High fuel prices begin to take toll on Gulf carriers

At the International Air Transport Association annual meeting in Istanbul in June, Emirates announced that its growth plans would stand regardless of soaring oil prices.

But while the carrier has not cancelled any of its orders for planes, it has made cutbacks on some of its existing routes.

This week Emirates told AME Info that it is cancelling its service to Alexandria, Egypt because of high fuel costs.

This follows the airline's recent announcement that it is deferring its plan to have direct flights to Durban, South Africa from Dubai in December, also due to high oil prices.

Commenting on the closure of the Alexandria route, an Emirates spokesperson said: 'We closely monitor the performance of all our routes to ensure that our resources are deployed in a way that best meets our overall business goals. With the current high fuel prices we are watching the situation even more closely.

'For this reason, we intend to terminate our services to Alexandria with effect from 10th September 2008.'

The spokesperson went on to say, 'Overall, Emirates' route network continues to grow as we bring on new destinations and add more flights onto existing routes. In terms of new destinations, there are no changes planned except for the deferment of Durban services.'

Booming economy buffers Gulf carriers

The cuts at Emirates are the first sign that Middle East airlines are beginning to take a hit from high oil prices.

Until now, no carrier had announced cut-backs on flights or destinations. In fact, many carriers in the region have added one or more routes during the first half of this year.

Gulf carriers have been somewhat immune to high fuel prices largely due to the fact that Gulf region is buoyant economically, said John Strickland, director of aviation specialist JLS Consulting in London.

People in the region are the ones who are benefiting from the fuel price surge, so they have extra money in their pockets to spend on travel.

By contrast the economic slump in the US and Europe is having a negative impact on the carriers that are based in those markets, he explained.

Gulf airlines are also benefiting from the fact that they are increasingly serving as hubs for travellers across Asia and Europe.

Another key factor in Gulf carriers favour is that they tend to have young, modern fleets which are more fuel efficient than older aircraft, he noted.

Asked if subsidized oil could be one factor that has helped insulate government-owned airlines such as Emirates from high prices, Strickland points out that the carrier has repeatedly denied that it receives assistance from the government.

Regardless of whether or not it receives subsidies, Emirates is an efficiently-run airline that benefits greatly from its location. All airlines have been forced to improve efficiency and more tightly manage their budgets, and Emirates is no exception.

Gulf low-cost carriers under pressure

In the Gulf, low-cost carriers have had success in providing services to a price-sensitive customer base made up largely of workers who are travelling home to high population areas. However, the smaller low-cost carriers are under increasing pressure because they don't have the cash reserves to keep their prices low as fuel prices continue to rise, Strickland says.

One low-cost carrier in the region that has begun to feel the pinch of high fuel prices is Sama Airlines. The carrier has had to introduce a fuel surcharge on international and domestic flights to offset some of the cost of the increase in fuel.

It has also deferred some aircraft additions to its fleet until the direction in oil prices becomes clear, according to the airline's CEO Andrew Cowen.

To help offset high oil costs, the airline has implemented a programme to reduce fuel burn by optimising flight paths and reducing unnecessary weight on the aircraft. So far the airline has not been forced to cut any destinations, but it is taking a close look at its routes.

'There is no question that the higher oil price has led to Sama revisiting its fleet and network plan and it will certainly make us more cautious about trying some of the perhaps more speculative new destinations. This unfortunately means fewer options for the consumer, and is another aspect of how damaging these high oil prices have become,' Cowen said.

One of the key challenges for airlines in the region is balancing the need to raise fares to offset high oil prices while ensuring that customers can still afford them.

'The key issue here for all airlines is how quickly and how willing passengers are prepared to pay higher fares due to higher fuel prices. This needs to be considered against a period of very high inflation in the region, where in many cases salaries have not kept up, reducing disposable income.'

'Having said this, a major positive aspect for low fares airlines such as Sama is that because our fares are as much as 75% lower than traditional carriers operating in the region, a fuel surcharge still leaves our fares at very attractive levels. Therefore customers looking to reduce their travel costs tend to find low fares airlines an increasingly attractive proposition in times such as these,' he said.

Asked if the region will start to see bankruptcies in the airline industry if oil prices continue, Cowen said they are unlikely as most carriers in the region are state-owned. Governments will use their booming oil revenues to easily cross-subsidise their airlines' increased losses.

Cowen also thinks it unlikely that the region will see any new private airlines in the near future. 'One impact I do think high oil prices will have is to deter the emergence of new private sector airlines. Why would you start an airline today where your business plan could be invalidated with one movement in the oil price?

'This I think is a key issue for policy makers and consumers alike - many of whom are looking for increased competition, lower fares and more choice in airlines in the region,' he noted.

See also:

Mega airports to take centre stage
Travel industry has yet to feel the impact of high oil prices