Though there has been no shortage of news coverage about the state of the Gulf’s airline industry after the international economic crisis, there are plenty of developments in the aviation sector ongoing outside the public eye, especially in Ras Al Khaimah (RAK).
Investment in the sector is taking off, with huge expansion plans from practically every carrier. Oman recently increased the operating capital of its national airline, Oman Air, six-fold, from $130m to $777m. Low-cost carrier Air Arabia, coasting on net profits of $123m in both 2008 and 2009, has placed an order for 44 new craft and invested $50m in a new hub in Casablanca. Qatar Airways has ordered a staggering $40bn worth of new aircraft. And RAK Airways has invested more than Dh100m ($27.22m) in infrastructure projects and plans to invest at least Dh550m ($149.74m) upgrading and expanding RAK Airport. But investment is not necessarily translating into profits: of the four carriers just mentioned, Air Arabia is the only one to turn a profit in the last two years.
The major upgrades across the board mean that interested parties are competing for slices of what is still a very small pie. According to the International Air Transit Authority (IATA), only about 10% of the world’s air traffic passes through the Middle East. While all estimates predict strong growth in the region – Boeing figures estimate revenue passenger km (RPKs) will increase at a compound annual growth rate of 6.6% between 2008 and 2028, and a report from the Kuwait Financial Centre (Markaz) predicts passenger traffic will more than double by 2014 to 280m from 126m in 2008 – the level of investment in the sector is well out of proportion to the region’s short-term revenue potential.
Even if the impressive passenger and freight growth of the last few months (16.5% and 21.4%, respectively, according to the IATA) continues, prices will have to increase exponentially for investors to see a return on the estimated $45bn that is being poured into the sector over the next four years.
This disproportionate spending is understandable in this fast-developing area, where cash-rich governments, who are often the principle investors in the region’s airlines, can afford to swallow short-term losses in order to capture long-term market share. Growing populations, and clout on the world economic stage, mean that the percentage of air traffic passing through the Middle East will almost certainly soar beyond the current 10%. But with so much competition, it will be hard for all the current players in the industry to ride the rising tide.
RAK’s plans for its aviation sector reflect an understanding of just how tricky it will be to gain market share while competing with more well-funded and longer-established neighbours. Rather than pursuing the high-end market – where it would compete with the well-known Emirates, Etihad, Qatar Airways, and Gulf Air, and rising contender Oman Air – RAK has chosen to carve its niche in the low-cost, freight and maintenance, repair and operation (MRO) services subsectors.
Included in the emirate’s business plan is a commitment to position RAK International Airport as “a low-cost airport with very competitive tariffs directly contributing to airlines’ bottom line”. This appears wise: low-cost carriers have been the brightest spot in the Middle East’s aviation industry throughout the recession, raking in profits even as the regional airline industry lost $1.2bn in 2009.
In addition, RAK Airport’s central location – close to key ports and industrial zones, far enough from Dubai to have clear air space – makes it an enticing base for freight consolidation. Worldwide freight traffic shot up 28.3% in January 2010 compared to the same time last year, while passenger demand grew a more modest 6.4%. Location is also key for RAK’s MRO ambitions: RAK lies within easy reach of the Middle East, North Africa, and the Indian subcontinent, areas which are all currently underserved by existing MRO facilities.
There is, undoubtedly, much room for growth in the aviation sector throughout the Middle East. Governments are right to invest in crucial infrastructure for future growth. However, it is important to avoid duplicating the same infrastructure too many times within the region. RAK’s decision to pursue niche markets seems well placed to not only take flight, but also soar.
Ras Al Khaimah www.rasalkhaimah.eu
Great info!