IATA raises concern on Gulf carrier overcapacity

The impact of the financial crisis is expected to take an even greater bite out of the Middle East aviation sector as the industry's losses are likely to stand at $1.5bn by the end of 2009, the International Air Transport Association (IATA) has reported in its revised yearly forecast.

In March, the IATA had projected potential losses at $900m.

The assessment for the region largely mirrors the outlook for the airline industry worldwide, which is forecast to lose $9bn this year, in a drastic reassessment of the worst slump the industry has ever faced.

The global forecast makes the current crisis worse than the aftermath of the September 11, 2001 attacks in the United States, the IATA said.

'There is no modern precedent for today's economic meltdown. The ground has shifted. Our industry has been shaken. This is the most difficult situation that the industry has faced,' said Giovanni Bisignani, IATA's director-general and chief executive.

Overcapacity fears

The report noted that passenger demand in the Middle East rose 11.2% while most other regions saw a decline. However, carriers in the Gulf have been forced to offer major discounts to attract passengers, leading to a severe drop in yields.

Adding to the region's woes is the fact that its location as a hub for Europe and Asia - one of the key factors that have led to its growth - is now a liability as these source markets have been slammed by the recession.

Bisignani has cautioned regional carriers that one of the biggest challenges they face is matching capacity to demand in light of the fact that a significant amount of capacity is set to hit the market.

But most carriers have elected to disregard this warning, including Qatar Airways, which earlier last week announced that it wants Airbus and Boeing to speed up the deliveries of the 200 airplanes that it has ordered from the manufacturers. The carrier also hinted that it may make more purchases at the Paris Air Show later this month.

Plans for growth

Etihad Airways is also in growth mode with plans to introduce services to Chicago later this year, in addition to having already launched flights to Astana, Istanbul, Turkey, Greece and Larnaca in May. The carrier plans to fly seven million passengers in 2009, an increase of 15% over the previous year. It also proudly touts that its occupancy is over 80%, albeit with discounted fares.

Another regional carrier that is boldly entering the fray is Flydubai, Dubai's first budget airline, which made its inaugural commercial flight earlier this month. At the 2008 Farnborough Airshow, Flydubai placed an order for 50 Boeing 737-800 aircraft, in a deal worth around $4bn. The carrier will take delivery of six aircraft this year.

Many analysts have raised concerns about the huge number of aircraft that regional carriers have ordered. 'The risk going forward for Middle East carriers in the next couple of years is the huge orders that they have made,' said Kareem Murad, an aviation analyst at Shuaa Capital.

'Now that we have capacity increasing at a much higher rate than the growth in passenger traffic, there are certain routes that will be profitable - and they will probably increase the frequency to these routes - but I don't think you will need the number of new aircraft that have been ordered. So my guess is, if the airlines get their deliveries early, then you will see certain grounding of aircraft, and that is an additional cost.'

Fall in profits

One carrier that is sounding a more sober note about the state of affairs is Emirates, the largest airline in the region. Last month the Dubai-based carrier announced that its net profit for the fiscal-year ending March fell 72%, citing record oil prices and falling yields as the reason for the decline.

Emirates President, Tim Clark, was quoted as saying it could take two years before the industry has fully recovered from the slowdown. He also said the carrier may slow deliveries of some of the 160 aircraft that is has ordered to help cope with the economic downturn.

However, he also said that the airline has no plans to cancel any of its aircraft orders, and that he is confident that the carrier will earn a profit in the fiscal year ending in March 2010.

Murad said he agrees with Clark's assessment, noting that Emirates' fuel costs are lower and that a higher number of passengers have gone through Dubai airport this year. 'They will be profitable, but will they be profitable like last year? I say no,' he said.

'I have no doubt in my mind that their growth is going to be slower, their number of passengers is not going to be as high, but their costs are lower, so I don't think they will be in the negative for net profit this year.'