x Abu Dhabi, UAETuesday 25 July 2017

Turbulent year for the airline industry

If you hear a loud whistling sound at midnight tonight, it could well be a collective sigh of relief from the world's airline managers.

An Etihad Airways plane takes off from Abu Dhabi.
An Etihad Airways plane takes off from Abu Dhabi.

If you hear a loud whistling sound at midnight tonight, it could well be a collective sigh of relief from the world's airline managers now that the roller-coaster ride of 2008 has come to an end. A bipolar economy wreaked havoc on the world's airlines, which posted a collective loss this year of more than US$5 billion (Dh 18.35bn). With coffers full of petrodollars because of record-high oil prices, the fast-rising Gulf airlines expanded routes and fleets. Their rivals in Europe and the US, though, were forced to lay off pilots and ground aircraft to pay for the rising cost of jet fuel and, eventually, a slowing economy.

"One airline executive told me it was a year of two halves - first half good, second half bad," says Nicholas Ionides, an editor of Flight International in Singapore. "There were several years of quite strong growth on traffic, and that had to end at some point." For much of the year, it seemed Gulf airlines were still operating in idyllic conditions, boosted by the unique characteristics of operating a long-haul airline in the Middle East. The region has enjoyed four years of passenger traffic growth above 10 per cent a year, thanks to the opening of once closed regional markets and intra-regional travel spurred by the economic boom.

These carriers also benefited from being located en route to some of the world's major destinations, causing them to launch aggressive bids to capture traffic from long-haul European and Asian airlines. A quick look at a world atlas shows the Gulf is halfway between the UK and Australia, dubbed the all-important "Kangaroo Route" among airlines. The boom in air traffic also brought new players to Middle Eastern skies. Air Bahrain in Manama began service in February, while investors in Kuwait announced they would form a new airline, Wataniya Airways, with plans to launch early next year.

Also in February, the Dubai Government sought to replicate the success of Sharjah's Air Arabia with its own budget airline as a sister carrier to its full-service giant, Emirates Airline. Air Arabia, meanwhile, used cash from its successful initial public offering to establish more hubs throughout the region. At a time when most airlines were considering cancelling existing aircraft orders, Abu Dhabi's Etihad Airways placed the year's biggest order for 100 narrow-bodied and wide-bodied aircraft from Boeing and Airbus at the Farnborough Air Show in July. The airline also got options on another 105 aircraft worth a potential $43bn at list prices.

At the same air show, the new Dubai budget carrier unveiled itself as FlyDubai and ordered 54 Boeing 737 single-aisled aircraft, worth $4bn. But oil, the perennial wild card in the airline industry, continued to keep airline managers guessing. The price of a barrel of crude oil broke $100 in January, and then in April began a quick ascent, reaching $147 in July. The fear of even higher prices led airlines to buy long-term fuel contracts - called fuel hedging - to lock in prices. Airlines were unable to pass on the fuel costs - which accounted for more than 40 per cent of operating costs, up from just 10 per cent a few years ago - to passengers.

In June, one airline official at an industry gathering in Istanbul said: "At these current oil prices, no airline is making money." In the first half of the year, Emirates Airline, the most transparent of the big Gulf airlines regarding its financial details, locked in prices at $70 to $80 per barrel of crude oil. But as many airlines took steps to protect themselves from escalating oil prices, the cost of fuel plummeted in line with the ailing global economy.

Crude dropped below $100 in September and now trades at about $40 a barrel - some $107 off its record high in July. "It was a complex year," says Adel Ali, the chief executive of Air Arabia. "With everything you planned for, something else happened." In January, the Sharjah carrier had opened a second hub in Nepal, only to pull out six months later because of political instability, it said. Global economic insecurity would further depress airline profits. By summer's end, the implosion of Lehman Brothers and the bailout of several US financial firms marked the start of a downturn that would spread quickly.

In September, Middle East companies cut their business travel budgets in the face of tough financial conditions, with first and business-class tickets falling 13.8 per cent, according to the International Air Transport Association (IATA). However, oil's sharp decline did not help reduce costs for airlines such as Emirates, which had fuel contracts in place at prices above the spot market. The Dubai airline reported that first-half profits ending in October fell 88 per cent, to $73 million.