Business

Unrest threatens Middle East aviation

Although Middle Eastern carriers have again outperformed their peers elsewhere, oil prices and related political tensions in the region carry the risk of disruption.

Tom Arnold

September 05, 2013

Regional instability poses a risk of disruption for Middle East aviation, one of the strongest growth markets in the industry, the International Air Transport Association said yesterday.

Iata made the warning after releasing the latest passenger data showing Middle East carriers again outperformed rivals from other regions in July.

In a month in which all regions registered growth, July traffic in the Middle East rose 7.8 per cent compared with a year ago.

But Tony Tyler, Iata's director general and chief executive, warned of potential risks to the outlook.

"The price of oil, a huge cost item for airlines, is tracking political tensions in the Middle East," he said.

"Along with the global cost impact of this, at the regional level there is the potential for disruption for one of aviation's strongest and most consistent growth markets."

Oil prices have been stoked in recent weeks by uncertainty over US military intervention in Syria, strikes in oil-producing Libya and the unrest in Egypt.

But any further escalation in instability could start to hamper carriers' operations. Qatar Airways suspended flights to Tripoli last month after the airline was reportedly threatened by armed gunmen.

The Iata July data for Middle East airlines showed a slight dip in passenger numbers compared with the previous month's growth of 12.1 per cent. It attributed part of the decline to the timing of Ramadan during July.

Capacity growth of 10.5 per cent sent load factors down two percentage points to 78.3 per cent.

International passenger traffic rose 5.1 per cent during July on an annual basis.

"Passenger demand continues to be strong. But the story of emerging markets driving growth as developed economies stagnate could be shifting," said Mr Tyler.

"The emergence of the euro zone from an 18-month recession provided the biggest boost to traffic over recent months. In contrast, the deceleration of the Chinese economy has been a dampener on air travel."

In a further indicator of the health of the Middle East aviation market, Abu Dhabi International Airport yesterday said passenger traffic rose 4.8 per cent in July compared with the year earlier period. Close to 1.4 million passengers travelled through the airport during the month.

"Efforts to attract new airline partners and new routes have led to yet another month of steady growth in passenger traffic, making Abu Dhabi International Airport one of the world's fastest growing airports," said Ahmad Al Haddabi, the chief operations officer at Abu Dhabi Airports Company.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”