The Wall Street Journal
By Robert Wall
April 15, 2016 12:30 p.m. ET
The Mideast’s fast-growing airlines, long a thorn in the side of legacy U.S. and European carriers, are hitting a rare patch of turbulence, thanks to low oil prices.
Today’s energy rout has been great for global airlines, whose fuel bills typically are among their biggest costs. Profits for the global industry nearly doubled in 2015, to a record $33 billion from a year earlier, thanks mostly to lower fuel costs, according to the International Air Transport Association, a global trade body. Delta Air Lines Inc., for example, says it expects to save $3 billion on fuel costs this year alone.
But not every big carrier is as big a winner. Dubai’s Emirates Airline, Abu Dhabi’s Etihad Airways and Qatar Airways all count on corporate travel in and out of the Mideast for a big chunk of their premium-seat bookings. And those booking are down sharply, executives say, amid today’s oil-price collapse.
Those airlines have posted blistering growth over the past decade, using their airports around the Persian Gulf as transfer hubs for long-haul flights between Asia and Europe. They spent lavishly on new planes, and benefited from infrastructure spending by their oil-rich governments.
Just like the rest of the industry, they are now saving lots of money on fuel. But low oil prices are acting as a “a double-edged sword,” said Tim Clark, president of Emirates, now the world’s largest by international traffic. Speaking to reporters at an aviation conference in Berlin last month, he said bookings from companies involved in the energy sector—Emirates’ most important corporate customers—virtually disappeared with the collapse in crude.
“There is a drop in premium yield because of the conservative budgeting of major multinationals, due to the drop in the oil price,” Qatar Airways Chief Executive Akbar Al Baker told reporters at the same conference. “When you have a drop in the oil price, you also have a drop in business travel,” he said.
The government of oil-rich Oman is cutting costs across the board, including curbing premium travel, said Paul Gregorowitsch, the chief executive of state-owned carrier Oman Air. The airline is trying to offset the loss of regional business travel with lower-margin “transfer” traffic, connecting destinations in Europe, Asia and Africa through its hub in Muscat. Etihad didn’t respond to requests for comment.
How hard are lower oil prices hitting the Mideast carriers? It’s difficult to tell since they are all government owned and most disclose few details about costs and revenue. Because they aren’t traded publicly, they also aren’t covered extensively by airline-industry analysts.
Mr. Clark said Emirates’ top-line revenue for the financial year ending March 31 was still likely to be “good,” though he didn’t disclose numbers. IATA figures Mideast airlines racked up overall profit of $1.4 billion, up 55% from the prior year.
As impressive as that sounds, lower oil prices helped U.S. airlines, along with those in Canada, book $19.4 billion in profit, up 73%, in 2015. In Europe, profit doubled, to $6.9 billion.
For Western executives who have long accused the Mideast carriers of benefiting unfairly from what they say are hidden subsidies from their government owners, the shift is a welcome one. As oil revenue plummets in the region, governments have been cutting budgets drastically. That could threaten industry investment, including airports and road links, critical to their growth. Mideast carriers deny benefiting unfairly from government assistance.
“The drop in fuel prices, which is absolutely significant, creates a different economic environment for these states regarding their airlines,” Air France-KLM SA Chief Executive Alexandre de Juniac said.
So far, there haven’t been signs of retrenchment. Qatar Air’s Mr. Al Baker said expansion of his airline’s new airport hub in Doha was proceeding as planned to more than double capacity before year-end.
Airlines from outside the region are also feeling some of the same pinch. In the U.S., the pain is principally centered on Houston, where capacity growth has slowed markedly, according to Khalid Usman, a principal at consultancy Oliver Wyman. Capacity in Houston is up just 0.6%, compared with 4.5% growth for U.S. airports overall.
Yield, a measure of ticket revenue, fell 6.3% in the third quarter in the U.S. as airlines passed along some of their fuel-cost savings. But Houston ticket yields fell 11.9%, Mr. Usman said, citing the latest available U.S. government data.
United Continental Holdings Inc., the largest operator in Houston, has suffered a 20% drop in business from energy clients and last week said it would keep capacity flat or even reduce it this year after originally planning to boost flying at the hub by up to 3% in 2016.
European airlines also have had to adjust. British Airways parent International Consolidated Airlines Group SA last year trimmed capacity on flights to Houston after unit revenues declined sharply. KLM is suspending its Dallas flights this summer from its Amsterdam hub and reducing its Houston service to one flight a day from two.
And Scandinavian airline SAS AB in October stopped flying an all-business-class flight between Stavanger, Norway’s oil hub, and Houston. The flight offered 44 business-class seats on a Boeing Co. 737 single-aisle plane.
Original article can be found here: http://www.wsj.com
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