x Abu Dhabi, UAEWednesday 26 July 2017

Airlines face further headwinds

The Arab Spring and euro-zone crisis put increasing pressure on global and regional carriers last year and there is little to suggest this year will be any easier.

After several years of delays during its manufacture, the Dreamliner finally entered service last year with Japan's All Nippon Airways. Bloomberg
After several years of delays during its manufacture, the Dreamliner finally entered service last year with Japan's All Nippon Airways. Bloomberg

Between the Arab Spring to the euro-zone debt crisis, airlines were buffeted by economic turbulence in 2011.

This year, the headwinds could be just as strong, with the global economy slowing as uncertainty in the euro zone squeezes profits for carriers.

A new EU emissions trading scheme (ETS) is also expected to nearly triple the cost to the industry of securing carbon permits to €2.8 billion (Dh13.36bn) by 2020.

Completing a triple whammy of risks for carriers is the likelihood of further volatility in fuel prices. Airlines already had to contend with a 13 per cent rise in oil prices last year as unrest hit parts of the Middle East and North Africa.

"Our bottom line for 2012 will be for an uncertain and challenging year once again for airlines and associated industries," says Peter Harbison, the executive chairman of the Centre for Asia Pacific Aviation (Capa). "Many of the directions will be driven by events in Europe."

The International Air Transport Association (Iata) has already cut its forecast for global airline profit for this year from US$4.9bn (Dh17.99bn) to $3.5bn. Middle Eastern airlines are expected to post a profit of $300 million, down from a previous forecast of $700m.

It is against such an uncertain backdrop that the industry is increasingly recognising the importance of flying the most fuel-efficient aircraft.

With more than 100 new passenger jets set to be delivered to Middle Eastern carriers this year and next, the region is at the forefront of the race to modernise fleets.

At a time when many of their competitors are either stagnating or seeking consolidation, the extra capacity should help regional airlines capture market share, aviation analysts say.

And by operating the most fuel-efficient, modern and comfortable aircraft, they should also bolster their efforts to save money and attract passengers.

The fleets of the region's biggest carriers - Etihad Airways, Emirates Airline and Qatar Airways - are younger than most of the fuel-guzzling planes of the US, European and Asian carriers.

Pressure to update fleets is likely to intensify in the coming years.

The introduction this year of the ETS threatens to bruise an industry that survives on wafer-thin profit margins during good years. All airlines operating in the EU will have to account for their carbon dioxide emissions by purchasing carbon permits.

Carriers have reacted with hostility to the scheme, arguing it further hampers an industry already struggling with high fuel bills and tough competition. Some industry commentators have warned that the plan risks a trade war in the sector.

On Monday, the German carrier Lufthansa became the first airline to explain how it plans to deal with the scheme. It said it would pass on to its customers an anticipated €130m of costs to pay for the permits this year.

"With the EU giving airlines a big quota for emissions already, further growth, particularly by expanding Middle East carriers, will see financial expenditure increase," says Saj Ahmad, the chief analyst at StrategicAero Research. "Whether this is passed on to the consumer remains to be seen, especially when GCC airlines have been very reticent about [imposing] fuel surcharge fees already."

Such schemes are likely to give greater urgency to moves by Boeing and Airbus to equip existing planes with new engines to help reduce operating costs, say analysts.

Over recent years, regional carriers have led the shift towards fuel-efficient jets such as the Boeing 777 and 787 Dreamliner, and Airbus's A380 superjumbo and the A350.

Last year, Emirates Airline accounted for a quarter of all 777 orders. But eyes will be trained most keenly this year on Qatar Airways, which in June is to receive the region's first Dreamliner.

Hailed as a game-changer in commercial aviation, the aircraft is already the fastest-selling twin-aisle passenger jet in history. It has been much anticipated because its more efficient engines will enable airlines to cut their carbon emissions while burning 20 per cent less fuel than other similar-sized aircraft.

After several years of delays during its manufacture, the Dreamliner finally entered service last year with Japan's All Nippon Airways.

In a sign that Etihad wants to make the aircraft a main plank of its long-haul fleet, the Abu Dhabi carrier last month said it would buy 10 787-9s in a deal that will make it the largest operator of the "stretch" version of the aircraft.

Etihad also has options and purchase rights on a further 25 Dreamliners. It is due to take delivery of 41 of the 787s between 2014 and 2019.

In all, the region accounts for 15 per cent of Boeing's entire order backlog for the aircraft.

The US manufacturer says the lightweight aircraft is more comfortable for passengers because it offers larger windows with an adjustable tint, an improved air filtration system and a quieter cabin.

Airbus hopes to lure business away from Boeing and the 787 with its own more fuel-efficient wide-body aircraft.

When the delayed A350 finally enters service in 2014, Airbus says the aircraft will be better than the 787. The lighter airframe and carbon-fibre reinforced fuselage results in lower fuel consumption and should be easier to maintain.

With 80 aircraft on order, Qatar Airways is the biggest customer for the A350 and is also the first airline scheduled to take delivery of the plane. It is also first in the queue for a revamped version of Airbus's A320, a narrow-body jet.

In November, it ordered 50 A320neo jets, which burn 15 per cent less fuel than the previous model of the A320. The aircraft proved so popular globally that it helped the European manufacturer win the race for total orders last year against Boeing.

The US company hopes to fight back with an overhaul of its own narrow-body, the 737 MAX. Mr Ahmad expects flydubai to be among the first regional customers for the 737 MAX next year as it adds to its fleet of 737s. One important uncertainty hanging over the industry this year will be how easy it is for airlines to secure financing for new passenger jets.

Between $85bn and $90bn of total funding will be required this year for new commercial aircraft deliveries, up about 20 per cent from last year, estimates Fitch Ratings.

Some airlines have already complained about a reluctance of European banks to provide financing as the euro-zone crisis deepens.

But Fitch does not expect a recent tightening of aircraft lending conditions in Europe to put the brakes on new aircraft deliveries.

"A well-functioning and globally diversified aircraft financing market will remain critical as airlines continue to face heavy capital commitments," the credit agency said in a report last month.

Whatever other challenges lie ahead for airlines this year, the need to update their fleets is likely to remain a priority.

tarnold@thenational.ae

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