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Once-Mighty Gulf Airlines Turn to Budget Allies for Growth

Layan Odeh
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Once-Mighty Gulf Airlines Turn to Budget Allies for Growth

(Bloomberg) -- From a desert outpost to a sprawling metropolis boasting the world’s biggest long-haul airline, Dubai has long epitomized rapid growth, and its biennial air show has typically mirrored that quest with record-breaking plane orders.

But the last two years haven’t been easy on the aviation industry or the global economy, turning the event, which starts Sunday, into a barometer for future demand.

Boeing Co.’s 737 Max, a star at the 2017 gathering, is grounded following two fatal accidents. The Airbus SE A380 super-jumbo has been canceled, and the three big regional carriers -- Emirates, Etihad Airways and Qatar Airways -- are re-evaluating their fleet requirements and route networks after gorging on wide-body orders in the last decade. The appetite to invest more has also been dented by the fallout from lower oil prices and trade tensions roiling global economies.

Dubai has become a crossroads for global air travel, a strategy emulated by Abu Dhabi just to the south and nearby Qatar, which is now excluded from the air show because of regional political tensions. But more recently the major airlines have sought closer ties with local budget carriers to supply passengers and rekindle growth, changing the dynamic in a part of the world that long championed the hub concept and put a focus on big aircraft.

“The Middle East is in a state of flux,” said John Strickland, director of JLS Consulting in London. “The super-hub model has been a tremendous success in exploiting the Gulf’s geography, but we’re seeing changes in the landscape as competition intensifies from more direct services and the hub carriers look to a future beyond the A380 with smaller equipment and a different approach to obtaining effective feed for their networks.”

A cooperation accord between Dubai-based Emirates and sister company FlyDubai has already morphed into a de facto merger, while a recent agreement will see Air Arabia establish a short-haul operation in Abu Dhabi to provide vital traffic to Etihad, which is struggling under the weight of $4.8 billion in losses over three years.

The move comes after Etihad abandoned a bid to build a global network from airlines including Air Berlin Plc and Alitalia SpA following a string of failures, prompting the state-owned company to cut routes, shrink operations and slash plane orders worth more than $21 billion.

Air Arabia may announce an order for 100 Airbus narrow-bodies with a sticker price of $10 billion, people with knowledge of the matter have said, spurred by existing growth plans together with the Abu Dhabi deal.

Emirates, which likes to make a splash at its home expo, has yet to sign off on 70 Airbus wide-body jets worth $21 billion at list prices. But Emirates President Tim Clark has said the deal is on hold amid issues with the planes’ Rolls-Royce Holdings Plc engines, and it’s not clear if a new strategic plan the company is working on will impact fleet requirements. Also at stake is a $15 billion commitment for 40 Boeing 787 Dreamliners that remains unconfirmed.

Initially lukewarm on getting close to its sibling, Emirates has embraced a strategy promoted by the airlines’ state owner, with the pair embracing route rationalization to minimize duplication. Emirates is reconsidering its fleet requirements after Airbus abandoned the A380 jumbo, for which the Dubai carrier is by far the biggest customer. Two years ago at the air show, Emirates came close to ordering more of the model, before putting the deal on ice and later opting for a far smaller number.

Emirates’ activity at the show will be closely watched, and the “jury is out” on any additional orders from the airline, Airbus Chief Executive Officer Guillaume Faury said in an interview with Bloomberg Television in London on Nov. 15. This year’s show will be Faury’s first as CEO, having taken over from Tom Enders earlier this year.

Growth at FlyDubai, the Max’s second-biggest customer has been hampered by the jet’s grounding. The carrier now serves 22 cities from the Emirates terminal at Dubai International Airport, and Clark has said other airlines could shift to the sheikdom’s secondary Al Maktoum hub -- where the air show takes place -- to accommodate further integration.

Local conditions continue to add pressure on Gulf carriers to join forces. Mideast demand initially roiled by the impact on economies of plunging oil prices, and that’s been exacerbated by a broader regional slowdown fueled by trade and political tensions.

The region is a focus for conflicting geopolitical forces “with real consequences for aviation,” International Air Transport Association CEO Alexandre de Juniac said at an Arab Air Carriers Organization meeting Nov. 5. Mideast airlines will lose $5 per passenger this year, versus an average global profit of $6, the industry group estimates.

It’s possible an Air Arabia plane purchase could see Etihad reduce its own wide-body backlog with Airbus, said George Ferguson, a Bloomberg Intelligence analyst.

“This shift is challenging for the aircraft manufacturers,” he said. “They like any order, but they’ll really miss demand for large aircraft even as they add single-aisle deals.”

--With assistance from Guy Johnson and Francine Lacqua.

To contact the reporter on this story: Layan Odeh in Dubai at lodeh3@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Christopher Jasper, Benedikt Kammel

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