The “Middle East 3,” or ME3 – the state-owned airlines Emirates, Etihad, and Qatar Airways – must have seen the 2019 Paris Air Show as an indicator that they face a steep uphill battle to maintain their status as industry leaders. One of the largest orders for new planes at the air show came from Saudi Arabian Airlines, more commonly known as Saudia, which placed a $7.4 billion order for 65 Airbus A320 neo-family aircraft. Saudia’s purchase of smaller, more fuel-efficient aircraft is a firm departure from the spending habits usually exhibited by Gulf carriers and is a strong sign that the aviation market in the Gulf is about to become more competitive.  Economic challenges affecting Gulf states are having a profound impact on the future planning of the major players in the region’s aviation sector. Slow growth, decreasing numbers of expatriates, and price volatility in energy markets are disrupting two decades of success in Gulf aviation. Dubai, Abu Dhabi, and Doha were transformed into international air travel hubs that service millions of passengers each year by state-run airlines that have consistently been able to outspend their competitors in almost every category. Now, however, maintaining their hard-earned positions will be contingent on the ability to cut costs where the competition cannot.

The United Arab Emirates is home to two of the ME3 carriers, Emirates and Etihad Airways, headquartered in Dubai and Abu Dhabi, respectively. The two have risen to be included among the most well-known airlines worldwide, but their upward trajectory is no longer certain. While Emirates remains profitable, albeit much less so than in the past, Etihad is currently being restructured after several years of losses. This came as the result of its attempt to build its own international airline alliance, which included large investments in the now defunct Air Berlin and debt-ridden Jet Airways of India. The failure of this venture has forced Etihad to renege on deals for new aircraft worth several billion dollars, offer its training facilities to pilots from other airlines, and cut multiple destinations from its network, ceding market share to other Gulf Arab and international competitors. Andrew Macfarlane, Etihad’s chief financial officer, is the airline’s third CFO in two years.

Qatar Airways, the other member of the ME3, placed a modest order for five new cargo aircraft in Paris this year. The order constitutes a considerable expansion to the Doha-based airline’s cargo fleet, but the announcement generated less excitement than those that distinguished the airline in the past. Once proud of its status as the launch customer of the Airbus A350 and one of the newest international airports in the region, Qatar Airways is also keeping a lower profile and focusing on managing expectations. Its chief executive officer hinted at a major acquisition announcement in Paris, but news of such an arrangement failed to materialize. The airline has been banned from using Saudi, Emirati, and Bahraini airspace since a boycott was imposed on Qatar by Saudi Arabia, the UAE, Bahrain, and Egypt in 2017. Unable to service destinations in any of these countries, Qatar Airways lost access to half of the Gulf aviation market overnight, largely eliminating Doha as a popular transit point for travelers whose final destinations were elsewhere in the Gulf Arab states. Political tensions between the United States and Iran have had less of an effect on Qatar Airways than its competitors, who are now avoiding Iranian airspace. Nonetheless, the loss of regional destinations and the need to reroute its flights have affected the carrier’s bottom line.

Though Emirates has not halted deliveries of new aircraft, it is taking a more circumspect approach for future additions to its fleet than in the past. Emirates joined other carriers that have become skeptical of new Boeing products after two crashes that have left its 737 Max aircraft grounded worldwide. Emirates’ close partnership with flyDubai, a low-cost carrier that currently has 14 of its own 737 Max sitting idle, may contribute to this sentiment. Before the Paris Air Show had even gotten underway, Emirates expressed intent to restructure an order for Boeing’s delayed 777X in favor of the 787 Dreamliner. Once expected to serve as Boeing’s launch customer for the 777X-9, the third generation of its 777 aircraft, Emirates appears to be favoring the more well-tested Dreamliner, which experienced its own series of production delays and safety incidents after it entered commercial service.

However, this cautious approach is also reflective of a wider problem faced by Gulf Arab government-related entities – the need to moderate energy consumption in an era when oil revenue does not provide the same level of economic security as in the past. Emirates has attempted to address this challenge by reducing its orders for the four-engine Airbus A380 in favor of the A330neo and A350, both of which are more fuel-efficient twin engine aircraft. Emirates once prided itself on operating a fleet consisting exclusively of the Airbus A380 and Boeing 777 variants, a strategy that may well have been implemented with cost-cutting in mind. If such a large airline operates only two different types of aircraft, it will theoretically spend less on flight-crew training and maintenance requirements. However, Emirates now plans to begin retiring the A380 in just over a decade and intends to acquire new types of aircraft that are designed to be lighter and more fuel efficient.

Not unlike other airlines of the Gulf Arab states, Emirates has sought to diversify its revenue stream in addition to cutting costs. In a highly unusual move, Emirates announced that it would “unbundle” its business-class fares, offering passengers the option of purchasing a seat in one of its opulent business-class cabins without the luxurious preflight features that previously came standard, such as lounge access, chauffeur services, and the ability to select seats prior to check-in. In 2018, Dubai International Airport missed its passenger growth targets for the first time in 10 years, and should there be a continued decrease in passenger volume, Emirates must continue to innovate in order to coax additional revenue from fewer customers.

Passenger volume is not a problem exclusive to Emirates. Economic prosperity attracted expatriates to the Gulf for years, but as growth has lost momentum and governments seek to rely less on expatriate workers, increasing numbers of expatriates are departing the Gulf Arab states for good. Gulf carriers can no longer depend on sustained demand for destinations in South Asia and the Philippines, which have been traversed by generations of expatriates. While aviation hubs in the Gulf have also become well established as transit points for long-haul journeys across the globe, technology has eroded the geographic advantage that helped Gulf airports achieve this status. Gulf airline hubs remain the most popular transit point for travel between South Asia and North America, but advances in the aerospace industry have allowed planes to travel further while consuming less fuel and enabled the establishment of new routes that bypass old stopover destinations.

The model of the low-cost carrier has penetrated the Gulf region, with flyDubai leading the charge among others in Sharjah, Oman, and Kuwait. A large part of this success stems from the ability to provide cheap flights for both expatriates who do travel to the Gulf and service to tourist destinations enjoying newfound popularity among Gulf nationals. With the future of national carriers like the ME3 undetermined, the low-cost model may have a more promising future in the region. Saudia’s order for dozens of narrow-body jets in Paris this year may indicate that it has taken notice of this trend and may attempt to incorporate it into its drive to turn Saudia into a profitable entity. Saudi Arabia retains a geographical advantage, with 12 airports in various parts of the country that service international routes. With the establishment of FlyNas, Flyadeal, and Saudi Gulf airlines, which provide low-cost international services, the Saudi aviation market will become more competitive, lowering fares and potentially attracting customers unwilling to spend the money to fly with the ME3 carriers.

The main challenge to a competitive commercial aviation sector in Saudi Arabia is the development of airport facilities and services that are on par with those offered in Dubai, Abu Dhabi, and Doha. This initiative is also critical to the government’s goal of boosting tourism in the kingdom. Dilapidated facilities, a lack of amenities, and sluggish security and customs procedures are synonymous with air travel to and from Saudi Arabia. “Sleeping in Airports,” a popular air travel website, listed King Abdulaziz International Airport in Jeddah as the second-worst airport worldwide in its last survey, although a long-awaited new terminal has slowly begun operations. Strikingly, the site also ranks Prince Mohammed bin Abdulaziz Airport in Medina as the fourth most highly-rated airport in the Middle East, beating Bahrain, Muscat, and Abu Dhabi by a wide margin and clearly demonstrating that establishing world-class facilities is not an impossible task in the kingdom. Notably, Medina hosts the only privately operated international airport in the kingdom – a dynamic reflective of the privatization challenges many government-related entities in the Gulf Arab states have grappled with.

The ME3 redefined consumer expectations for global air travel, but as the region they call home continues to change, so too will the industries that grew there. Cost-cutting measures, increasing revenue streams, and developing a more efficient aircraft fleet are critical for Gulf carriers to remain competitive in regional and global aviation markets. The deals made at the Paris Air Show are yet another stark indication that the Gulf’s commercial aviation sector is entering uncharted territory.