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French Version

Arab aviation sector holds up despite slump in world's airline industry

The global aviation industry is estimated to have suffered accumulated losses of $30 billion since 2001, following one of the deepest crisis ever to hit the sector. A series of blows starting with Sept. 11, 2001, attacks, followed by the "war on terror," the SARS outbreak, the war on Iraq - and coupled with rising fuel and insurance costs - have all left their negative impact on the aviation industry.

Several airlines worldwide have been battling for survival; others have restructured and downsized in order to remain in business.

Despite the global slump, the aviation sector in the Arab region fared better than most. According to the International Air Transport Association (IATA), the sector's growth rate in the Middle East was 1 percent in 2001 and 7 percent in 2002. Despite an overall travel decline in the region of 30 percent during the period March-April 2003 due to the war on Iraq, nevertheless for the year as a whole, the sector recorded a passenger growth rate of 10 percent and freight at 15 percent, driven by a 20 percent jump in inter-regional traffic. Most Arab airline companies were able to re-route flights and organize their fleet distribution to service higher demand generated from within the region. This upward trend is expected to continue. According to IATA, by 2007 regional passenger traffic is forecast to rise by 27 percent, with travel to and from the Gulf recording annual growth rate of 6-10 percent.

This growth picture is reflected in projections from leading aircraft manufacturers. Airbus predicts Arab carriers will require 520 additional planes by 2020, while Boeing is forecasting that the total fleet of passenger airplanes in the region will double during this period from 409 to 833. The largest plane purchase in history has recently been made not by a major international airline but by state-owned Emirates Air. The UAE airline recently placed orders worth $25 billion for 45 large Airbus planes (A380 and A340), and 26 of Boeing's extra-long 777-300 aircraft. Qatar Airways has signed a $5.1 billion deal for the purchase of 32 Airbus planes and is planning to double the size of its fleet over the next five years. Middle East Airlines has bought and leased new airplanes and has the youngest fleet in the region. Gulf Air, Tunis Air, Royal Air Maroc and Air Algerie are all buying and leasing new planes, while Royal Jordanian is exploring the best option for an upgrade.

Several important factors underpin the trend toward expansion and upgrading of aircraft. The first is the expected growth in the regional airline industry as a whole, especially in the Gulf. Restrictions imposed on Arab visitors abroad after Sept. 11, caused a reduction of Arab tourist traffic to the US and Europe, while the SARS epidemic reflected negatively on the movement of passengers to Asian destinations. Inter-regional traffic increased substantially and tourism to such destinations as Beirut, Cairo, Amman and Dubai picked up considerably. This trend is likely to continue given the strong regional economic growth expected for 2004-2005.

The opening of Iraq will likely turn surrounding Arab countries into important entry points for the inflow of goods and services into the country. Business travel and air freight services are the biggest growth sectors. On the other hand, the growing importance of Dubai as a tourist hub, the strong economic growth in Qatar and the gradual opening of the Saudi market to year-round pilgrimages are additional signs of regional passenger growth.

Two novel developments in regional air aviation took place last year: the introduction of a premium airline and a low-cost one. These will undoubtedly increase competition and raise questions about their sustainability and future profitability. Etihad Airways, owned by the government of Abu Dhabi, has been designated the national flag carrier of UAE, competing directly with Gulf Air and Emirates airlines. It redefined the class system altogether, with its least luxurious class described as "superior economy." At the other end of the scale, a low-cost airline, Air Arabia, based in Sharjah, UAE, began operation in November. Its strategy is to cater to millions of expatriate workers from the Indian sub-continent. To cut costs, Air Arabia is focusing on internet booking and is charging money for in-flight snacks.

Gulf Air, which is in the process of turning itself around following the heavy losses suffered in 2002, has also tapped into the demand for cheap flights. The difference is that it has responded with a different model. In June 2003, its all-economy Gulf Traveler was launched. From its Abu Dhabi base, the airline flies to seventeen destinations, mainly in the Gulf and the Indian subcontinent.

In Europe, EasyJet and Ryanair have been showing impressive profits. Meanwhile, economy carriers in North America such as JetBlue and the low-cost pioneer Southwest Airlines, have proven profitable. It is not yet clear if the low-cost airlines are likely to do as well in the Middle East as they have in Europe or the US. Such a business model requires the existence of a large middle class that takes yearly vacations and shops for the lowest possible airfare independent of comfort and frequency of flights, a structure that does not exist in the region. For the time being, business passengers generate more than 50 percent of revenue. This market segment is best served by small aircraft that fly from one destination to another without connections or stop overs, and provide luxury service to its passengers.

With the notable exception of Emirates, which saw net profits jump by 50 percent last year, profitability remains elusive for the vast majority of regional carriers. Lebanon's Middle East Airlines (MEA) managed to turn its first profit in 25 years in 2002. Royal Jordanian showed operational profits for 2002, but remained in the red because of provisions. For others, the break-even point is still some way off. Even Qatar Airways, which has seen passenger numbers rise 35 percent over the past five years, does not expect profits until 2006.

The outlook remains promising for Arab airline companies, supported by strong regional economic growth and an expanding inter-regional tourist market. The major challenge is how to attain higher profitability levels and improve competitiveness. Arab carriers should opt in their expansion plans for one type of aircraft, either Airbus or Boeing planes, in order to reduce maintenance, increase flexibility and create economies of scale. They should also form alliances with other airlines. Cutting costs includes debt restructuring, closing unprofitable destinations, addressing the usually bloated payroll of Arab companies and developing internet-based ticketing. To date, most Arab airlines are owned by governments. This makes them subject to political decisions rather than economic criteria. Becoming profitable will also open the way for privatization.

Henry T. Azzam is chief executive officer of Jordinvest in Amman. He contributed this comment to The Daily Star

Beirut,29March2004
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