Tom Gill JEDDAH Unity among Arab airlines is being tested over proposals for a single aviation market in the region as they struggle against a weak economic background.

With the Middle East peace dividend yet to materialise, weak oil prices , a continuing UN economic embargo on Iraq and political instability in many countries, these are challenging times for the Arab world. A recent International Monetary Fund report has confirmed fears of another slow year. Unimpressive economic forecasts for the Arab world have been revised downwards, to just 2%, while Saudi Arabia and Kuwait are in for a year of negative growth, it says.

Arab airlines have not escaped the suffering. Following a decade of sluggish growth, passenger numbers for members of the Arab Air Carriers Organisation (AACO) fell last year - for the first time since 1991. A marginal expansion in international passenger traffic failed to compensate for a disastrous contraction in domestic markets. Although seven out of the 18 members recorded close to double-digit international passenger growth, eight of them saw a decline of over 5%.

Moreover, capacity growth has outstripped demand. AACO secretary general Abdul Wahab Teffaha says Arab airlines suffered a "serious decline" in passenger load factors - they now stand some six points lower than the International Air Transport Association (IATA) average. What is more, he says, Arab carriers are losing their share of traffic flowing in and out of Arab airports.

When Teffaha looks into his crystal ball for this year it is clouded with uncertainties. The direction of oil prices - the rise and fall of which simultaneously benefit and hurt Arab carriers because of the importance of the commodity to their economies - is an unknown, as are the chances of a greater degree of political stability and the consequences of the millennium computer bug. In short, Arab carriers cannot rely on an improved business climate to help them out of their troubles.

Yet there is some good news. Recent efforts by Syria and Jordan to rebuild diplomatic relations are raising hopes of growing trade and tourism between the two countries. The eight-year ban on flights to Libya has been lifted, giving hope to a straitjacketed Libyan Arab Airlines and other nearby carriers that stand to benefit.

Despite the internal friction in Israel, the new Gaza International Airport opened last November, providing a home for Palestinian Airlines. It had been forced to operate out of Al Arish in Egypt when it started in June 1997. Palestinian, AACO's recently signed up nineteenth member, is set to join a host of Arab carriers, including Egyptair, Royal Air Maroc and Qatar Airways, which are starting services between Gaza and the Gulf. Palestine's "flag carrier" has rights to Cyprus, Istanbul and Athens. It plans to fly to London, Paris and Rome as well as to build links with KLM, says chief executive Fayel Zaidan.

The addition of new aircraft to the Arab fleet is also a clear sign that, despite current difficulties, airlines are looking to the future.

Egyptair announced in April an order for three Airbus A318s - all to be financed out of the state-owned carrier's own cashflow, according to the carrier's president and chief executive Muhammad Fahim Rayan - which will help replace its ageing Boeing 737-200 fleet on domestic and regional routes. The airline plans a host of new international services.

Rapidly growing Emirates, whose aggressive expansion strategy included the acquisition of a minority equity holding in AirLanka last year, has started taking deliveries of the 17 A300-200s it has on order.

Another challenger from the United Arab Emirates, Qatar Airways, is building its fleet. It is to take on four leased A320s and expects the delivery of six A320s from 2001. Royal Air Maroc is in the middle of a major Boeing fleet-renewal programme and plans to spend $100 million over the next 10 years on modernising its fleet. Saudi Arabian Airlines is taking deliveries of a massive $6 billion worth of orders in Boeing and McDonnell Douglas aircraft.

Cost-cutting dividend

In addition, Arab carriers have made some progress at getting their own houses in order. Unit costs have fallen by 10% since 1991 and are set to drop further as closer co-operation within the region begins to bears more fruit.

Nine AACO members are making collective savings of $200 million a year through Arabi, a joint venture with Galileo, the computerised seat reservation provider. Joining forces in other areas, such as fuel purchasing and ground services, is also delivering savings. Buoyed by the recent ground handling contract at London Gatwick and Heathrow, which is set to save an annual collective sum of $5 million, AACO plans to duplicate this concept in other major airports in Europe. Planned joint fuel purchases and pilot training will also save substantial sums. AACO is also launching a programme aimed at boosting the poor yields in a region where fares are 30% lower than in Europe or the USA, according to the Beirut-based organisation.

In the present tough climate, cost cutting may help explain Arab carriers' relatively strong financial performance. While IATA calculates that the Arab airlines remain in the red overall, AACO claims that 10 of its members made $625 million operating profits between them - only three made losses, although these added up to $257 million.

AACO is undoubtedly earning credits with its members for bringing them together in an effort to cut their costs and boost their muscle power in the marketplace. Yet tougher challenges for the Arab carriers are on the horizon and AACO's job to keep a united front may prove increasingly difficult.

Earlier this year the three-year old Rabat-based Arab Civil Aviation Commission (ACAC) recommended the transport ministers of the Arab League countries to liberalise inter-Arab air traffic over a period of five years, gradually ending restrictions on third, fourth and fifth freedoms for carriers in the region.

This was a move that many Arab carriers say they were not expecting. They complain that they were not consulted and many oppose the recommendations. AACO's response, agreed at its annual general meeting in Jeddah in April, was that it would "launch a joint dialogue with the ACAC" and resolved to set up a task force to "conduct in-house studies" on this issue.

Reluctant liberalisation

AACO justifies its reluctance to embrace deregulation in terms of the need for a trade zone with free movement of people and goods to be created first. It points to the evolution of events in Europe and the USA. But, while bilateral free trade agreements are beginning to take shape in North Africa and the Middle East, a single Arab market is a long way off.

Stephen Wheatcroft, chairman of IATA's Aviation Regulatory Watch Group and economic advisor to the World Travel and Tourism Council, is sympathetic to the ACAC initiative. He told the AACO annual general meeting that "the benefits of increased tourism as a result of airline liberalisation was very much greater than those of continuing protectionism of individual carriers." This was a message that AACO members "simply did not want to hear," he says.

The most vigorous opponent is Egyptair, says Wheatcroft, while Saudi Arabian Airlines is said to be another sceptic of open Arab skies. Wheatcroft describes both as "very protectionist".

Ahmed Rihan, head of government affairs at Egyptair, says that "the spread of globalisation and open skies is creating problems for us". He also appears to contradict Teffaha's assertion that AACO is not divided on the issue.

"Those carriers with their own big markets are most against [open skies]," says Rihan, head of government affairs at Egyptair. "Carriers with big fleets and no markets are most in favour," he says, in what can only be a thinly veiled reference to the rapidly growing Gulf State start-up carriers.

Egyptair wants a "step-by-step approach" to open Arab skies, says Rihan, a view that apparently has been taken on by AACO. Egyptair, one of the largest carrier's in the AACO, feels it has much to defend. Egypt is not only the most populous country in the Arab world, but the Cairo-Jeddah route commands among the highest yields in the region, totals 1.5 million passengers annually and is growing in double digits, according to Rihan.

Yet liberalisation is a game that incumbent airlines can win too, says an executive of one Arab carrier looking to penetrate the large Saudi and Egyptian markets. "There is so much demand but short supply. Pakistan International Airways opened up and was very successful," he points out.

IATA's Wheatcroft admits that his pro-deregulation message did not receive hostility from all AACO airlines. Royal Air Maroc and, to a lesser extent, Royal Jordanian - both airlines which have significant links with Europe and both with an intention to privatise - support his views, he says.

In the Gulf States, too, support is strong for liberalisation. In the United Arab Emirates, there has been a proliferation of start-ups, with Emirates and Qatar among those aggressively challenging the monopoly of the original multinational incumbent, Gulf Air.

A study commissioned more than two years ago by Arab carriers recommended closer pan-Arab co-operation in relation to suppliers and ground services. It also advised some or all of AACO to seek an alliance with a US or European airline. While the former has been acted upon with some success, the whole question of alliances with western carriers, remains a mute point.

Some carriers, notably Royal Air Maroc, which has built codeshares with Air France, Iberia and TWA, but also Qatar, which codeshares with Lufthansa to Munich, have begun to make links with western carriers on their own account. But, in common with other Arab airlines, Royal Air Maroc refuses the alliance logic and is building links with AACO members.

Some argue that Arab carriers run the risk of losing east-west connecting traffic at their hubs unless they strike closer relationships with western carriers (and their alliances) who, in any case, are diverting such passengers northwards as a result of their superior global networks. And, if Arab carriers want to boost sluggish growth rates, they may have to embrace deregulation with a little more enthusiasm and a touch more haste.

AACO 1998 operational statistics


Numbers (million)

Change %










Capacity change (ASKs)



Traffic change (RPKs)



Load factors*



*international ASK=Available seat kilometres RPK=Revenue passenger kilometres

AACO Fleet 1998


No. aircraft

Total fleet












Revenues for selected AACO carriers 1997


Total revenues ($ million)

Saudi Arabian Airlines


Gulf Air




Kuwait Airways




Royal Air Maroc


Royal Jordanian


Air Algerie


Syrian Arab Airlines


Oman Air


Trans Mediterranean Airways




Note: Members also include Emirates, Iraqui Airways, Libyan Arab Airlines, Middle East Airlines, Palestinian Airlines, Qatar Airways, Sudan Air and Yemen Airways. Source: Arab Air Carriers Organisation

Source: Airline Business