Narrowing the gulfThe Middle East’s once fast-expanding airlines are coming under pressure
Questionable investments and scrutiny from regulators are forcing “superconnectors” to slow their growth
LAST April, Etihad Airways, the flag-carrier of the emirate of Abu Dhabi, claimed that 2015 had been its fifth consecutive year in the black, with net profits of $103m. James Hogan, the firm’s chief executive, hailed the result as proof that Etihad is a “sustainably profitable airline”. Yet less than one year on, both Mr Hogan and his chief financial officer, James Rigney, have been eased out amid a “company-wide strategic review” to “improve cost efficiency, productivity and revenue”; reforms ill-befitting a healthy business. Just across the sand, Emirates, the flag-carrier of Dubai, has deferred orders for 12 double-decker Airbus A380s in response to a 75% drop in profits. Qatar Airways, the region’s other super-connector airline, has abandoned plans for a subsidiary in Saudi Arabia. After years of uninterrupted and speedy growth, the Gulf carriers are hitting turbulence.
Taken in isolation, falling profits and waning sales should be of no great concern to these industry goliaths. Low oil prices and jitters about terrorism may have sapped demand for business and leisure travel—particularly in their neighbourhood—but overall the global economy is holding up well. If Emirates, Etihad and Qatar Airways could survive and thrive during the 2007-08 financial crisis, they can surely shrug off whatever 2017 has to throw at them. Demand for their core product—competitively priced long-haul flights with a single stopover in the Gulf—should continue to grow in the long-term, fuelled by the public’s insatiable appetite for globetrotting and the innate geographical advantages of their home bases, which are a natural stopover on flights from Asia to Europe and beyond.
The carriers have not always helped themselves, however. During his time at the helm, Mr Hogan invested in seven struggling airlines, uniting them under the umbrella of the Etihad Aviation Group. One of those investments, India’s Jet Airways, is now delivering handsome profits. Two others, Air Serbia and Air Seychelles, have squeezed their way into the black. But those gains have been more than wiped out by continued heavy losses at two sorry adventures, Air Berlin and Alitalia. While Etihad’s annual report trumpeted the 5m passengers and $1.4bn revenue that its equity partners gifted it in 2015, the associated losses were brushed aside. The government of Abu Dhabi, the airline’s only shareholder, is belatedly winding down its exposure by leasing 38 of Air Berlin’s planes to Lufthansa, Germany’s flag-carrier. But even that deal comes with an unfortunate twist. Lufthansa is placing the jets at Eurowings, its new low-cost subsidiary, which was partly set up to compete with the Gulf carriers.
Etihad gambled on foreign investments because it needed to beef up its organic growth with non-organic feed. That has never been the case for the older, larger flag-carriers of Dubai and Qatar. Yet they too are suffering. Speaking at an industry conference in Berlin this month, Tim Clark, the president of Emirates, warned of a “gathering storm” for the sector. The problem goes beyond weak business demand and rising political instability. “At the back end of ’90s I did a paper on long-haul low-cost,” Sir Tim explained. “Everyone laughed at me. But what I predicted then has finally started to happen.” After decades of failed attempts, a new breed of airlines like Norwegian Air Shuttle and AirAsia X is managing to operate no-frills flights in the long-haul market. The sustainability of their models has not yet been proven, but with improved aircraft technology and low fuel prices they are undercutting legacy-carrier airfares. That is a worry for the Gulf super-connectors, which market their one-stop routings as the best alternative to pricey nonstop flights.
Indeed, that very cost advantage, though diminishing, is itself a cause for concern. The American majors—Delta Air Lines, American Airlines and United Airlines—spent two years lobbying Barack Obama’s administration to curb traffic rights for the Gulf states, accusing them of anti-competitive practices. They published evidence of $42bn of government subsidies and “unfair” advantages, ranging from direct equity injections to indirect infrastructure and tax benefits. That was not enough to sway a liberal-minded administration obsessed with friendly foreign relations and rapid globalisation. Donald Trump, however, has different priorities. After pledging to put “America First”, Mr Trump may be less forgiving of perceived misdemeanours. Similar scrutiny is growing on the other side of the Atlantic, where European lawmakers are working to impose duties on foreign airlines that exploit subsidies for commercial advantage. If enacted, their draft law will expose the Gulf carriers to the same kind of competition investigations that have forced several European flag-carriers to repay illegal state aid.
These headwinds will not stop Emirates and Qatar Airways from increasing capacity by about 7% this summer. (Etihad will cut its capacity by 1%.) Most mature airlines would be delighted with that speed. But for the Gulf carriers, which have expanded at a double-digit pace for more than a decade, it feels sluggish. With Mr Hogan departing this year, and Sir Tim hinting at his own exit, two of the main architects of the Gulf aviation boom could soon bow out. It will be up to their successors to avert the bust that typically follows years of breakneck growth.