Gulf megacarriers will become world leaders within five years says Boston Consulting Group

In BCG’s latest report Middle Eastern Megacarriers: Gaining Altitude. The consultancy said passenger flows to and from the Middle East increased by 45 million passengers over the five-year period from 2005 through 2010, and they are expected to increase by another 45 million passengers over the next five-year period, from 2010 through 2015.

BCG said the region has become entrenched as a hub for long-haul travel and expected the Middle Eastern megacarriers – Emiratesi, Qatar Airways, and Etihad – to triple their passenger capacity over the next 20 years.

In the report BCG said the megacarriers share a common challenge as well: the need to manage the pressure that their aggressive expansion plans exert on their margins. Ultimately, Middle Eastern airlines must fill their added seats, it said , —either by expanding their networks or by capturing a greater share of their existing markets..

The consultants identified five main threats:

· Competition from full-service legacy airlines, which can leverage their networks and schedule advantages to attract more-profitable business travelers who prefer nonstop flights at business-friendly departure times

· Greater regional competition among Emirates, Etihad Airways, and Qatar Airways for connecting traffic to non-hub destinations in the Middle East and for intercontinental travel

• Competition from low-cost carriers within the Middle East, such as flydubai and Air Arabia

· The emergence of airlines in Turkey, India, and, potentially, China that embrace the same type of advantaged hub business models being used by the Middle Eastern megacarriers

· The possibility that foreign governments will restrict market access or alter pricing regimes

BCG anticipates that like most other hub carriers, the megacarriers will see their largest profits come primarily from point-to-point travelers, but the industry’s saturation of this segment will force the megacarriers to also pursue two other, more contested pools: passengers with short-haul connecting flights and intercontinental connecting passengers (who, in many cases, are unprofitable to serve).

BCG said the next five years may prove to be a critical turning point for the Middle Eastern megacarriers, and asked:

· How will Middle Eastern megacarriers maintain their profitability and margins as they grow? How will they manage the future mix of passengers, in which (often unprofitable) intercontinental connecting passengers are expected to represent an increasing proportion of demand?

· What markets are likely to see the fiercest competition among the Middle Eastern megacarriers? Are there opportunities for closer cooperation to better manage the increasing competition for the same customers and to prepare for greater competition from emerging hub carriers in Turkey, India, and China?

  What recruiting and retention strategies (especially for pilots and engineers) will be required to manage the operational challenges associated with undertaking a rapid and ongoing fleet expansion while maintaining a competitive cost base?

Rend Stephan, Partner & Managing Director in BCG, Middle East said: “ The next five years will see even greater levels of competition in the airline industry, as Middle Eastern megacarriers add capacity well ahead of underlying demand. They will continue to expand their networks aggressively, add more frequent flights to existing destinations, and upgrade their fleets to larger, more fuel-efficient aircraft so that they can extend their cost leadership. Managing the challenges posed by these transformative shifts should rank high on the agendas of all airline executives”.