Under fire Middle East carriers defiant on expansion and see region supporting continued scope for growth, writes Graham Dunn in Cairo

Arab carriers mounted a robust defence to critics of their rapid expansion as the Arab Air Carriers Organisation met for its annual general assembly in Cairo. The ambitious expansion of the mega Gulf carriers, along with the competitive benefits access to credit export financing affords them, has come under fire from some in Europe and North America.

But in turn frustrations have been growing among Arab carriers who feel those who have pushed for liberalisation for many years are now dragging their feet in the face of the competitive threat from Arab carriers.

AACO secretary general Abdul Wahab Teffaha says it "becomes awkward" that the calls for restraint are coming from mature airlines in established markets in countries that have pushed for open markets.

"It is not fair for the calls for liberalisation to be quickly forgotten and actually reversed when these airlines are no more the only beneficiaries from liberalisation and when their cost structure is putting them at a competitive disadvantage," says Teffaha.

IATA is now forecasting Middle East carrier profitability will improve $1 billion during 2010 to around $400 million, partly driven by a more cautious capacity approach. But with traffic growth expected to fall short of capacity next year, as in other regions, IATA sees Middle East profits slipping back in 2011.

Chief executive at Gulf Air, Samer Majali, says the region's recovery has been in line with the rest of the world rather than the sluggish pace in Europe, but sees capacity as an issue. "There is too much capacity, both globally and in the region. In most cases the airport structure is keeping pace. But yields are very difficult."

For Gulf Air the priority has been to concentrate on higher-yielding traffic. Majali, a year into the job of turning around the carrier, has revamped its fleet and network to give it more of a regional focus. He says: "ASKS have been cut 25%, but we have more flights, more destinations and more frequencies. Passenger levels dropped [only] 5%, so seat factors shot up and so did yields." This, along with a cost focus which has seen its workforce cut by a fifth, is key to cutting losses from $500 million last year to around breakeven in 2012.

Part of Majali's longer-term strategy is to shift the balance so Gulf Air is less reliant on lower-yielding transfer traffic. Etihad chief executive James Hogan is also seeing more destination traffic as Abu Dhabi develops. "The corporate market is coming back, there is more O&D traffic at Abu Dhabi, and that helps balance it versus through traffic," he says. Hogan highlights the continued opportunities for growth. "There is a huge market still to work on: China, parts of South-East Asia."

Middle East Airlines chief executive Mohamad El-Hout says his carrier is expanding, growing its fleet to 17 over the next two years, as it steps up frequencies in some markets. "People are putting a lot of capacity in and if you don't fly two flights a day you are out of the market," he says.

MEA's stalled move into SkyTeam appears to be gaining pace as it is now being lined up for full membership, enabling it to keep its frequent flyer scheme. This was the major impasse and it could now join in 2012.

Oneworld's Royal Jordanian, meanwhile, is open to the possibility of securing a strategic partner over the next couple of years. "I always said, since I took over the presidency, that Royal Jordanian cannot survive on its own," says chief executive Hussein Dabbas. "We need to get closer co-operation with other airlines. I still believe [Royal Jordanian] should look at a strategic partner in the next two to three years."

Dabbas says that while traffic has grown fast - the carrier's own traffic is up 15% year-on-year - it is from a low level. But he points to a positive traffic impact from the region's fledgling low-cost sector. "This is definitely stimulating the market," he says.

Low-cost newcomer FlyDubai is now in its second year and will roughly double in size over the next year. "There is enormous untapped potential in the region," says chief executive Ghaith Al Ghaith. "When you look at the region, the GCC, the Middle East, the subcontinent, parts of Russia, and some parts of Africa, that is a huge unserved part of the world that we can operate from.

"It is the regulatory [framework] that is the biggest single barrier to growth. Visa restrictions have also been a barrier," he says, noting the cost and time needed to get visas hits impulsive trips. But he adds: "We are very hopeful they are improving [on both fronts]. Ten years ago in the GCC to get a daily flight was impossible. Now some of these cities we fly four to five times a day."

IATA director general Giovanni Bisignani is critical of progress on opening intra-Arabian markets, calling the number of countries to ratify the 2004 Damascus Convention liberalisation initiative disappointing. "The Middle East has been very successful in liberalising long-haul," he says, but adds: "I see continuing restrictions on travel within the region. As a result, growth in not balanced. Long-haul traffic is growing much faster than intra-regional connections."

Source: Airline Business