Forty years ago, most international airlines saw the Middle East market as a purely technical stop on their way from Europe to Southeast Asia. In the wee hours of the morning, as their planes flew over the Indian Ocean at 35,000 feet, transit points in the Middle East could provide cheap fuel.
A handful of large airlines, such as Saudia and Gulf Air, offer low-frequency flights, ensuring that the extremely wealthy can enjoy luxury first-class every time. Fast forward to 2024 and the Middle East is one of the world's fastest-growing markets, with the world's leading airlines competing to operate the world's most comprehensive network and highest-level service.
The transformation can only be described as incredible, with a visionary idea and near-perfect implementation, making the Middle East the center of the aviation industry in one fell swoop, with almost every major city in the world connected to at least one major hub in the region. Forty years ago, many would not have believed that dream could come true – but today, it has become a reality, surpassing the most optimistic expectations of the past. However, the aviation industry never stands still.
As soon as aviation stops to catch its breath, the traces of progress will pass. As the aviation industry continues to grow, many airlines, former executives, shareholders, and passengers can attest to this fact. New competitors are popping up out of nowhere, emerging markets are springing up with changes in the geopolitical environment, and entrepreneurs who smell the smell of JA1 kerosene are chasing their dreams of being aviation start-ups; They put in millions of dollars, only to shrink into hundreds of dollars in the blink of an eye!
In aviation, change is constant; Innovation happens every day, and boundaries are always being pushed through. This surprise industry contributes $3.5 trillion to global GDP, the size of the world's 17th largest country, and the aviation industry is likely to change even more in the next decade.
In this report, we will explore the success of the Middle East 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 most disruptive period of change. Fasten your seatbelts and let's take off!
Climbing market
While we often hear about new aircraft orders, new routes, and new airlines in the Middle East, we may not be fully aware of the pace of growth in the region's aviation industry since the turn of the century. The following two figures clearly illustrate how rapid this growth has been.
• In 2000, the Middle East ranked seventh in the world with 70 million seats per year. This year's forecast is 257 million seats, which is close to the South Asian region, which is dominated by the Indian domestic market.
• Since 2000, the Middle East has grown at an average annual rate (AAGR) of 6.8%, twice the global growth rate. If measured in terms of available seat kilometres (ASKs), the average annual growth rate (AAGR) will increase to just over 9% due to the region's typically longer segment lengths and the operational capacity of wide-body aircraft. Of course, there is a series of winners and losers hidden in this regional average.
While the UAE and Saudi Arabia are two dominant markets, they have very different market structures. In Saudi Arabia, 45% (33.6 million) of the seats are operated on domestic routes, while all seats in the UAE market are international. Together, these two national markets 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 top three countries' markets and their investments in the aviation industry, their average annual growth rates (AAGR) are higher than the regional average; Qatar leads the way with a strong annual growth rate (AAGR) of 12.5%, which means that production capacity could double every six years. Considering how the market is evolving, the sustainability of this further growth is an interesting topic to explore.
Countries that are growing at a rate higher than the market average also face challenges. In some cases, this is due to geopolitical issues affecting demand, while in others, it is because economic and market growth is not as strong, such as Kuwait and Bahrain, where local airlines may struggle to develop long-term strategies in the face of increasing competition.
Since 2000, there has also been an increase in the number of airlines operating in the Middle East. In 2000, there were 135 scheduled airlines serving, which subsequently peaked in 2023 with a total of 213 airlines in operation. The balance between domestic and overseas airlines shows that the number of domestic airlines has doubled in the last two decades, reaching 36 by 2023, compared to 177 overseas airlines. The current ratio is 4.7:1, compared to 7.4:1 in 2000, which is more harmonious; More local airlines are emerging, creating more direct jobs and revenue for the local economy.
Since 2010, the number of domestic and overseas airlines appears to have stabilized, averaging around 160 overseas airlines and 38 domestic airlines. Although new destinations are constantly being added, flight services to these destinations often come from domestic airlines rather than overseas airlines that are new to the market.
Back in 2000, many local airlines began operating at the beginning of the century, including Saudia, Emirates and Oman Air. Perhaps surprisingly, Etihad Airways was founded in 2003 and flydubai was founded in 2009, but both are now among the top five airlines (by capacity). Many overseas airlines are also operating continuously, such as Turkish Airlines, Ethiopian Airlines, and KLM. At the same time, a steady stream of migrant workers has enabled airlines such as Pakistan International Airlines, Air India and Bangladesh Airlines.
Unsurprisingly, since 2000, the growth of airlines and capacity has led to an increase in the number of airports connected to the Middle East, with both domestic and overseas airlines regularly adding new airport connections, as shown in the table below. Although the 2020 highs have yet to recover from the impact of the pandemic, the number of airports connecting from the Middle East is almost twice as high. Competition between local and overseas airlines is present in nearly 400 airport pairs (20%), which undoubtedly keeps market fares competitive, and is often seen between traditional full-service carriers and low-cost carriers.
Among the major local airlines in the Middle East, the number of airport pairs served over the years has shown a complex picture, reflecting changes in the composition and product segmentation of the region's airlines. Saudia operates the largest number of airport pairs, although a number of routes have been transferred to FlyNas in recent years, resulting in its total number falling from a peak of 283 in 2015 to 205 in 2024. Given the broader national strategy that Saudi Arabia is currently taking, this is likely to change further.
Interestingly, Qatar Airways serves more airport pairs than Emirates. Although Emirates and flydubai have a combined network of around 251, the two airlines only serve 32 airport pairs, including points such as Riyadh, Karachi and Malé. Emirates and Qatar Airways operate an average of two flights per day on each airport pair. In contrast, Gulf Airlines' route network has shrunk due to a change in ownership structure, focusing only on its Bahrain base, but the airline still flies to each airport on average with an average of two flights per day, illustrating that service frequency is still important for all local airlines.
Strive to be profitable
Despite the continued growth of the airline industry, airlines are not always profitable in such a competitive market, especially the smaller local airlines that struggle for market share and offer a more pronounced gap compared to the growing ranks of Emirates and Qatar Airways.
In the Middle East airline market, the effect of scale is indeed clear: the profitability of large airlines in 2023 is unusually high. Emirates posted a profit of $2.7 billion in its latest half-year report; Qatar Airways made a profit of $1 billion (for the same period). Given the confidence of both airlines in 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 operate their routes out of obligations to meet societal needs rather than commercial needs.
Oman Air has been struggling in terms of profitability, with the airline reducing its losses by 25% in 2023. Despite raising prices, expanding its route network and setting ambitious plans, the company is still not profitable, and those plans may now need to be readjusted. In 2016, the airline paid a record $75 million to KLM/Air France for two flight slots at London Heathrow, but it is difficult to see how that price has been recouped from the benefits of the wider network. In today's market, such a price is unlikely to happen again.
Similarly, Saudia, the region's largest airline, hopes to return to profitability by the end of the year, despite a slowdown in market growth over the past 12 months, while also expanding into new destinations. Saudia 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's religious tourism, it remains to be seen whether profitability will be resolved for some time to come.
Like other major regional markets around the world, it's clear that while the major airlines in each market are generally profitable and provide 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 be profitable. In Europe, Ryanair, IAG International Airlines, Air France/KLM and Lufthansa create value for shareholders during the economic cycle. However, for many other airlines, it is almost impossible to make a profit, and it is rare to be able to stay alive every day.
Profit margins are at stake for many airlines operating in the Middle East, and a sudden major change in the market can be extremely disruptive, and any such change could scare the CEOs of many airlines. However, as Saudi Arabia ramps up its investment in Vision 2030 projects, this is exactly what is likely to happen in the next five years, and the impact will be huge for all – and perhaps there are other possibilities?
Disruptive forces in the market
The aviation industry is constantly facing new and sometimes disruptive challenges. Geopolitical events, pandemics, and environmental events have all had an impact on air capacity and demand around the world. In many cases, this "shock event" leads to short-term changes, and then the market returns to normal capacity and demand levels within 12 months. The pandemic broke all records, and it took up to four years for most markets to recover. But happily, this is coming to an end in every market. With the pandemic fully gone, attention turns to the next major development that could be a game-changer for the Middle East aviation market: Saudi Arabia's Vision 2030.
Vision 2030, which took several years to plan, is one of the world's most high-profile and expensive economic transformation projects. The plan to transform an oil-dependent economy into a major economy 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 ($3.3 trillion), the overall goal of the plan is threefold: to create an ambitious, vibrant, and thriving society, and to establish Saudi Arabia as a key business and cultural hub in the Middle East through a series of transformative projects. Aiming to surpass opponents 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 worked out and are in line with major infrastructure investments in major cities, of which the airport project is just one element.
By 2030, Vision 2030 aims for tourism to account for more than 10% of GDP; GIGA projects (such as NEOM, Amala and the Red Sea) attract tourists from all over the world who seek a combination of culture and beach vacations that will generate at least 1 million new jobs. An additional 150,000 hotel rooms will be available in the coming years, including seven-star luxury accommodation invested in places such as Al Ula and Red Sea Resorts. More than half a million hotel rooms are expected to be available every night by 2030.
Promoting such growth is extremely challenging; Significant infrastructure investment, skills training, relaxed visa requirements, and luxury brand and destination campaigns targeting high-value travellers around the world are just some of the list. But perhaps the most important is Saudi Arabia's desire to attract more tourists, as well as the direct impact on the local aviation market, and the subsequent "ripple effect" on other markets in the Middle East.
Vision 2030 aims to achieve 300 million air passengers by 2030, of which 100 million will be tourists (regardless of the classification of tourists). Considering that the current estimated passenger volume for Saudi Arabia (to/from) in 2023 is 107 million, this is a very ambitious target, as shown in the table below.
With a domestic market of nearly 43 million passengers per year, it provides a solid foundation for the overall market. However, achieving this will require an unprecedented level of capacity growth on international routes. To achieve the required scale, market demand will have to grow by more than 20% annually until 2030, which is three times the pre-pandemic level from 2010 to 2019 and before the pandemic. Never before has such a sustained growth rate been achieved in any major national market. While the goal is visionary, 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 will be able to achieve its Vision 2030 goals. In fact, even half of what they expected would be an extraordinary achievement. So, what are the key factors that will 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 in addition to the existing homegrown airline. That's why Riyadh Air was founded, and perhaps one or two more airlines will be announced in the coming months.
Riyadh Air has an ambitious plan to connect the capital to more than 100 international destinations, which could potentially create around 200,000 jobs. They also ordered 39 Boeing 787 airliners, with the first deliveries initially expected to be in 2025, although Boeing's current production issues may cause delays. In addition, in November 2023, the airline's CEO, Tony Douglas, had said that they would announce narrow-body fleet orders in a few weeks. However, a few weeks have now turned into months, and Boeing's (as well as Airbus) ongoing quality issues appear to have interfered with the plan. With or without orders for narrowbody aircraft, Riyadh Air is unlikely to become a significant airline operator until the end of 2026, as any new airline will need to go through the necessary gradual ramp-up of capacity. As time goes on, it becomes increasingly doubtful that they will actually be able to achieve their goal of 300 million passengers.
The launch of Riyadh Airways has allowed Saudia to focus on the religious market in Jeddah and to the city, as well as on business needs. It could also mean that Saudia will have to abandon some routes to Riyadh, even on limited flight slots like London Heathrow. The adjusted focus also places more emphasis on Saudia's profitability in business, with a clearer focus and business strategy, including leveraging the 39 Boeing 787 aircraft ordered in 2023. With a near-"guaranteed" religious market, strong domestic demand, and a mature regional market, it is almost impossible for Saudi Arabia to fail. However, only time will tell if they can achieve a clearer market position.
In addition to Saudia and Riyadh Airways, Saudi Arabia is developing other new airlines. Scheduled to launch NEOM Aviation later in 2024, they are committed to delivering service levels that align with the region's broader development vision. NEOM Aviation does not currently have IATA accreditation and, more importantly, has not ordered any aircraft, or announced any route network plans, all of which make the launch in 2024 look somewhat suspicious. Of course, aircraft can be leased quickly, but persistent delivery issues have led airlines to extend their current lease terms. In addition, it also seems unrealistic to modify the interior of the cabin, considering that NEOM is designed to provide high-quality service. While broader supply chain issues have caused many of the initial NEOM projects to fall behind schedule, the delayed launch of new airlines may be the least of the many issues faced.
Aircraft aside, perhaps the bigger problem is the lack of qualified staff to operate these expanded airlines. Although Riyadh Air aims to digitalize and NEOM Air wants to operate "innovative aircraft", attracting a pool of experienced and qualified pilots can be a challenge.
Even before the pandemic, there were projections that the global pilot talent gap would reach nearly 35,000 by the end of 2030. This shortage has become even more acute after the pandemic. Despite efforts by the industry to promote talent development, the situation is still far from as good as people would have hoped. All of this means that airlines in Saudi Arabia may have to pay higher-than-market wages for experienced pilots. Although Saudi Arabia has attractive tax-free benefits, similar benefits exist in other regions. This made the "Come to Work With Us" recruitment program challenging, and the result was a need to hold job fairs all over the world this year!
Balancing product portfolio and market creation?
In addition to the shortage of aircraft resources, other resource issues and the timely completion of master planning projects, 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 can also be the most difficult to create – especially the level of demand needed to reach the publicly stated target. Market stimulus often comes from low-cost airlines (there are many in Saudi Arabia) and the need to offer cost-effective accommodation options to attract tourists, but this is at odds with the product positioning of luxury resorts currently under development. A quick search for accommodation in the Red Sea resort in October shows a six-night package at St Regis at £11,200 and Six Senses Southern Dunes at £8,327; In comparison, similar luxury accommodation in Southeast Asia is half the price, and even the Caribbean is cheaper.
While the development of luxury accommodation may be in line with the goals of Vision 2030, it seems to be out of touch with the actual needs of tourists with ordinary spending power. Creating a market with 300 million passengers, 100 million of whom are tourists, and launching a six-star accommodation product, is unlikely to achieve the desired results.
Steal my market – no way!
The success of other local airlines, at least initially, has been built on attracting transit passengers from all over the world. For Emirates, the foundation of their route network was initially centred around connecting Europe with the Indian subcontinent and Southeast Asia, often attracting travellers with attractive transit packages on Dubai's beaches. In recent years, local market demand has matured to the point where it accounts for more than half of all passenger traffic, but that's only 23 million transit passengers per year.
In Doha, the proportion of transit traffic is close to 85 per cent, and even higher on some routes, as Qatar Airways tries to go head-to-head with rival Emirates. Although slightly beyond the Middle East, the new Istanbul Airport and Turkish Airlines' growth strategy (which already flies to more countries around the world) shows that developing a transit hub through Riyadh requires a very competitive product. This product should combine low fares, fast connections, and offer attractive transit packages in Riyadh, while the lack of coastline may deter some potential transit passengers. Of course, it would be naïve to expect anything other than a competitive response from all the local airlines in the region, with many companies having their own large aircraft orders in the coming years, as shown in the table below.
By the end of 2029, the 10 largest airlines in the Middle East had a total of 795 aircraft on order; On a regional market basis, it is one of the largest orders in existence. In the latest global market forecasts, Airbus estimates that 58% of new aircraft deliveries will be for network expansion; Applying this ratio to the 795 aircraft already ordered by these airlines, assuming an average capacity of 160 seats per aircraft and a low utilisation of an average of 4 flights per day, these domestic airlines will add an additional 107 million seats to the market by 2029. Although about 16 million of these aircraft will be supplied by Saudi airlines, the level of competition from competing airlines (with their own new capacity) will further complicate market conditions, creating additional challenges not only for Riyadh Airways and Saudi Arabia, but also for Vision 2030 ambitions.
A balance between ambition and reality
It is necessary to adjust Saudi Arabia's dependence on the oil economy. The focus on sectors such as tourism, aviation/space and services is also a natural evolution of economic development. The ambition of Vision 2030 captures everyone's imagination and of course makes architects desperately design works better than others almost every day. From a strategic positioning point of view, Saudi Arabia always wants to outdo its immediate neighbors, and the plans it has set do meet that goal.
All in all, it's getting harder and harder to achieve these ambitious goals. The dilemma of the aircraft supply market, the scarcity of experienced operators (or at least it will be costly), and the fierce competition from a host of airlines that will not easily give up their existing market share make the 2030 target of 300 million passengers seem unattainable, even in the most optimistic scenario.
However, even if Vision 2030 achieves half of its goal by the end of 2030, the 100 million additional passengers passing through Saudi airports will still create an extraordinary success story for the kingdom. (Source: OAG Aviation)