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.

The Consolidation of the LCC Market

In the last few weeks three events happened which might indicate some changes in the Low Cost Carriers market in GCC in particular.

The most important is SAMA stopping operation after sustaining one (1) billion riyals ($266 millions) in losses. These losses were sustained during the period of Oct 2009 and March 2010. A government relief package and a shareholders' cash injection fell short in monetary and time terms to bail out the airline. SAMA competes against NAS another LCC and Saudia the national carrier. Saudia has been subsidised for years by the government to keep domestic ticket prices low. SAMA senior management are hopeful to restart operation, how soon and under what shape remains to be seen.

Last June Bahrain Air announced that they will exit the Low Cost Carrier market and become a "value for money airline" more like a regular aka legacy airline. They reckon the LCC model does not work in the GCC. Bahrain Air will go for code shares, alliances and a frequent flier loyalty program.

Finally, RAK Airways announced its relaunch sometime in the September/October period of this year indicated also they will not launch as an LCC, but as a full fledged service airline.

The three airlines are not major players, but are feeling and reacting to the effects of a crowded and very competitive LCC market dominated by Air Arabia, Flydubai and Jazeera Airways.

How the market develops in the GCC remains to be seen. I very much doubt that we will see more airlines than the existing four (add NAS to the big three). This may mean that the next market is going to be in MENA, giving credibility to Air Arabia's strategy of starting LCCs in Morocco, Egypt and Jordan.

Aviation and Social Media

This weekend I read two blogs at SimpliFlying the most influential website in Airline Branding and Social Networking. Both blogs were about large aviation organisations on whom I and millions depend on for their travels; Boeing and AA and how they successfully used/use Social media to communicate and enhance their brand and image. They are proof that this is an industry that revolves around people, people who travel and people who make it possible to travel.

Large organisations at best are slow at embracing change but both have shown a willingness to embrace social media and engage their respective audience.

Boeing is changing the way it communicates. Boeing has enhanced their website to engage more those who already visit and increase their numbers. What is amazing for such a well know brand like Boeing is the realization that it is only a name on a bunch of buildings. The real heroes are the people of Boeing. They are what make the name and the product. It is their real stories and successes that Boeing is communicating to the world. A warmer and more humane image of a gentler giant if we may. (Click here to read the full piece) .

American Airlines had a security incident on flight AA24 at San Francisco bound to New York.

The aircraft was delayed until the issue was resolved. Two passengers tweeted from on board the aircraft and became the source of information to the media. Enter @aairwaves who engaged the two passengers, took charge and responded to all media questions until the issue was resolved. A case study of crisis management online and in real time. (Click here to read the full piece) .

Kudos Boeing and American Airlines for embracing change and of course my friend Shashank for driving us all in the right direction.

Aviation in MENA

I read on Zawya.com an article entitled "comment: aviation needs better management" click here to read the full article. Below is my comment on that article with a few more insights.

Like everything else in the MENA region aviation is affected by politics, both regional and international. Several countries and by extension airlines face sanctions mostly by the USA such as Syria, Sudan, Somalia to name a few. The region is beset by political turmoil and armed conflict. Yemenia was almost black listed by the EU, MEA can not fly to the USA and Iraqi Airways had to be shut down and cease international operations because of claims by Kuwait Airways.

There is also the matter of national pride that stops in the way of progress not only in terms of subsidies to national carriers but also in restricting access by other airlines.

The idea of a single market similar to the EU is very far fetched and will take decades to materialize. Simply we need a long period of peace and stability to develop into a single market and a political union, in the same manner that the EU did.

However, there are encouraging signs; there are more countries that embrace open skies like the UAE, Lebanon, Syria, Jordan, Egypt, Bahrain and Qatar to name a few, some more liberal than others.

There is also a trend for the national civil aviation authorities to embrace EASA's EU-OPS (the European regulatory regime) which will standardize regulations and make cross border movement of aircraft and aviation assets easier, acceptance of maintenance standards and licensing.

Unless the region experiences stability and peace the efficient management of aviation will be very difficult. The mere fact that the region has thrived, amid the worst recession in modern history and a few armed conflicts, is a tribute to the ability of individual airlines and authorities to manage crises.

Impressions of a Frequent Flier

This year I have traveled extensively and had the opportunity to experience on board service of several airlines on different flights (Ultra long, long, medium and short range) and different classes.

Here are some of my impressions

Ultra long range (12 to 16 hours) on Emirates, and any other airline for that matter, economy is not a joy if it was not for the inflight entertainment system (ICE). ICE makes all the difference, I am not a movie goer but with ICE I have seen 5 movies during one flight, a personal record, and still had 7 hours to sleep.

For some reason Emirates always serves the last meal on the flight too close to the arrival time, and results in the cabin crew really hustling to secure the cabin sometimes up to a few minutes from landing. And if you are sitting in the back you will never get your first choice when it comes to meals.

However, long and medium range flights on Emirates Business is a gourmet experience that stands true to their radio advertisements. I had my best steak ever on an Emirates flight.

Business class service on long and medium range flights of American Airlines, is an enjoyable although sometimes a very slow service depending on the flight attendant serving your side of the cabin. I understand there are laws and rules to prevent discrimination based on age and/or BMI, but please let us be reasonable here, having one's meal when the other side of the cabin is halfway through their siesta is not nice. The inflight entertainment system is adequate.

On the other hand a BA flight to Dubai during a UNITE strike day is a bloody awful experience. Minimum crew on the B777 (8 out of which 6 are of minimal experience). The service in Business left a lot to be desired, lucky it was a night flight and most of the passengers were asleep.

Willy Walsh should be grateful passengers are still flying with BA. Of course, I had better experiences on BA flights but this one was memorable.

Royal Jordanian's Business class on short flights (2 to 3 hours) is a relatively good experience. The flight attendants sometimes lack the sophistication and finesse of their counterparts in other One World carriers. The food is good and the crew are friendly and actually smile at you most of the time and I like it, but then I am biased (ex RJ).

As for Regional travel in the USA whether with American or Continental, the best you can do is nap. The seamless service and experience that we were promised in the 70s and 80s did not happen and it will never happen you can not compare a B777 to an EMB145. Service is not the issue. It is the feel and look of the aircraft that throws you off, the Majors need to look again at their regional feeders.

However, the one thing that EMIRATES surpasses all the others is the ability to deliver your bags in a reasonable time no matter where the aircraft is parked at Dubai airport. On Business class I found my bag on the belt and I use e-gate. Kudos Emirates

ETIHAD's Version of Low Cost !!

Etihad is ready to lunch its first "All Economy" flights on a 162 passengers all economy A320, starting with 2 and going up to 10 aircraft (click here to read full story).

This model was tried earlier this decade, when Gulf Air converted several B767 into all economy aircraft and based them in Abu Dhabi. The idea then was to placate Abu Dhabi and stop them from pulling out of Gulf Air.

This time is Etihad trying to ward off the Low Cost Carriers from encroaching on its turf. For the last 18 months rumors had it that a Low Cost Carrier is about to be launched in Abu Dhabi. The new entity was going to be managed by a UK carrier probably Flybe using EMBRAER 175/195.

Is this positioning for an independent low cost carrier spin off similar to Emirates Flydubai or just another product to be competitive on certain routes. So far, Etihad has maintained it is just a product to cater for routes that have very little premium passengers.

In any case this is a new product that will definitely add competition to an already competetive and already crowded UAE market