Passenger demand primed for a hit, despite price cuts

Lingering strength in the US dollar is more of a factor to the aviation industry than the Fed rate hike itself as airlines struggle to attract passengers to fill seats.

Passenger demand is expected to be hit as the dollar climbs to its highest level in 13 years and regional carriers, with too much capacity, are likely to struggle.

Gulf carriers have already slashed prices this year to attract passengers as seat capacity grew. In the Middle East, airline capacity grew by 14 per cent in the first 10 months, outpacing the 11 per cent growth in traffic, according to the International Air Transport Association, the trade body. Globally, capacity grew by 7 per cent during the same period.

“The Fed rate hike is quite small and even with expected increases is not of itself going to have much effect on the aviation industry in Middle East,” said Peter Morris, the chief economist at London based-consultancy Ascend Worldwide. “However … the dollar will remain strong, and that is important as a significant part of aviation costs are dollar related, such as fuel, aircraft and leases.”

At the moment the key problem for Gulf carriers is finding the traffic at a competitive yield to keep up with their growth plans, particularly when there are multiple political and economic challenges in the Middle East region, he said.

Passengers from countries, which effectively devalue against dollar such as the pound and euro, during such circumstances face price increases and reduce travel needs, Mr Morris said.

The strong US dollar has already hit Emirates Group’s profit in the first half of this year. Net profit at Emirates Airline dropped by 75 per cent to Dh786 million compared with the last financial year.

A spokesman for flydubai said the airline “constantly monitors its fares to ensure they match market requirements”.

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