Airline mergers unlikely in Middle East

Giovanni Bisignani, director-general of the IATA, said further mergers are essential to help revive an industry that is on course to lose $2.8bn in 2010. A few days after he made his comments the outlook for the industry took a turn for the worse, as the volcanic eruption in Iceland led to massive flight disruptions in Europe which are expected to cost the industry $1.7bn.

While the crisis no doubt further buttressed the business case for mergers and consolidation in the industry across the globe, there is not likely to be any change to the status quo in the Middle East in the near future, experts say.

Ownership barriers

While mergers might make economic sense for some carriers in the Middle East, they are unlikely to happen largely because most airlines in the region are government-owned, says John Strickland, an analyst at JLS Consulting in London. 'The trend is to consolidation, but that would be to ignore local national/political sensitivities of wanting a national airline,' he noted.

When airlines are government-owned, there is often a social dimension that prompts them to be more focused on the national agenda rather than strictly serving their shareholders, Abdul Wahab Teffaha, head of the Arab Air Carriers Organisation told AMEinfo.com.

Until there is more privatisation in the region, we are unlikely to see new mergers, he argues, adding that national ownership rules also need to be loosened to allow more flexibility in terms of foreign ownership.

The strong performance of carriers in the region is another factor weighing against mergers. Strong intra-regional and domestic demand helped mitigate the effects of falling demand from key source markets following the collapse in leisure and business travel in Q4 2008, says Nadejda Popova, an analyst at Euromonitor International.

As such, the economic crisis has not curbed the ambitious plans of the regions' airlines to acquire new fleet and expand their operations.

Alternative options

Rather than take part in mergers, Middle East carriers are more likely to adopt new policies and strategies for boosting efficiency and attracting new customers, Popova says. For example, many carriers reduced airfares to key destinations in 2009, and some have formed alliances as a means of maintaining existing customers.

Forming alliances can offer airlines opportunities normally afforded by a merger such as access to different routes, and economies of scale in terms of joint lounges and marketing campaigns. It is also a way of overcoming regulatory barriers which often restrict mergers, she noted.

Another new trend, which is being led by Air Arabia, is establishing a brand in more than one location with local partners, says Teffaha. The UAE-based carrier is well established in Sharjah and Morocco, he noted, and is about to launch a new hub in Egypt.