Boeing's New Love Affair: The Gulf Airlines

By Markets Fool.com

Boeing's top 10 customers list (based on pending orders) as of November 2014 and around a similar time last year tells an interesting tale -- the spectacular rise ofPersian Gulf airlines. Dubai-based Emirates has made it to the list, and is expecting no less than 200 deliveries from Boeing. The other two big carriers from the region, Etihad and Qatar Airways, though not in the top 10, are waiting for 97 and 63 planes, respectively. What's behind the meteoric rise of these Gulf airlines? And how much do they control the fate of plane makers like Boeing?

Continue Reading Below


Source: Boeing

What's going on with the Gulf airlines?
Emirates, Etihad, and Qatar Airways are growing at a rapid rate.Middle East air hubs such as Dubai, Doha, and Abu Dhabi have become the preferred stopovers for transcontinental journeys. This is corroborated by aCredit Suisse report that states, "Between 2005 and 2013, average annual departures out of the three Gulf hubs increased 11 percent a year, and between them, the three airlinesnow service more departures each year than Hong Kong." The airlines also offer "non-stop flight from more than 80% of the world's population", according to a Wall Street Journal report. These connected and non-stop flights have revolutionalized long-haul flying, and Emirates, Etihad, and Qatar Airways together make up for the biggest chunk of global wide-body backlogs.

Gulf carriers' key to success is simple -- superior airline service at competitive or even lower prices. Passengers get hot towels even in economy class, while premium class travelers get access to a bar and shower. This balance is possible as high traffic strength helps keep unit costs low. For most airlines, the breakeven load factor is around 80%, but forGulf carriers it is just 58.6% -- among the lowest in the world, according to International Air Transport Association (IATA). Emirates, Etihad, and Qatar Airways have the best two-year traffic growth compared with other global airlines. Among the three, Emirates is the leading Gulf carrierand has a fleet growth rate of 15.5% to date since 2007.


Data fromThe Wall Street Journal, chart by author.

More growth is coming
With the recent drop in oil prices, Gulf airlines now have more ammunition to realize their ambitions. The UAE's General Civil Aviation Authority predicts cheaper airfares next year, as airlines pass on to customers some of the fuel cost savings. This could boost passenger growth by another 10%-12%.

Continue Reading Below

In its 2015 outlook, IATA is expecting passenger capacity in the Middle East to expand to 15.6% in 2015, up from 11.4% in 2014. The carriers could reap post-tax net profits of $1.6 billion in 2015 against $1.1 billion in 2014. This works to a net margin of 2.5% and a profit of $7.98 per passenger. While this is lower than North American airlines, it's superior to most other airlines across the globe. The table below shows IATA's profitability forecasts for airlines from different regions.


Source: IATA

According to Boeing'sMiddle East Market Outlook 2014-2033, nearly 3,000 new jets will be added by 2033 to satisfy the growing air travel demand in the Middle East.


Source:Boeing.

More growth means more planes
As investors can see in the chart below, deliveries to the top three Gulf airlines have been increasing in the last five-six years, and if the above growth predictions come true, the momentum is likely to continue.


Source: Boeing

The three major Middle East airlines are going for rapid capacity expansion, and have ordered the majority of the wide-body planes in Boeing's current backlog. Emirates is the biggest customer for Boeing 777. Boeing has pending orders for 576 jets from Gulf carriers 360 will go to Emirates, Etihad, and Qatar Airways, and the remaining to a host of other airlines such as Saudi Arabian Airline, and Gulf Air.

Given the huge potential, it's not surprising that Boeing is building jets keeping in mind the requirements of these airlines. The severe heat inthe Gulf region makes take off difficult. Thus, jets operating in the region have to be equipped with more powerful engines and bigger wings to get airborne. The latest Boeing 777X caters to these needs.

Foolish takeaway
Gulf airlines have become a force to reckon with in the commercial aviation industry. Emirates is already Boeing's sixth most important customer, and Etihad and Qatar Airways are not too far off. Investors could keep a tab on the Middle East market because as it continues to evolve, it could have a big bearing on Boeing's results.

The article Boeing's New Love Affair: The Gulf Airlines originally appeared on Fool.com.

ICRA Onlineand Eshna Basuhave no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.