Transformation, growth and future challenges of the Middle East aviation market
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Forty years ago, most international airlines viewed the Middle East market as a purely technical stop on the way from Europe to Southeast Asia. In the early hours of the morning, as their planes fly over the Indian Ocean at 35,000 feet, Middle Eastern layovers provide cheap fuel.
A handful of large airlines, such as Saudi Arabian Airlines and Gulf Air, offer low-frequency flights to ensure that the ultra-wealthy can enjoy luxurious first-class service every time. Fast forward to 2024, and the Middle East is now one of the fastest-growing markets in the world, with the world's leading airlines vying to operate the region with the most comprehensive flight network and highest service levels in the world.
This transformation can only be described as incredible. It was far-sighted in thinking and almost perfect in implementation, making the Middle East the center of the aviation industry in one fell swoop. Almost every major city in the world is connected to at least one major hub in the region. Forty years ago, many would not have believed this dream could come true – and today, it has become a reality, surpassing even the most optimistic expectations. However, the aviation industry never stands still.
As long as the aviation industry stops to take a breath, the vestiges of progress will pass. As the aviation industry continues to evolve, many airlines, former executives, shareholders and passengers can attest to this fact. New competitors appeared out of nowhere. Emerging markets sprung up as the geopolitical environment changed. Entrepreneurs who smelled the smell of JA1 kerosene pursued the dream of starting an aviation start-up; they invested hundreds of millions. Ten thousand dollars shrunk to a few hundred dollars in the blink of an eye!
In the aviation industry, change is constant; innovation happens every day and boundaries are always being pushed. This industry full of surprises contributes US$3.5 trillion to global GDP, equivalent to the size of the world's 17th largest country, and the aviation industry may change even more in the next decade.
In this report, we explore the Middle East's success over the past four decades and highlight some incredible statistics. Recognizing that history is not everything, we also look ahead to the next decade, which will be the most exciting and potentially the most disruptive period of change. Fasten your seatbelts and let's take off!
Rising market
While we often hear about new aircraft orders, new route launches and new airline launches in the Middle East, we may not fully realize how quickly the region's aviation industry has grown since the turn of the century. The following two figures clearly illustrate just how dramatic this growth has been.
• In 2000, the Middle East ranked seventh globally with 70 million seats per year. The forecast for this year is 257 million seats, close to South Asia, which is dominated by India's domestic market.
• Since 2000, the Middle East has experienced an average annual growth rate (AAGR) of 6.8%, twice the global growth rate. If measured in available seat kilometers (ASKs), the average annual growth rate (AAGR) will increase to just over 9% due to the region's typically longer segment lengths and wide-body aircraft operating capabilities. Of course, hidden within this regional average is a series of winners and losers.
While two markets, the UAE and Saudi Arabia, dominate, their market structures are very different. In Saudi Arabia, 45% (33.6 million) of seats are operated on domestic routes, while all seats in the UAE market are international routes. The two national markets together account for 61% of all airline capacity in the region, and together with third-placed Qatar, the top three account for nearly three-quarters of all capacity in the Middle East. Unsurprisingly, given the size of the markets in the top three countries and their investment in the aviation industry, they all have higher average annual growth rates (AAGR) than the regional average; Qatar leads the way with a strong AAGR of 12.5% ) is far ahead, meaning production capacity could double every six years. The sustainability of this further growth is an interesting topic to explore, given how the market is developing.
Countries that are growing faster than the market average also face challenges. In some cases this is due to geopolitical issues impacting demand, while in other cases it is because economies and markets are not growing as strongly, such as Kuwait and Bahrain, where local airlines may face increasing competition. Difficulty formulating long-term strategies.
The number of airlines operating in the Middle East has also increased since 2000. In 2000, 135 scheduled airlines provided services, followed by a peak in 2023 with 213 airlines operating. The balance between local and overseas airlines shows that the number of local airlines has doubled over the past two decades to reach 36 by 2023, compared with 177 overseas airlines. The current ratio is 4.7:1, which is more coordinated than the 7.4:1 ratio in 2000; more local airlines have emerged, creating more direct employment opportunities and income for the local economy.
The number of domestic and overseas airlines appears to have stabilized since 2010, averaging around 160 overseas airlines and 38 domestic airlines. Although new destinations are being added, service to these destinations is usually provided by local airlines rather than new overseas airlines entering the market.
Looking back to 2000, many local airlines started operating at the beginning of the century, including Saudi Arabian Airlines, Emirates Airline and Oman Air. Perhaps surprisingly, Etihad was founded in 2003 and flydubai in 2009, but both airlines are now among the top five airlines by capacity. Many overseas airlines are also continuing operations, such as Turkish Airlines, Ethiopian Airlines and KLM. Meanwhile, a steady stream of migrant workers has allowed airlines such as Pakistan International Airlines, Air India and Bangladesh Airlines to grow.
Unsurprisingly, growth in airlines and capacity since 2000 has seen an increase in the number of airports connected to the Middle East, and as the table below shows, both local and overseas airlines are regularly adding new airport connections. Although the highs of 2020 have yet to recover from the impact of the epidemic, the number of airports connecting to the Middle East has almost doubled. Competition between local airlines and overseas airlines exists in nearly 400 airport pairs (20%), which undoubtedly keeps market fares competitive. Competition is also often reflected between traditional full-service airlines and low-cost airlines. between.
Among the Middle East's major local airlines, the number of airports served over the years presents a mixed picture, also reflecting changes in the region's airline composition and product segmentation. Saudi Arabian Airlines operates the largest number of airport pairs, although some routes have been transferred to FlyNas in recent years, causing its total number to drop from a peak of 283 in 2015 to 205 in 2024. This situation is likely to change further given the broader national strategy currently being pursued by Saudi Arabia.
Interestingly, Qatar Airways serves more airport pairs than Emirates. Although Emirates and flydubai have a combined network of approximately 251 airports, the two airlines only serve 32 airport pairs, including points such as Riyadh, Karachi and Male. Emirates and Qatar Airways operate an average of two flights per day per airport pair. By comparison, Gulf Air's route network has shrunk due to changes in ownership structure, focusing solely on its Bahrain base, but the airline still averages two flights per day to each airport, illustrating the importance of all local airlines. For example, service frequency is still important.
Strive to make a profit
Although the aviation industry continues to grow, airlines are not always profitable in such a competitive market, especially smaller local carriers that struggle to compete for market share and offer products that are inconsistent with The gap is even more pronounced when compared to growing airlines such as Emirates and Qatar Airways.
In the Middle East aviation market, the scale effect is indeed obvious: large airlines will achieve unusually high profitability in 2023. Emirates achieved a profit of US$2.7 billion in its latest half-year report; Qatar Airways (for the same period) achieved a profit of US$1 billion. With both airlines confident about their results for the second half of the year, we can expect both airlines to announce record-breaking results in the coming weeks. Unfortunately, profitability is more challenging for some of the region's smaller airlines, some of which may be operating routes more out of an obligation to meet social needs than commercial needs.
Oman Air has struggled with profitability, with the airline reducing losses by 25% in 2023. Despite raising prices, expanding its route network and setting ambitious plans, the company has yet to turn a profit and now those plans may need to be readjusted. In 2016, the airline paid a record $75 million to KLM/Air France for two slots at London Heathrow, but so far it's hard to see how that price translates into a wider network recovered from proceeds. In today's market, prices like this are unlikely to happen again.
Likewise, Saudi Arabian Airlines, the region's largest airline, hopes to return to profitability by the end of the year despite slowing market growth over the past twelve months while also expanding into new destinations. Saudi Arabian Airlines is likely to be acquired by the Saudi PIF fund as part of their Vision 2030 project. As the airline begins to turn its attention to its base in Jeddah and develop passenger traffic to the country for religious tourism, it remains a mystery whether it can solve the profitability problem in the coming period.
Like other major regional markets around the world, it's clear that while the major airlines in each market are generally profitable and delivering returns to shareholders, second-tier and smaller airlines are struggling to break even. In North America, United Airlines, Delta Air Lines and Southwest Airlines continued to make profits. In Europe, Ryanair, IAG International Airlines Group, Air France/KLM and Lufthansa create value for shareholders through economic cycles. However, for many other airlines, making a profit is next to impossible, and staying alive every day is hard to come by.
For many airlines operating in the Middle East, margins are at stake and sudden major changes in the market could be extremely disruptive, with any such change likely to strike fear into the hearts of many airline CEOs. However, as Saudi Arabia ramps up its investment in Vision 2030 projects, this is exactly what is likely to happen over the next five years, and the implications will be huge for all – and perhaps there are other possibilities?
The power to disrupt markets
The aviation industry is constantly facing new and sometimes disruptive challenges. Geopolitical events, epidemics and environmental events all have an impact on global air transport capacity and demand. In many cases, such "shock events" result in short-term changes, before the market returns to normal capacity and demand levels within 12 months. The COVID-19 pandemic has shattered all records, with most markets taking up to four years to recover. But the good news is that this is coming to an end in every market. With the pandemic behind us, attention turns to the next major development that could be disruptive to the Middle East aviation market: Saudi Arabia's Vision 2030.
Planning for Vision 2030 took several years and is one of the most high-profile and expensive economic transformation projects in the world. The plan to transform an oil-dependent economy into a major one based on services and tourism is visionary, exciting and costly, attracting the attention of airline and airport executives across the region. With a total investment of more than 12.4 trillion Saudi riyals (approximately US$3.3 trillion), the plan has three overall goals: to create an ambitious, dynamic and prosperous society and to transform Saudi Arabia into a A key commercial and cultural center in the Middle East. Aiming to outperform rivals such as the UAE or Qatar. Such ambitions cannot be achieved without dramatic changes in the aviation market. Plans to achieve these goals are well developed, consistent with large-scale infrastructure investments in major cities, of which the airport project is just one element.
The Vision 2030 plan aims to have tourism account for more than 10% of GDP by 2030; GIGA projects such as NEOM, Amala and the Red Sea Project attract tourists from around the world who seek a combination of culture and beach vacations. Generate at least 1 million new jobs. An additional 150,000 hotel rooms will be made available in the coming years, including investment in seven-star luxury accommodation in locations such as Al Ula and Red Sea Resorts. It is expected that more than half a million hotel rooms will be available per night by 2030.
Fostering such growth is challenging; significant infrastructure investment, skills training, relaxed visa requirements, and luxury brand and destination promotions targeting high-value global travelers are just some of the challenges. But perhaps most significant is Saudi Arabia's desire to attract more tourists, and the immediate impact on the local aviation market, and subsequent "ripple effects" on other markets in the Middle East.
Vision 2030 plans to achieve 300 million air passengers by 2030, of which 100 million will be tourists (regardless of how tourists are classified). This is a very ambitious target considering the current estimated passenger volume to Saudi Arabia (round trip) in 2023 is 107 million, as shown in the table below.
Having a domestic market of nearly 43 million passengers per year provides a solid foundation for the overall market. However, achieving this will require unprecedented levels of capacity growth on international routes. To achieve the required scale, market demand will have to grow by more than 20% annually until 2030, a growth rate that is three times the level from 2010 to 2019 and pre-pandemic. Such sustained growth rates have never been achieved in any major national market. While the goals are aspirational, achieving such a breakthrough is becoming increasingly challenging as the aviation industry faces a range of supply challenges.
Of course, the local market is confident that Saudi Arabia can achieve the goals of Vision 2030. In fact, achieving even half of what they expected would be a remarkable achievement. So, what are the key factors that determine whether Saudi Arabia can approach the 300 million air passenger market by 2030?
New airlines, aircraft orders and resources
One of the fastest growing drivers is the launch of a new airline alongside existing local airlines. That's why Riyadh Airways was founded, and perhaps one or two more airlines will be announced in the coming months.
Riyadh Airways has an ambitious plan to connect the capital to more than 100 international destinations, which could create around 200,000 jobs. They have also ordered 39 Boeing 787 passenger jets, with first deliveries initially expected in 2025, although current production issues at Boeing could cause delays. In addition, in November 2023, the airline's CEO Tony Douglas said that they would announce a narrow-body fleet order within a few weeks. However, weeks have now turned into months, and ongoing quality issues at Boeing (and by extension Airbus) appear to have derailed that plan. Narrowbody orders or not, Riyadh Airways is unlikely to become a significant air operator before the end of 2026, as any new airline would need to go through the necessary incremental increases in capacity. As time goes by, it becomes increasingly doubtful whether they can actually achieve their goal of 300 million passengers.
The launch of Riyadh Air enables Saudi Arabian Airlines to focus on Jeddah and the religious markets traveling to the city, as well as commercial needs. It could also mean Saudi Arabian Airlines will have to drop some routes to Riyadh, even on limited slots like London Heathrow. The revised focus also places more emphasis on Saudi Arabian Airlines' profitability in the business, with a clearer focus and business strategy, including leveraging the 39 Boeing 787 aircraft on order for 2023. With an almost "guaranteed" religious market, strong domestic demand and mature regional markets, it is almost impossible for Saudi Arabia to fail. However, only time will tell whether they can achieve a clearer market position.
In addition to Saudi Arabian Airlines and Riyadh Airways, Saudi Arabia is also developing other new airlines. With plans to launch NEOM Airlines later in 2024, they are committed to delivering service levels in line with the region's wider development vision. NEOM Air does not yet have IATA certification and, more importantly, has not ordered any aircraft or announced any route network plans, making a 2024 launch look somewhat dubious. Of course, aircraft can be leased quickly, but ongoing delivery issues have led airlines to extend current lease terms. In addition, considering that NEOM aims to provide high-quality services, modifying the interior of the cabin seems unrealistic. Wider supply chain issues have caused many of the initial NEOM projects to fall behind schedule, so the delay in the launch of the new airline may be the least of the many issues facing it.
Planes aside, perhaps the bigger problem is the lack of qualified employees to operate these expanded airlines. Although Riyadh Air aims to go digital and NEOM Air wants to operate "innovative aircraft", attracting a pool of qualified pilots with experience could be a challenge.
Before the outbreak, predictions showed that the global pilot talent gap would reach nearly 35,000 by the end of 2030. After the epidemic, this shortage became more serious. Although the industry has made efforts to promote talent development, the situation is still far from improving as expected. All of this means Saudi Arabian airlines may have to pay above-market wages for experienced pilots. While Saudi Arabia has attractive tax-free benefits, similar benefits exist elsewhere. This makes the "come work for us" recruitment program challenging, resulting in the need for job fairs all over the world this year!
Balancing product portfolio and market creation?
In addition to issues such as aircraft resource shortages, other resource issues and the completion of master planning projects on time, the key question remains: Where will these 300 million passengers come from, and how sustainable will this demand be in the future?
Stimulating local market demand is the most obvious source, although it may also be the most difficult to create – especially to achieve the levels of demand required to achieve publicly stated targets. Market stimulus usually comes from low-cost airlines (of which there are many in Saudi Arabia) and the need to provide cost-effective accommodation options to attract tourists, but this is inconsistent with the product positioning of luxury resorts currently being developed. A quick search for accommodation in the Red Sea resorts in October showed a six-night package at the St Regis from £11,200 and Six Senses Southern Dunes from £8,327; by comparison, South East Asia Similar luxury accommodation is half the price, even cheaper in the Caribbean.
While the development of luxury accommodation may be in line with the goals of Vision 2030, it appears to be disconnected from the actual needs of attracting average spending tourists. Creating a market of 300 million passengers (100 million of which are tourists) and launching a six-star accommodation product is unlikely to achieve the desired results.
Steal my market - impossible!
The success of other local airlines, at least initially, has been based on attracting connecting passengers from around the world. For Emirates, the foundation of their route network initially revolved around connecting Europe with the Indian subcontinent and Southeast Asia, often luring travelers with attractive transfer packages on the beaches of Dubai. In recent years, local market demand has matured to a certain extent, accounting for more than half of all passenger traffic, but this is only 23 million transfer passengers per year.
In Doha, the share of transfer traffic is close to 85%, and even higher on some routes as Qatar Airways attempts to go head-to-head with rival Emirates. Although slightly beyond the Middle East, the new Istanbul Airport and the growth strategy of Turkish Airlines (an airline that already flies to more countries around the world) show that developing a transit hub through Riyadh requires a very competitive product. The product should combine low fares, fast connections and offer attractive transfer packages in Riyadh, while the lack of coastline may deter some potential transfer passengers. Of course, it would be naive to expect anything other than a competitive response from all the local airlines in the region, many of which have substantial aircraft orders of their own for the coming years, as the table below shows.
By the end of 2029, the 10 largest airlines in the Middle East had ordered a total of 795 aircraft; on a regional market basis, it is one of the largest existing orders. In its latest global market forecast, Airbus estimates that 58% of new aircraft deliveries will be used for network expansion; applying this proportion to the 795 aircraft these airlines have ordered, assuming an average passenger capacity per aircraft of 160 seats, assuming a lower utilization of an average of 4 flights per day, these local airlines will add an additional 107 million seats to the market by 2029. While some 16 million of these aircraft will be supplied by Saudi Arabian airlines, the level of competition from competing airlines (with new capacity of their own) will further complicate market conditions, creating more consequences not only for Riyadh Airways and Saudi Arabia Challenges are also great challenges to the ambitions of "Vision 2030".
The balance between ambition and reality
Adjusting Saudi Arabia's economic dependence on oil is necessary. Focusing on sectors such as tourism, aviation/aerospace and services is also a natural evolution of economic development. The ambition of Vision 2030 has captured everyone's imagination, and of course it has architects scrambling almost every day to design something better than others. From a strategic positioning perspective, Saudi Arabia always wants to outperform its immediate neighbors, and the plans it has set are indeed in line with this goal.
All in all, it is becoming increasingly difficult to achieve the above ambitious goals. A difficult aircraft supply market, a scarcity of experienced operations personnel (which would be costly to say the least), and fierce competition from a host of airlines that will not easily give up their existing market share, make The goal of 300 million passengers by 2030 seems unachievable, even under the most optimistic scenarios.
However, even if Vision 2030 achieves half of its target by the end of 2030, the additional 100 million passengers passing through Saudi airports will still create a remarkable success story for the kingdom. (Source: OAG Aviation)