Economy could take toll on luxury of Middle East airlines

The Gulf region has not been immune to the global economic crisis, and there are gloomy signs of a slowdown. The Middle East was the only region to register air traffic growth in January, up 3.1% from a year ago, according to the International Air Transport Association's latest monthly report. But the region's passenger and cargo traffic growth is expected to slow this year to 1.2%, compared with 7.6% in 2008 and 16.4% in 2007, the Geneva-based organization says.

The real estate bubble that fueled Dubai's boom has finally popped. And falling oil prices have also dimmed the prospects of the entire Gulf Arab region, which includes the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain.

The International Monetary Fund projects the Gulf's economy to grow only 3.5% this year, vs. nearly 7% in 2008. That means fewer business travelers willing to pay $15,000 for first-class seats.

Customers such as J. Rossi of Butler, Pa., have the Gulf carriers concerned. The marketing executive of Burt Hill Architecture is a huge fan of Emirates' service and is willing "to fly with them anywhere."

But her firm laid off about 50 employees earlier this year as several key projects in Dubai have been canceled, and she expects less travel to the Gulf.

In the latest sign of the region's vulnerability, Emirates said earlier this week that it will stop flying the Airbus A380, the world's largest passenger plane, for its Dubai-New York route due to a drop in traffic. The carrier will switch to Boeing's smaller 777, and redeploy the two A380s freed up from New York to its services to Toronto and Bangkok.

Emirates' net profit fell 88% in the fiscal first half of 2008 to $77 million. The airline, which is the only major Gulf carrier to disclose financial data publicly, largely blamed fuel prices at the time, and said it will continue to grow in 2009. Qatar Airways and Etihad have yet to turn profits. As a group, the Mideast carriers are projected to have about $200 million in net losses for all of 2009, according to IATA.

"Some Middle East carriers are star performers, but it is still a mixed picture," says Brian Pearce, IATA's chief economist. "For the region as a whole, the profits are still exceptionally slim."

Geography is key

UAE was established in 1971. Blessed with bountiful oil, the country has attracted multinational workers streaming in for jobs in construction, telecom, oil, tourism and retail industries. The worker migration, coupled with heavy infrastructure investment, fueled demand for air service.

"The region needs foreign labor. Oil creates much more dynamic activity, and not necessarily just in the oil industry. And that creates a very large business and leisure travel," says Abdul Wahab Teffaha, who heads Arab Air Carriers Organization.

Still, with only about half their passenger traffic arriving in the region as their final destination, they've bet heavily that its central location will draw connecting passengers if they can deliver competitive fares, second-to-none quality of service and world-class airports where travelers can actually enjoy themselves.

"The strategy we've adopted is (to have) a global network ," says Ali Al Rais, executive vice president of Qatar Airways. "The Middle East has always been in the middle of the world, and we've capitalized on the geographical location. With new airplanes, we can fly from one hub to another in one flight."

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