Thursday, February 24, 2011

Airline Challenges in MENA and GCC

Air Arabia announced its 2010 results which showed a 31.5% decline in net profit compared to 2009 (309.559 million vs 452 million AED) similarly Royal Jordanian announced its 2010 results which showed a 66% decline in net profit compared to 2009 (9.8 million vs 28.6 million JOD). Both carriers had higher revenues, load factors and passenger numbers carried. While passenger numbers and revenues have increased yields are coming under pressure.

The field is getting crowded in the GCC and MENA and not only because of regional airlines but also due to the increase in number of airlines operating into the region.

When everybody advocates  "cost savings" as the immediate reaction to lower financial results, the region in addition to lowering costs has always embarked on expanding their networks. Cost savings are subject to the law of diminishing returns and has a finite contribution whereas expansion, the sky is the limit, through the efficient use of assets and resources. This is why almost every airline in the region is expanding its network in 2011. Of course expansion has its difficulties where European and North American legacy airlines fight it every step of the way.

One thing to remember these profits were made on core business, imagine if ancillary fees are added. North American and European airlines showed increased profits in 2010 as a result of Ancillary Fees revenues.

2011 has started with several challenges, upheaval and regime changes in MENA and GCC and the resultant rise of oil prices which were already on an upward spiral did not deter the increase of January 2011 passenger traffic in several countries. These are resilient economies that have gone through major conflicts in the last few decades. Oil prices while affecting airlines is a good thing for the gulf countries where affluence is dependent on oil revenues.

While 2011 looks more challenging than previously thought, these challenges are potentially great opportunities.


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