Regional airlines suffer as the nationals thrive

The continued growth of the Gulf's national airlines - which are expanding their fleets and route networks - does not bode well for regional carriers such as Air Arabia, according to Nomura Holdings.

Abu Dhabi newpaper The National reported Nomura analyst, Scott Darling as saying "smaller, domestically focused regional carriers have less operational and financial strength to compete with national carriers" Darling also downgraded the Sharjah carrier to neutral from buy and lowered his forecast on its passenger growth over the next five years from 10 per cent to 7 percent.

Darling said that region’s national airlines are becoming increasingly comfortable in operating Boeing 777 and Airbus A380 aircraft on short-haul routes “to maintain fleet load factors and access specific premium cabin traffic”.

He also argued that most passenger traffic in the Middle East is moving to or from points outside the region, presenting an inherent problem for regional carriers. “With regional carriers' growth being partly determined on developing regional hubs, increasingly these will encroach on national carrier routes, which may limit the potential upside to margins for smaller carriers.”

Another factor that Darling predicts will restrict earnings is the rising cost of jet fuel, which represents 40 per cent of an airline's operating costs. Air Arabia has made forward purchases of only 15 per cent of jet fuel requirements so far this year.

“With global jet fuel demand up 1.2 per cent year-on-year so far, and inventories at the [Organisation for Economic Co-operation and Development] where they are, we expect [higher] jet fuel prices and hence further cost pressures for these operators for 2011 and beyond," Darling told the newspaper