How Long Can Middle East Airlines Keep Buying?

Posted by: Carol Matlack on June 16

In the biggest deal announced so far at this year’s Paris Air Show, Etihad Airways on June 16 placed an order for engines worth at least $7 billion to power 100 big jets that the Abu Dhabi-based carrier ordered last year from Boeing Co. and Airbus. By boosting its fleet from 50 to 150 planes over the next decade, the 6-year-old airline will cement its position as “the fastest growing airline in aviation history,” Etihad Chief Executive James Hogan said at a press conference.

Obviously, Etihad has grand ambitions and deep pockets – but so do a lot of other Middle Eastern carriers. Qatar Airways, Dubai-based Emirates and its low-cost affiliate Fly Dubai, and Bahrain-based Gulf Air together have more than 420 passenger jets on order from Boeing and Airbus. ALAFCO and DAE, two leasing companies based in the region, have ordered about 260 more planes.

Even as the airline industry was spiraling into deep recession, Airbus booked an astonishing $30 billion in orders from Middle Eastern customers, accounting for some 61% of its order book during the 12 months leading up to the show. Qatar ordered another couple of dozen planes, worth almost $2 billion, as the show opened on June 15.

The question is whether all these airlines can possibly succeed, or even survive. Boeing and Airbus, in their long-term market forecasts, say they expect passenger traffic in the Middle East to rise an average 6% to 7% annually over the next two decades, compared to an average rate of 5% or so worldwide. Yet Hogan predicts Etihad will grow 12% annually at least through 2020. The orders from other carriers imply that they are counting on similar expansion.

When I asked Hogan to explain his forecast, he talked about new outposts of the Louvre museum, the Sorbonne, New York University and the Cleveland Clinic helping to establish Abu Dhabi as an “alternative hub” in the region, attracting visitors as well as connecting passengers. “We’re very comfortable that we will utilize these aircraft,” he told me. “Alternative” means an alternative to Dubai, which is less than 100 miles away from Abu Dhabi.

Realistic? Frankly, I have my doubts about that scenario, and about the prospects of some other carriers in the region. And I suspect that the aircraft makers and their suppliers are more nervous about it than they let on.

But not everyone agrees with me. When I put the question to Damien Lasou, the head of Accenture’s aerospace consulting practice, he said Middle Eastern carriers had a smart strategy. “They’re taking advantage of the crisis to position themselves, with newer planes, on routes where they can compete” against established carriers such as Air France and Lufthansa, he said.

We may have to wait until the 2011 air show, or even later, to find out who’s right.