Gulf carriers compete for world dominance

WHILE Gulf carriers Emirates Airlines, Etihad Airways and Qatar Airways have become daunting competitors to other airlines across the globe, they are themselves competing with each other for world dominance.

All three airlines have been up there in the charts as world’s best in one category or another, garnering awards mainly for premium travel. A recent announcement by Etihad of its decision to no longer participate in Skytrax surveys – allegedly over disagreement on the rating system – has come as a surprise. Yet it may be a sign of there being one too many that points to a meaningless pursuit in a class deemed to be without real competition, and which can only lead to embittered rivalry. In the last Skytrax survey (2013), Etihad was the world’s “best first class”, “best first class seats” and “best first class catering”. But in the “best airline” category, it was placed seventh, far behind Emirates and Qatar which were ranked first and second respectively.

Is there even competition for Etihad’s new Residence suites? (see Extreme luxury: What price prestige? Jun 25, 2014) The race is on: Emirates has said it would introduce a similar product, and it is unlikely that Qatar will want to be left behind.

Interestingly, apart from spending big to acquire the best of equipment and pushing the limits on creature comforts, all three airlines seem to be pursuing different strategies for market dominance.

Courtesy Airbus

Courtesy Airbus


Emirates Airlines

Emirates is replicating the Singapore Airlines (SIA) story of the ‘70s and ‘80s, growing organically with giant strides as it expands its network. Last year it carried 44.5 million passengers to more than 133 cities in six continents. The number far exceeded Etihad’s 12 million passengers to more than 90 destinations and Qatar’s 18 million passengers to over 125 destinations. There are no indications of a likely change in course as Emirates continues to add new destinations in its expansion. Unlike Qatar, which has since joined OneWorld, and unlike Etihad, which has been on a binge to acquire equity in foreign carriers, Emirates remains very much a loner in the game, relying on its own strength and reputation for growth – again, quite reminiscent of the younger SIA.

But unlike SIA, which is a leading member of Star Alliance, Emirates does not believe in alliances. Echoing the sentiments of Virgin Atlantic chief Richard Branson, Emirates senior vice-president of commercial operations worldwide Richard Vaughan said in 2010: “We don’t believe in alliances. We intend to stay as an independent airline.” He believed that alliances reduce the airline’s ability to react swiftly changes in the market place and that they actually reduce competition and lead to higher fares. So true it is that when a passenger books a ticket with an alliance member airline, there is no guarantee that the passenger will be flying with the airline of choice. Under the circumstances, Emirates would have felt its product compromised.

Emirates’ stance has not changed. It has held out impressively during the economic crisis that saw many airlines scrambling to cut back services and subsequently entering into extensive commercial agreements with partner airlines. While Emirates maintains its independence, it has entered into code share agreements – a common industry practice – with a small number of airlines that include All Nippon Airways, Cathay Pacific and Air New Zealand. Its extensive non-equity partnership with Qantas made headline news in 2012, but it was a deal seen as impacting the Australian carrier more than Emirates. The Gulf carrier continues to steer clear of mergers and acquisitions although there was speculation of its interest in acquiring an ailing Indian carrier as India relaxes its rules on foreign ownership. The question remains as to whether Emirates can continue to buck the trend.

Courtesy Etihad Airways

Courtesy Etihad Airways


Etihad Airways

Etihad on the other hand has been acquiring stakes in foreign carriers besides a list of code-share partnerships that include Air France, American Airlines, All Nippon Airways and Cyprus Airways. The cash rich Gulf carrier partially owns Air Berlin (29.21%), Air Seychelles (40%), Aer Lingus (2.987%), Virgin Australia (10%), Jet Airways (24% – to be formalized), Jat Airways which has been renamed Air Serbia (49%), Darwin Airline which has been renamed Etihad Regional (33.3%) and Alitalia (49%). Some of those airlines have been shrouded in financial problems, such as Jet Airways of India and Italy’s flag carrier Alitalia which is already partially owned by Air France-KLM. In the case of Virgin Australia, Etihad also shared ownership with two other foreign carriers – SIA and Air New Zealand.

While code-share partners do little more than allowing airlines to sell seats on each other flights, equity alliances play a more forceful role for partner airlines to feed traffic into each other and provide seamless transfers in an extended network. For the ailing airline, Etihad is the white knight. For Etihad, it proffers the opportunity for growth via a third party. Alitalia, which is reeling in debts of about 800m euros (US$1.1bn), is looking to further injection of capital by Etihad to not only save it from the brinks of bankruptcy but also growth from then on. Italy’s transport minister Maurizio Lupi was elated by the deal. He said: “It’s increasingly clear that this marriage should happen because it’s obvious to all that we are dealing with a strong industrial investment that will offer our airline concrete growth prospects.” Someday Air France-KLM might wish it had enough gumption and money to raise its stake of 25% which has as a consequence dwindled to 7%. But Air France-KLM chief executive Alexandre de Juniac said Alitalia was not a priority at the moment. Still, Mr de Juniac viewed Etihad’s investment “with favor”, adding that the doors to KLM-Air France raising its stake were not closed.

Courtesy Qatar Airways

Courtesy Qatar Airways


Qatar Airways

Qatar is the only airline among the three Gulf carriers that has joined a global alliance, in its case OneWorld, whose members include Qantas, British Airways, American Airlines, Cathay Pacific and Japan Airlines. At its induction in 2013, Qatar chief executive Akbar Al Bakar said: “Alliances are playing an increasingly important role in the airline industry today – and that will continue long into the future. Becoming a member of OneWorld… will strengthen our competitive offering and give our customers what they fully deserve – more choice across a truly global network served together with airline partners.”

That is the ideal scenario, but in reality airline relationships are more complex than that. Without downplaying the benefits of global alliances such as wider network connections, shared facilities (Qantas/British Airways/Cathay Pacific premium lounge at Los Angeles Airport) and a dedicated terminal to enhance coordination (London Heathrow’s terminal 2 for Star Alliance members), member airlines have also entered into bilateral agreements across alliances. It is not uncommon to find rival airline connected in some way through a third party. Perhaps, in this context, lies the reason why Emirates and Etihad have so far not been convinced of the need to join any of the global alliances.

Whatever the strategy adopted by the Gulf carriers as they compete for world dominance, they have become daunting forces in the global market. Lufthansa’s new man at the helm Carsten Spohr has identified the competition posed by Gulf carriers as a major concern in Europe. In Asia, SIA is facing increased pressure from Gulf carriers tapping into its traditional market for traffic between Europe and Asia-Pacific and on the kangaroo route. While they have the means and resources to cut a product above the competition, it is their increased popularity that worry more their rivals, which will be relieved to see the Gulf carriers shifting their energies to outdoing each other instead, for the time being, in pushing the limits for the best Residential suites in the sky.

This article was first published in Aspire Aviation.

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It’s the age of mega carriers: Will Air France-KLM raise its stake in ailing Alitalia?

Courtesy Wikipedia Commons

Courtesy Wikipedia Commons


Alitalia is fighting bankruptcy as its shareholders initiate efforts to raise funds in light of its main fuel supplier threatening to cut off supply. The Italian postal service will contribute 75m euros (US$101.6m) to the rescue package of 500m euros.

Meantime, Air France-KLM – already the biggest shareholder of the beleaguered airline – waits to see if it should increase, possibly double, its stake of 25 per cent. Air France-KLM chief executive Alexandre de Juniac is in favour of the takeover to gain greater access to the Italian market, but the Franco-Dutch board is cautious about the debt incurred by Alitalia. The Italian flag carrier last made a profit in 2002 and has so far lost 294m euros in the first half of this year. Air France once made a bid in 2008 to take over the airline but was thwarted by a consortium led by then Prime Minister Silvio Berlusconi. The timing today may not be right as the new Air France-KLM is itself struggling with restructuring and cost issues.

The age of the mega carriers has long arrived and it appears the trend, predicted in as early as the ‘80s, looks set to continue. In Europe, besides the Air France-KLM merger, there is the International Airline Group comprising British Airways and Iberia. Lufthansa wholly owns Austrian Airlines and Swiss, and owns 45 per cent of Brussels Airlines, 14.44 per cent of Luxair, and varying interests in a string of other airlines. The competitive field – not only in Europe but also in the United States and to a lesser extent elsewhere – has narrowed to a few mega groups of airlines with fiscal partner interests beyond mere marketing alliances.

In the United States, United Airlines is merged with Continental Airlines under United Continental Holdings; Northwest Airlines is merged with Delta Air Lines; and American Airlines is merged with US Airways. Delta made news when it acquired a 49-per-cent stake in Virgin Atlantic, the stake bought from Singapore Airlines (SIA) which until then had maintained a passive interest in its holding. For Delta, more than for SIA, it would materially increase its presence across the Atlantic.

In South America, LAN Airlines of Chile absorbed TAM Airlines of Brazil to form LATAM.

Somehow the trend is less prominent in Asia and the extended region where flag competing flag carriers generally prefer marketing alliances such as the partnership between Qantas and Emirates, and that between Singapore Airlines (SIA) and Virgin Australia. But it is changing as the competition intensifies in a tight market and as blocs begin to form to make bigger bites, and as countries relax their rules on foreign ownership. SIA now owns 19.9 per cent of Virgin, which is also 19.9 per cent owned by Etihad Airways and 23 per cent owned by Air New Zealand (ANZ). ANZ has announced it will increase its stake to 25.9 per cent, and thus continues to be Virgin’s largest shareholder outside the Virgin Group.

Cash-rich Middle-East carrier Etihad seems to be particularly active on this front, picking up stakes in Air Berlin, Air Seychelles and Aer Lingus, and targeting to complete a 49-per-cent acquisition of Air Serbia in January next year.

Yet the interest seems more as a matter of pure investment or hedging against a shifting competitive landscape. There is no white knight appearing in the horizon to rescue ailing Kingfisher Airlines while many foreign carriers have expressed interest to enter the large and growing Indian market now that India has relaxed its policy on foreign ownership. Etihad is more interested in the less vulnerable Jet Airways. Malaysian budget operator AirAsia and SIA have initiated separate deals with local investors to start new airlines. There is really no valid reason to buy into debts unless the potential for recoup plus growth is visible, almost tangible. But the Indian market has been somewhat of a come-and-go melee, susceptible to changing regulations.

Yet what should make the Alitalia case different for Air France-KLM? It is probably one of market proximity, where the impact may be more immediately felt by the suitors. It goes beyond passive investment – a case in point as mentioned earlier is the SIA/Virgin deal compared with Delta/Virgin deal – to more strategic considerations of how the acquisition would advance the Air France-KLM cause vis-à-vis its competitors within the same region. It becomes an issue of survival in itself.

Interestingly, Etihad was asked if it would be interested to buy into Alitalia, and chief executive James Hogan sidestepped the issue, telling AFP: “At the moment I’m focussed on India, transactions in India. We look at many businesses but we are primarily focused on Jet Airways.” Yet it is rumoured that Hogan has been meeting up with Air France-KLM to discuss the matter, purportedly to persuade Air France-KLM to raise its stake or let someone take its place. Does it appear obvious enough who that “someone” may be? You make a guess.

Air France to axe 5,000 jobs

It is no coincidence that Air France has announced it will cut more than 5,000 jobs – about 10 per cent of its workforce – by end 2013 to reduce costs, on the heel of the grim message delivered by the International Air Transport Association (Iata) at its recent annual summit in Beijing that more airlines would go bust this year.

European carriers are most vulnerable in light of the continuing Eurozone crisis. Earlier in the year, Spanish carrier Spanair and Hungary’s Malev went bust.

Other airlines that have previously made similar moves include Qantas, whose restructuring of its maintenance and catering divisions will render 500 positions redundant, and the number could be higher.

It is interesting how Air France chief Alexandre de Juniac prefaced the move with the following statement: “Air France is facing a fundamental choice about its future. Our business plan has two ambitions: to ensure Air France returns to profitability and to better serve our customers.”

Staff retrenchment is a bitter pill to take, and in many countries this may meet with industrial unrest. So customers share in the attribution. How exactly will they benefit? It would be good to know.

Perhaps Mr de Juniac has a point there. While airlines should be managing their costs with discipline no lesser in good than in difficult times, the worst thing to happen is when they are clutching at straws, loyal customers are switching allegiance.