Growing in the desert
Posted Date: 15/05/2009
Issue: Airline Ground Services June 2009
Publication: Airline Ground Services
Anyone perusing IATA’s figures at the beginning of 2009 will note that Middle East passenger figures came off relatively well compared with the dismal reports from other regions. Even the bad news for cargo was concentrated on other regions, largely Asia Pacific. African carriers are expected to produce 2009 losses of $600 million as they are losing market share on long haul routes but the picture in this region is still not as bad as elsewhere.
The beginning of 2009 was rung in to the sound of despair from Giovanni Bisignani, IATA’s Director General and Chief Executive Officer. “It will be a grim 2009. And while prospects may improve towards the end of the year, expecting a significant recovery in 2010 would require more optimism than realism,” said Bisignani. In fact the Middle East will be the only region with demand growth in 2009 (+1.2%). But this will be overshadowed by the impact of a 3.8% increase in capacity. While this is significantly below the double-digit growth of previous years, the region continues to add capacity ahead of demand. The result is expected to be a loss of $900 million (a slight deterioration from the $800 million loss recorded in 2008).
It is fair to say that the Middle East’s airlines are exhibiting bountiful strength and bravado in a world that is operating without credit or confidence. But Emirates’ expansion plans are far from reckless in this difficult and opaque environment for airline operations. A 14% growth in the number of flights across its network in 2009 is exactly what the airline sector needs to hear to encourage some of the less buoyant participants out of the doldrums.
In fact, this year, the Dubai based carrier will add 18 new passenger aircraft to its fleet, increasing seating capacity by 14% and enabling it to start new routes as well as increase frequencies on many existing routes. It will also expand cargo capacity by 17%. Emirates currently has a fleet of 129 wide-bodied aircraft. By the end of the 2008/09 financial year, that figure will stand at 132, including four A380s. The carrier will welcome a further seven A380s in fiscal year 2009/10, as well as 10 777-300ERs, one 777-200LR and one 777 freighter.
HH Sheikh Ahmed bin Saeed Al-Maktoum, Chairman and Chief Executive, Emirates Airline and Group, offers a note of realism to the announcement: “The next year is not going to be an easy ride for the airline industry. Emirates has prepared the best we can for the challenges we foresee, but we also see it as a time of opportunity. 2009, with our significant capacity increase, will be a year of consolidation for us, with fewer new routes launched than in previous years.”
He continues: “Instead, we will concentrate on strengthening our presence on routes where there is a greater demand from our customers. All of our new capacity will be deployed in markets where we see growth potential, particularly Africa and the Middle East.” Growth for Emirates in Africa and the Middle East was recorded at 17% and 6% respectively in the last 12 months.
Ram Menen, Emirates Divisional Senior Vice President Cargo, is hoping for a return to stability in the coming months with the cargo operation’s presence being bolstered in markets where there is most demand, such as China and Africa. Further, Emirates SkyCargo has become the first e-freight-compliant carrier in the Middle East; and it is has also become the leading airline worldwide in terms of the number of e-freight consignments carried each week. Niranjan Navaratnarajah, Emirates Manager Cargo Systems & Revenue Planning and co-Chairperson of the Dubai implementation team, comments: “Part of the reason for the quick uptake in Dubai is the complete buy-in from the authorities involved in implementing the initiative.”
Of course Emirates’ uptake of the A380 is all part of this confident airline’s strategy. It has recently announced that it will introduce the A380 on its Bangkok and Toronto routes. Effective 1 June 2009, the aircraft will debut in Canada while the new Thai route extends the aircraft's presence in Asia after the successful launch of the A380 on Sydney and Auckland in February. From June 2009, Emirates will operate five A380s on the following routes: Dubai-London Heathrow, Dubai-Sydney/Auckland, Dubai Toronto and Bangkok. The airline will accept another four A380 aircraft into its fleet in the financial year of 2009/2010 and has announced it will introduce services to Seoul in December.
Just recently Emirates has taken the next step in online innovation by launching Mobile Emirates.com, a new facility for customers accessing the Emirates website from their mobile devices. Travellers who access Emirates.com from a mobile browser (on their phone or PDA), will be automatically redirected to the mobile version of the airline’s website. The facility is compatible with over 3,000 devices and allows customers to interact with Emirates from almost anywhere in the world.
Confidence is also flowing at Etihad Airways which is targeting 7 million passengers in 2009; an increase of 15%. The airline will expand its global flight network to 55 destinations during the year as well as grow its fleet to more than 50 aircraft. Eleven new passenger aircraft are set to join Etihad’s fleet in 2009 which will enable the airline to launch new services to Melbourne, Istanbul, Athens, Larnaca and Chicago, as well as increase frequencies on many existing routes across its network of international destinations. The additional aircraft will increase Etihad’s seat capacity by 18% and cargo capacity by 12% to 3.5 million tonnes.
James Hogan, Etihad Airways’ Chief Executive Officer, admitted that the aviation industry is facing its toughest challenge for many years but “Etihad Airways will seek to continue its expansion plans during 2009 in a measured, considered and controlled manner”. This means watching costs very closely. Further, the opening of the new Terminal 3 at Abu Dhabi airport will allow the airline to expand and meet its future growth projections. Hogan comments: “The transfer of Etihad flights to Terminal 3 is supported by our significant investment in passenger facilities, such as state-of-the-art premium lounges and improved check-in areas for premium and economy passengers.”
A third Middle Eastern airline which appears to be shrugging off recession is Qatar Airways. Qatar Airways’ Chief Executive Officer, Akbar Al Baker, has announced six new routes with scheduled flights to Australia planned and further expansion of the airline’s operations in India on the cards. Flights to the Australian cities of Sydney and Melbourne, together with new services to Goa and Amritsar in India, and two new European services, are being earmarked over the next nine months. Subject to regulatory approval, the long-awaited Australian services will become reality as more 777-200 Long Range aircraft join the fleet.
The expansion is part of the airline’s ongoing growth strategy which comprises a long-term commitment to develop its route infrastructure as new aircraft join the fleet at an average delivery rate of one a month. The Doha-based airline currently has on order more than 200 new Airbus and Boeing aircraft worth over $40 billion. “Qatar Airways’ robust expansion is continuing undeterred by the current economic climate,” says Qatar Airways’ Chief Executive Offcier. “As a network hub airline, Qatar Airways does not rely on traffic from any specific markets, so we are largely immune from the circumstances surrounding the current global economic meltdown."
Gulf Air is not to be forgotten in the confidence stakes. It has received the first three of the four 777- 300ER aircraft planned to join the fleet as part of the airline's re-fleeting and product-enhancement strategy. The fourth will join the airline in May. The aircraft, leased from Jet Airways, will be used on a number of routes including London, Kuala Lumpur, Bangkok and intra Gulf routes, gradually replacing the A340s.
Oman Air, the national carrier of the Sultanate of Oman, will also fly to four more destinations in Europe and Asia in 2009. Peter Hill, Oman Air’s Chief Executive Officer, comments: “August marks the commencement of our wide body fleet acquisition plan when we take delivery of the first of seven brand new A330 aircraft. We will operate non-stop flights from our base in Muscat to Frankfurt and Paris in the west and eastbound to Colombo and Male.” This year Oman Air will take delivery of two A330-200s.
The airline is also planning new passenger check-in options to accompany its new aircraft. It is providing four new ways to check-in including using a mobile phone, internet, airport kiosks, and in the airport where customer service agents equipped with mobile check-in technology await passengers. In conjunction with the launch of its Sabre web check-in solution, Oman Air will also introduce passenger seat selection and boarding pass printing through its website.
In keeping with the mood of the region, notes of optimism can also be heard from other airlines based in the region. Egyptair is expanding to daily operations from Milan Malpensa airport to Cairo; Mahan Air is increasing the frequency of its flights to Dubai from Tehran; MEA has announced the arrival of its second new A330; Syrian Arab Airline has increased its scheduled flights to the Arabian Gulf; and Royal Jordanian will start operating a direct, regular, twice-weekly service between Amman and the Libyan city of Benghazi.
Further, Saudi Arabian Airlines has started updating its fleet. The first modernised 777 has already been unveiled, while the remaining 21 aircraft of the same model are scheduled to be renewed before long.
PIA has achieved a record seat utilisation of 78.1% on its scheduled services (excluding Hajj); this is the highest ever achieved in the last 19 years.
While there is a resounding defiance in the Middle East with regard to the downturn, African airlines are struggling with diverse political and entrenched regional issues that are tripping up a number of the airlines based in the region. African carriers are expected to produce 2009 losses of $600 million. This is six times the $100 million lost in 2008. The continent’s carriers are losing market share on long-haul routes and demand is expected to drop by 7.8% with only a 6.0% fall in capacity.
Some airlines have experienced more challenges than others. A case in point is South African Airways (SAA) which has announced the termination of Chief Executive Officer Khaya Ngqula’s employment amidst a time of strike and unrest at the airline. Meanwhile, Erik Venter, Joint Chief Executive Offcier of kulula’s parent company Comair, has lambasted the public funding. Airports Company South Africa (ACSA) announced a 18.5 percent tariff increase on air fares to pay for its multibillion-rand capital expenditure programme, currently running at R17-billion until 2012. This, again, has angered Venter.
Meanwhile, Comair has reduced its Mauritius schedule but maintained the company’s unbroken record of 63 years of operating profits. Venter said: “The trading environment continues to be the toughest in the history of the industry and we anticipate this to continue throughout the year ahead. We still anticipate growth from our new business ventures like our outsourcing business where we provide a range of services to other airlines that include flight training and passenger handling.”
Sticking with South Africa, Airlink SA has been increasing its regional flights over the last six months as well as improving its passenger check in arrangements. Less optimistic is Interair South Africa which, because of the turbulent oil prices in 2008, has put expansion plans on hold. If oil prices remain stable during 2009, the airline is planning to implement additional services to Pointe Noire, Libreville, Bangui, Douala and Lagos.
Air Mauritius too is showing the strain of recession. The Air Mauritius recovery and restructuring operation has been set in motion, the management of Air Mauritius has floated a tender for the review of the company’s operations and steps have been taken to sell some of the company’s assets. Sale of these assets will enable the raising of funds to deal with the losses incurred as a result of hedging, exchange rate movements and the drop in the number of passengers.
Political and social unrest in Kenya has compounded the effects of the global economic crisis and adversely impacted Kenya Airways’ financial results during the industry’s peak session. The effect of the strong Kenyan Shilling against the US Dollar earlier in 2008 also further magnified the decline in profitability of the airline as the dollar denominated revenues were converted at depressed rates. The impact of these factors was reflected in the unaudited results of the first half of the financial year in which profits declined by Kshs 1.2 billion.
Despite the recent downward trend in jet fuel prices, Kenya Airways has hedged a part of its fuel prices higher than market levels, hence the benefits that accrue from the decline in jet fuel prices are being offset by the hedge costs, thereby impacting the airline’s profitability. The weakening of the Kenya Shilling has also increased the fuel costs, which are US dollar denominated, and passenger numbers keep falling. Therefore, the directors of Kenya Airways have announced that the projected profit for the year ended 31 March 2009 will be at least 25% lower than the earnings of the prior year. However, the directors, at this time, expect Kenya Airways to remain profitable although at a lower level compared with the previous year. Despite the gloomy numbers, Kenya Airways has received its fifth 737-800, which is leased from ILFC.
Also issuing bad news from Africa is Virgin Nigeria which has suspended flights to London Gatwick, UK, and Johannesburg, South Africa. The decision to suspend both services was to enable the airline to review its entire long haul operations including its product offerings on these routes. In the meantime, the airline’s focus is on consolidating and continuing to expand its profitable domestic and regional flight operations. Once the long haul product review has been finalised, the airline says it is certain to return to these routes.
Amazingly, Ethiopian Airlines registered higher revenues and profits compared with its performance during the same period of the previous year. Based on the preliminary reports, Ethiopian generated 6.7 billion birr in operating revenues for the period in review, representing an increase of 54.8% over the six months result of 2007/08 budget year. A net profit of 515 million birr is also recorded for this period which is 9% higher than the results of the same period (July-December) last year.
According to Ato Girma Wake, the Chief Executive Officer of Ethiopian: “The first half of 2008/09 was another successful period for the national carrier despite the numerous challenges we had to deal with, and today Ethiopian remains optimistic that its performance will be sustained going forward, considering the strategic cost reduction efforts and improved operating procedures we have put in place. The increase in revenue is mainly attributed to the growth in traffic, which was stimulated by the increase of frequencies, the introduction of new flights on the international sector, the augmentation in cargo revenues, and the strategic steps taken to streamline operational as well as marketing activities.”
If there is ever any clear conclusion that can be drawn in relation to the fortunes of the airline industry in Africa is that they are and always will be diverse as a consequence of the huge political, social and cultural mix of the continent. But the Middle East is throwing up some very strong themes that appear to defy the negativity of Europe, North America and Asia Pacific. With the Middle East region moving forward strongly, cautiously but together, there is every probability that the airline giants of the future will be based in this region.
