Airline capacity growing faster than passenger demand

However, according to A.T Kearney, a global strategic management consulting firm, these plans should be reviewed in light of the economic climate.

Emirates, Qatar Airways, and Etihad are expected to more than triple their current fleets by 2015 and most of the other airlines in the region also have substantial orders. Bill McKnight, head of Aviation/Aerospace Practice, A.T. Kearney, Middle East, said that current aircraft order backlogs for GCC airlines will add considerable capacity to the market during the next seven years and will more than triple the then available seat kilometers (ASK) from an estimated 207 billion ASKs per year in 2007 to 647 billion ASKs per year in 2015.

"This capacity growth will significantly outpace the expected passenger increase, clearly generating more capacity than can be profitably operated. In addition, the pilot shortage challenge that GCC airlines face will continue under these growth plans, likely driving additional costs due to related recruiting, training, and retention activities," McKnight said. "The increase in capacity combined with the current crisis means that regional airlines must rethink and adjust the fundamentals of their business."

Overall 2008 passenger growth already decreased to 7% from 18.1% in 2007, with December 2008 showing a low 3.9% growth. While lower fuel prices have reduced costs significantly it is expected to be insufficient to cover the lower demand. Airlines in the GCC need to react swiftly to avoid following the same path of their European and American competitors.

The International Air Transport Association (IATA) recently announced that Middle East airlines will double their losses in 2009. Profitability has become an even more difficult challenge, in what has always been a very tough business.

All available levers must be utilized, including:
• Managing capacity growth more aggressively by deferring deliveries, retiring older aircraft earlier than planned, or deploying the extra capacity in other parts of the world.
• Fixing the bottom line by lowering unit costs by aggressively attacking cost elements that do not damage the 'products and services' sold.
• Striving for operational excellence by reducing business complexity and making business processes efficient and consistent with the product.
• Attracting target customers is now more than ever important ie. by optimizing loyalty programs, customer segmentation, and channel management
• Generating ancillary revenues through creative use of all available assets breaking the traditional way of thinking is clearly an area of opportunity that many airlines have yet to master.

"Lower unit revenues and continued cost pressures will squeeze margins, requiring airlines to focus more on their cost structure. But, we believe, that many airlines still have the opportunity to explore all their abilities to secure stable revenue and maybe even generate future revenue growth," according to McKnight. "Truly creative airlines are now generating significant revenues through non-traditional channels, innovative approaches to pricing and through monetizing more of their assets, particularly various communication channels available to their customer base."

"With billions of dollars at stake, the GCC airlines can not afford inaction," Robert Ziegler, vice president of A.T. Kearney, based in Dubai, said. "Airlines operate on very narrow margins even in the best of times, so the industry is at great risk if it continues down this path."

Many airlines in the United States and Europe have faced crises in recent years. Their actions and results have varied significantly. In the United States many of the major airlines have gone through one or more bankruptcy proceedings to eliminate onerous labor contracts and other burdensome contracts with vendors. And, like in Europe, there have been mergers designed to reduce capacity, which, according to McKnight, lies at the heart of the industry's problem in most regions.

The question remains, how will the carriers in this region deal with the looming overcapacity situation that appears to be nearing? While each airline may initially focus on their own range of levers, the airlines may eventually need to consider different levels of alliances and integration with other players, to optimize their businesses.

Until now, most GCC airlines have been able to avoid any turbulence. Going forward however, A.T. Kearney suggests that airlines must consider with an open mind how to best mitigate both regional and global challenges facing the aviation industry in the current economic climate. Winners and losers will be defined by the quality and timeliness of key decisions made by management teams, concerning overall strategies, capacity utilization, rigorous cost controls, creative marketing and in some cases rethinking fundamental aspects of the current business model.