Gulf carriers not worried by high oil prices

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Gulf carriers continue to focus on expansion and are not overly concerned about rising oil prices or decreasing demand, while regulated markets in Africa may help to insulate some of that region's players

Record high oil prices clearly will eat into airline profits in the Middle East but the region's carriers are confident they can weather the storm and continue their torrid growth.

Carriers from the Middle East which made the Airline Business top 150 posted a $1.6 billion profit last year as revenues surged 26% to $25.3 billion. These profits are expected to drop considerably in 2008 but not as much as their counterparts in Asia or North America. "We don't feel this turmoil will hurt us as much as other carriers," says Arab Air Carriers Organisation secretary general Abdul Teffaha.

Teffaha adds Arab carriers have several advantages in the current environment: lower labour costs a younger more efficient fleet continued strong local demand and networks which are focused more on Asia and the Middle East rather than weaker Europe and North America. Citi analyst Andrew Light says another key advantage for Middle Eastern carriers is most of their economies are oil-based: "The most important driver is the health of their economy. With oil prices the way they are there will be a lot of economic activity out there that should be good for air travel."

Oliver Wyman senior partner Blair Pomeroy agrees: "Their home markets are exploding because they are petrol-based economies and the geographic position of their hubs is wonderful. The diversity of their routes really buffers them from regional weaknesses. Obviously they have the same headwinds as everyone and they are not immune, but I'm bullish on their business models."

maurice flanagan - emirates
"There's no downturn whatsoever"
Maurice Flanagan
Vice chairman, Emirates

Middle East carriers, in particular those from the Gulf, continue to aggressively add capacity despite the sharp rise in oil prices. If anything they see the current crisis that is inflicting the global airline industry as an opportunity for their hubs to gain even more market share from those in Europe. "There's no downturn whatsoever," says Emirates vice-chairman Maurice Flanagan. "Our revenue forecasts and our cost forecasts have been exceeded. We're not reducing capacity at all."

Etihad chief James Hogan says he asks his revenue management team everyday if they see any signs of a downturn and they keep on saying no. "Etihad is not only bucking the trend, the entire Middle East is doing so," he says. Teffaha adds: "If there's an economic crisis in one part that doesn't mean it affects the rest of the world. I don't believe there will be much of a decline in demand."

Load factors are increasing and yields are as well with premium demand continuing to strengthen. "Business and first class is filling up before economy," Teffaha says. "When you get to luxury premium ­traffic, Arab ­carriers are a class of their own."

That doesn't mean every airline in the region is profitable. While Emirates posted a record $1.4 billion profit last year, Etihad and Qatar are still in the red. "It's very difficult to be profitable when you're growing not at 10% per year but 30% to 40%," Pomeroy says.

Teffaha says overall about six of AACO's members were unprofitable last year but most of these were "transformation" based as carriers such as Kuwait Airways and Gulf Air underwent restructurings. "Generally airlines in the region are profitable but not as much as that scored by Emirates and Air Arabia," ­Teffaha says. He adds in 2008 "the profits scored by the bigger airlines will be less" but he still expects most of the smaller carriers in ­Middle East and North Africa to remain profitable or at least break even.

In sub-Saharan Africa, several of the region's flag carriers continued to lose money in 2007. Record fuel prices, however, may not hit African carriers as hard as others in 2008 because many of their markets are regulated with under-capacity. "Outside of South Africa a lack of competition and protective regimes allows the carriers to pass oil prices onto the consumer without much fuss," says University of Cape Town economics professor and air transport specialist Evan Blecher. "However, in South Africa things are very tough since the market is quite competitive and the airlines are unable to pass all of the cost on. Also the South African market is more price sensitive and rising fares will result in declining passenger numbers."

In Africa overall, the nine carriers which made the Airline Business top 150 turned a $168 million profit in 2007, as revenues increased 11% to $9.9 billion. The nine includes four AACO members and five from the rest of Africa. While the crisis is expected to claim casualties, both Africa and the Middle East seem relatively immune. "Many ­airlines are government-owned and I don't see them letting their airlines fail," Teffaha says. "The message needs to be lay off and let us restructure freely."