Mideast carriers to emerge stronger

The global economy has entered a two-speed recovery with the developing economies of the Middle East, Asia and Latin America roaring ahead while Europe and North America stagger on. The International Monetary Fund (IMF) has estimated that developing world growth between 2007 and 2011 will be a whopping 22.1 per cent. The advanced economies will grow by just 1.9 per cent.

Nowhere is this two-speed divide seen more clearly than in the aviation sector, which is finally experiencing a recovery after a miserable couple of years. During the economic downturn people travelled less and swapped nice, lie-flat beds for the cramped conditions at the back of the plane. This hit airlines hard and International Air Transport Association (Iata), which represents international carriers, estimates that the industry lost $15.9 billion (Dh58.39bn) in 2008 and $9.4bn last year.

Iata had been predicting another horror year in 2010 with global losses of $5.6bn but it has recently revised that estimate down to $2.8bn. The reason for the reduced estimate is that airlines in the developing economies are roaring back into profitability and growth.

The Middle East, for example, is predicted to see passenger growth of 15.2 per cent this year while Asia and Latin America are not far behind with 12 per cent and 12.2 per cent respectively. Passenger growth in North America, by comparison, will be just 6.2 per cent and Europe will manage only 4.2 per cent.

As a result, most of the Middle East's carriers are expected to get stronger this year (Emirates recently forecast it would make a Dh2bn profit). European carriers, by contrast, will focus their efforts on stemming losses and, in the case of British Airways and Lufthansa, trying to prevent strikes grounding the airline.

However, the Middle East's carriers are not immune to economic difficulties and the aviation market is still far from recovering its 2007 peak. The Iata data reveals that premium passenger numbers are still 17 per cent down and yields – the amount the airline makes on each seat – are only just starting to recover.

Iata gives the example of a typical premium transatlantic fare (London to New York), which hit a peak of nearly $1,400 one way but then fell to $1,000 in the depths of the recession. Airlines were forced to cut fares in order to keep planes full and although premium fares have now rebounded to about $1,100, this is still far from a robust market. The situation in economy is better but it will take some time for yields to regain their peak – perhaps another 18 months according to one estimate last week.

Airlines responded to the crisis by cutting capacity, shrinking supply to match the lower demand for seats. This has been a successful strategy, although arguably it could have gone much further if governments had allowed greater consolidation and competition in the airline industry (too many weak flag carriers have been propped up because of misplaced national pride).

The question in 2010 will be whether the industry sticks to this responsible attitude towards capacity or whether carriers dump additional supply and endanger the industry's recovery. This is a serious concern given that about 1,400 new aircraft are scheduled to be delivered this year – representing about six per cent of the global fleet.

That is a lot of new seats to fill and it is far from certain that the market is robust enough to support them. The best outcome is for profitable airlines like Emirates to bring in new planes while stepping up the sale of older ones, thereby improving the quality of the overall global fleet without adding too much extra capacity.

Meanwhile, Europe's struggling airlines have little choice but to protect their cash by postponing deliveries of new aircraft, which means they will be flying older planes for a lot longer. As frequent fliers know, new planes are the best planes and many passengers will be encouraged to switch from the old bangers flown by Europe's weak airlines to the shiny new aircraft flown in and out of regions like the Middle East and Asia. The result of this trend may be two-tier quality as well as two-tier growth.

The writer is Business Correspondent, The Times of London


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