GENEVA: Air traffic congestion is a big hurdle for the Gulf airlines, warns Alexandre de Juniac, the new Director-General and chief executive of IATA.
“In the Gulf, the infrastructure problem for air traffic control is becoming a very big issue – causing delays, causing disruptions. And it’s not the matter of capacity. The Gulf states should have kind of a unified system, or cooperative, collaborative system to run their skies,” he told Gulf News in an interview on Thursday in Geneva.
Asked if there was any progress made by the region in that direction and if IATA had made any headway in tackling the situation, de Juniac said: “Yes. They have launched two programmes for that, and yes, I think they will do the job. Each of the [Gulf] countries have a national aviation strategy so for them it’s a big concern, it’s a big priority.”
Asked what the Middle East carriers needed to do to improve their profitability, de Juniac said: “What we say to the governments over there is do not increase too much taxes and charges. Otherwise you will put an end to that fantastic success story.”
IATA spends a lot of time “fighting taxes and charges”, he added, and sometimes enlightened government policies are the result.
“And combined increases in passenger fees in the UAE and Qatar are risking the Gulf’s amazing success story with $700 million in new costs,” de Juniac pointed out.
Championing freedom in aviation, the new IATA chief says “air transport is the business of freedom. The safe and efficient global movement of goods and people is a positive force in our world.”
The Middle Eastern carriers are forecast to generate a net profit of $300 million (Dh1.1 billion) for a net margin of 0.5 per cent and an average profit per passenger of $1.56 next year. This is below the $900 million profit expected in 2016.
According to Brian Pearce, IATA’s Chief Economist, it’s the challenging business conditions that are responsible for the falling profitability of Middle East airlines.
“Airlines in the Middle East have seen traffic slow. Both yield and load factors have fallen very sharply in the region. The load factors for the Middle East region have been down by 5 percentage points, as a result of weakening demand. That’s quite a substantial fall. And the industry is capital intensive. So you need to utilize those aircraft and those assets to keep profitability up,” he told Gulf News.
Explaining further, he said that load factors are falling as there has also been more competition for particular business models. “Airlines like Turkish have sort of joined the Gulf as the global super connector. So it’s getting to be a more competitive market.
“However, Middle East airlines are already providing a pretty good service to consumers. It’s been a successful model. There are others who are copying it… to some extent in Turkey, for example.”
Lower airfares next year:
With passenger numbers expected to touch nearly 4 billion next year from 3.8 billion this year, airfares are set to be lower next year. “It would be a slighter stronger growth next year. World GDP [gross domestic product] is projected to expand by 2.5 per cent in 2017. So travellers will feel a bit more confident. We would expect to see air travel get cheaper in real terms,” Pearce said.
Asked if it was a good time for airlines to hedge, Pearce said it was hard to say if airlines would be hedging next year. “Fuel hedging should be about insurance and not betting on the market. It shouldn’t be speculation. And I think airlines have learnt to use fuel hedging as risk management and not as a bet on where oil prices are going to go… because that’s gone wrong in the past,” he said.
According to IATA, it’s principally “oil”, which has been on a rising trend since the start of the year and with the Opec deal, has stepped up to about $55 a barrel for Brent, that’s responsible for falling airlines profits.
“Then, the world economy has been weaker than we were expecting. The average growth is expected to be 2.2 per cent this year. We expected it to be more than that. And that means it’s been a tough environment for airlines… revenues, load factors and yields have all fallen,” explained Pearce.
However, the negative impact of a lower load factor is expected to be offset somewhat by a strengthening of global economic growth. World economic growth is projected to expand by 2.5 per cent in 2017.
With all this, there is some optimism over the prospects for the cargo business in 2017. The break in falling yields and a moderate uptick in demand (3.5 per cent) will see cargo industry volumes reach a record high of 55.7 million tons (up from 53.9 million tons in 2016), according to IATA. Industry (cargo) revenues are expected to rise slightly to $49.4 billion (still well below the $60 billion level of annual revenues experienced in 2010-2014). And trading conditions remain challenging, IATA said.