Risks of Middle East Aviation Disruption Rise the Longer It Lasts

The duration of the aviation disruption following the attacks launched by Israel and the US on Iran on 28 February and Iran’s subsequent attacks on countries in the region, will be fundamental to determining the implications for affected sectors, including airlines, airports, lodging, insurance and lessors, Fitch Ratings says.

Our baseline expectation that the conflict in the Middle East will last less than a month should limit the implications for Fitch-rated issuers in sectors affected by the aviation disruption. Our base case is subject to particularly high uncertainty. A more prolonged disruption could have more significant implications for affected sectors and issuers, particularly smaller and less diversified ones.

Since 28 February, aviation across the Middle East has been severely disrupted by widespread airspace closures and restrictions with airlines rerouting, diverting or cancelling services. Major hub airports, including Dubai, Abu Dhabi and Doha, have experienced significant schedule disruption and congestion. More than 15,000 flights were reportedly cancelled across seven major regional airports between 28 February and 5 March, affecting over 1.5 million passengers. There have also been flight diversions into European airports.

The airlines most immediately affected are those operating the disrupted routes. Airlines face lost revenue from flights not operated, with the greatest exposure concentrated among carriers whose hubs are located in directly affected countries. Flight operations over the UAE and Qatar appear particularly constrained, which is important given the scale of the region’s hub carriers’ operations.

Other airlines are primarily affected by the suspension of services to impacted destinations and the need to reroute around restricted airspace on certain corridors. The highest volume exposure among Fitch-rated EMEA network airlines to the broader Middle East region does not exceed a high single-digit percentage.

Disruption increases operating costs through longer routings, additional technical stops, crew and staff overtime, and higher accommodation and handling expenses. Passenger compensation is likely to be limited because the conflict is outside airlines’ control, but carriers may still incur costs for meals and accommodation and may need to provide refunds or vouchers for cancelled services. Finally, disruption often drives higher fares on affected and adjacent routes, which can partially offset the negative financial effects.

As well as lost revenue, airlines are likely to be affected by higher fuel prices. Most EMEA carriers, including those in the Middle East, typically maintain relatively high fuel-hedging coverage. Hedge levels for the next three months range from around 50% to more than 80%.

The impact on Fitch-rated European airports is likely to be mixed, with lost revenue from declining point-to-point traffic from the Far East and the knock-on effect on retail spending per passenger, potentially offset by higher ancillary revenues such as parking fees, and, where applicable, regulatory protection against traffic volatility.

Fitch-rated lodging issuers with exposure to the Middle East are primarily global companies with a high degree of geographical diversification. Given the regional nature of the conflict, they should be able to absorb the impact of travel and booking disruption. The effect may be further mitigated by higher revenue per available room in the Mediterranean and APAC regions.

Aviation policies may give insurers the right to cancel cover. War cover would typically relate to aircraft damage, although business interruption policies usually exclude war risks. Pressure is most likely to emerge on less diversified portfolios with heavy exposure to the Gulf. Reinsurers may reduce cover or raise attachment points, increasing exposure for primary carriers.

The impact of the conflict on Fitch-rated aircraft lessors is very limited, reflecting their globally diversified fleets and generally well-managed regional concentration exposures. Credit profiles also benefit from predominantly fixed-rate, long-term contracted lease revenues, strong liquidity buffers and well-laddered debt maturity profiles, which should mitigate the effects of any adverse disruption in the sector.