Looming overcapacity for Middle Eastern airlines
Despite declining passenger traffic, Middle Eastern airlines are still pushing forward with their fleet expansion plans and will more than triple their existing capacity by 2015. This capacity growth will significantly outpace the expected passenger increase, even in the best case scenarios, and will be make it challenging for airlines to operate profitably.
Emirates, Qatar Airways, and Etihad are expected to more than triple their current fleets by 2015 and most of the other airlines in the region also have substantial orders. The current aircraft order backlogs for GCC airlines will add considerable capacity to the market during the next seven years and will more than triple the then available seat kilometers (ASK), from an estimated 207 billion ASKs per year in 2007 to 647 billion ASKs per year in 2015.
This capacity growth will significantly outpace the expected passenger increase, clearly generating more capacity than can be profitably operated. In addition, the pilot shortage challenge that GCC airlines face will continue under these growth plans, likely driving additional costs due to related recruiting, training, and retention activities. The increase in capacity combined with the current crisis means that regional airlines must rethink and adjust the fundamentals of their business.
Airlines in the GCC in particular need to react swiftly to avoid following the same loss-ridden path as their more mature competitors in Europe and America. All possible levers need to be considered, including:
- Managing capacity growth more aggressively by deferring deliveries, retiring older aircraft earlier than planned, or deploying the extra capacity in other parts of the world
- Fixing the bottom line by lowering unit costs by aggressively attacking cost elements that do not damage the “products and services” sold
- Striving for operational excellence by reducing business complexity and making business processes efficient and consistent with the product
- Optimizing loyalty programs, customer segmentation, and channel management to attract target customers
- Generating ancillary revenues through creative use of all available assets to break out of traditional ways of thinking
Lower unit revenues and continued cost pressures will squeeze margins, requiring airlines to focus more on their cost structure. But, we believe, that many airlines still have the opportunity to explore all their abilities to secure stable revenue and maybe even generate future revenue growth. Truly creative airlines are now generating significant revenues through non-traditional channels, innovative approaches to pricing, and monetizing more of their assets, particularly various communication channels available to their customer base.
Until now, most GCC airlines have been able to avoid any turbulence. Going forward however, A.T. Kearney suggests that airlines must consider with an open mind how to best mitigate both regional and global challenges facing the aviation industry in the current economic climate. Winners and losers will be defined by the quality and timeliness of key decisions made by management teams, concerning overall strategies, capacity utilization, rigorous cost controls, creative marketing, and in some cases rethinking fundamental aspects of the current business model.
Contact
Bill McKnight, a principal in the Dubai office
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