Arab air transport is slowly evolving to free-market system

 - January 31, 2007, 4:32 AM

As the emirate of Dubai helds its biennial international airshow last month, travelers from anywhere but a major city were feeling first hand the pressures against a robust regional-airline industry in the Arab world. Despite a handful of exceptions, such as Dubai and Beirut, very few airports in the region offer “Open Skies,” a circumstance perhaps more than any other that thwarts any meaningful competition and, thus, an environment demanding of varied service options. And with little scope for internal services from new domestic operators (only a handful of genuine regional airlines exist throughout the whole area), aircraft salesmen have a hard row to hoe in placing turboprop or small-jet equipment with fewer than 100 seats into the Arab market.

Rather, the air-transport industry in the Gulf, the Middle East and North Africa
remains subject to transport regulations that almost always involve the application of
bilateral air-service agreements between pairs of nations or states. Typically, this involves the designation of government-owned (flag carrier) airlines as the only carriers allowed to fly between (usually) capital or other specified principal airports, and subject to strictly limited frequencies and seat numbers.

Being government owned, most generally do not have to fly on a strictly commercial basis, leaving much of the market that could be served by small aircraft flown by appropriately sized airlines the province of altogether bigger machines. For example, travelers between Dubai and nearby Muscat in Oman may find themselves aboard a sparsely populated Airbus A330 and served with a meal for a journey of less than 250 miles and little more than 40 minutes’ flying time.

Meanwhile, the region remains subject to rigid conditions on ownership and control that work against any general move toward overall market freedom. This year’s International Civil Aviation Organization (ICAO) symposium on the industry’s future drew attention to the need for individual countries to consider a more liberal approach. “This might present a major challenge to the Arab sector,” according to Abdul Wahab Teffaha, secretary-general of the Arab Air Carriers Organisation (AACO). “It comes at a time when most Arab airlines are still government owned, with roles beyond strictly commercial considerations [inducing] financial inflexibility and problematic labor issues.”

Changing Market
In a twist of fate, Arab operators find themselves facing European rules, which now require bilateral agreements to embrace the whole European Union membership, rather than individual states. Since this opens Arab markets to all comers, local operators may have to compete against competition on all routes. “Arab countries lack sufficient legal and legislative structure for group negotiation,” said Teffaha. “ICAO has addressed this issue, encouraging the purging of the conditions of ownership and control in such a manner that grants the airlines adequate access to international capital markets.”

Teffaha stressed that issues of war, security and recession have changed the Arab market. “Gone are the days when Arab air transport was immune from economic cycles. War in Iraq, the continued Israeli occupation of Palestine, the surging of international terrorism and terrorism incidents in Tunis and Morocco induced varying degrees of change in different Arab countries.”

These factors have also changed vacation habits of both Arab and non-Arab tourists: Arab travelers have tended in recent months to choose intra-Arab or east-Asian spots, until the outbreak of severe acute respiratory syndrome “thrust [them even more] toward Arab destinations,” said Teffaha. “Restrictions imposed by Western nationals on travel to the Arab region have greatly affected destinations that cater for their taste.” Such trends will dictate a need for Arab tourism infrastructure to change, as well as a new approach to route networks, said the official.

Teffaha’s call for a reconsideration of Arab air-transport structure anticipates an open market where local carriers participate in dynamic developments, resulting from access to equity and investment markets, that would permit them “to restructure into larger and more-effective entities.” If such an evolution were to begin in the Arab market, the air-transport industry in the Middle East could eventually, and no doubt slowly, follow the experience of more mature regional sectors, particularly with the emergence of increased competition through operations such as Etihad Airways in Abu Dhabi and various low-cost carriers in points such as Sharjah.

But so far the region has not followed the trends seen first in North America after President Jimmy Carter’s deregulation of air transport in 1978 or in Europe after liberalization in the mid-1990s. Those developments stimulated increased competition among air-service providers that included, among other measures, the release of non-profit-making routes by flag carriers and other major airlines. Very often such services were essentially short haul, connecting major hubs with provincial points to support medium- and long-haul international flights, or linking secondary cities locally or across the borders of neighboring territories.

Such routes have provided the bread and butter for regional airlines, whose lower cost structures and smaller machines allow more effective service out of the mainstream of international travel. Indeed, the regional industry only emerged as a product of U.S. deregulation, and drove the development of 30-seat turboprop designs such as the de Havilland Dash 8, Embraer Brasilia and Saab 340.

Beginnings of a Trend
While some regional aircraft pepper the arid landscape of the greater Arab region, including North Africa, their numbers hardly constitute the beginnings of a trend. Examples include the two Bombardier Q300s operated by Royal Jordanian subsidiary Royal Wings, Oman Air’s ATR 42s, and a pair of Egyptian-registered Fokker 50s nominally flown by Palestinian Airlines from a temporary base in Egypt alongside two newly delivered Q300s. (Israeli occupation forces razed the 4,590-foot runway at Palestinian’s Dahania International Airport base in December 2001. Since then, the airline has operated from the Egyptian border town of El-Arish and Amman.) In the very north of the region, Iran Asseman Airlines’ fleet includes seven ATR 72s. Among former Soviet designs, Antonov An-24s still fly with Sudan Airways, while Yemen’s Yemenia maintains a few An-26s.

A large portion of the region’s turboprops fly unscheduled charter in support of mineral exploration or oil and gas exploitation, including four-engine de Havilland Dash 7s and twin-engine Dash 8s with Egypt’s Petroleum Air Services. Air Algerie has a well-established collection of Fokker F.27s that serve onshore gas companies in mixed passenger and freight operations, while state industrial company Sonatrach flies an ATR 42 and a handful of 19-seat de Havilland Canada DHC-6 Twin Otters. Three of Oman’s ATR 42s support such contracts, which often require operations to and from gravel runways or other unpaved airstrips. Oman Air would like to introduce regional jets to operate from fewer (but paved) points served by ground shuttle transport to exploration sites.

Considering the long-term demand for regional aircraft in the wider region, Brazilian manufacturer Embraer perceives a requirement for some 130 aircraft in the Middle East and Africa in the next ten years. It divides the market into three elements, which together would constitute 9 percent of total demand in the area: 60 aircraft with capacity for 30 to 60 people, 40 in the 61- to 90-seat category, and a further 30 covering 91 to 120 travellers.

One factor that might continue to mitigate against turboprop sales is not only the lack of pressure on carriers to operate efficiently but a lingering bias against “old-fashioned” propellers in markets that have grown accustomed to costly jet services provided by carriers not burdened by profit requirements.

According to Bombardier Regional Aircraft vice president of marketing Barry McKinnon, interest in regional jets so far appears focused on the 70-seat variety. Gulf Air, for one, has taken RFPs from both Embraer and Bombardier for their respective 70-seaters, and expects to declare a winner during next year’s first quarter. Egyptair surfaced as another strong candidate for a 70- to 90-seat acquisition, as has Oman Air, which for local Gulf services sees itself as a high-frequency/low-capacity niche operator. Potential destinations include not only the obvious Dubai (which is already served by competitors using aircraft as large as the Boeing 777), but also secondary points such as Al Ain and Sharjah.