A battle royal is brewing as the Gulf's newcomers Etihad Airways and Qatar Airways chase Emirates to be the region's leading global network carrier
The airline industry boom in the Gulf may have been led by the emirate of Dubai, but there is a growing number of local rivals vying to steal the pace-setter's crown. And they are all confident that they can survive and prosper, despite the close proximity of their global network hubs.
It was Dubai that drew up the original blueprint for how to create, "virtually overnight", a nation-state premium global network carrier - based on the likes of Singapore Airlines and Gulf Air. Emirates was created by the Dubai government in 1985, but really began to accelerate its growth a decade ago and now serves 80 destinations with a fleet of 90 aircraft. Last year it carried 14 million passengers.
As Emirates' passenger numbers continue to grow at around 20% annually, the basic menu and ingredients from which it was created have been adopted by two of Dubai's neighbours - Abu Dhabi and Qatar. This has seen the creation of Etihad Airways and Qatar Airways, which are becoming worthy rivals to their mentor. Both airlines have growing fleets of new-build widebodies, rapidly expanding route structures - both are poised to introduce direct services to the USA - and bespoke major developments of their hub airports funded by their governments.
But the emergence of the two airlines has come at the expense of the region's original powerhouse - Gulf Air. The Abu Dhabi and Qatar governments were once partners in the four-nation carrier along with Bahrain and Oman, but following their withdrawal to focus on their own carriers, Gulf Air has been restructured into somewhat of a niche player without the global ambitions of its rivals. The airline, which was on the brink of collapse three years ago before its shareholders (which then still included Abu Dhabi) injected much-needed capital, has retreated to a two-hub operation based around its two remaining shareholders.
None of the Gulf carriers have full affiliation with any of the global alliances - indeed for Emirates it is a strategic decision not to be involved. But on a local basis there are closer ties, creating a somewhat unusual relationship by the competitive standards of the airlines of Europe or North America. While by the sheer proximity to each other they are natural enemies in the battle for global traffic, they are all outwardly supportive of each others' ambitions and the chairmen and chief executives often meet up on a friendly basis.
Of all these new Gulf carriers, it is three-year-old Etihad Airways that is on the fast track to adolescence. The airline was created in July 2003 following a decree by the government of the United Arab Emirates (of which Abu Dhabi is the capital) and launched services in November that year with an investment of 500 million dirham ($136 million) by the Abu Dhabi government, the single shareholder. Since launch, Etihad has styled itself "the national airline of the UAE" - not a tag that meets with the whole-hearted approval of Abu Dhabi's friends along the road in the emirate of Dubai.
After an initially tentative start, with capacity being provided by an eclectic mix of leased widebodies, Etihad first hit the headlines at Farnborough in 2004 when it announced a multi-billion dollar order for 29 Airbus and Boeing widebodies - including four A380s.
The airline has until recently been fairly low-key, while putting together its product strategy and preparing to bring in its own dedicated aircraft. This exercise began in earnest in February with the introduction of its first of five Boeing 777-300ERs equipped with a two-class business/economy cabin (dubbed "Pearl" and "Coral" respectively). The first three-class aircraft - an Airbus A340-500 - arrived in June incorporating the airline's newly introduced "Diamond" first class cabin. The 240-seater will be used to introduce daily direct flights to New York in October.
"We'll be serving 35 destinations by the end of 2006 - which means we've added an average of one city per month since we launched," says Etihad's acting chief executive Geert Boven. "But we've actually been growing even faster than that because we didn't really start expanding rapidly until around 18 months ago."
The stated aim is to be serving 50 destinations by the end of 2008 and 70 by 2010, requiring further aircraft acquisitions either through exercising options and/or a new raft of orders. Boven - promoted in mid-2006 from vice-president commercial to his acting chief executive role following the sudden departure of chief executive Robert Strodel - expects to decide on the fleet expansion by early next year.
With the airline on course to triple passenger numbers for the last 12 months to 3 million, Etihad's expansion was given what Boven claims was an "unexpected" boost when Gulf Air decided to close its Abu Dhabi hub last year after the local government withdrew from the airline and threw all its weight behind Etihad.
Gulf Air completed the Abu Dhabi pull-out in March, from where its operations included its all-economy brand Gulf Traveller. "Gulf Air's departure from Abu Dhabi was unexpected, so we had a temporary period of readjustment," says Boven. "This was more of a logistical challenge - we had to shuffle aircraft and destinations." Gulf Air's chief executive James Hogan - who has overseen the recovery of the airline during the last three years - says the Abu Dhabi government's decision to pull out of Gulf Air came at a time when the airline "had to expand dramatically if it was to service the three hubs properly" and that the "creation of Etihad slowed down our expansion plan". He adds: "When Abu Dhabi said last September that it intended to withdraw in six months, we quickly developed a two-hub strategy around Bahrain and Muscat."
When a national shareholder leaves an airline, one of the issues is the reallocation of the international route-rights that dictate frequency or capacity limits for foreign services. Gulf Air - once eligible to use the rights of its four national shareholders - lost out several years ago when Qatar withdrew to throw its weight behind Qatar Airways, and it happened again when Abu Dhabi exited.
"Most of the route rights have been taken by Etihad," says Boven, who adds that such agreements, and aircraft capacity, are the airline's "main constraints to growth".
Boven sees Etihad's role as being to provide connections for business traffic between Abu Dhabi and the world's economic centres as well as to help the emirate grow as a leisure destination. But the airline's executives are well aware that Dubai is well-established as the region's premier leisure destination and believe that Abu Dhabi, as the capital of the UAE, will become the region's cultural centre - a view supported by the fact that it is to get its own Guggenheim art museum. Etihad believes that Dubai's role as the region's leisure capital will make it the equivalent of a Las Vegas or Orlando, with Abu Dhabi representing a New York or Washington DC.
"Our 'bread and butter' is the third- and fourth-freedom traffic coming from South-East Asia, the Levant and the Indian sub-continent," says Boven. He adds that 45% of the airline's business is transit traffic - "sixth-freedom routing through Abu Dhabi between Europe and Asia" - but the target is to reduce this to 40%.
Despite the broad plan to increase the number of destinations, the airline's network plans beyond the end of this year are still being evaluated, says Boven. "Shanghai will be our first Chinese destination early next year, and in the USA, the West Coast - Los Angeles - will be the next logical step," Boven says. Another possible new market would be Australia, but "would require two aircraft to serve", he says.
The airline has just launched its frequent flyer programme, and although it has some codeshares with airlines such as BMI it is in no hurry to jump into bed with one of the alliances. "We need to establish our own brand and identity and will then look at possibilities," says Boven.
Over in Bahrain, Gulf Air is pursuing a less ambitious strategy as it comes to terms with its position regarding the might of its local rivals. "We're not going to be a global airline, that isn't our intention," says Hogan. His original recovery plan has seen the airline stabilise its network and traffic at around 6 million passengers a year, upgrade its product and rebrand, and focus on improving yield and revenue per available seat-kilometre. The next three-year plan - dubbed "smart airline, successful business" - was agreed earlier this year, and covers the network strategy based around the two-hub operation as well as the long-term fleet renewal programme.
"We'll probably expand to no more than one more European city, we'll definitely need to go to China and expansion after that will be in the Middle East," says Hogan. "We're going to develop a strong regional network over the next three years," he adds. "Our intention is to fly to key long-haul cities, continue to develop Asian, Indian, Middle-Eastern propositions, improve the connectivity, and get the frequency model right."
Having safely navigated Gulf Air through the perils of the last four years - the Gulf war, the Asian SARS epidemic, the Asian tsunami of 2005 and the withdrawal of two shareholders - and returned the airline into profit (just) in 2004, Hogan has announced his departure from the airline at the end of this year. When he spoke to Flight International just prior to announcing his exit, he acknowledged that Gulf Air's financial position had deteriorated in 2005, with the airline back in the red. He indicated that because the airline's fuel purchases have been unhedged since the end of last year, things could get worse before they get better: "2005 was a loss, and fuel's even higher now, and we're not hedged."
Qatar Airways has enjoyed huge success in recent years under the stewardship of chief executive Akbar Al Baker. He says that the airline's network will include "close to 80" destinations by the end of the year, and that it will carry 8 million passengers - up 25% on last year - in the financial year to March 2007. The current fleet comprises around 50 aircraft, and by 2015 Qatar Airways "will serve 110 destinations with a fleet of 115 aircraft", says Al Baker.
Flights to East Coast
The airline has just introduced the A340-600, which will initially serve London but is earmarked for direct services to the USA, with flights to the US East Coast expected to begin early next year once Qatar's civil aviation authority has received US Federal Aviation Administration safety oversight approval. Australia is also on the short-term planner, but only when the airline can obtain the desired level of frequencies.
Although the airline is investing $16 billion in new aircraft, it faces a potential medium-term headache over its capacity growth as the planned introduction of 60 Airbus A350s from late 2010 has been affected by Airbus's decision to redesign the aircraft and delay service entry by two years. The carrier, which has recently concluded an order (not yet officially disclosed) for 20 Boeing 777-200LR/300ERs, is evaluating whether to proceed with the A350 deal as it considers its options to bridge the capacity gap.
Despite suggestions by some international rivals that the loss-making airline is little more than a government-funded public relations exercise, Qatar Airways turned over more than $1.5 billion in its 2006 financial year. While the Qatar government is a shareholder, Al Baker dismisses suggestions that the airline receives unfair state support. He concedes that the airline division is not yet profitable, but points out that the group as whole (including other divisions such as a the holidays arm) has been in the black for the last two years. But full financial transparency is unlikely until the planned flotation early next decade.
The arrival of new rivals like Etihad in the region has put further pressure on yields but, says Al Baker: "Competition is always good. I concentrate on my own business and do not spend too much time looking at what the others are doing."
The airline is gradually boosting the proportion of direct business to transit traffic, a figure that has already increased from 25% to 30% as the country expands its local infrastructure to become destination in its own right rather than a staging post between Europe and Asia. "Qatar's local economy is very buoyant and the population will nearly double in less than a decade," says Al Baker.
Doha's overcrowded airport will be replaced in 2009 by an all-new development being built on reclaimed land. It will have an annual capacity of 50 million passengers within a year of opening. By then, Qatar Airways' fleet will include a small batch of A380s. Although Qatar Airways has a network of codeshares, it is yet to formalise a link with one specific alliance, but Al Baker envisages the airline will eventually join one of the groups.
For Emirates the local competition appears to be little more than small arms fire against a main battle tank. Until late in the last decade its local benchmark was Gulf Air, but a dramatic growth strategy saw it overtake what had been the region's major player in 2000 when Emirates' passenger numbers passed 5.7 million.
This year, Emirates' passenger numbers will be more than double its biggest rival - now Qatar Airways - as it is expected to carry around 17 million passengers. The Dubai flag carrier was ranked 20th in last year's Airline Business Top 100 with a revenue of $6.3 billion, a 30% rise on its 2004 performance. A further move up the order is likely in the next ranking.
Emirates airline division president Tim Clark is relaxed about the burgeoning local competition: "The cake is getting bigger - I don't see any dilution in what we are doing [as result of the other local carriers]." He adds that Emirates is focused on its own business and targets "and we don't build in any dilution effect into our forecasts based on what Etihad or Qatar Airways are doing".
Clark concedes that one factor that has caused damage is the spiralling oil price, which means that Emirates' profitability is not yet where he would like it to be. "Although we're still well ahead of last year in terms of profit, we are implementing remedial measures to make sure we meet our full year targets," he says.
One area of frustration for Clark is the delay to the arrival of the airline's A380 fleet, although he concedes that he'd rather wait for the aircraft than introduce the giant prematurely and suffer technical glitches. The first of the 45 aircraft on order is due to enter service in January 2008 - more than a year later than scheduled - which means that the airline's short-term growth - although still an impressive double-digit number - has been affected.
As Emirates seeks to increase the coverage of its global network, one market that has not developed as quickly as envisaged is the USA. The airline serves just one US point - New York - but Clark is confident that a US mid-continent or West Coast city - "probably the latter" - will be in the network before the end of the next year.
Fleetwise, Emirates has 47 777-200LR/300ERs (plus eight 777Fs) on order, but has to resolve the long running wrangle over its deferred deal for 18 A340-600s. This could be tied in to the airline's plans to buy a large number of A350s or 787s, but Airbus's success in retaining the airline's business could well depend on how well it fares with the A380 delay saga. "We're about to re-engage with Airbus over the A340s and the A380 delay," says Clark.
The first 777-200LR will arrive in July next year, joining the current ultra-long-haul fleet of A340-500s, bolstering the airline's ambitions to boost long-haul frequencies and add more non-stop points on the other side of the globe to Dubai.
One of the next most pressing things for Clark to resolve is the ongoing negotiations to boost frequencies to Australia. "Over a seven-year period we want to eventually move to a three times daily frequency to the four Australian cities we serve - Sydney, Perth, Melbourne and Brisbane," says Clark. "Etihad also has aspirations for this market, so the UAE government has to decide how that will be worked out," he says. The next round of bilateral talks with the Australians is due in December.
Dubai's growing popularity as a destination has seen Emirates' transfer business decline to less than 50% in recent years - a situation that Clark concedes would have been beyond the airline's wildest dreams when the airline was first getting going 20 years ago. "The increasing Dubai O&D [origin and destination] traffic is good for business as yields are higher than for the transfer business," he says. However Clark expects in the longer term, when the large A380 fleet is up and running, that the business will stabilise at a 50/50 level between O&D and transfer.
Describing some of the global alliances as being "like graveyards" containing some less-than-healthy carriers, Clark says that the alliances are no longer the "end game" like they were in the 1990s, indicating that Emirates' appetite for such organisations is no greater than it has ever been. ■
Source: Flight International