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Gulf carriers face expansion challenges

Managing pressure from aggressive expansion plans,competition can affect mid-east carriers.

Written by Agencies | Dubai |
September 20, 2011 12:56:26 pm

Air passenger flows to and from the Gulf are expected to reach 140 million by 2015,led by the region’s big three carriers,but there will be significant challenges as these airlines pursue aggressive expansion plans,Boston Consulting Group (BCG) has warned.

In its latest report,BCG says that Middle East airlines — led by Emirates,Etihad,and Qatar Airways — are expected to triple their capacity over the next 20 years.

Emirates,the region’s largest carrier,is on track to become the largest operator of wide-body aircraft in the world by 2016,with Qatar Airways and Etihad not far behind in the ranks of the top 20,the report added.

At a time when many carriers throughout the world were struggling with weak growth in overall demand,Emirates’ performance over the past few years stands out as “exceptional”,the report said.

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The carrier has nearly tripled capacity and passenger revenues over the past five years,adding 32 new destinations while improving aircraft utilisations,load factors and yields.

Although the company’s cash margins decreased from 28 per cent to 23 per cent during the past five years,they still compare favourably with those of other international airlines,the report found.

Emirates’ financial strength gives it greater flexibility to expand capacity and boost market share.

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BCG estimates that Emirates will increase its capacity by up to 12 per cent annually through 2015,with a key to its growth being the considerable savings it enjoys compared to other legacy carriers in terms of fuel and operating costs.

Emirates is in the midst of consolidating to three types of aircraft — Boeing 777s,Airbus A380s,and the Airbus A350s — giving it a younger fleet and simplifying its maintenance and crewing operations. “We estimate that the delivery of newer,more cost-effective aircraft over the next several years will reduce unit operating costs at Emirates by an additional 12 per cent to 15 per cent below their already low levels,” the report said.

The carrier also benefits from the minimal airport fees it pays at its Dubai hub and also from its relatively low personnel costs,thanks to the fact that its employees pay no personal income tax in the UAE.

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The report noted that Etihad and Qatar Airways share similar cost advantages and also benefit from being closely aligned with the national policies of their home countries.

Because of these advantages,all three carriers are well positioned to compete aggressively with more financially constrained airlines,the report argues.

However,the next five years may also be a critical turning point for the big three carriers,the BCG report warned.

One key challenge that each of the carriers must contend with is the need to manage the pressure that their aggressive expansion plans will exert on margins. “For example,the 9 per cent to 12 per cent annual capacity growth projected for Emirates exceeds the 8 per cent growth in annual market demand that BCG estimates for the airline’s current network,” the report said.

BCG also sees the carriers facing threats on five major fronts. These include competition from full-service legacy airlines,which can leverage their networks and schedule advantages to attract more profitable business travellers who prefer nonstop flights at business-friendly departure times.

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The airlines must also contend with low-cost carriers within the region,as well as the emergence of airlines in Turkey,India and potentially,China,that embrace the same type of advantaged hub business models being used by the Middle East mega-carriers.

Another concern is greater regional competition for connecting traffic to non-hub destinations in the Middle East and for intercontinental travel.

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Lastly,the big three carriers face the risk that foreign governments will restrict market access or alter pricing regimes. “The challenge for the global air alliances will be to match the sheer size and reach of the networks run by Middle Eastern mega-carriers,which will increasingly ‘own’ certain intercontinental-traffic flows,” the report said.

“The next five years will see even greater levels of competition in the airline industry,as Middle Eastern megacarriers add capacity well ahead of underlying demand. They will continue to expand their networks aggressively,add more frequent flights to existing destinations,upgrade to larger,more frequent flights to existing destinations and upgrade their fleets to larger,more fuel-efficient aircraft so that they can extend their cost leadership. Managing the challenges posed by these transformative shifts should rank high on the agendas of all airline executives,” the report added.

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First published on: 20-09-2011 at 12:56:26 pm
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