Gulf Wars

While there has been a wave of such deals, including Delta Airlines’ purchase of Singapore Airlines’ 49 per cent stake in Virgin Atlantic, Korean Air’s 44 per cent holding in Czech Airlines and Chinese investors’ 35 per cent equity in Cargolux of Luxembourg, what really concerns Lufthansa and other European carriers lies in another direction: The Gulf… and in particular Abu Dhabi-based Etihad Airways.

Sitting in Frankfurt, the German carriers’ executives are watching the development of an invasion that is gathering pace. With its big holdings in Airberlin and Air Serbia, smaller investment in Ireland’s Aer Lingus and now regional operator Darwin Airline (rebranded Etihad Regional) in Switzerland, as well as the looming potential for a major stake in Italy’s Alitalia, Etihad is fast becoming a major player not only on routes to and from Europe but within the continent itself. It’s a market changing dynamic with the potential to drastically alter the competitive landscape, not only in Europe. Etihad’s penetration elsewhere, such as its holding in Virgin Australia and in India’s Jet Airways, shows clear intent. The airline’s Australian chief executive James Hogan means to duplicate the European strategy in other regions.

For carriers in Europe, and everywhere else in fact, this is only the tip of the sand dune. The spectacular growth of the Gulf carriers, Emirates and Qatar along with Etihad, is showing no signs of abating. All three are continuing to launch new routes at a remarkable pace, as well as adding aircraft in unprecedented numbers. They are probing every corner of the globe, siphoning off traffic from international competitors’ traditional long-haul routes through their growing hubs in Dubai, Abu Dhabi and Doha. Tony Tyler, director general of IATA made the point at the Doha AGM that these carriers have been at the core of “a major shift” in global aviation. “In just over a decade, the share of global traffic accounted for by Middle East airlines increased from four per cent to nine per cent. Much of this growth has been realised here in the Gulf,” he added.

As Richard Aboulafia, an aviation analyst at the Teal group in Fairfax, Virginia, put it: “Their strategy is simple. They want to take over the world. ” It’s not a view the Gulf carriers agree with. Emirates’ president Tim Clark reflects the feelings of all three: “Being the biggest airline in the world is not really the end goal. Our aim has always been to connect travellers from around the world to Dubai and other destinations with just a single stop via our hub. ” Etihad’s chief executive James Hogan underscores that philosophy, the intention being to operate a business model based on geography, setting the Gulf as the new crossroad for international travel. “Our growth plan has been taking advantage of this crossroad,” he says.

Their strategy is simple. They want to take over the world. RICHARD ABOULAFIA

If their rivals believe Emirates, Etihad and Qatar will batter each other to death in a vicious competition for passengers they should think again. Dubai is a mere 130km flying distance from Abu Dhabi and 380km from Doha. Abu Dhabi is 300km from Doha. Yet asked about their position vis-à-vis their neighbouring rivals, the heads of all three carriers have a similar muted response: there’s plenty of traffic, now and in the future, for everyone. As Qatar’s chief executive Akbar Al Baker says: “Qatar Airways does not compare itself or compete with its neighbours. We are in the unique position in the Middle East to be within an eight hour flight of 80 per cent of the world’s population and so naturally, we are not the only airline hub in the region. What we strive for and do achieve, is an unrivalled five-star service for our passengers. ” In a way, the three actually support each other, constantly bringing more and more traffic through whatis fast becoming the world’s mega tripartite airport hub.

Last year, while Asia Pacific still heads towards becoming the world’s largest airline market, the Middle East continued to make inroads. Air traffic there grew 12. 1 per cent in 2013, compared with 7. 1 per cent in Asia Pacific. The latest statistics from IATA, for April, show more improvement with Middle Eastern carriers continuing to see the highest growth rate in both passenger and air freight markets, rising 18. 6 per cent and 8. 7 per cent, respectively.

Driving that growth is fleet expansion. The three Gulf carriers have approaching $200 billion worth of new jets on order, from A380s to 777Xs, A350s and single-aisles (Emirates’ A350 order cancellation notwithstanding). At November’s Dubai Airshow Emirates, now operating 206 passenger jets and 12 freighters, ordered 150 777Xs and 50 A380s worth some $90 billion at list prices. It now represents more than half of Airbus’s A380 order book and Clark says he’s ready to buy more if the European manufacturer goes ahead with an updated model, an A380neo.

Qatar, with a current fleet of 134, has more than 300 aircraft on order worth some $60 billion. In June it began taking delivery of 13 A380s and later in the year, probably in October or November, the first of 80 of Airbus’s new A350s – it is launch customer – will begin touching down. Also in the pipeline: 60 787s (13 are already in service), 13 777s, including freighters, 13 A330 freighters, 80 A320neos and 50 of Boeing’s new 777X.

Etihad, with a current fleet of 101 passenger jets is increasing weekly departures by 20 per cent through 2014. Later this year it takes delivery of its first 787s and A380s as well as five 777-200LRs,one 777-300ER, three A320s, three A321s, four A330-200s and one A330 Freighter. It has more than 220 narrowbody and widebody aircraft on firm order, plus options on another 89. At the Dubai show it ordered 25 777Xs, 17 of which are 777-9Xs and eight 777-8X aircraft. It also ordered a further 30 787-10s making it the biggest customer for the jet. Airbus also won orders from Etihad for 87 aircraft, 50 A350 XWBs and 36 A320neos as well as an A330-200F freighter with options on another 30 freighters. All up a total list value of some $67 billion. If the world didn’t get the message before it certainly got it at the Dubai show. Of orders for 259 777Xs placed at the event, 225 of them were from the Gulf trio. The other 34? Ironically, they’re heading for Lufthansa, the launch customer.

Given the rate the Gulf carriers launch new routes they are having no problems finding places to put their growing fleets. Unlike many traditional carriers, which like to have firm proof there is a market before throwing in heavy metal, Gulf operators have shown a real tendency to create new markets. Etihad has or will be launching services this year to Rome, Jaipur (India), Yerevan (Armenia), Los Angeles, Dallas, Zurich, Perth and Medina. In May Qatar launched to Al Hofuf in Saudi Arabia, Istanbul and Edinburgh, Scotland. In June it added Miami and Tokyo’s Haneda. In July Dallas/Fort Worth and Djibouti were to join the network. It is also commencing domestic operations within Saudi Arabia with a new offshoot, Al Maha Airlines, with plans to fly from November.

Their penetration is hardly confined to using their own aircraft. Etihad’s endeavours to make regional inroads, such as its European venture with Darwin Airline, could be duplicated elsewhere. While it doesn’t involve equity, an example is the interline deal struck in April with Fiji Airways. That allows reciprocal sales from and to 12 cities in Europe, 17 cities in the Middle East, five cities in Africa, five cities in North America, 29 cities in Asia and three cities in Australia to and from Fiji, and the agreement also connects the outer South Pacific islands to Etihad’s network.

Neither are there any concerns the Gulf hubs will be unable to handle all this metal. Airport development has been just as stunning as fleet expansion. Dubai now has two airports, Dubai International handling 66 million passengers, being expanded to handle 100 million, as well as the new Al Maktoum International Airport at Jebel Ali, which opened to passenger traffic last year. When completed it will have a projected annual capacity of 160 million passengers and 12 million tonnes of freight. In Doha, the new $17 billion Hamad International Airport opened its doors in May in time to welcome delegates to the IATA AGM. It is designed to accommodate 30 million passengers annually, rising to 50 million upon full completion. Abu Dhabi Airport, expected to handle over 30 million passengers this year, is also undergoing a multi-billion dollar redevelopment and expansion designed to increase the overall capacity of the airport to more than 40 million passengers annually.

In the midst of this, while most carriers around the world are struggling to produce decent profits, the Gulf operators are riding on a wave of black ink. Emirates in May announced a 42. 5 per cent increase in annual profits for 2013 to $887 million on record income of $24. 3 billion. Its passenger numbers were up 13. 1 per cent to 44. 5 million in 2013. Etihad’s profits last year were its largest yet, up 48 per cent to $62 million on revenues that rose

Our growth plan has been taking advantage of this crossroad. JAMES HOGAN

27 per cent to $6. 1 billion. It was, according to Hogan, “the best results so far”. Qatar doesn’t yet publish detailed results but will do so from later this year. However, Al Baker says “Qatar Airways is a profitable company”. It is understood the carrier did achieve a revenue target of over $10 billion in 2013.

What is interesting is the divergent paths the three Gulf carriers are taking towards their expansion: Etihad’s virtual global alliance through equity stakes and increasing codeshare partnerships, Emirates independent strategy along with its Qantas alliance and Qatar’s decision to join the oneworld alliance. They all appear to be working extremely well though their penetration of global markets has sparked a constant wave of accusations their success is built on the back of subsidies and the unfair competitive advantage they have through being controlled by rich government owners.

That issue raised its ugly head again in May when the Australian Financial Review reported Etihad had access to an interest free US$3 billion loan from Abu Dhabi’s ruling family that required no repayments until 2027. Etihad said in a statement it had received financial support from its shareholder in the form of equity capital and shareholder loans, but gets no government subsidy and that the airline operated under a strict commercial mandate. It did not specifically comment on the loan mentioned in the report.

Qantas has long complained that Etihad, and by extension Virgin, have benefited from subsidies from the Gulf state, something Etihad management has repeatedly denied. Both Emirates and Qatar have also persistently denied claims they are subsidised and insist they operate commercially and for profit.

Emirates’ Clark says profit above all else is what keeps his company flying. “We have never had protection. We’ve never had Chapter 11. We’ve certainly not had any more money from the government. ” While the rise and rise of the Gulf carriers has attracted world attention, however, everything is by no means entirely a bed of roses. Rapid growth has put strains on air traffic management in the Gulf, causing increasing congestion along the region’s airways. IATA’s Tyler drew attention to the issue, saying congestion is a real and rising problem which is growing with each aircraft delivered. “Unless it is dealt with quickly, the efficient hub operations which are supporting the region’s success will begin to unravel. ” He said effective air traffic management requires regional and international teamwork.

“That teamwork needs to address how to fit a growing commercial aviation sector into airspace when between 40 and 60 per cent of it is reserved for the military. One solution is developing partnerships and trust with the military to open more flexible-use zones. That is happening progressively – but notnearly fast enough to keep pace with demand for air travel. The other challenge is to address the complexities that we have built into the system. For example, historically there was one Flight Information Region or FIR for the Arabian Peninsula – Bahrain. From the early 1980s it began to be fragmented and today there are six FIRs. For an airline, the important thing is to get from point A to point B as smoothly as possible. The challenge for the air navigation service providers is to work together to make that happen as seamlessly across six FIRs as if there were one. ” But, as has been well demonstrated in Europe, getting several FIRs to work together is a minefield of political complexity and it won’t happen overnight.

Another major potential stumbling block for the Gulf carriers is, to a certain extent, in the hands of others: getting the increases in traffic rights that will enable them to fully utilise their flying assets. For example, the Centre for Asia Pacific Aviation (CAPA) in a report released recently points to a slowing of growth in Middle East-Australia frequencies as Emirates, Etihad and Qatar approach bilateral capacity ceilings. Emirates has nearly reached its limit while Etihad will reach its cap when it launches Abu Dhabi-Perth services in July. Qatar reached its limit when it opened Perth in 2013. It is hardly surprising. Collectively, Gulf carriers are now flying 11. 5 per cent of all international passengers to and from Australia.

The vast majority were by Emirates, now Australia’s second-largest carrier flying more than half the international passengers Qantas does. CAPA says Qatar is once again considering Sydney, while Etihad would like an additional daily service to each of Melbourne and Sydney, and possibly Brisbane too. “But in the short term there are notable developments in the Australia-Middle East market. Etihad’s A380 deployment to Melbourne and Sydney (planned for July next year) represents 25 per cent seat growth over July 2014 levels. Once that growth is realised, Etihad will have grown seat capacity 76 per cent since 2013. ” Etihad’s share of the Australian market is still relatively small. It carries 2. 1 per cent of international passengers to and from Australia compared to the 9. 3 per cent of Emirates. Qantas’s share is only 17 per cent. Etihad’s position is, however, still stronger than the 0. 9 per cent share of Qatar Airways in 2013 and once its A380 deployment to Sydney and Melbourne is complete, Etihad will likely overtake China Southern as the 11th largest carrier in Australia. If it maintains its strong 85 per cent load factor, it could also overtake Thai Airways as the 10th largest carrier in Australia.

As for Emirates, Clark has openly talked about the possibility of 100 weekly flights to Australia, a thought that will be deeply troubling for big operators around the region who tap into Australia-Europe traffic. But for this sort of growth the Gulf carriers will need significantly more traffic rights.

That situation is duplicated across the region where many governments, including in key markets such as China, are under increasing pressure from their national airlines not to get too liberal when it comes to granting rights to Middle East operators. That is exacerbated by the fact that many airports around the world, particularly in Asia, are heavily congested anyway and will almost certainly have to put limits on capacity growth.

In the meantime, all three are progressing on their merry way. But like everyone else they remain subject to the volatile nature of the airline industry, to high fuel prices, unexpected crises and events. As Etihad’s Hogan puts it: “In a global business environment, business models continue to change and the more established carriers have traditionally worked their global alliances. We have a different approach. That’s business. At the end of the day the customer will decide who wins, who loses. ”