Oil Crisis
Another example of an issue that affected the global economy, caused political rifts in the Middle East and impacted the aviation industry was the oil crisis. The early years of the 21st century showcased a great deal of turmoil and instability in the global oil market. In 2001, oil prices “stood at $20 per barrel” which shot up to $75 in 2006 (Luft, 2006). Since the 1960s, oil consumption had steadily increased it accounting for over 60% of total energy consumption by 1972 (CVCE, n.d). Over the last decade, Arab oil producers have seen annual revenues decline from $1 trillion to $300billion, reflecting a gradual shift from hydrocarbons to renewable energy sources (Hallinan, 2020). The steep rise in oil prices stemmed from a plethora of events and issues such as the growing demand in Asia, collapse of leading Russian oil company Yukos, insufficient investments, terrorism and political instability in several oil-producing nations, fear of military confrontation in Iran, and hurricane activity in the USA (Luft, 2006).
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Figure 8: World Oil Reserves 2005, peak oil crisis (Luft, 2006)
According to the International Monetary Fund, the oil price increase was responsible for the decline in global GDP by 0.7% in 2006 (Luft, 2006). Due to this challenge, GCC nations have begun to plan and implement development programs aiming to diversify their economies. This includes Saudi Arabia Vision 2030, UAE Vision 2021, Kuwait Vision 2035, Oman Vision 2040, Qatar national Vision 2030, and Bahrain Economic Vision 2039 (Deloitte, 2020).
More so, the oil prices imposed a significant impact on energy-intensive industries such as transportation and petrochemicals. 40% of goods traded internationally are transported as air cargo. The air cargo industry itself, in which fuel accounts for 20-30% of the operational cost, is poised to be the prime casualty of the new era of expensive oil. Jet fuel prices had almost tripled between 2001-2005. As a result, the world’s airlines and cargo carriers spent over $100 billion on fuel in 2005, a 50% increase over 2004 (Luft, 2006).
How Emirates Airlines and Etihad Airways leveraged the global issue of Oil Crisis in their AIMC
Since the UAE's airline industry is partly funded by the government, the government’s spending power diminishes due to the falling oil prices. This causes the industry to experience underfunding. Underfunding will affect the operations of Emirates Airlines, which has been distinguished as a luxury carrier (Wilson, Eckhardt & Belk 2015). Additionally, the spending power of people will be negatively affected at a personal level, thus forcing them to reduce their traveling expenses. In turn, this situation will reduce the demand for the airline’s services. The tourism sector in the country is also projected to experience reduced growth, thus negatively affecting Emirates Airlines and Etihad Airway’s growth capacity (Business Essay, n.d).
However, the Chairman of Emirates states “For Emirates, surging oil prices in the second half of our financial year increased our operating costs. We saw the gradual recovery of economic activity in key markets which drove a strong uptick in airfreight activity and, to a lesser extent, a rise in air travel and tourism demand” (Whyte, 2018). Meanwhile, Etihad has brought an end to its fuel hedging program, no longer protecting them from volatile and potentially rising fuel costs. Etihad Airways has been acquiring equity stakes in struggling carriers to boost its geographic footprint and connectivity (N Business, 2014).