Middle East: Gulf carriers fall into line

The rumour circulated among air transport specialists for several days: Etihad Airways and Emirates are said to be considering merging their activities. In early March, the German business daily Handelsblatt reported that the ruling families of Dubai and Abu Dhabi had met and discussed a possible merger between the carriers. This rumour was immediately vehemently denied by the chairmen of the airlines concerned, who described the information as absurd. False or not, it certainly indicates that a certain nervousness among the players in the Gulf.

It has to be said that the situation of the two carriers would in some way encourage this logic. Of course, Emirates and Etihad are among the most profitable airlines in the world, with two decades of growth that would make the rest of the industry green with envy. In 2007, Emirates carried 21.2 million passengers and Etihad 4.7 million. Barely ten years later, in 2016, Emirates was carrying nearly 55 million and Etihad 18.5 million. However, with hubs less than 150 km away of each other, the risks of duplicates according to the German daily. If we add the nearby presence of Qatar Airways in Doha, the Gulf actually has three mega-transporters for a domestic market of nine million people, comparable in size to London.

This potential cannibalisation was of little importance in the days of oil wealth, when each monarchy was proud to have its own airline.
And rightly so, since in the space of a decade, the Gulf carriers have become real key players, with the firepower of global networks, fleets numbering in the hundreds of aircraft and, more recently, equity stakes in other airlines.

To make their mark, the three giants that are today Emirates, Etihad and Qatar Airways began by reshuffling the cards in the region, leading to theweakening of "incumbent" operators. While Kuwait Airways, Gulf Air, Royal Jordanian and Middle East Airlines have not disappeared from the map, they now operate in the shadow of their neighbours. Even if their networks still include intercontinental destinations, even if they are supported by their respective governments to modernise their fleets and improve their on-board service, they no longer aspire to the rank of global airline.

Among the "big three are Oman Air and Saudia. The former is following - at a slower pace - in the footsteps of Emirates and Etihad in the past, adding four to five new routes to its network every year. This summer, Oman Air is launching routes to Manchester and Nairobi and increasing frequencies to Bangkok and Kuala Lumpur. Positioning itself as an alternative to direct routes between Europe and Asia, and to India in particular, omanie continues to grow, operating a fleet of 51 aircraft, rising to 70 by 2020.

As for Saudia, a member of theSkyTeam allianceThe Saudi national airline has a network of 80 destinations and benefits from a powerful domestic market as well as strong activity thanks to the transport of pilgrims to Mecca.

A model called into question

However, the unbridled growth model of Middle Eastern companies now seems to have reached its limits. The economic and geopolitical environment has changed, and changed a lot, starting with the region's main financial windfall, oil. While the price of a barrel of crude oil reached USD 115 in June 2014, it hit an all-time low of USD 35 in February 2016. Although it has since risen back up to reach the 50 mark at the beginning of May 2017, this still represents a fall of 63 % over three years. As a result, revenues are drying up for the Gulf States, which are cutting back on investment and increasing their austerity plans.

Significant examples of this new caution are the delays in airport expansion. This is the case in Oman, for example, with the new terminal at Muscatexpected at the end of the year but long postponed to find private funding, or to Abu Dhabi where passengers will have to wait until 2019 to be able to stroll through the impressive Midfield Terminal, which was due to open this year. The official reason for this is technical problems, but some experts are pointing to the limitations of the shareholder state, which has been hit in the wallet by the fall in commodity prices.

Added to this is a unstable political climatesupported by acts of terrorism and by an American administration which, with Donald Trumpis resolutely placing the interests of the United States above all other considerations. Many analysts believe that the recent ban by the US authorities to carry electronic devices other than mobile phones in the cabin is actually a disguised protectionist measureaimed at diverting American passengers from Gulf carriers.

With the rise of long-haul low-cost airlinesToday, there is a new threat to the profitability of Middle Eastern mega-carriers. With their low fares between Europe and Asia or Asia and America, the AirAsia XEurowings, Norwegian and others Level should soon make transit via the mega-hubs of Abu Dhabi, Doha and Dubai less attractive. As a result, long-haul low-cost carriers could eventually take market share from Gulf carriers, not so much in the Middle East itself as on intercontinental routes.

Middle Eastern airlines are therefore suffering the combined effects of this economic situation. And, for the first time in years, they are posting lower profits and are even being forced to apply austerity programmes. "The emergence of an airline giant like Emirates, always pushing the boundaries, was linked to an era that has probably come to an end."he told the Bloomberg press agency in early January. Tim Clark, Emirates CEODubai's national airline. "It's true that we are the product of multilateralism and trade liberalisation."he added.

In fact, the three giants of the Middle East may simply have also entered a period of crisis. standardisation phase. In the age of maturity, so to speak. In May 2016, Emirates revealed that its annual sales had fallen for the first time in a decade, while last November the airline reported that its profit was down 6 % year-on-year, to 364 million dollars. The carrier has had to reduce its offer in certain markets affected by a mediocre economic climate or a drop in demand, for example to Turkey, Brazil and certain African countries. On the other hand, the airline continues to grow in Asia, having added Yinchuan and Zhengzhou in China, Yangon and Hanoi in South-East Asia and a second daily flight to Bali to its network.

Earlier this year, the Dubai-based airline also announced that it would be making staff redundancies. This decision follows the reduction of its network from 116 destinations in 2015 to 112 at the end of last year, alongside a stagnation in its fleet with 119 aircraft, just one more than in 2015.

For its part, the Outgoing CEO of Etihad Aviation Group (EAG), James HoganIn commenting on the Group's results at the beginning of the year, the Chairman of the Management Board acknowledged that ".2017 promises to be a challenging year. We are continuing to grow, but in a prudent and efficient way, in line with the nature of our economic environment. Our business model should prove its long-term viability in the current economic climate."Qatar Airways remained the most profitable airline in 2016, tripling its profits thanks to the opening of a dozen new routes and lower oil prices.

However, there are a number of reasons for this, IATA predicted at the beginning of the year that economic downturn in the Gulf in 2017. The CEO of the powerful airline association, Alexandre de JuniacIn a press release issued on the same day, the Group said that it expected profits for Middle Eastern airlines to come in at $300 million for the current year, three times less than in 2016.

On the road to maturity

Another sign of the evolution of the Gulf carriers is the redefinition of their relations with the rest of the world. Over the past decade or so, Qatar Airways, Etihad and Emirates have become increasingly involved in international air transport. This has taken the form of large-scale cooperation agreements, shareholdings in other airlines and integration into alliances.

In 2013, Emirates struck a major blow with the signing of a major partnership with Australia's Qantas. An agreement that shattered the traditional link between British Airways and the Australian airline and, at the same time, transferred transit traffic to Australia to Dubai instead of Singapore. "With Emirates, our Qantas passengers now have access to over 70 destinations in Europe, North Africa and the Middle East."said Qantas CEO Gareth Evans. Emirates operates code-share flights with around twenty carriers worldwide, as well as with SNCF in France.

TheEtihad was the most ambitious by acquiring stakes in a dozen or so companies, creating the the air transport industry's leading capital-intensive alliance. The Abu Dhabi company owns 49 % of the capital ofAlitalia andAir Serbia40 % ofAir Seychelles29 % ofAirBerlin and 24 % of Jet Airways in India. But while there may be synergies between all these airlines, is it really worth it for Etihad to take on the big boys? Alitalia's abysmal losses and AirBerlin? The Abu Dhabi carrier's European investments have resulted in losses of more than €2.5 billion over the last six years. The departure of CEO James Hogan, who initiated this strategy, could reshuffle the cards. Etihad, for example, refused to get back into Alitalia's business after several recapitalisations over the last decade, which led to the Italian airline's bankruptcy. As for AirBerlin, cooperation is taking shape with Lufthansa to find a way out.

Diplomatic crisis

Later in the game, Qatar Airways is also extending its influence. After joining oneworld in 2014, the carrier acquired a 20 % stake in theInternational Airlines Group (IAG)the holding company for British Airways, Iberia, Vueling and Aer Lingus. The Qatari airline has also taken a stake in South American leader LATAM, a member of oneworld, in which it has held 10% of the shares since the end of 2016. D'other similar comparisons are probably to be anticipated. Unless geopolitics catches up with the carrier's ambitions... The recent breakdown in diplomatic relations between Saudi Arabia and the Gulf States and Qatar could have consequences for the results of the Emirate's airline.

Frost and Sullivan estimates that Qatar Airways could see its revenues soar by 30 % as a result of the freezing of routes to Dubai, Ryadh and Cairo, the cost of rerouting flights that previously crossed the airspace of neighbouring countries, a drop in premium seat sales and, probably, a decline in leisure passengers. It remains to be seen how long this period of turbulence will last.