When Emirates – ranked the world’s best airline in 2016 and one of the Middle East and Africa (MEA) region’s most successful businesses – announces an 81% plunge in annual profits, it is probably time to take a closer look at the Gulf’s aviation industry.
For decades, the aggressive growth strategy of airlines from the Gulf Co-operation Council (GCC) region was rewarded with attractive profit rates, and created global players that took three of the ‘world’s best airlines’ top 10 spots in 2016. Billions were invested in new fleets and modern airports, ignoring questions of overcapacity and the economic sustainability of so many airlines in a relatively small region.
Paradoxically, with the fall of the oil price, the problems for these premium airlines began, due to falling passenger appetite for business – and recently also for economy – class flights. The list of problems directly affecting the aviation business last year is long and includes the Brexit vote, global terror attacks, currency issues and the policies of the Trump administration in the US.
Since the large orders with Boeing and Airbus are unlikely to be cancelled and the airport expansion plans can hardly be halted, it remains to be seen how GCC airlines will master the current challenges. They are trying to attract more passengers with investments in flight security and flight comfort (connectivity and cabin space), along with an aggressive price strategy that clearly did not work in 2016.
This year, the overall framework for the aviation industry does not appear to have changed, and this might lead to market consolidation or a shift from a growth to a profitability strategy. Meanwhile, passengers are likely to enjoy lower fares and better attention after a long period of price hikes and falling service quality in recent years.
Mazdak Rafaty is managing partner of Ludwar International Consultancy and SME adviser to the joint Emirati-German Chamber of Commerce. Email: firstname.lastname@example.org