Budget airlines ready to modify plans

So far this year, 30 airlines have gone bust and another 20 are on a watch-list because of the oil price.

Rudy Vercelli, the chief executive of Abu Dhabi Airports Company, addresses the Low Cost Airlines World Mena conference in Al Ain.

Al Ain // Two weeks into his job as chief executive of the Saudi budget airline, Nas Air, Walter Prenzler is doing a lot of contingency planning these days. With Middle East passenger traffic recently falling for the first time in four years, Mr Prenzler and managers of other start-up airlines told a conference yesterday they were ready to modify their aggressive growth plans should the global financial crisis envelop the Gulf.

So far this year, 30 airlines have gone bust, primarily due to record oil prices, and another 20 are on a watch-list as passenger demand emerges as a top concern, according to the International Air Transport Association (IATA). However, most executives at the Low Cost Airlines World, Middle East and North Africa conference in Al Ain agreed that the impact on the Gulf would be slight. More important, they said, was opening up air travel markets in countries with restrictive rules.

"Given the current market conditions, for Nas Air and others, maybe we have to make some adjustments with this ambitious expansion programme," Mr Prenzler said. Like many airlines, Nas Air placed large orders for aircraft in the headier days of 2006 and last year, when the Gulf was performing like a well-oiled economic machine and years of double-digit growth in the air travel market was expected. Nas Air has 11 new aircraft due for arrival in the next 12 months, which will bring its fleet to 18.

But in September, IATA reported a 2.8 per cent decline in traffic from Middle East carriers, a sharp reversal from years of seeing growth greater than 10 per cent. Deciphering which airlines suffered the brunt of this decline is not simple, however. The fortunes of budget airlines are separate because they are not members of IATA and do not report their results to the trade body. Nas Air, which launched in February last year, had not experienced a decline in passenger demand, Mr Prenzler said.

The same is true for Bahrain Air, which launched its services over the summer. "So far we have not seen any effect, but I believe that it will happen in the future," said Ibrahim al Hamer, the company's managing director. Likewise, Abu Dhabi Airports Company said traffic at Abu Dhabi International Airport grew a healthy 22 per cent for September. "New budget airlines create demand. It's not a fixed traffic 'cake' where everyone is fighting for a piece," Mr Prenzler said. Nonetheless, the airline is making plans to substitute smaller aircraft on lower-demand routes and cut frequencies or routes altogether if the global economic downturn starts to affect its operations.

"The Gulf is insulated, but not isolated," said Peter Harbison, the executive chairman of the Centre for Asia Pacific Aviation. While airlines worldwide were in for extremely challenging times ahead, Gulf airlines had tremendous room to grow into untapped markets so long as some governments relaxed their air travel rules, he said. "Overall, it's probably going to be less pain for Gulf carriers." One start-up airline, Wataniya Airways of Kuwait, is pushing ahead with plans to launch in January despite the murky outlook. "It probably would have been easier to launch in 2006, when there was less volatility," said George Cooper, the chief executive. With the uncertainties, "we may be a little more cautious about the rate in which we grow", he said.

With US$180 million (Dh660.6mn) raised in an initial public offering in 2006, Wataniya said it had all the cash needed to launch its network of destinations throughout the Gulf and Middle East. It will have seven aircraft at the end of 2010, but it has decided to hold off on acquiring more. "My feeling is the economic downturn will be smaller and won't last as long in this region," Mr Cooper said.