A.T. Kearney says low cost carriers will make their mark in the GCC
by: A.T. Kearney
Global management consulting firm A.T. Kearney says the Middle East will see a significant growth of low cost carriers (LCC) across the region.
|A.T. Kearney suggests the GCC market has ample room for LCCs due to the high growth rates and consumer demand for a wide range of value based fares.
According to Bill McKnight, Associate Director in A.T. Kearney global airline practice, 'The Middle East region is one of the last frontier's for the LCCs and there is no reason to believe that the business model that has been very successful in the United States and, Europe and Southeast Asia will not be successful here as well.'
The Middle East is predicted to be the fastest growing region for passenger traffic, with an average annual growth of 7-8% between 2007 and 2015. That surpasses the global average of five percent according to AT Kearney's estimates.
The region's aviation markets are still regulated although some governments have implemented the 'open skies' policy that is facilitating new players in the airline industry to promote air services and traffic growth. The UAE, Oman and Kuwait are three of the region's leaders in adopting liberal flying policies, which has helped in their tourist development. McKnight says,'While there has been progress in liberalization of air rights, much more will be necessary for the LCCs to reach their full potential.'
LCC capacity worldwide continues to grow unabated as the low cost carriers add to their fleets and expand into new markets, a trend A.T. Kearney says will only continue to grow for the next few years. Currently, the Sharjah based Air Arabia is the largest LCC airline in the region with Kuwait based Jazeera and Saudi Arabia's NAS Air and Sama not too far behind. Air Arabia had steady growth- carrying 1.76m passengers in 2006 to nearly 2m in only the first nine months 2007; proving that the Middle East market is embracing the LCCs price advantage.
In the next five years, over 1000 aircraft will be delivered to the low cost carrier segment of the market across the world. Although the global market share has been continuously rising from 3.4% in 1996 to over 10% in 2006, it is still expected to rise to between 15 and 20% in the next 5 years.
The likely growth of LCCs in the region will not go un-noticed by the Region's legacy carriers. As in other areas of the world where the LCCs have experienced significant growth, the legacy carriers will have to adapt.
McKnight says, 'The days when national flagship carriers dominated air traffic and were regarded as national symbols are gone; airlines in the Middle East today are being run by professional management teams and on a commercial basis. What this means is that they will move aggressively in the face of new competition and, given the market's dramatic growth rates, find ways to exist along side the LCCs.'
If history is a good indicator of what will happen in the Middle East as low cost carriers grow, there will likely be attempts by legacy carriers to start their own versions of LCCs, introduce more innovative pricing structures, and/or focus more on premium segments of the market. In addition, historically, the growth of the LCCs in other regions has resulted in bankruptcies and major re-structuring by legacy carriers.
'I don't foresee airline failures in this Region, due primarily to the extraordinary growth rates in the Region and a variety of regulatory and infrastructure issues that will be faced by the LCCs,' added McKnight.
In fact legacy carriers are not cutting back, they continue to expand their fleet. 'Emirates Airline now has a total of 246 wide body aircrafts on order totaling a massive $60bn,' says Dirk Buchta, Partner and Managing Director at A.T. Kearney Middle East.
'But the LCCs are sure to make their mark' says McKnight. In five to ten years time the mix of airline products being offered throughout the Region will be broader and will afford the traveling public a wider range of options than ever in the region.'