REVISITING: The Rise of the Gulf Carriers

jet gulf story

Every company can count on an existential threat showing up at its door sooner or later. For European and Asian airlines, that time is now, and it is three Persian Gulf-based carriers that are ringing the bell and peering through the window. According to Credit Suisse’s global airline analysts, Etihad Airways, Emirates, and Qatar Airways will increase the number of seats offered on their Europe-to-Asia flights between 8 and 18 percent a year between now and 2020, bringing a lot of airborne pain to the competition in the process.


The Persian Gulf carriers’ hubs in Dubai (Emirates), Doha (Qatar), and Abu Dhabi (Etihad) are already popular stopovers for travelers moving between Europe and Asia. “Ten years ago, the clear epicenters of aviation activity were London, New York and Tokyo,” the airline analysts wrote in a May report. “The Middle East was [more of] an afterthought [geared toward] servicing oil company executives and sheiks on shopping trips than providing any cohesive global connections.” That’s changed. Between 2005 and 2013, average annual departures out of the three Gulf hubs increased 11 percent a year, and between them, the three airlines now service more departures each year than Hong Kong.


The Southeast Asian carriers Singapore Airlines, Thai Airways, and Malaysian Airlines, which are already fending off competition from regional low-cost carriers, are most vulnerable. All three of their home countries offer relatively open access to the Gulf airlines, and airports in Singapore and Malaysia also have plenty of room to accommodate future growth. The Gulf carriers are taking advantage of the opportunity by driving a major increase in traffic between the Middle East and Southeast Asia. Flight capacity between Thailand and the Gulf states has increased 80 percent over the past year, while capacity to Europe has grown just 4 percent, suggesting that European tourists and Thai residents are increasingly stopping in the Middle East when traveling between their respective regions. But Thai Airways fills just 5 percent of the seats between Thailand and the United Arab Emirates, and the three Gulf carriers control the lion’s share of the rest.


Singapore Airlines’ share of traffic to and from the Middle East has shrunk from 55 percent in 2009 to 15 percent in 2013, and the three Gulf carriers account for two-thirds of the total available seats on flights from Singapore to their three hubs. And while Singapore Airlines has gained market share on flights to Europe since 2009, thanks in part to a partnership with Virgin Australia, as well as a decision by Australian airline Qantas to move its primary hub between Australia and Europe from Singapore to Dubai last year, which illustrates a more worrisome trend. The number of available seats from Singapore to Europe has fallen from more than 60,000 in May 2012 to just over 50,000 today, whereas the number of seats from the Middle East to Europe has grown from some 550,000 to nearly 650,000 over the same time period. “The Gulf state hubs have eclipsed Singapore both in pace of growth and absolute scale,” the analysts write. Middle Eastern carriers also control all the capacity between Malaysia and the Gulf, which has grown 15 percent annually over the last five years.


The outlook for European carriers is somewhat sunnier, but storm clouds are gathering. Lufthansa warned investors June 11 of the possibility of a downward revision to its earnings outlook, with Chief Financial Officer Simone Menne citing pricing pressure from the Gulf carriers’ expansion into Europe as a contributing factor. Middle Eastern airlines, which are expanding in major European cities such as Paris and Frankfurt, are also ramping up service in secondary cities like Barcelona and Brussels, meaning that they’re going after the European carriers not only at their hubs, but also at their spokes.


The challenges facing both the Asian and European carriers are compounded by the age of their fleets. Whereas the Gulf airlines plan to add 534 new wide-body planes between now and 2027, making fleets that already offer some of the most extravagant premium cabins in the business more attractive and fuel-efficient, their Asian and European counterparts are sitting on older fleets. The average age of Lufthansa’s wide-body planes is 9 years old, and those of Air France and IAG (the holding company of British Airways and Iberia) are 12- and 16 years old, respectively. The Asia-Pacific carriers have been aggressive about renewing their fleets over the last five years, and European carriers have ambitious plans, too, but airlines in both regions will have to generate significant cash flow to keep those plans on track, says Credit Suisse.


What can European and Southeast Asian airlines do in response to the new competitive threat? They have three options, according to the analysts. First: They can pull back from hotly contested markets. But that’s unlikely, because Asia-Europe routes are strategically important to both Asian carriers trying to develop their home markets as well as European carriers craving exposure to the high-growth region. Second: Cut costs. This is critical, particularly for European airlines. Lufthansa needs to reduce costs on flights to Southeast Asia by 40 percent to stay competitive, Credit Suisse notes, while Air France and IAG have 30 percent higher unit costs on flights to Southeast Asia than a competitive set of Asian competitors, Turkish Airlines, and Emirates.


The third option? European and Asian airlines could reduce competition and protect pricing by developing mutually beneficial partnerships with the Gulf carriers. Last year, Qatar Airways joined the oneworld alliance, a partnership in which 11 carriers (including IAG and Malaysia Airlines) coordinate routes and honor other airlines’ frequent flier miles. For its part, Air France-KLM is currently negotiating a partnership with Etihad. These relationships would make it easier for both Air France and IAG to get more customers into India, Indonesia, and Australia with little investment. Sometimes, making friends is the most effective way to neutralize the threat at the door.


Above: It looks like clear skies ahead for the Gulf carriers.