Budget carriers have potential in Middle East

Middle East airlines have solid fundamentals, according to a report released yesterday by UAE-based The National Investor (TNI). Quoting data from the International Civil Aviation Organization (ICAO), TNI said ‘passenger traffic in the Middle East is expected to grow at an average annual growth rate of 6.4% until 2015’.

This high passenger traffic growth will be sustained by several factors: Population growth, expanding tourism in the Middle-East, economic growth fuelled by high oil prices, significant airport construction, lack of railway systems, potential liberalization and a competitive cost base.

The Middle East is one the fastest growing regions for passenger airlines. Six of the 20 countries with the highest projected passenger growth belong to the area. Airport authorities are planning major construction projects to match projected passenger growth. Airlines and airports throughout the entire MENA region are revamping their fleets and infrastructure by purchasing large numbers of modern planes and by erecting dozen new international terminals and airports. In fact, authorities are pouring over $25 billion in airport construction projects in the region. The UAE itself accounts for nearly three quarters of the region’s airport investments.

‘In our opinion, budget carriers have strong growth prospects,’ said Mr. Eric Chang, Senior Associate, TNI Investment Research. Firstly, the region’s highly urbanized population means a LCC’s choice of hub will have a wide catchment area. In addition, the plane is the sole transportation mode for intra-MEA travels given the absence of rail systems in the Gulf region. Lastly, Middle Eastern LCCs have a low share (1.4%) of passengers. In contrast, US and European LCCs have nearly 25% market share while Asia Pacific budget carriers have 8% of the market. Ultimately, the success of LCCs in the Middle East hinges on political support to open routes.

Based on the TNI report, ‘Open skies’ agreements provide opportunities for smaller LCCs to enter new markets and compete with Air Arabia, the leading budget carrier in the Middle East, which has transported more than 3.4 million passengers since its launch in 2003. According to the TNI report, Air Arabia has the first mover advantage. Kuwait-based Jazeera Airways, a privately-owned budget carrier, has benefited from the partial liberalization existing in the Middle East. In Saudi Arabia, NAS Air started commercial operations in February 2007 while Sama Airlines will debut on March 18 2007.

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In addition, Mr. Chang believes the passenger market is large enough to accommodate the growth of Full Service Carriers (FSCs) as well. ‘Fears of oversupply have so far not materialized,’ he pointed out. ‘We believe that a few FSCs - namely Emirates, Qatar Airways and Etihad Airways - have the potential to give their European and Asian competitors a run for their money due to their competitive cost base. In addition, the region is an ideal hub for Europe-Asia Pacific and Asia Pacific-Africa routes. The availability of long range aircrafts means that Dubai-Sydney or Doha-Los Angeles is possible. This fits with Dubai and Doha’s strategy to become the most attractive transit hubs in the world,’ he added.
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