Next stop for long haul: airlines set a course to the East

With their large populations and booming economies, the Arab world and Asia offer rich rewards for carriers prepared to risk flying into volatile regions
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The Independent Online

The entourage, including Egypt's first lady, that rocks into town this week with Tutankhamun will not only have walked like an Egyptian, but flown like one.

The exhibition on the life of the boy king at London's O2 Arena is the latest example of new links between the two countries, which include the recent expansion of UK airlines' capacity in the region.

Forget the "open skies" agreement set to unlock transatlantic travel next April – airlines are shunning the US to go East, drawn by the promise of strong market growth, a relative lack of competition and bigger margins.

Their focus is on Asia and the oil states, where passenger numbers are literally taking off. The surge in business for the airlines is being driven by the industrialisation of China and India, which are now importing their finance and infrastructure expertise.

In the Middle East, oil billions are being used to create tourist destinations such as Dubai and financial hubs as the Gulf states attempt to earn an income beyond their diminishing natural resource.

BMI, the airline formerly known as British Midland, has just acquired 17 new routes, including flights to Lebanon, Sierra Leone and Khartoum, all capital cities that have been ravaged by war at some point in their past. But that was then. Now, according to data from the International Air Transport Association, the Middle East is the only region posting double digit growth this year, catapulting it past the mature but solid transatlantic market. In July passenger numbers to and from the oil states grew at 18.8 per cent, dwarfing the 5.2 per cent achieved by North America.

Airlines are not only piling in to new routes but taking minority stakes in partner carriers. Sir Richard Branson's Virgin Group has just bought a 20 per cent stake in Air Asia, while BMI launched its first route to Cairo last week at the same time as announcing plans to fly to Dammam, the heart of Saudi Arabia's petroleum industry.

Singapore Airlines took a 24 per cent stake in China Eastern a few months back; Silverjet, the Luton-based airline that caters for the business-class market, announced it would start a route to Dubai; and Airbus has set up a Middle East operation to cater for what it believes will be 400 per cent growth over the next 20 years.

Sir Richard says the drive east is everything to do with the industrialisation of China and India: "The debt crisis and the decreasing value of the dollar means the wealth is in some of the growing economies and less so in more traditional routes. Many of the airlines are following the prosperity of where big business and investment is going."

But going to the Middle East or to Asia carries risks. Both areas are economically volatile and subject to political unrest. Nigel Turner, chief executive of BMI, says the answer is to spread yourself over a number of destinations to mitigate these risks: "We fly 42 routes. We tell all governments that we are non-partisan and non-governmental – we have never been a state carrier. Below the radar, airlines work to lubricate trade, encourage tourism and bring countries together. We told the government in Tehran that in the past 70 years we've had more fallouts with the UK government than they've had."

For the past decade BMI has lobbied hard in favour of the "open skies" agreement, and against what was in effect a monopoly in favour of a handful of airlines flying from Heathrow to the US. BMI has 83 pairs of slots at Heathrow and would be well placed to benefit from an opening-up of the market. But it has abandoned its strategy stateside, at least for the time being.

"Our niche is in the Middle East," says Mr Turner. "We would love to do trans-atlantic, but quite frankly we have been waiting 10 years, so another year ain't going to make a difference.

"I would rather watch what happens and see how competition develops, and if there is a blood bath it can happen while we are not there. The global economy is changing and there is a greater emphasis on developing economies and large populations where there is a huge latent demand."

There are only three services a day between Cairo, which has a population of 16 million, and London, with eight million. Egypt continues to reform economically – growth rates topped 7 per cent last year. When Telecom Egypt sought a public listing, it chose the London Stock Exchange.

The growth in the Middle East and Asia looks promising but the volatility in global stock markets does not. It is likely to put a drag on demand, so the wise airlines will add capacity only on a gradual basis. Their one key advantage over other businesses is that their infrastructures are mobile so they can chase the jam as new opportunities appear and old ones fizzle out. But they can't afford to have too many routes that fail to take off.