Airways Quality Quick Service Restaurant Radio Repair Stations Risk road roots ROTANAJET Royal Jordanian Safety Sanctions. Sao Jose Dos campos SAT Saudi Arabia Saudi Arabian Airlines Security Sharjah Airport SimliFlying Simplicity SKYTEAM SMS social media Southern California Southwest Airlines Star Alliance Sudan Airways support target teachers Technology terrorism tolerance Toulouse tourism traffic Training transition travel TSA Turkey Twitter UA UAE UBM US Airways VIA Rail Violin Vision volcanic ash Wataniya Airways
Top Blogs
Powered By Invesp