2010 Aviation Market Outlook

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Towards the end of 2008, it became evident that the Middle East was unlikely to be spared from the devastating affect of the global recession. Aviation experts argued that, in this region at least, we would see an impact on the bottom end of the aviation market, while the legacy carriers would be afforded the foresight of cutting costs pre-emotively.

But, quite the opposite has occurred. While the legacy carriers continued to tough out the economic downturn, it was the low-cost carriers that saw a healthy growth in their figures during 2009.

Take Air Arabia for example. During the first nine months of 2009, the company registered a turnover of US$400 million. That is just 2% lower than the figure recorded during the same period last year. Not a bad result considering the critics’ argument that the region’s low-cost carriers would be the first to flounder as the financial crisis took hold.

The sharp economic downturn has devastated airlines in other parts of the world however, and due to the recession, the future is uncertain, even in the oil rich countries of the Middle East.

“In times where the entire industry is consolidating, most of today’s airlines are facing the challenge of survival,” explains Oryx Aviation managing director Sebastian König, “and navigating through the rough waters of stiff competition requires a mixed skill-set.

“A significant drop in demand paired with a constant growth of low-frills carriers and a higher volatility in oil prices have all resulted in a situation where the industry’s fundamental problems are being disclosed,” he adds.

But a handful of airlines have managed to handle their cost base expertly, and despite the hard times, have increased their shareholder value.

So why have some carriers survived, while others have failed? “A common feature of those successful airlines is that all of them persistently lowered their cost base without jeopardising the core of their business, meaning that the art of cost cutting lies in the ability to reduce expenditures along the service value-chain where it doesn’t show to the customer,” König explains.

“Having talked to several senior executives in the Middle East, as well as in other regions across the world,” he adds, “the majority emphasised that the exercise of relentless cost cutting has to dissolve into each and every departmental function, eventually resulting in a substantial paradigm shift of an airline’s employees.”

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A case in point, it seems, is Gulf Air. The airline’s CEO, Samer Majali is making it his priority to adapt the troubled airline according to changeable market conditions.

The decision to fly to five cities in Iraq has been hailed by experts as an “excellent one”, and Majali remains adamant that there needs to be a change of culture within the airline in order to establish itself in a profitable position.

“Altering the mindset of the staff could take a long time – maybe even a generation – so we have to ask them to give more than 100%,” he told Aviation Business in October.

König argues that quite often, where airlines fail however, is in conveying the sense of urgency needed to cut costs.

“Very often, cost cutting schemes simply lack the profound structure required to tackle this issue in a holistic and sustainable manner, meaning that they are either not aligned with a company’s overall business strategy, or, rather, they focus on quick-fix solutions in order to present short-term success to the shareholders.”

But the biggest contributor to an airline’s downfall, König says, is a lack of support from the board of management.

“In other words, just a few months down the line, many executives tend to question the viability of their cost cutting programme and eventually, may refrain from executing it.”

But how should an airline go about establishing a comprehensive and yet detailed cost reduction scheme? “Like all other strategic decision-making processes, the initial step is to set the scene”, says König, which implies to accurately evaluate the company’s status quo.

“Widely used theories that support these efforts are the SWOT (Strengths – Weaknesses – Opportunities – Threats) model, Porter’s Five Forces and the so-called Gap Analysis. Properly deployed, they all serve the purpose of obtaining a profound ‘helicopter view’ on the company’s starting position, with a view to benchmarking it against the competition.

“An implementation team must be formed, quarterly or bi-annual review meetings have to be scheduled, and operational results must be measured,” König says.

“It is then up to senior management to set a strategic direction, taking into consideration the company’s long-term plans, cost cutting goals, future trends and, of course, constraints. Finally, the delivery of the action plan has to be ensured.”

Unfortunately, cost reduction is only one part of the business, however. In times of increasingly fierce competition, yields also have to be maintained in order to secure positive operational results at the end of an airline’s financial year, and as transparent and easy as all of this may sound, most companies fail to execute their cost cutting plans, simply because of poor internal communications, or a lack of trust in the board of management,
König adds.

Read on to find out what 2010 holds for some key Middle East airlines.