Middle East slowdown has profound implications on aviation

Adam Pilarski

Middle East slowdown has profound implications on aviation

Adam Pilarski

Middle East slowdown has profound implications on aviation

The big three Middle Eastern carriers grew at an unprecedented rate, despite having no real domestic basis to justify it, says Adam Pilarski, Senior Vice-President at AVITAS.

Download the PDF Version – Middle East slowdown has profound implications on aviation

Recent developments in the Middle East dampened the overall positive outlook for aviation experienced by the region, especially in the big three Gulf carriers (Emirates, Etihad and Qatar Airways), which had spectacular growth in the past few years.

These three airlines are located in a region with very difficult operating conditions and a forbidding climate, with a total citizen population that, when added together, would not make the list of the top 75 cities in China. Despite such an environment, the Gulf carriers grew at rates almost unheard of in the world. They also became a leading force in aviation, having a very active role in determining the shape of the industry.

The Airbus A380 would probably not exist without them, and the Boeing 777X might not have been launched. The region has been a crucial part of aircraft orders, especially in the widebody category.

Recent developments show lower traffic growth, lower productivity and aircraft order delays. Some see this as a result of the political conflict between Qatar and some of its regional adversaries. It is my contention that these unfortunate events are immaterial in the long run. What really matters are the oil prices. If they stay at similar levels as experienced now, as is my firm belief, future high rates of growth of Gulf carriers will not happen.

Unlike China or India which are blessed with huge populations, these carriers succeeded in exploiting peculiar circumstances and creating a wonderful product and highly successful airlines and airports. With miniscule home markets, they managed to secure a position where they have about 10% of the world’s in-service widebody fleet and more than 20% of widebody backlog. Interestingly, these shares were both about 1% 20 years ago, having shown a continuing upward trend almost every year. This trend stopped showing growth in 2014 when oil prices dropped.

To give the Gulf carriers appropriate credit, they transformed elements of airline traffic by introducing new ways of connecting passengers, not just via hubs but also by expanding traffic from secondary cities. Their service surpassed most competitors and introduced levels not achieved before. Their expat crews made flying fun again.

When I was asked years ago to assess these phenomenal developments my contention was that they were entirely because of the high price of oil. This does not detract from the fantastic job these airlines did but without high prices all this would not have happened. Let me start with dismissing the false reasons given for the growth of traffic in the region. It was not because of their central location. Yes, the Gulf is probably eight hours away from 80% of the world’s population (or whatever advocates claimed) but we can come up with virtually dozens of other cities with similar locations such as Kampala, Uganda.

Also, the argument pursued now that the success of Gulf carriers is entirely because of unlimited government subsidies does not make sense. How many decades was Alitalia subsidised? And how about Air India? Or the major Chinese carriers of today? Government subsidies did not make them power houses like the Gulf carriers are today.

Going back to my hypothesis, high oil prices represent three reasons for the Gulf carriers’ successes. One is simple economics. Even if Dubai does not have oil, many countries in the region have vast oil-induced wealth that attracts business people to visit, plus it generates incomes for locals who travel extensively.

Two, jet fuel is very heavy and when prices are high it is very uneconomical to carry it for long distances on board, hence hubs make good sense. Falling oil prices make this argument less pronounced, reducing the relative attractiveness of flying passengers via hubs.

Finally, the stiff opposition to the Gulf carriers’ expansion, especially in Europe and the US, reduces their market penetration. The US oligopolistic airlines did not suddenly raise concerns. Lufthansa in Europe was raising similar concerns pushing for de facto protectionism. The arguments were that Singapore, another very small country, managed to surprise the industry years ago and establish itself as a major force in aviation, and the Gulf carriers will establish a significant beachhead from which nobody will be able to displace them in the future.

While oil prices were high and expected to go even higher, many governments were reluctant to antagonise Middle East countries and allowed their expansion at the expense of local airlines supposedly in the interest of their economies. This rationale disappeared with lower oil prices, and the US and some European governments decided to take a much stronger protectionist stance.

So, if oil prices stay where they are, the Gulf carriers will have a greatly reduced impact on world aviation. The destiny of the A380 or the 777X may be seriously affected.  One of the major sources of growth in the worldwide widebody market will pause, thus affecting the whole market tremendously.

Download the PDF Version – Middle East slowdown has profound implications on aviation

 

Leave a Reply