Autumn 2021

Bridging the Gulf

Bridging the Gulf

The Gulf’s big three – Emirates, Etihad and Qatar Airways – all have significant challenges to restore their fortunes. Shakeel Adam, managing director of Aviado Partners, takes a deep dive into their strategies, network and fleets as they plan a return to growth and profitability

In the two decades preceding Covid-19, Emirates, Etihad and Qatar Airways – commonly referred to as the ME3 – dramatically influenced the global long-haul market. As with other leading carriers in the world such as Singapore Airlines, Qantas and Air New Zealand, which all were national champions in their early days, these airlines played an integral part in shaping global travel while transforming their countries supported by exceptional airport infrastructure and setting new standards for service.

By 2020, these carriers were some of the hardest hit by the global pandemic which closed borders because their business models relied most heavily on long haul international travel. Unprecedented was the word of the day for most of 2020 as airlines seemed caught as deer in headlights; frozen and unsure how to deal with an emerging, then stagnant, then expanding global pandemic. The US closed its borders to widespread criticism by much of the global community, only to be copied by the same critics soon thereafter.

Confusion & Uncertainty characterised the start of 2021. Borders opened and closed. Guidance from health experts changed regularly and government policy has been anything but consistent.

By mid-2021, Optimism emerged as the word of the day. Domestic travel within China, the US and Australia is at all-time highs in some parts. The European Union (EU) remained largely constrained except for some regional travel, with restrictions progressively being relaxed starting May 2021. International travel around the world has remained largely constrained. Travel bubbles, such as between Australia and New Zealand, were bound to burst because even with all the apparent restrictions, loopholes allowed business and other exceptional travel to continue.

Gulf region carriers’ business models rely largely on connecting the EU and North America to the Gulf, Asia and Australasia. The Gulf Cooperation Council (GCC) group of Arab states in the Gulf does have a regional market. But the blockade of Qatar remained in effect until 5 Jan 2021, thus restricting one of the largest regional flows. Proximity to India, a significant Subcontinent diaspora in the GCC, and Ramadan, all combined to cause rising covid cases in many GCC countries.

Without EU-AU/NZ, EU-South East Asia and North America flows, the Gulf carriers, in particular the ME3, lost their core business. These and others including Oman Air, Gulf Air and Turkish Airlines – a fierce direct competitor of the Gulf carriers – shifted, as did most major carriers, to focusing on cargo operations and sought passenger flight opportunities where possible.

The path to recovery for the ME3 carriers appears to be vastly different, largely due to differing development and business models prior to the pandemic.

Emirates, clearly the largest of the ME3, committed to providing a consistent large widebody experience. It progressively grew to be one of the preferred airlines in the world, both for business and leisure travellers. And from the much sought-after Germany originating market, Emirates also became a major player in the premium leisure travel market to Asia, the Indian Ocean and Australasia. The original Superconnector, it specialized in connecting passengers from one large aircraft onto perhaps 50 destinations operated by larger aircraft; an optimal strategy so long as large numbers of passengers continue to flow.
Shortly before the pandemic it began to closely integrate with flyDubai, the short-and- medium-haul narrowbody operation sharing the same owner, providing another platform for growth leveraging both networks to gain efficiencies and synergies through alignment. And it was ramping up toward Expo 2020 in Dubai; all stars were aligning. Against this backdrop, and with the largest Airbus A380 and Boeing 777 fleets on the planet, combined with no domestic market, border closures eliminating the international market certainly made 2020 and 2021 challenging.

Qatar Airways, the youngest of the ME3, is very different. It had the most typical network carrier model prior to the pandemic with a balanced mix of narrowbody aircraft, small and large widebodies, and a small fleet of A380s. In many ways its premium passenger experience is more luxurious than at Emirates, and on the other end more rational than other airlines in the world in network design. Even in Economy, it sought to be a cut above the norm.

For years, Qatar Airways consistently used the “try us once and fall in love” strategy to win over customers with deep discounts when entering markets, which falsely gave competitors the impression the airline was always a discounter. With vast orders of new aircraft on the books and investments in various airlines, Qatar Airways had its fingers in many pots up to 2019 and seemed poised for further growth, essentially still going up the S Curve.

Etihad Airways is arguably a hybrid of the two. Its top end premium products are as luxurious as Qatar’s, and its economy, as reliable as Emirates’. With half of Qatar’s fleet and almost a third of Emirates’, it was a smaller player pre-pandemic and was further rationalizing. Its narrowbodies, small and large widebodies and small A380 fleet, as with Qatar, provided much flexibility.

Recovery: dancing to different beats
As travel recovers, the first two markets recovering (quite quickly) are domestic and leisure travel. But with regulatory constraints, closed borders, and various restrictions such as expensive testing requirements and conditions for vaccinated travellers, demand continues to be inconsistent. Consistent demand is critical for filling a large aircraft day in and day out.

Since the ME3 airlines are essentially very different, it is not surprising that their recovery paths are also likely to be very different. One will likely recover slowly, one is right-sizing/shrinking fast, and one is using a land and expand FAST (Focus, Accelerate, Strengthen and Tie it all together) strategy to lock in fortunes for the future.

Etihad was already well into a transformative restructuring, which in hindsight, is a tremendous advantage for them, providing them a head start to most airlines in the world. Although travel demand had been softening since 2017, particularly in Europe, most airlines were continuing to grow. However, Etihad was already preparing to rationalize capacity.

Having performed its homework in advance of the pandemic, it was well placed to cut capacity rationally and quickly as the pandemic hit, while most others were caught off guard. With a much smaller fleet than its Gulf rivals, and one centred on smaller widebodies, Etihad is perhaps the closest to being right sized amongst the ME3 for the start of the recovery, providing it with the most flexibility and the lowest risks of carrying excess aircraft.

This means it is the strongest off the gate facing the recovery and with the most positive prospects in the short term. Not much is talked about Etihad of late as Emirates and Qatar Airways dominate headlines, but under the leadership of its now not-so-new CEO and a strong long serving commercial leadership team, the airline is on a path to new strength. It seems less concerned about world domination than on ensuring it becomes a well established, reliable, and profitable airline. Covid may have been the catalyst which gives it the opportunity to emerge stronger before its competitors.
Not ever to be outdone, Qatar Airways seems to always find opportunity in crisis, this time through repatriation flights. The airline immediately launched a campaign to be the rescuer of stranded souls around the world, launching flights on routes long sought after but not previously flown either because regulators didn’t permit it or due to excessive competition. One example is Brisbane, where Qatar was locked out based on (flawed) analysis which reportedly suggested it was saturated with capacity from the Middle East. Analysis which ignored the competitive nature of Qatar Airways, the growth the airline had repeatedly demonstrated when entering markets and the fact Gulf carriers connect much more than the Gulf itself.

Suggesting Brisbane should not add Gulf capacity was akin to suggesting no more capacity should be added from any midpoint carrier connecting Europe, the Middle East, Africa, and the North American Eastern Seaboard to Brisbane. Suggesting Qatar would only duplicate Etihad and Emirates ignores that the ME3 do not have identical networks beyond their hubs. But as carriers withdrew capacity due to the pandemic, Qatar capitalized on the opportunity to show travellers, regulators, and the local community its compelling product and service.

Gulf carriers have also been mostly locked out of Canada for years. A long time interline partner of Air Canada and Lufthansa, and more recently a member of oneworld and shareholder of IAG, Qatar has fed traffic to/from Canada across numerous airlines and gateways only because it was limited in its authorization to fly there. The airline capitalized on the closure between Europe and North America to establish a formal partnership with Air Canada, gaining further access to the Canadian market while circumventing the Atlantic Joint Venture (A++) Air Canada has with Lufthansa, Swiss, Austrian, United and Brussels Airlines which includes the highly lucrative Indian market.
Access to Brisbane and circumventing the A++ joint venture previously seemed highly improbable to impossible. Yet, while others navel-gazed, contemplated survival and went on defence, Qatar Airways went on offence. In addition to Brisbane, the airline added Abuja, Accra, Cebu, Luanda and San Francisco in 2020, and Seattle in 2021, cementing its position in key markets.

This capacity growth and recognition-building during the pandemic can be fruitful going forward. According to the Wall Street Journal, by March 2021, just months after starting the Seattle route, Qatar Airways had captured 22.3% of the Seattle-Asia market, ahead of Emirates’ 16.7% (which launched Seattle flights nine years earlier).

With tremendous fleet flexibility, plenty of regional aircraft and a large 787 fleet, Qatar Airways also seems to have the right-sized assets to recover quickly. But it does also have 53 A350 and 48 777-300ER large widebody aircraft to fill. This means recovery could be slower than Etihad’s. No doubt boosted by the joining of long-time industry veteran Thierry Antinori, previously CCO (chief commercial officer) of Emirates and CCO of Lufthansa Group, Qatar Airways continues to defy critics and innovate. It continues to show it is a young and nimble airline.

In contrast, Emirates seems, at first, to be in a disadvantageous position on long routes where, save for a small number of ultra-long-range 777-200LR units, its smallest aircraft is a 777-300ER. With 119 A380 and 124 777-300ER aircraft in the fleet, Emirates is under tremendous pressure to fill big aircraft consistently at a time when border restrictions prevent travel or create tremendous uncertainty and discourage travel. The Boeing 787 types would be absolutely ideal for Emirates now, but they won’t arrive soon. flyDubai 737s do help grow the network on regional and thin medium haul routes.

However, without strong demand to/from Europe and the ability to transport large numbers of passengers to/from Australia, the Emirates network continues to be under pressure. With 243 large widebody aircraft in the fleet, it will obviously take longer for Emirates to recover than its regional competitors. Does that mean Emirates is in trouble? Not at all. When travel returns, it will likely be at a lower base (we expect down 20% overall). But airlines with the best connections, brand recognition, superior products and services, etc have and always will, win.

Emirates only needs more time than the others to recover. It is bigger and has bigger aircraft. That makes it less nimble. When demand recovers and others race to get aircraft, Emirates will have the advantage because it already has the fleet. A further opportunity for Emirates is it can use the downtime of the fleet to accelerate the rollout of its new premium economy seats. With leisure and premium leisure leading the way in the recovery, premium economy will likely be critical to airline recovery.

A question mark for Emirates continues to be its long running leadership succession. Sir Tim Clark has been the guiding light for two decades and has been a driving force in the industry. Will the new President chart a new course, as is often the case when a new leader takes over, or will the new President stay the course?

The road ahead seems bright for all ME3 carriers. Etihad is poised to lead the recovery. Chief executive Tony Douglas told CNN in January that “[Etihad is] still confident 2023, 2024 will be where we said we were going to be” turning around from a $870 million loss in 2019.

Qatar Airways is growing to lock in its presence on lucrative markets, incurring losses in the short term with a long view and tremendous flexibility in its fleet. “We try to take every single dollar that is on the table,” chief executive Akbar Al-Baker told the WSJ. Consistency and reliability are critical to the travel trade and by stepping in to fill voids, Qatar Airways earns tremendous recognition and loyalty which will no doubt pay future dividends.
Meanwhile, Emirates is poised to return to industry leadership. Because its capacity is lumpy (with only large aircraft available), it will face a bumpy road in the short term until demand returns. But it will, purely based on inertia and sheer force, emerge as a leader again. It has become like most legacy airlines, slow and inflexible. How it uses the down time to rationalize, to expand, to innovate, to renovate, will determine how well and how fast it recovers.

COVID-19 shook the industry in ways no one predicted, creating opportunities for once ailing airlines. While things are shaking up between the ME3, one should not forget Oman Air which has a small fleet with efficient small capacity aircraft. Nor Gulf Air which has been restructuring. Or Turkish Airlines, based on the eastern edge of Europe and connecting the world much as the ME3 do (stronger in European points and north Asia, unable to compete on oversupplied Australia).

Tremendous uncertainty also surrounds Lufthansa Group’s attack on leisure and premium leisure outbound from Germany and Switzerland. The ME3 have dominated the growth of those segments in the decade leading up to the pandemic, while home carriers Lufthansa et al focused on the business customers and frequent fliers redeeming leisure award tickets. With business travel all but dried out, Lufthansa Group, its various leisure subsidiaries and newly launched airlines are aggressively focused on these market segments. This certainly puts pressure on all Gulf carriers and Turkish Airlines on traffic originating in the EU and sets the pace for a challenging road ahead.

About the author:
Shakeel Adam is the managing director of global aviation and airline restructuring and turnaround consultancy Aviado Partners. Website: Twitter: @aviadopartners