Middle East carriers drop fares to lure passengers (page 2 of 2)

Other carriers in the region that have announced fare discounts include Egypt Air and Saudi Airlines.

Carriers have had to quickly adapt to a whole new set of challenges, said Kareem Murad, Transportation Lead Analyst at Shuaa Capital. 'A couple of months ago we were looking at the impact of fuel prices on the profitability of airlines. Today, with the global financial crisis, what we must focus on more closely is the demand side of the business,' he said.

Murad believes that we will see a shift in traffic from conventional airlines to low-cost carriers because of the high price elasticity of demand for the aviation industry. 'Historically, during a crisis, we see the load factor for conventional traffic dip and traffic for low-cost carriers rise,' he noted.

Meanwhile, in the longer term, there is likely to be more consolidation in the Middle East, particularly acquisitions of companies that are going through tough times. 'But for the next few months, everyone will be just sticking it out and keeping their cash just in case', he said.

Pressure on balance sheets

McKnight conversely believes that the airlines that will perform better during the crisis are not necessarily the low-cost airlines, but rather the ones that are in a stronger financial position.

'The financial crisis is going to put a lot of pressure on the balance sheets of some of these companies,' he said.

With a greater focus on their balance sheets, airlines are also likely to think twice about adding to their fleets. 'Any responsible airline management team is clearly going to have to take a look at their order books and make some pretty hard decisions about whether to take the airplanes on the schedule they have in place or whether they need to defer some of those orders,' he said.

Usually carriers can work with manufacturers to defer orders, but if carriers on a global basis are all trying to do the same thing, that is going to make it a much more difficult process. One carrier in the region that has benefited from the delay in orders is Gulf Air.

The airline ordered planes last year but was told that delivery of the aircraft would be delayed because other carriers had orders from several years before that were still being fulfilled. However, because of some deliveries being deferred by other carriers, Gulf Air has been able to advance delivery of some of their airplanes up to this year from 2011 and 2012, McKnight said.

Asked if we are likely to see a spike in mergers, McKnight said the greatest obstacle to mergers in the Gulf is that each of the large carriers is an instrument of their local government.

'In my mind it's hard to see these national airlines merging, but what you might see is some of the larger airlines in the Gulf looking beyond this region and forming alliances, partnerships, or code equity positions on a more global basis to strengthen their worldwide networks,' he said.