Leaders of the Middle East business aviation community gathered in Dubai yesterday in search of strategies for reversing the industry’s general malaise in this part of the world. At a conference held on the eve of the 2016 MEBAA show, speakers called for a more business-friendly regulatory environment as well as progress on controlling rising costs.
The biennial MEBAA event opens on Tuesday less than a week after Middle Eastern economies were boosted by news of an agreement by OPEC oil producing nations to cut supply rates from January in a bid to end the slump in prices that has stunted economic growth. However, experts indicated that crude oil prices will need to get well above their current level of just over $50 per barrel to have a lasting impact on economies in the Gulf states.
Homaid Al Shimmari, CEO of Mubadala’s Aerospace and Engineering Services division, said the Middle East needed more concerted lobbying and advocacy, as fragmented industry representations to government and regulators are not sufficient to effect change. “Currently, the business aviation industry faces a lot of challenges. It needs to understand how to compete and grow. If you are not agile, flexible and smart enough to predict some of the headwinds, you are not going to be able to sustain your presence in this industry,” he told the MEBAA Conference in its keynote address.
Flight costs, training, logistics and catering were all challenges the industry faces from customers. “Pressure from customers is [having] a significant impact on this industry. They want to go farther, they want better services, and they want to pay less. They want more for less. There are many opportunities for us to achieve significant improvements for our customers,” Al Shimmari said.
In his view, enhanced first- and business-class services on Gulf airlines Emirates, Etihad and Qatar Airways represented a threat to business aviation operators. All three are constantly improving premium-segment travel, despite a commercial war with U.S. and European airlines, and enhancing service provisions on board.
For instance, Etihad’s “The Residence”, a private cabin for first-class passengers on the airline, is “definitely an impactful technical development on our industry,” he said. “We have to be very careful to defend our business and keep challenges away.”
Industry fragmentation is a concern. “There is [too much] product. For the customer, that is not a bad situation. For the industry and investors, that is a challenge. If this industry produces 10 platforms per year over 10 years, that is an unsustainable model. There has to be consolidation in this industry at all levels,” Al Shimmari said.
“I believe that competition is good, but only to a certain extent. Given the growing pains of the market, if you cross the line, it becomes destructive. We are not seeing all of you pushing a single item on government, regulators, and suppliers. With fragmented voices, you are not going to get any success,” he said.
“From an investment point of view, if there is a 1 million passenger market for small and medium-size aircraft in this region and I get an 8-to-9 percent internal rate of return, I would definitely invest. As an industry, you are not helping us to look at those investment opportunities.”
Oil Price Boost
The prospect of a meaningful and sustained recover in oil prices could provide a welcome boost for a Middle East business aviation community that has been in the doldrums since it last assembled here in Dubai for the 2014 MEBAA show. In reality, it will have to wait until at least the end of the first quarter of 2017 to determine whether last Wednesday’s decision by OPEC to cut production for an initial six-month period from the start of January will get the price for barrels of crude up to and beyond its $60 target.
In trading days last week the price climbed by 14 percent to just over $53. As trading opened in London on Monday morning, this had further improved to just above $55.
While rising fuel prices are not generally welcomed by aircraft operators, in this part of the world they are viewed in a positive light as a driver of prosperity that may bring fruit in the form of new aircraft sales or more charter bookings. According to research conducted by aircraft broker Jetcraft, oil prices of at least $80 per barrel would result in “a material increase in business aircraft orders” from emerging markets like the Middle East. However, for the purposes of its most recently published survey of market conditions, the company only reckoned on an average price below $50 for the next 10 years.
It is worth keeping sight of the fact that OPEC’s planned cut in supply is predicated on a complex and hard-to-police agreement on production rates holding firm. The brunt of the short-term sacrifice will be taken by Saudi Arabia, the UAE, Kuwait and Qatar and it remains to be seen whether their trust in the commitment of other OPEC producers proves to be well founded. Equally, non-OPEC states could easily undermine the market correction measure by refusing to follow the group’s example.
