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First with Financial Comment from Arabia

Passenger growth fails to boost revenues at Air Arabia

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Air-Arabia-796752Air Arabia has reported a 14 per cent growth in passenger numbers to 2.96 million in the first nine months of the year, and yet profits advanced by a more modest six per cent to $91.6 million and revenues actually fell by two per cent to $400 million.

Sharjah Government-owned Air Arabia’s figures show a similar pattern to Dubai’s Emirates Airline. That is to say passenger numbers are rising while revenues are falling, although profits are benefiting from cost cutting and lower fuel prices.

Return-on-capital

Normally the objective of business expansion is to boost revenues with the introduction of new capacity. When revenues fall as a result of new capacity it points to pricing pressure on the core product, and over-expansion. Indeed, more people are traveling but they are paying less to do so; and ticket prices are being cut to fill new aircraft.

At what point does a business stop expanding when its prices are falling? In a normal commercial venture then accountants would begin to raise the red warning flag at this stage. The return-on-capital-employed is falling when it ought to be rising in a growing business.

Have Middle East airlines overdone their expansion and purchasing of new fleets in the boom years only to face delivery of these aircraft in a market slump? That much seems increasingly obvious but what can be done about it?

Much depends on the government owners of the airlines. How long term are they thinking with capacity expansion? Is it for national prestige or commercial reasons? Are the additional benefits of an airline to an economy so great that it can be a loss leader?

Engines of growth?

However, one thing that is becoming clear is that Gulf airlines do not look like becoming engines of prosperity for any government except Dubai, whose own profitability is bound to take a knock from all this new competition.

The winners in the short term are the airline manufacturers with orders to keep them going through a tough time, and the global traveller whose tickets are being subsidized by governments to whom they generally have no affiliation. Yet such is the underlying wealth of the Gulf that this situation could continue for many years.

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Written by Peter Cooper

November 15, 2009 at 10:14 am

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