Region's airlines face turbulent time

Declining profitability of Middle East airlines is forecast to worsen further next year as the impact of higher fuel prices, Arab unrest and economic problems elsewhere take their toll on the industry.

Demand growth for Middle East traffic has slowed in the first 10 months. Above, an Etihad Airways plane flies over Muscat. Silvia Razgova / The National

Profitability of Middle Eastern airlines is expected to decline to US$800 million (Dh2.9 billion) this year as the triple whammy of higher fuel prices, instability in parts of the Arab world and global economic problems hurt the industry.

Come fly with us:

Industry Insights Take to the skies with The National as it charts the aviation industry. Learn More

Earnings will slip further next year to $700m, said Tony Tyler, the director general and chief executive of the International Air Transport Association (IATA).

It represents a downward slide from last year, when the region's carriers achieved profits of $900m.

"The double-digit growth trend of Middle East carriers over the last years has fuelled expansion. That has slowed this year," he said during a speech at the Arab Air Carriers Organisation annual general meeting in Abu Dhabi yesterday.

The deterioration in profitability comes despite multibillion-dollar outlays on fleet capacity by several Gulf carriers announced this year. Etihad Airways also moved into operating profitability for the first time in the third quarter of the year.

But globally, the outlook has worsened this year. For an industry that exists on wafer-thin margins even in good years, declining business conditions are a pressing concern.

The global industry made $15.8bn last year, a record amount in absolute terms, according to the IATA. But the net margin was just 2.9 per cent.

This year, profits are expected to fall to $6.9bn, cutting net margins to 1.2 per cent. Profitability would decline further next year to $4.9bn for a margin of just 0.8 per cent, the IATA estimates.

Higher oil prices this year - to an average of $100 per barrel - mean airlines are facing a $201bn fuel bill, consuming nearly a third of their costs.

Mr Tyler said there was good reason to expect weakness in demand.

"The European debt crisis continues to deepen. We have not seen the job creation needed to put the US recovery on track. And the challenges of the political situation in the Arab world also could well continue into 2012," he said.

Mirroring the slide in profitability, passenger demand growth for Middle East traffic has slowed from double-digit levels in recent years to 8 per cent in the first 10 months of the year. Both Latin America and Europe have recorded higher demand growth.

The dip means regional demand has lagged capacity expansion of 8.8 per cent.

Regional airlines and airports, however, are bolstering their aircraft fleets and infrastructure to capture a surge in air traffic over the longer-term between the East and West.

In the UAE, about $136bn has been invested in the aviation sector, said Sultan Al Mansouri, the Minister of the Economy.

The country is targeting 8.5 per cent average annual growth through 2015, said Mr Tyler.

"If that materialises, in 2015 it will handle 86.6 million international passengers - nearly 30 million more than in 2010. And it will be the eighth-largest market for international travel - only slightly smaller than China at 90 million passengers and well ahead of Japan at 70 million. This will be an extraordinary achievement," he said.

This month, Abu Dhabi Airports Company (Adac) announced work on the long-delayed Midfield Terminal building would go ahead from the second quarter of next year. Part of a Dh25bn to Dh27bn redevelopment and expansion plan, the terminal building is planned to be capable of handling between 27 million and 30 million passengers a year when it opens in 2017.

Dubai International Airport's annual capacity is being raised from 60 million passengers to 90 million by 2018, with a new facility, Al Maktoum International Airport,serving the emirate's aviation needs beyond that.