Two decades after aviation really started to take off in the Middle East and things are changing fast. Rising oil prices, financial hurdles and political disputes have started to take their toll on the Middle East’s biggest airlines. Can Etihad, Emirates and Qatar stay the distance, or have they had their moment?
The financial struggles at Etihad have been no big secret. From laying off pilots to cancelling aircraft orders and even seeking massive loans to pay for those they do actually want, it’s been a rollercoaster of cutting costs for the Abu Dhabi based airline. But they’re not the only one.
As 2018 drew to a close, Dubai was forced to admit that the growth in passenger numbers at DXB had definitely slowed. This was a first for Emirates, having experienced year on year growth for over a decade previously. Perhaps this was part of the reason the expansion at DWC has been put on ice for the foreseeable future.
Emirates profits were down for the first half of this financial year, partly due to economic problems in Dubai. To call it a slump would perhaps be overstating it, but things have slowed in general. Undoubtedly this was in the mind of Tim Clark when Emirates sought to shake up their fleet, including their move away from the inefficiencies and high purchase costs of the A380, effectively sealing the fate of this giant of the skies.
And in Qatar, aviation’s growth is still being stunted by the Saudi-led blockade. It started in 2017, and has been imposed by Saudi, UAE, Bahrain and Egypt ever since. There’s no signs of it being released any time soon either, which is an ongoing headache for Akbar Al Baker for sure.
Add to all this the proliferation of low cost carriers servicing the Middle East, and you could have a recipe for disaster. So, what does the future look like for the Middle East three (ME3)?
Changing times in the Middle East
If we roll back the clock to 20 years ago, the Middle East picture couldn’t have been more different. Back then, in 1999, Etihad didn’t even exist. Qatar operated no more than a handful of aircraft, and Emirates was about to place it’s first ever order for an A380.
Over the next decade, the Middle East became one of aviation’s fastest growing regions, until it hit the inevitable bumps in the road. Political, social and economic upheaval in more recent times have begun to prick at the commercial aviation bubble.
From the violent repercussions of the so-called Arab Spring to the Dubai property crisis of 2009 and the more recent spat between Qatar and its neighbours, the landscape has changed and it’s forcing the ME3 to change too.
Fuelling Middle East aviation
The ME3’s meteoric rise to global success was fuelled, in part, by fuel itself. The worldwide demand for the region’s biggest export made the locals more affluent. This boosted demand for long haul travel, and for a luxury product that the Gulf three were only too happy to provide.
However, riding the wave of ideal oil prices was always like walking a tightrope carrying an A380.
At Emirates, the world’s largest long haul airline, profitability is incredibly sensitive to fluctuations in the price of oil. Too high, and the increased bill for jet fuel starts to eat into margins. Too low, and the demand for their services starts to dry up.
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We saw the impact crude oil can have in the Gulf just last year, where net income at Emirates dropped by more than half in the first six months of the fiscal year. As well as the surge in the price of crude, the airline struggled with negative currency swings in many of its key markets, including India, Iran and Brazil. A statement from the airline said:
“Emirates … grew steadily in the first half of 2018-19. Demand for our high quality products and services remained healthy, as we won new and return customers across our businesses and this is reflected in our revenue performance. However, the high fuel cost as well as currency devaluations in markets like India, Brazil, Angola and Iran, wiped approximately AED 4.6 billion from our profits.”
This impact is a marker of just how fragile airline profits really can be. The statement also warned of ‘tough times ahead’, a big change of tune since the airline’s heyday when it thought nothing of going to the Paris Airshow and ordering $19bn of aircraft.
Efficiency over growth
Over the years, we’ve seen a sea-change in the focus of the Middle East’s biggest airlines. Once firmly concentrated on unbridled growth, exemplary quality and scooping up as many awards as they could, we’re now seeing a shift in focus towards efficiency instead.
Emirates decision to purchase a large number of A330s signals a move towards point to point services rather than the hub and spoke model. Not only will this approach open new markets for them, it will also allow them to keep one hand on the purse strings, optimising their schedules for the most profitable routes more easily.
Qatar are increasingly looking to more efficient aircraft, recently stating they plan to retire their fleet of A380s in favour of the highly efficient 777X. This is despite the fact they’re unlikely to be able to sell any of the $400m+ aircraft. For Qatar, it’s a case of cutting their losses.
Despite recent challenges and changes to the landscape, the ME3 are clearly stepping up to the plate. All three have recognised the need for a change in strategy and are making great shakes in re-evaluating their future direction.
Both Boeing and Airbus are positive about the future of aviation in the Middle East, with the US plane maker estimating the region will need around 3,000 new aircraft over the next 20 years. No matter what the price of oil or the local economies do, nobody can take away the region’s unique position at the heart of 80% of the global population.
To address the original question, have the three Gulf carriers had their glory days? Yes. Are they going anywhere? Probably not. Things in the Middle East are certainly changing, but we think the ME3 are up to the challenge!