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Hey, big spenders

The Gulf's big three have continued to grow since the last air show - and they could be ready to splash the cash again

By: Max Kingsley-Jones

Dubai Airports
Deliveries of Emirates' existing 90-strong A380 order are due to be complete in November 2017

Since the industry last gathered in Dubai two years ago, the Gulf’s network carriers have been undergoing a remarkable transformation in parallel with their continued global expansion. As the networks have extended out from Dubai, Doha and Abu Dhabi across every region, so their fleets have enlarged to support that growth.

But their expansion has not all been organic, as the Gulf’s big three are all now much closer to their legacy rivals than they were at Dubai 2011. However, each carrier is following a different strategy in engaging with the old guard.

And while Emirates, Etihad and Qatar Airways could never claim to be short of hardware, they are all likely to splash some serious cash at the air show on some new toys from Airbus and Boeing.

With its fleet of over 200 aircraft, Emirates is the undisputed market leader. Last year it carried 39 million passengers through its Dubai hub, and is growing its traffic rapidly as it deploys its expanding fleet of Airbus A380s across the network. It confidently aspires to be “the largest airline on the planet by international passenger traffic” in 2020, carrying 70 million passengers annually.

Clear in its long-held views that life is better outside the global alliances, Emirates created a few waves this year when it linked up with Oneworld founder member and long-time British Airways collaborator, Qantas.

Qatar Airways, meanwhile, has broken ranks and joined the alliance throng, with entry into Oneworld in October. Etihad, meanwhile, has used its expanding “equity alliance” as the cornerstone of a strategy to forge commercial tie-ups with airlines across the globe – and across the alliance spectrum.

Oman Air, sitting at the top of the region’s second division, is ploughing its own furrow and, despite relatively modest ambitions, has significant near-term expansion planned. Gulf Air, once the powerhouse in the region, has restructured around a smaller operation concentrating on a short-haul network within the region, along with a few longer international routes to primary destinations.

Boeing’s new 777X family is odds-on to rack up a lot of business at the air show, and the Gulf carriers are likely to be at the front of the queue for the “big twin” due to debut in 2020. All three airlines have been in negotiations over the type, but warn that deals will only come if the right commercial terms can be agreed.

ALL IN THE TIMING

“We spent the summer working through the technical side of the aeroplane, and from what I can see it looks very good,” says Emirates Airline president Tim Clark.

Speaking two months before the show, Clark said Emirates had only just been given definitive pricing information on the twinjet. He added that the timing of any contract with Boeing would be “when it suits us – it may be the Dubai air show, but if we’re not ready we won’t be doing it”.

Deliveries of Emirates’ existing A380 orderbook of 90 aircraft are due to be complete in November 2017. Growth requirements aside, Emirates will need replacements from 2020 for its early aircraft, as they reach its stipulated retirement age of 12 years.

“There’s an automatic replacement of 90 aircraft, in my view,” says Clark. “If I could find ways and means to get more space [at the Dubai hub] to get them in, we’d like some more.”

And the ability of Dubai International airport (DXB) to keep its capacity growth on pace with Emirates is a moot point. Emirates’ growth and the strong recovery of Dubai as a destination is piling on the pressure, despite an ongoing expansion programme designed to enable the airport handle more than 90 million passengers by 2020.

“The maths tells us that [Dubai will reach that target] four years earlier than we thought we would. So Emirates is busy working on stand choreography in the peaks to maximise the most efficient use of the real estate,” Clark adds.

The all-new airport south of the city, dubbed Dubai World Central (DWC), will take up the load to relieve the pressure on DXB by handling cargo flights and new entrants. “The [strategic plan] 2020 has an amalgam of the two fields, and we could get to 120 million,” says Clark.

The long-term solution for Dubai is “to build the big one at DWC”, says Clark, referring to the proposed six runway/160 million passenger complex.

“If we didn’t have that physical constraint today [at Dubai International] we would have ordered another 30 A380s.Without constraints, we would be able to take many more – I’m assuming that Airbus doesn’t ‘bottle out’ on the A380,” says Clark, adding – with genuine conviction – that if the “big one at DWC” does materialise then Emirates could operate 180 of the Airbus superjumbos.

EXPANSION

Qatar Airways’ outspoken boss Akbar Al Baker is notorious for making headlines at air shows, and is likely to be among the big spenders in Dubai. The airline’s ongoing double-digit expansion saw it carry 17.2 million passengers last year, and this is expected to rise a further 13% to 19.5 million this year.

“The biggest challenge is not getting enough aircraft on time,” says Al Baker. “We have a fleet of 129 aircraft and are taking one every 12 days on average. We should have 200 aircraft in less than three years, maybe earlier.”

The new aircraft are all being used for growth, as plans to begin replacing older equipment were affected by delivery delays. “We were supposed to [begin a roll-over], if Boeing had given us the aircraft on time,” Al Baker says, referring to the delayed delivery of the carrier's 787s.

“The roll-over will not begin for another two years, because we are so short of aircraft that A330s and A340s that were supposed to be phased out are going for a cabin refit,” he adds.

Etihad chief executive James Hogan says the Abu Dhabi carrier has been evaluating a fleet deal covering its growth from 2020 to 2040.

“We’ve currently got 80 aircraft, and between now and 2020 there’s another 70-80 aircraft coming,” he says. "We’re still in negotiation [about the 2020-2040 deal], and probably expect the order to be split between Airbus and Boeing.”

Etihad
Etihad carried 10 million passengers
in 2012, serving 94 cities with 80 aircraft

He adds that “the 2020 deal takes into account the retirement programme [of existing aircraft]”, and confirms that the 777X is included in the evaluation along with the 787-10, A320neo and 737 Max.

“[Talks are] a pretty good way down the road,” he says, and hints that the order will likely be sizeable, as it could include not just Etihad’s own requirements, but also the needs of some of its partner airlines.

And those strategic partners have been coming thick and fast to Etihad’s equity alliance, since it bought its 29% stake in Air Berlin two years ago.

“What we’re doing is building a strategy to drive traffic over the hub to give me the network that is competitive with my two near neighbours,” says Hogan. “My fiercest competitors are here in the Gulf. This strategy is part of how I differentiate and build a network to compete.”

He divides Etihad’s “equity alliance” into two groupings: “The ones where there is a management contract: Air Serbia [previously Jat Airways] and Air Seychelles; and the pure strategic investments: Virgin Australia, Aer Lingus Air Berlin and Jet.”

It was Clark who instigated Emirates’ romance with Qantas, after watching how the Australian airline’s chief executive Alan Joyce was reshaping the carrier. “For Qantas, its international [division] was the weak link in Alan’s whole business model. So I thought that it was probably a good idea to have a chat, and Alan picked it up and ran with it so fast,” he says.

The commercial agreement began in April, with Qantas switching its Australia-London “Kangaroo route” stop-over from Singapore to Dubai. This allows the carrier to connect on to the Emirates network, while its partner gets access to Qantas’s Australian network at the end of its flights from Dubai.

Unlike the three global network carriers up the road, Oman Air’s finances are currently in the red. But chief executive Wayne Pearce sees an acceleration of the airline’s near-term expansion as way to move into profitability. “We certainly wound our losses down in 2012, but we’ve got a long way to go – we need a bigger fleet and continue to make efficiencies and get our seat factors and yield up,” he says.

Oman Air operates 30 aircraft, including 17 Boeing 737-800s, seven Airbus A330s and six regional aircraft, and has firm orders for 20 aircraft comprising three A330s, 11 737s and six 787s.

FURTHER GROWTH

“We have a roll-out of older aircraft, so that will take us to a net total of 44 aircraft by 2018,” says Pearce. “But we have a major fleet programme review under way and we are aiming to expand the fleet to 50 aircraft by 2017, with further growth beyond that to 2022.”

Qatar Airways
Qatar Airways expects to carry 19.5 million
passengers this year - up 13% from 2012

Even by the standards of fast-moving Qatar Airways, the next 12 months represents a major transformation for its operations. “2014 will be very exciting because we will be part of Oneworld, we will receive our first A380s and first A350s, and will move to our new home – Hamad International airport,” says Al Baker.

“Joining Oneworld will be very important for us. We will have a reach to over 860 destinations and over 550 lounges. It will give us a boost to our revenue and to our Oneworld partners. It will give Oneworld members a double-digit boost to their network in Africa and the Middle East,” he adds.

Etihad carried 10 million passengers in 2012, but Hogan is guarded on any growth forecast for this year. “What’s important is we’re getting the load factor and the RASK that we’re targeting.”

The Abu Dhabi carrier serves 94 cities with a fleet of 80 aircraft, including freighters, and is looking to add destinations in “all parts of the world”, Hogan says.

The next phase of fleet expansion begins in earnest at the end of next year, when it receives the first of 41 787-9s and 10 A380s on order.

As he surveys Emirates’ next move, Clark is not yet ready to implement long-held plans to create “a fully linked global carrier” operating services between points outside Dubai, such as across the Pacific: “We have the aero-political rights from points in Asia and from the USA to do it. Is the timing right? Probably not,” he says.

Clark acknowledges that such a move would not sit well with rivals. “Our mantra has always been that we would increase the size of the pie,” he adds. “I’ve got to be absolutely satisfied that if we do, it’s going to be equilibrium as far as [competitors are] concerned. So we’ll wait for the global economies to start picking up, so that the transpacific operations become as good as they were prior to the meltdown, and there is room for others.”

In terms of growth from Dubai, Emirates is adding more destinations within the “3,000-mile arena” and upgauging to the A380 on existing points, such as Barcelona, Brisbane and Los Angeles.

“By the end of 2013 we will have opened 25 new points and taken on 40 additional aircraft,” Clark says, although he adds that Emirates plans to only add a net four aircraft in 2014, as it will retire 14 A330/A340s and take delivery of 18 A380s and 777s.

BRANCHING OUT

Qatar Airways is focused on expanding across its already expansive network, which now covers the six continents. “We still see gaps which Qatar Airways will be able to fulfil,” says Al Baker.

Qatar is also branching out locally with a wholly-owned Saudi Arabian domestic airline, which should be ready for launch by early 2015, initially flying Airbus single-aisle aircraft acquired via its parent.

Al Baker still has an appetite for foreign airline investment, despite a brief, unsuccessful dalliance at Cargolux. “This was a unique situation. We were there to help them with productivity, help them grow their network and help them with the synergies that are between Qatar Airways and Cargolux. Unfortunately there was no will on the part of the other shareholder to oblige, so we decided to withdraw,” he says.

“We are always looking at every investment opportunity, but we will not jump into bed with anyone unless we can add value for each other. We want to make sure our investment is very prudent and adds value to the bottom line of the airline.”

Oman Air is tempering its expansion plans around its role as a national airline, rather than a predominantly hub-and-spoke operation like its bigger neighbours. This year it will grow 12%, carrying almost five million passengers – half of which will be origin and destination traffic.

Future growth will be undertaken systematically – increasing frequency to existing routes, bringing better connectivity and adding new destinations, says Pearce. “We are a network carrier, but we’re not trying to get to 100 aircraft in three years’ time,” he says.

The focus is on bilateral relationships, rather than joining an alliance, says Pearce. The airline has implemented or announced codeshares with five carriers, including both independent players and alliance members.

There is no doubt that attitudes around the world towards the big three Gulf carriers are changing significantly, and the reason is simple, says Clark: “There’s been a kind of realisation that the Gulf airlines are here to stay, and they’re actually not doing a bad job.”

The challenge the legacy carriers face now around the region’s big three, is not to get left behind in the rush to do business with them.