Gulf Hubs Asphyxiated by Covid-19

Over 800 jetliners are grounded in the airports of the Gulf countries. Nerve centre of the air routes between Asia, Europe and Africa, the region has cause for worry: will the industry that plays a crucial role in the diversification of economies that are far too dependent on hydrocarbon revenues be able to survive?

“In a career of 21 years, I’ve known several sanitary crises, SRAS and Ebola in particular, but nothing has affected air travel as seriously as the coronavirus pandemic. It’s a drastic drop for several rotations per week which aren’t flying at all...” Thus speaks Feras Malallah, a pilot based in Kuwait.

In the neighbouring United Arab Emirates (UAE) the situation is identical. There the government has temporarily suspended almost all commercial flights to and from the terminals of the federation bringing to a standstill the major hubs at Abu Dhabi and Dubai, which see 100 million transit passengers each year. The long-haul giant, Emirates, has grounded 270 aircraft and over 20,000 flight crew members. A press release from the company’s CEO explains that he can no longer operate passenger flights at a profit “so long as borders remain closed.” The sixty-year-old executive adds that “rather than ask our employees to resign”, Emirates has chosen to “temporarily reduce” by 25 to 50% their basic salaries for a period of three months.

Several hundred seagoing personnel of the company’s competitor Oman Air have seen their employment contracts abruptly come to an end. As for Qatar Airways, which has been under pressure on account of a deficit of 639 million dollars (515 million pounds), due in part to the blockade imposed on the emirate since 2017, has laid off 200 employees.

Over 500 billion pounds losses

According to estimates published in mid-March by the International Air Transport Association (IA TA), the coronavirus could cost the Gulf airlines over 7 billion dollars (5.6 billion pounds). Worldwide, the pandemic has decimated air travel and rating agency Moody’s is predicting the cancellation of over 25% of all commercial flights for 2020. The situation is all the more disruptive for companies specialising in a transit method which consists of funnelling all their passengers through a single air hub located at the junction of major commercial routes before sending them on to their final destination with a second flight. Dubai and Doha are situated midway between Europe and Asia, a route which accounts for a quarter of the total mileage flown by passengers the world over, and their airports thrive on an economic model known to maximise occupancy rates. However, this model remains especially “vulnerable” in the event of travel restrictions, according to Singapore Airlines, another transit specialist.

The Emirates’ war chest

“Suspending all our flights was a wise decision. As I’ve been saying since the crisis began, the coronavirus doesn’t travel on its own! Airlines are the number one vector of its dissemination”, Ferras Mallah reminds us. “And it’s an opportunity for my family to take advantage of my presence, the wife is happy to have me home”, he adds.

While our pilot has his own perspective, the airlines have to find financial strategies to weather this unprecedented crisis. The IATA has issued a warning: there is a danger of many bankruptcies if the travel debacle continues to affect their business beyond the month of May. The low-cost Emirati company Flydubai told us that “it is too soon to measure the long-term impact”. Qatar Airways, Oman Air, and Saudia refused to give us interviews. “Smaller, independent airlines such as Saudi Gulf, Jazeera Air, Flynas and a few others may be at risk but it is too early to tell”, says Saj Ahmad, chief analyst at StrategicAero Research. In his view, this temporary suspension of air traffic to and from the UAE will enable the companies to reduce their costs and preserve liquidity, a policy he feels is sound. “The Emirates are sitting on a war chest of nearly six billion dollars” (4.8 billion pounds), he says.

“We’ll get through this” was the confident statement released by the head of Emirates, a company founded in 1985 at the behest of its present Vice-President and Prime Minister of the EAU. “While all the world’s airlines are under threat today, it is unlikely that the Gulf industries will allow their national airlines to go bankrupt” the Bahraini economist Omar Al-Ubaydli tells us. For Muhammad Albakri, IATA Vice-President for Africa and the Middle East, the survival of Gulf carriers will depend in part on “the type of government aid” they receive. In order to prevent bankruptcies, the association “encourages governments to help companies,” he told Orient XXI.

Indeed, besides their role as the nerve centre of the world’s air travel, these infrastructures are seen by the Gulf states as strategic entities of prime importance.

For example, Emirates is owned by Dubai’s sovereign wealth fund. “They are small countries and cannot count on foreign airlines to respond to their needs,” the economist reminds us. The second objective, more political than economical, is to increase the soft power of countries that are still under construction (the EAU, Qatar and Bahrain only became independent in 1971) and to satisfy, as well, the regional rulers’ thirst for international recognition.

While these airlines were quickly able to attract a Western clientele through the quality of their services and low fares, for a long time their European competitors looked down on them, accusing them of unfair State subsidies, cut-rate jet fuel and of investing in European companies in decline so as to attract their Asia-bound passengers. Which is a way of getting around the obligation to negotiate access to the European market. At the same time, the granting of additional stopover rights was facilitated by record aircraft orders placed with Airbus, especially for the long-range A380, as well as armament contracts.

A cornerstone of diversification

Besides their desire to impress the rest of the world, commercial aviation has a key role in the plans for economic diversification common to all the countries of the Arab peninsula, still over-dependent on energy revenues—in Oman, fossil fuels represent three fourths of the national budget. The drop in the price per barrel of oil in 2014 and again at the beginning of 2020 have confirmed the latest estimates of the International Monetary Fund (IMF): considering the present budgetary situation, the region’s financial resources could well be exhausted by 2034.

In this context, the Gulf States see the tourist trade, one of the world’s fastest-growing industries, as a key vector of economic growth. Several of the region’s airports, most particularly Dubai and Doha, invite transit passengers on a quick excursion of the country, conducting an aggressive marketing campaign to arouse tourists’ curiosity about the region.

“A successful tourism strategy begins with a marketing campaign plus a good commercial reputation, and the airline is the starting point for this process [...]. In Saudi Arabia, the importance of the air transport industry is increasing all the time since the idea is to make religious and non-religious tourism a central part of the economy,” Omar Al-Ubaydli points out. Between now and 2040, the Kingdom plans to attract each year over 100 million tourists, twice the current figure, largely made up of the millions of pilgrims to the Islamic holy sites. The capital of Oman has comparable ambitions: 5 million international tourists per annum twenty years from now.

In Qatar and Bahrain, tourist revenues are generated in part by the organisation of international sporting events, World Athletics Championships and FIFA World Cup for the former, Formula 1 Grand Prix for the latter. In Omar’s opinion, international events on that scale require a country to have its own carrier in order to interconnect air and ground services. “There have to be enough flights with the right schedules, connecting directly with ground transport, hotels and car-rental services so that tourists can make the most of their stay,” the economist tells us.

This key role which the airlines play in the development strategies of the Gulf countries limits the risk of bankruptcy despite the financial costs of the coronavirus crisis. “Many of them enjoy direct or indirect government backing, so it is unlikely that any major airline will go down. But in all honesty, several of these companies financed by their governments have been underperforming for decades and would not have survived without that support,” says Saj Ahmad. In an exclusive interview to Reuters on 29 March 2020, Akbar Al-Baker, the CEO of Qatar Airways, promised to maintain commercial flights but admitted that the company might soon run out of cash. “We will certainly have to turn to our government”, i.e., the Emirate which owns the company. “Urgent and decisive state support is needed [...]. We call on governments [around the world] to support the industry through direct financial support, loans, loan guarantees and tax breaks,” says Albakri.

In the medium-term, the greatest threat is the emergence of new airline hubs on the route between Europe and Asia: a terminal with a capacity similar to the Dubai hub has just opened in Istanbul. It will be the home base for Turkish Airlines, a company which serves more countries worldwide than any other. In 2018, Emirates also declared a fall in profits, the worst in a decade. And, last but not least, the emergence of low-cost long-haul flights, made possible by aircraft of a new type, calls into question the durability of an economic model which has allowed the Gulf hubs to thrive for the last twenty years.