Aviation's global hub is quitting the Persian Gulf

Aviation's global hub is quitting the Persian Gulf

Once upon a time, airlines based in the Persian Gulf were making all the running in the global aviation market.

Propped up by state owners that didn't care too much about profits and blessed with a unique geographical position from which a single flight can reach almost every inhabited spot on the planet, Emirates, Etihad Airways and Qatar Airways seemed to have the world at their feet.

Emirates was expanding capacity at the rate of 30 million or so available seat kilometers per year – roughly equivalent to adding an AirAsia to its network every 12 months – and striking deals with weakened rivals such as Qantas to win more long-haul traffic.

Etihad was even busier, taking equity stakes in more than half a dozen airlines to build a rival to the traditional aviation groups of OneWorld, SkyTeam and Star Alliance – one that carried almost 127 million passengers last year.

Qatar Airways was moving in the same direction, becoming the biggest shareholder in IAG, the owner of British Airways, and South America's largest operator, Latam Airlines.

For good measure, Qatar's sovereign wealth fund even bought a 20 percent stake in Heathrow Airport Holdings, owner of the busiest airport for international passengers after Dubai.

With remarkable speed, that advance is falling into disarray.

Hard times for the Gulf trio

Etihad announced Thursday a US$1.87 billion loss for its 2017 fiscal year, driven by massive writedowns in the value of those equity partners and its aircraft fleet. Even by the standards of the aviation industry, where fleet impairments can often spark dramatic numbers of this sort, that's a giant of a loss.

Qatar Airways, meanwhile, could lose 30 percent of its revenue due to the blockade of its home country by its Arab neighbors, according to Frost & Sullivan, a consultancy, while Emirates in May reported its first annual profit decline in five years.

There are short- and long-term factors driving this. U.S. airlines, revived by a wave of domestic consolidation and seeking payback for the decades when Gulf carriers kept them on the back foot on international routes, have been using the government to exact revenge.

Restrictions on travel from Muslim-majority countries and a ban on laptops from Middle Eastern airports – the latter finally lifted in the past month, thanks to enhanced security measures – have chilled the activities of the Gulf carriers into the U.S. Etihad scrapped flights to San Francisco last month and Emirates has cut 25 weekly services to the country.

While those crises, and the blockade on Qatar, may gradually pass, it's the longer-term picture that's more worrying.

New alliances

Consider the other big aviation news Thursday. Delta Air Lines and China Eastern Airlines paid about €751 million (US$876 million) to each take 10 percent stakes in Air France-KLM, with the European group using some of the cash to buy a 31 percent stake in Virgin Atlantic Airways.

Alitalia, which counts Etihad as a 49 percent investor and was declared insolvent in May, will also be brought into the joint venture.

This sort of new alliance – cemented by market power on the big bilateral routes between the EU, the U.S. and China, and dominated by players in those markets – poses a profound threat to the vision of aviation's future promulgated by the Gulf carriers.

A domestic market, after all, provides a formidable advantage for international carriers. Domestic passengers tend to pay more for each kilometer flown than international travelers, allowing the short-haul routes to subsidize the more competitive long-haul legs.

They also provide feeder traffic so that planes from Chicago to London can be filled up with passengers ultimately traveling from Cincinnati to Glasgow, further improving profitability.

The Gulf carriers – all based in jurisdictions that are, in essence, city-states – lack that advantage.

For most of the history of modern aviation, the geographical benefits of being global hub carriers has compensated for that handicap. That era, along with the double-decker jumbo jets that drove it, is now fading into the sunset with new aircraft that can fly further than their predecessors.

A future based on the power of the three big outbound tourism markets, rather than the strategic locations of global hubs, was always going to be challenging for the Gulf's carriers. It could be arriving at the gate sooner than anyone expected.

 

5 comments

  • StudiodeKadent

    StudiodeKadent

    29 Jul, 2017 11:22 am

    Are the "ME Big Three" going down? Yes to a degree, but I don't think its because of the US Big Three exacting "revenge" or anything. I think its simply due to technology.

    The next generation of jets... i.e. the widebody jets that come after the A330neo, 787, A350 and 777X... these jets (or at least one or two models thereof) will almost certainly make point-to-point travel from anywhere to anywhere else feasible. We're already on the cusp of that with the A350ULR, 787-9 and 777-8... the generation after that will almost certainly be able to do routes that are at least as long if not longer, and do so less expensively. Once we have that capability, we will be in a point-to-point world.

    All other things being equal, people will prefer direct over indirect flights. A very large part of the economy class market is willing to sacrifice this in exchange for lower fares, however.

    This makes it pretty clear where the economics are headed; there will be a volume market for commodity travel in economy class that is driven entirely by price. These passengers will still be funneled through megahubs since these allow economies of scale and thus lower prices. 

    Everyone else... non-price-supremacist-economy-class, and all the premium cabins, will move towards more point-to-point travel.

    The Middle East 3... and all carriers generally... thus will have their yields eroded to the premium demand that they can support to/from their own hubs. Sure, they'll probably remain huge volume carriers in the lower-yielding market, but premium flyers prefer point-to-point over connections. 
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  • Steve987

    Steve987

    30 Jul, 2017 11:37 am

    To build on this (all of which I agree with), I suspect the hubs that are successful will be the ones that have broader attraction and can attract overnight stays. Eg Singapore and Hong Kong are far more likely to win than any of the gulf states, which have very little appeal other than location.
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  • StudiodeKadent

    StudiodeKadent

    30 Jul, 2017 06:32 pm

    I agree, but Dubai and Abu Dhabi have much to recommend too. Both have international commercial centers (Dubai mostly but Abu Dhabi is trying to do one too), art galleries, architecture, great food, amusement parks and the like. Certainly Dubai and Abu Dhabi will have longterm appeal (Dubai's expansion and growth is effectively the Singapore Model). 

    Hong Kong and Singapore are wonderful, but Singapore isn't really in a good location for connecting traffic except for the kangaroo route. Hong Kong has slot restrictions. In addition, HK and Singapore are pretty solidly higher-end destinations; Dubai and Abu Dhabi have the luxury of enough space by which they can expand capacity and cater to a wider range of budgets. 

    And I think they'll eventually have to start doing that if they want to sustain their tourist/connecting passenger flow. 
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  • hwle

    hwle

    31 Jul, 2017 10:47 am

    I agree that the ME3 will have their yields further eroded, but I think there will still remain a role for them, following consolidation. 

    I have no doubt at some stage that Etihad and Emirates will be merged into a single entity, especially following the recent quasi-merger of Emirates and Fly Dubai.  There will still be a role for the ME3 as "volume" carriers like you have suggested, given that not everyone prefers to travel on 15+ hours flights (and even with technology allowing this, airlines would have to charge a premium for such ultra long haul flights). 

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  • worldwanderer

    worldwanderer

    5 Aug, 2017 10:04 pm

    I'm not at all surprised that they are in a downward spiral.

    I am aware EY have their avid fans. However, having had the misfortune to have 5 out of 5 unpleasant experiences via EY in Y and spent 4, less than inspiring, days in Dubai, I have no urge and will actively avoid ever repeating. 

    I now plan all my overseas flights to avoid EY, and DXB like the plague. Why Qantas partnered up with them is something I fail to understand 

    Given limited options for convenient connections from Australia to many African destinations, I will probably try QR for next year's planned holiday just to try out the on-board offering; but no real desire to exit DOH and would merely transit.

    New long haul non-stop options are my ideal to minimise the number of times having to go through the typical airport security/transit experience & delays.
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24 May, 2019 01:30 pm

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