Still climbing

“It [the dire predictions] just went on and on and I have no idea where some of these ideas came from. Sure things have slowed down, sure there is culling in some sectors and quite frankly it was a correction the world needed. Some of the spending was wasteful and delinquent with people changing their mobile phones five times a year just because a new color came out. That was stupid – no question!” says Clark. He adds that “the lesson from the correction is it has shown us all what we can reasonably expect from the assets we have rather from the means [debt] we do not.”

Clark concedes that business in Dubai has slowed down – but makes the point: “Slowed down from what – eighteen percent growth!” Sure there will not be as many new mega projects starting but there is plenty of building going on. In front of Clark’s office there are forty cranes at the site of Dubai Airport’s Concourse 3, which will lift the airport’s capacity to 85 million.

As the number of jets being stored at US deserts tops a record 3,000, in the deserts of the Middle East a different sort of record is being set – record deliveries. There have been no deferrals by any major Middle East airlines. Emirates, for instance, is taking delivery of a 777 model every month and is now the world’s largest operator of the type while an A380 is delivered every three months or so. And the pace is similar at Etihad and Qatar with new routes being announced almost on a monthly basis. In fact, on OAG figures, no airline has cut capacity into Dubai or Abu Dhabi this year.

According to Boeing’s VP Market Randy Tinseth, more than 100 new aircraft, including 45 twin-aisles, will be delivered to airlines in the region during 2009. “This accounts for approximately 20per cent of 2009 twin-aisle deliveries worldwide. Another 50 twin-aisle airplanes will be delivered to the region in 2010, enhancing the already strong competitive position of the region’s carriers,” Tinseth said.

Boeing says that Middle East airlines will need 1,580 new aircraft at a value of $260 billion by 2027. “Frankly, the Middle East, when you take a look at schedules, is the only market growing today,” Tinseth said. At the beginning of this year Tinseth correctly forecast the Middle East to be the only region seeing real traffic growth this year.

Pirates and Pioneers?

Clarks smiles and shakes his head at the question “Are Middle East airlines pirates or pioneers?” and says that while the airline has certainly grown on 6th freedom business linking the four corners of the globe, 40per cent of the airline business comes from O&D traffic for Dubai itself, which has its own critical mass as a tourist and business destination.

And the facts support that proposition with 53.1per cent of the airline’s capacity dedicated to intra Middle East routes and 16.7per cent to the India subcontinent, according to the Centre for Asia Pacific Aviation. Only 13.5per cent is dedicated to Europe and 7.9per cent to Asia while US routes are just 1.7per cent of the airline’s capacity. The numbers for Qatar Airways are almost identical.

Clark has some words of wisdom for his competitors. “There is not going to be a paradigm shift in the market. It hasn’t changed forever and first class is not dead.”

At Etihad, the ratios are even greater says CAPA with 64.9per cent of capacity dedicated to the Middle East and 16.8per cent to the India subcontinent. Asia Pacific is just a paltry 3per cent and Europe 10per cent .

In Dubai, there are 70 five star hotels to support tourism with another 17 due for completion over the next two years. Overall, there are approximately 58,000 hotel rooms with 10,984 more to be completed next year and while the softer business market has seen hotel room rates fall 30per cent this has been a boon for tourism.

And the tourists are flocking in with Emirates experiencing an 18per cent jump in traffic in July over the prior stanza. There are similar numbers at Qatar Airways and Etihad had its busiest month ever in July with 616,000 passengers, a 9per cent increase on the prior year.

According to Hogan on July 31, a record 21,640 passengers at a load factor of 90.3per cent flew with the airline through Abu Dhabi. Load factor for July was 88.8per cent across all cabins.

On the basis of those numbers Hogan believes that airfares will start to rise next year particularly for long-haul as the airline sees demand holding up for its premium cabins.

Hogan said Etihad had been able to maintain loads on most routes but had seen pressure on yields.

“If you look at Melbourne and Sydney, these flights are 80per cent ,” he told The Australian newspaper.

“We’re running pretty good premium penetration at the moment,” Hogan added. “Not where we’d like it to be, but it’s still at an acceptable level and I’ve got no doubt it will come back. And when the market does correct, we’re in great shape to accelerate.”

Hogan added that the airline was experiencing some improvements in cargo and some reversal in yield decline.

“For the consumer at the moment, it’s great for the passengers with great deals out there. But as the markets correct, we’re confident as we go into 2010, pricing will move [upwards].

Clark also notes that more and more the airline is finding that people are living in Dubai and commuting each week to work in Europe, the US and other countries in the Middle East.

And Clark has some words of wisdom for his competitors. “There is not going to be a paradigm shift in the market. It hasn’t changed forever and first class is not dead.”

Clark scoffs that “the same people who say first class is dead were turning their backs on backpackers just two years ago.” He is adamant that “you can’t stop the aspirations of the people in China, India and Brazil they are going to want to travel. Everyone wants to travel… it is in our nature.

“Sure we have knocked it [the world economy] down and the world is now rebuilding and we have to do it smarter. But we in the airline industry are masters at this…we do it all the time with all the shocks we have endured.”

But Clark is not so sure the industry is getting it right this time. “Business models change all the time and we are now in the grip of the “amalgam group” with Europe moving towards domination of three blocks – BA/Iberia, Air France/KLM and the Lufthansa Group.

Business as usual

“Where do we fit? Plans remain the same and we haven’t changed anything we do and have kept our brand intact and grow organically.” While conceding that some airlines have obligations to share market regulators, Clark says that an airline’s brand takes a hit every time CEOs say they are taking on the unions to survive or shrinking the network and grounding aircraft.

And the strong brands of Emirates, Etihad and Qatar have proven major bonuses during the downturn with the airlines releasing more lower yield seats into the market which have been snapped up by travelers who were previously excluded from buying by computer yield management systems.

Those lower yield seats were an effective 30 per cent decline in fare levels, a figure Clark now regrets as traffic rocketed in June and July. Clark says that he feels a bit guilty for allowing the fares to fall as low because the market “would have supported high fares.” Emirates has increased fares by 22per cent since.

“We are getting great business from Africa, Europe, China, India and Russia,” Clark notes. And to tap into that demand Emirates is launching services to Durban and Luanada [Angola] in November, adding frequencies to Cape Town and Johannesburg, delinking Rome and Nice and Tunis and Triploi to give them all daily services.

The message is the same at Etihad Airways. Its latest schedule which came into effect late last month (OCTOBER) saw an increase of 15 per cent in flying with 950 flights a week. Hyderabad services start this month (NOV) and the city follows Chicago and Cape Town as the airline’s newest routes.

The airline has 44 aircraft in service with 118 on order and by 2020 it plans to handle 25 million passengers with a network of 100 destinations and a fleet of 162 aircraft. Deliveries of aircraft are approximately at the rate of 11 a year.

Qatar Airways, is also launching new services to add to its 82 destinations. New services started to Amritsar and Goa in India last month (OCT) and the airline is heading downunder in December with flights to Melbourne and Sydney will be served from 2010. Also on the radar are more frequencies to Paris, Madrid, Athens and Stockholm.

Madrid is an excellent example of the pioneering efforts of the Middle East airlines. Qatar launched a four times service in December 2005 that has now grown to daily and it is the only airline to operate to Madrid from the Middle East. Its new flights to Melbourne and Sydney will link the Australian cities to Spain’s capital with just one stop. Qantas and Iberia passengers need to make two stops via Singapore and Frankfurt as neither airline operates the route. In fact, despite Iberia and Qantas being oneworld alliance partners, the Spanish airline’s reservation system does not even offer a Madrid-Melbourne flight.

Qatar Airways CEO, the colourful Akbar Al Baker, says the additional frequencies demonstrate the airline’s commitment to offer passengers greater choice. “We are constantly looking at ways to offer our passengers improved levels of service, more choice and more connections across our global network.” Like Clark, Al Baker says cutting back is not the way to go. “We strongly believe on building capacity to meet the needs of the traveling public, both in the short-term and long-term.”

The airline, which started operations in 1994, had 70 aircraft in service in September and 134 on order. The airline plans a fleet of 110 by 2013. Its A380s are due to arrive in 2012. The airline is due to get 25 aircraft in 2009, 23 in 2010 and 17 in 2011. An interesting delivery this year were two Boeing C-17s carrying the Qatar Airways’ livery to be used for outside cargo and humanitarian support.

A number of Gulf States wanted to airlift supplies to Indonesia after the tragic 2004 tsunami that claimed 230,000 lives and to Pakistan after the 2005 earthquake, but lacked the airlift capability relying on Russian and US Air Force airlifters. Qatar has two C-17s and is ordering two more this month at the Dubai Air Show and the UAE has committed to four that may well operate in Etihad or Emirates colors.

Heavylifter

Clark just smiles about another heavy lifter – the A380. “Our flights are full and it generates its own traffic,” he says. Emirates’ next A380 destinations are Seoul and Paris and Clark hints at Manchester. The airline will get its 7th A380 this month and 8th in December with three more in the first two quarters next year. Emirates will have 20 A380s in service by the next Dubai Air Show in 2011.
Qatar’s first A380, MSN106 arrives in the first quarter of 2012, while Etihad’s first of 10, MSN114 will be delivered in the first quarter of 2013.

And to handle the heavylifters, Dubai’s ever growing airport is not surprisingly getting bigger. Terminal 3 and Concourse 2 opened late last year and the airport handled 37.4 million passengers last year. Currently, Concourse 3 is under construction to be opened in September 2012. Concourse 3 will be connected to the other facilities by an underground railway.

Clark says that the longer term Jebel Ali airport will open in March next year with the first of a planned six runways. It will initially handle cargo and executive jets and later the new low cost airline flydubai.

However, while infrastructure on the ground in the Middle East keeps pace with growth, the air above does not, warns Clark. “We need to spend more on ATC. The big inhibitor to growth now is the space above.” IATA has cited expanding military airspace requirements as an impediment while balancing that, Clark says the airline can now overfly Iraq to Europe. Currently 50per cent of the space above the UAE is specified as aerial exclusion zones, although the altitudes vary.

According to CAPA, the UAE is working to increase the number of air corridors from 27 to 35 over the country by the end of this year, while Dubai Airport has called for a similar organization to Eurocontrol to take charge of the region’s airspace system.

And that pressure for the space above is only going to become more intense as more LCCs emerge to tap a virtually untapped market in the Middle East.

Initially, the large number of migrant workers seeking a seat to get home are seen as the first customers. But it is the huge number of young people in the Middle East, which has a median age of 25, which are seen as the LCC’s pot of gold. By comparison, the median age in Europe is 42.2 while the median in the US is 38.6.

According to CAPA the “youthful middle-class workforce has a strong appetite for travel, and the region’s proximity to high-growth markets, such as India, Europe and Central Asia, create many opportunities to introduce service to medium-haul destinations.”

During the past few years, eight low-cost airlines have initiated service and one more is due to start flights this year. Two trendsetters are AirArabia, based in the Emir of Sharjah adjacent to Dubai which has a fleet of 14 A320s and flies to 41 destinations, while flydubai, which launched operations this year, has four of an order of 56 737-800s in service and operates to six destinations so far.

Clearly, no airlines in the Middle East are merging or dying but instead they are following the advice of Mark Twain who said: “Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”