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.

Politics and The Airlines

In the news today "Emirates, Etihad get France Clearance" Gulf News today 29 January 2011 (click here for full story) reported that a tentative agreement was reached to grant additional 22 weekly flights to Emirates and Etihad (4 to Paris and 7 to other French  cities). These were granted despite Air France-KLM lobbying the government to refuse granting the authorities on the basis that lower taxes and airport fees in their home bases give the carriers an unfair advantage.

Air France-KLM position has been made public for weeks, right at the time Canada refused to grant additional flights to the UAE carriers. However, a few weeks after both the government and Air Canada opposed Air Services to Qatar, Canada granted authority to Qatar Airways (a CS order with Bombardier was probably at stake). It appears that the French Government are smarter than the Canadian, they did not listen to the parochial demands of their airline, at stake are mega orders with Airbus and a Rafale deal that was faltering. The Government decided that what is at stake transcends the potential losses of an airline on a couple of routes.

Legacy Airlines have conveniently forgotten that aviation and airlines are very much affected by politics and economic conditions and realities that far transcends the immediate needs of individual airlines.

Canada's Air Transport Competitiveness

On 20 January 2011 in an address in Montreal Mr.Giovanni Bisignani the Director General of IATA called on the Government of Canada "to improve its global competitiveness in air transport, travel and tourism" Government policies has eroded Canada's competitive edge to the extent that Canada became the 15th most visited country in 2009 from the 8th in 2002 and the World Economic Forum Travel and Tourism Competitiveness in 2009 has ranked Canada (106) behind Japan (86), UAE (50), India (46) and China (20).
As a result the government protects Air Canada at the expense of the tourism industry by preventing airlines from   freely operating into Canada or allowing Canadian operators the freedom to compete with Air Canada.
Claims of loss of jobs if Emirates and Etihad operated additional flights into Canada are not supported by the realities on the ground. On the contrary, these additional services would have increased the number of visitors to Canada and probably generated additional jobs.
The short sightedness of these policies has resulted into more barriers and a rift with the UAE which is affecting Canadian Businesses and Citizens.  

For the full Press Release click here

Qatar Airways Extends Its Global Reach

Qatar Airways is expanding its presence in Brazil in a big way (click here for full story). Six months after starting its Sao Paolo service the airline signed a code share agreement with GOL Linhas aereas inteligentes Brazil's fastest growing low cost low fare airlines. The agreement covers Sao Paolo and 47 destinations in Brazil. The code share agreement allows Qatar Airways to use its QR code on all segments of a flight no matter where it originates on the Qatar Airways network and terminates on the GOL network. Both airlines have submitted a joint application for approvals and anti trust immunity to the Brazilian Civil Aviation Authority and the Antitrust Agency. They are also working on coordinating their Frequent Flyer Programs.

This agreement has the potential to extend the arrangement beyond Brazil to include GOLs international destinations in nine (9) countries, in the future.

Qatar Airways is aggressively pursuing a rapid expansion of its network in Brazil, South America's largest country and one of the world's rising economic powers. This arrangement will probably be replicated in other important markets to give the airline a larger global reach.

Expectations.... Airlines in 2011

As 2011 approaches one wonders how will the industry cope after a great 2010 (15.1 Billion USD net profit). One thing for sure, we need to manage expectations.

- 2011 will probably not be as profitable as this year
- Air fares are going to rise again around 10% to 15% due to tighter capacity control and rising fuel prices
  (estimated at $100 a barrel).
- Ancillary fees are here to stay and are expected to spread beyond the USA and Europe.
- Traffic and revenues will be adversely affected due to a soft US economic recovery and a looming Euro
   Zone debt crisis.
- MENA/GCC will lead the industry in growth
- LCC segment in MENA/GCC will continue to grow and probably reach a 10% to 12% market share

I wish you all a Happy and Prosperous 2011