Over recent years it has been the big Gulf carriers that have caused headaches for rival network carriers in virtually all corners of the globe.
The rapid expansion of Qatar Airways and the UAE pair of Emirates and Etihad, allied with their investment in a raft of new long-haul aircraft and high-end product, has created stiff competition for established network carriers as they develop new transit hubs in the Gulf.
But over the past 12 months these carriers have had to tackle issues closer to home, as a more challenging economic environment in the Middle East has been exacerbated by a series of wider issues which have clipped the soaring ambitions of the big Gulf carriers.
Emirates was the first to signal tougher times ahead last November, when it reported a sharp drop in first-half profits, citing the impact of a strong dollar, weakening demand and intensified competition. The Dubai carrier went on to report a group full-year profit of Dh2.44 billion ($664 million) – down 71% on the previous year.
That reduction in profit also in part reflected the challenges which followed Donald Trump’s arrival in the Oval office. While the executive order Trump signed to restrict travel into the USA by nationals of up to seven Muslim-majority countries was subsequently blocked by US courts, it was followed in March by a ban on large electronic devices in carry-on luggage on US flights from 10 airports, including all three of the big Gulf hubs.
The latter restrictions were lifted over the summer, but the impact on demand was clear. Emirates had cited these as factors in announcing cuts in frequency on a number US routes. Fellow UAE carrier Etihad pulled its San Francisco service for the coming winter, citing lower-than-planned yields and loads.
However Emirates Airline president Tim Clark said in September that the carrier was recovering swiftly from travel disruption arising from the US government travel and security restrictions.
“We’ve outperformed where we thought we’d be,” he said. Clark expects Emirates will have restored capacity on the affected routes, to the levels prior to the restrictions, in about six to nine months.
Emirates had also identified a logic in greater collaboration with the group’s low-cost arm Flydubai.
“There is a lot of competition and capacity in the single-aisle area [in Emirates’ region] and it would be foolish of us to ignore it,” Clark said in June. “A lot of Flydubai’s business has been head-to-head with Emirates, which doesn’t add to the whole equation. We’ve minded ourselves now to accelerate a greater joining at the hip of what we do.”
That culminated in July in the two carriers entering a broad partnership, including codeshares and optimisation of the airlines’ networks.
Emirates says the airlines will still be managed independently but will “leverage” one another’s networks to “scale-up operations” and speed expansion. In October it announced codeshares covering twenty-nine destinations, on three continents, as part of the initial phase of the partnership.
ETIHAD PARTNER WOES
The same tough conditions also took a heavy toll on Etihad Airways, which after several years of modest profits plunged to a group loss of $1.87 billion in 2016. That, though, included a negative impact from certain exposures relating to its equity partners, notably Air Berlin and Alitalia.
The challenges facing both these European investments – in which Etihad acquired significant minority stakes in support of its equity alliance partnership strategy – have snowballed as first Alitalia and then Air Berlin entered formal restructuring processes.
Abu Dhabi had signalled greater scrutiny of its alliance investments earlier in the year. “We must progress and adjust our airline equity partnerships even as we remain committed to the strategy,” its chairman Mohamed Mubarak Fadhel Al Mazrouei says.
Etihad’s investments also include stakes in Air Serbia, Virgin Australia and Indian carrier Jet Airways. But it has exited one of its equity investments, selling its stake in Swiss regional carrier Darwin Airline. The latter, which had been operating as Etihad Regional, has been sold to Adria Airways.
It leaves plenty on the plate of the successor to group chief executive – and architect of the partnership strategy – James Hogan, who left earlier this year.
That task has been handed to former Abu Dhabi and Heathrow airport chief Tony Douglas, who the company named as its new group chief in late September.
Douglas will take on the role in January. By then the Air Berlin brand will have disappeared, with portions of its operations taken up by Lufthansa and EasyJet. The fate of Alitalia may also be clear by then, with the same two carriers among seven to have submitted interest in the Italian carrier.
Since putting a stop to its future funding of the two carriers, Etihad has given little indication as to its future co-operation with either Air Berlin or Alitalia. But at the start of the year Etihad struck a co-operation pact with Lufthansa. While that initially focused on the catering and MRO sectors, then-Etihad chief Hogan described it as its “most significant non-equity partnership with an airline we have ever announced”. This could pave the way for closer co-operation.
QATAR CRUNCH
For much of the year, Qatar Airways struck a more bullish note. While battling similar challenges to its UAE neighbours, the airline, for example, made little change to its US schedule.
But it has found itself in the eye of a geopolitical diplomatic storm in early June, after several neighbouring states implemented an airspace ban on Qatar. Any hopes for a swift resolution to the spat were dashed and the restrictions remain in place today.
Chief executive Akbar Al Baker says the airline lost about 10% of passenger traffic and saw a corresponding drop in revenue as a result of the blockade imposed in early June by neighbouring countries Saudi Arabia, Bahrain, Egypt and the United Arab Emirates.
But the ban on the airline’s flights has also freed up capacity for it to start expansion plans that had been pushed back due to aircraft delivery delays, he adds.
“We have already started our expansion,” says Al Baker, and “hopefully by the end of the current financial year” Qatar Airways will have made up for the lost business.
In September the airline took delivery of its first Boeing 747-8 freighter and, in a sign of its intent, added two more of the type and another four 777-300ERs to its orderbook.
While Al Baker acknowledges that the airline has been negatively affected by the ongoing blockade against Qatar, he says the diplomatic rift “has quite the opposite impact” on the airline’s cargo business, with cargo volumes more than doubling. “We’ve already sold the capacity of two 747-8Fs,” he says.
The airline is also continuing its investment in other carriers, in late September completing its acquisition of a 49% stake in Italian carrier Meridiana. That joins its minority investments in European airline group IAG and LATAM Airlines Group. But its aspirations to take up to a 10% stake in another Oneworld partner, American Airlines, came to nothing. The move, announced in June, both surprised and was not supported by American, and Qatar ultimately dropped the idea at the start of August.
During that period American took the step of cancelling codeshares with both Qatar and Etihad, a reminder of the US majors' continued efforts to get the US government to review open skies agreements with Qatar and the UAE as part of the the row around alleged Gulf carrier subsidies.
That feeds into the wider geopolitical factors that have slowed the recent juggernaut pace of the big Gulf carriers. But equally the fact that Emirates will in early November take delivery of its 100th A380 serves as a remainder of how big these carriers have already become. Emirates, Etihad and Qatar between them operate getting on for 600 aircraft, predominantly widebodies. And with just as many aircraft on order, their will be plenty of eyes on how quickly they pick up the pace again.
ABU DHABI SLOWS
One of the main rationales for Etihad’s equity-alliance strategy has been to feed traffic through Abu Dhabi, but the unravelling of some of those investments has contributed to a halt in growth at the UAE hub.
Etihad’s commercial deals, ranging from codeshare agreements to its equity-alliance partnerships, helped drive both its own traffic growth and that of Abu Dhabi International airport.
Abu Dhabi passenger numbers grew at double-digit rates every year from just under 10 million in 2009 to just over 23 million in 2015.
But growth began slowing last year, amid more challenging conditions in the region, increasing only 5% to reach 24.5 million in 2016.
As the environment became more challenging this year, notably in relation to restrictions imposed around travel to the USA, and the diplomatic spat which has blocked air services into Qatar from several states in the region, so Abu Dhabi seems to set for a rare fall this year. Passenger numbers at the airport are down 1.2% over the first eight months of the year, but by more than 6% in August, its most recently reported traffic month.
FlightGlobal schedules data shows capacity set to fall at the airport for the first time in years.
Declining passenger numbers also in part reflects lost traffic between Abu Dhabi and Doha, one of a number of route casualties from the diplomatic row in the region. FlightGlobal schedules data shows that Etihad and Qatar Airways between them operated almost 350 services on the route in October 2016, none of which are operating this month.
It also illustrates the pull-back of some services into Abu Dhabi, notably some from Etihad partners. In some cases that capacity has been picked up by Etihad itself, in other cases service has been lost.
Capacity from Etihad itself at Abu Dhabi in October is down fractionally in terms of seats against the same month last year, although almost 4% higher as measured by ASKs. Alongside suspending Doha flights, Etihad halted its Sao Paulo service and will from November drop San Francisco flights.
New Etihad group chief Tony Douglas, who takes charge in January, will be familiar with the growth ambitions, given that he formerly ran Abu Dhabi airport. But it remains to be seen to what extent the airline will seek to use its partnership strategy to drive Abu Dhabi’s growth, and to what extent it can return to the rapid expansion it has previously been enjoying.
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Source: Flight Daily News
