Middle East Adjusts

At a Glance

  • Middle Eastern countries continue to adopt policies to diversify the economy and move away from oil, supporting private sector activities while reducing the exposure to volatility and uncertainty in the global oil market.
  • RPKs are projected to remain steady at 5.8% over the next two decades, despite sharp oil price decline.
  • The region’s geographic positioning opens it up to opportunities to grow as a connectivity hub for long-haul travel.
  • Intra-Middle East flow will be an increasingly part of the air transport demand growth.

Moving Away From Oil

In recent years, Middle Eastern countries have been adopting a number of policies to diversify the economy and reduce the reliance on oil. Increased public sector employment and spending on infrastructure, health and education have been supporting private sector activities while reducing the exposure to volatility and uncertainty in the global oil market. Non-traditional industries are experiencing rapid growth such as retail trades, financial services and tourism. Non-oil economic activities that now represent 60% of the region’s economic output, were responsible for no more than 20% in the 1980s.

Stable RPKs

Further diversification is paramount and air transportation can play a key role in the region’s economic development. Despite the new scenario of sharp decline in oil prices and mounting geopolitical threats, air traffic growth – measured in revenue-passenger kilometer – in the Middle Eastern countries is projected to remain steady at 5.8% over the next 20 years. The strategic location of the region as a global hub and the opportunity to develop the intra-regional aviation are the engines of air transport demand growth.

Suffering Yields

According to IATA, net profits for the region in 2017 are forecast to be only slightly above breakeven, at US$ 0.3 billion, with net margins reflecting this at a meagre 0.5%. This compares with US$ 0.9 billion profit achieved in 2016. Capacity is also starting to noticeably lead traffic, with IATA forecasting respective growth of 10.1% vs 9.0% for 2017. Yields are suffering as a result.

A Growing Market

The unique geographic positioning allows Middle Eastern carriers to capture a significant share of long-haul market growth. Similarly, intra-Middle East flow will be an increasingly large part of the region’s traffic, either connecting through the major hubs, or in point-to-point operation linking secondary cities.

New Opportunities Emerge

Yet while much of the growth in the Middle East has taken place in the Persian Gulf, Turkey and Iran are on track to become major players in the future. Home to some 160 million (or 45%) of the region’s 360 million inhabitants, these two countries alone comprise some 55% of the in service fleet of passenger aircraft – underscoring the importance and potential of the two markets.

Iran Fleet in Service - Age Profile

Source: Ascend

Connection Hub Potential

Iran in particular presents significant opportunities, as home to the largest (and oldest) fleets of 70 to 150-seat jets in the Middle East, as well as larger jets that were acquired more due to their availability than their actual suitability. But they are not alone: Egypt is turning more towards connecting traffic rather than local, in response to ongoing geopolitical instability in its home market, while even the major carriers in the Persian Gulf are likely to revise their hitherto successful strategies of mostly capacity-driven growth.

Stepping Back From Larger Aircraft

Indeed, there is plenty of room to right-size from large narrow-bodies and even wide-bodies (which are often used as de facto regional aircraft) down to smaller aircraft. Stage length is one of the reasons why, as well as demand, which would be better met with less capacity and more frequency – some 60% of all intra-regional flights departs with fewer than 120 passengers onboard. Regional aviation remains an elastic term in the Middle East, where some airlines operate nothing smaller than a wide-body, yet in order to improve frequency and connectivity of the local markets, the need to right-size is ever present.

Passengers per Departure - 130+ Seat Jets

Source: Sabre, Innovata, Embraer

The Right Time to Evolve?

The Middle East has a long tradition of adapting to challenging scenarios, and in fact few of today’s headwinds are without historical precedents. Nonetheless, no airline will be afforded the luxury of resting on its laurels, and evolution will be essential for survival. The concept of connecting through the region is decades old, but the competitive landscape is ripe for broadening and passengers will likely benefit from increased competition. What will be novel, and where the cases of Turkey and Iran differ from the status quo, is that both countries have deep reservoirs of local demand which can feed the hubs, for which there will be no tool more versatile than 70 to 130-seat jets.

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