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28 March 2024

Securing funds is a challenge

Some deferrals for aircraft orders in the Middle East are expected. (SUPPLIED)

Published
By Shweta Jain

One of the biggest challenges for the airline industry in the Middle East, just like across the world, would be securing financing for new aircraft, according to Iata's Director-General and Chief Executive, Giovanni Bisignani.

"We will see a decrease in aircraft numbers now not just because of the fall in demand but also because of the lack of finance. It will be a combination of deferrals and cancellations of aircraft orders in the Middle East and the rest or the world," he told Emirates Business.

With regards to the massive scale of aircraft orders by the Middle Eastern carriers such as Emirates, Bisignani said: "I cannot comment on a particular airline in the region, but in general terms, there is a big problem on the delivery side because of the finances.

"When you finance a plane, normally about 20-30 per cent comes from the Exim bank or government aid. The rest is coming from the financial market. And the financial market is not very keen now on financing those kinds of assets," he added.

Echoing Bisignani's views, Iata's Chief Economist Brian Pearce said airlines in the Middle East, just like airlines anywhere in the world, would face difficulties in attaining fresh financing for new aircraft.

"Some of the aircraft deliveries in the Middle East, as we move through 2009, with shortages of bank credits, might be an issue that causes some cancellations," he said.

"As an aviation trade association, we cannot comment on individual airlines but throughout the Middle East I imagine there would be some deferrals for aircraft orders," Pearce said.

Asked if the region's airlines would strike off some plane orders from their bulky order book for the new aircraft, Pearce said: "Whether or not the airlines change those deferrals into cancellations would depend on their long-term outlook. And the long-term outlook looks good."


Middle east carriers to see losses double to $200m

As the airline industry faces tough times, the Middle Eastern carriers will see their losses double to $200 million (Dh734m) in 2009, according to the Iata's (International Air Transport Association) financial forecast for the year 2009.

Globally, the airline industry is projected to incur losses worth $2.5 billion next year, while the industry losses for 2008 will amount to a total of $5bn, Iata said, while revealing its outlook for 2009.

"The challenge in the Middle East is to match capacity to demand as fleets expand while traffic growth slows, particularly on long-haul connections," said Giovanni Bisignani, Director-General and Chief Executive Officer.

"We have already seen quite a sharp drop in passenger traffic for Middle East airlines. We will see the capacity growth going down sharply in the region in 2009," added Brian Pearce, Iata's Chief Economist.

Asked if the Middle East airlines would be able to escape the aviation downturn, Pearce told Emirates Business: "It is going to be very challenging 12 months to 18 months for airlines across the globe and I do not think airlines in the Middle East will escape those pressures, the principal pressure being the fall in amount of air travel.

"However, traffic within the Middle East still has some support from the economies in the region," he added, further highlighting that load factors in the region are likely to continue their decline.

Global passenger traffic, meanwhile, is expected to decline by three per cent in 2009, following growth of two per cent in 2008, recording a first decline in passenger traffic since the 2.7 per cent drop in 2001, Iata said.

Overall, industry revenues are expected to decline to $501bn, which is a fall of $35bn from the $536bn in revenues forecasted for 2008.

"The outlook is bleak. The chronic industry crisis will continue into 2009 with $2.5bn in losses. We face the worst revenue environment in 50 years," said Bisignani.

"All regions, except the United States, are expected to report larger losses in 2009 than in 2008," he added.

And last but not the least, the cargo traffic next year is expected to decline by five per cent following a drop of 1.5 per cent in 2008. "Prior to 2008 the last time that cargo fell was in 2001 when a six per cent drop was recorded," Iata said.

"The 2009 oil price is expected to average $60 per barrel (brent) for a total bill of $142bn. This is $3bn lower than in 2008 when oil averaged $100 per barrel (brent)," said Bisignani.

He outlined an action plan for 2009 that reflected the Iata's Istanbul Declaration in June. "Labour must understand that jobs will disappear when costs don't come down. Industry partners must contribute to efficiency gains. And governments must stop crazy taxation, fix the infrastructure, give airlines normal commercial freedoms and effectively regulate monopoly suppliers," said Bisignani.


Consolidation is the way

As the Middle East aviation industry goes through a difficult moment, just like the industry worldwide, airlines in the region need to look at consolidation, said Iata chief.

"Consolidation is something we would like to see more often. Unfortunately, it is quite difficult for carriers to be able to do so. I hope that in the moment of crisis, governments could understand that we need new set of rules in order to consolidate and have a stronger industry," Giovanni Bisignani, Iata's Director-General and CEO, told Emirates Business.

Agreeing with Bisignani, Iata's Chief Economist Brian Pearce said some Middle Eastern carriers will be forced to look at consolidation as an option as it is going to be a very tough environment.

Asked if the Middle East carriers are likely to consolidate in the immediate future, Bisignani said: "It depends on whether the airlines' cost base and the quality of their products enable them to succeed in the long-haul markets they are tackling. But I think clearly in the short-term it is a real problem with the increase in capacity in the Middle East."

Pearce said revenues are falling on average six to seven per cent and in the business travel it would fall even more.

"The revenues from the business travel, which is a key feature for long-haul network airlines, would actually fall much more than the six per cent. So it is going to be vital for airlines to take costs down to save business. And one of the many ways airlines are looking at it is through consolidation. And that would be one option that airlines in the Middle East would have to consider as well," he said.

Bisignani added: "The year 2008 was an extraordinary year not because we lost $5 billion (Dh18.3bn) but we went from oil at $147 a barrel to recession, with oil at $60. Next year would be a especially difficult one because it is the first time we would see a decrease in revenues worldwide, and especially the fall in business class is something that would have a negative impact on the airlines across the world."