Two Middle East airlines are set to battle it out on who gains the most out of one of the fastest-growing markets in the world, India. Reports indicate that Qatar Airways will announce a codeshare agreement with IndiGo, the biggest airline in the South Asia country, while Etihad, partnered with Air Arabia, is looking to establish a new low-cost carrier to make use of Etihad’s slots acquired when Jet Airways, a former partner in business, closed its doors for good.

For the two Middle East airlines, the move is important – for different reasons, both are not exactly living in their Golden Ages. Etihad reported a net loss of $1.28 billion in 2018, while Qatar Airways announced very frugal results in FY2019 – a loss of $639 million. While the former suffered a lot of financial damage due to failed investments in several airlines, including airberlin and the aforementioned Jet Airways, the latter is operating under a blockade of airspace in the region, massively increasing Qatar Airways’ expenses bill.

Nevertheless, the message is clear – as India’s market is set to grow over the coming years, the two carriers are looking to make a move into the country and strengthen their commercial positions there.

Middle East – India connections

For the past few years, international traffic has been growing steadily in India. Throughout 2015-2016, the total international traffic amounted to 49.7 million; in 2016-2017 it was 54.6 million and the latest data indicates that in 2017-2018, 60.5 million international passengers landed or departed from India’s airports. Going further back, international traffic has not stopped growing since 2004-2005, according to data provided by the Directorate General of Civil Aviation (DGCA) in India.

Looking at country-specific statistics, DGCA data indicates that the United Arab Emirates (UAE) is by far the biggest international market:

In Q1 2019, 28.7% of passengers either landed or flew to UAE, while traffic to Qatar amounted to 5.3%. In Q1 2018, UAE’s share was 30.2%, while Qatar’s was 5.5%. Similarly, in Q1 2017, UAE traffic was 33.2%, while Qatar’s was 5.1%.

However, most of this traffic is served by India-registered airlines. The biggest foreign carrier in terms of international traffic market share was Emirates, with 8.8% of the market. Qatar Airways transferred 3% of international passengers to and from India, while Etihad is not present on the top ten airline list in Q1 2019.

There is a reason for such an amount of traffic and attention to the Indian market. Both Qatar and the United Arab Emirates have very big Indian expatriate communities: over 700,000 Indians live in Qatar (21.8% of total population), while over 2.6 million Indian expatriates reside in the United Arab Emirates (27.4% of total population), according to data.

Serving these communities is a huge business opportunity for airlines and both Etihad and Qatar Airways have made previous attempts to establish themselves in the air corridor between India and the Middle East.

Etihad’s investments

The Abu Dhabi-based airline had a 24% in the now-bankrupt Jet Airways, which has been on the brink of collapse much throughout 2019. For Etihad, the final result of the Jet Airways crisis was that it has an abundance of slots in India – reports by Bloomberg indicate that the number of slots currently held by Etihad is 100.

And the plan to make use of those slots is to establish a new low-cost carrier that will focus on flights between India and Abu Dhabi, with Air Arabia dedicating the most crucial resource to the project – around 70 aircraft out of more than 100 jets the low-cost carrier plans to order. A decision on what type of aircraft to order is set to be announced by January 2020, reports Reuters.

Establishing a new airline can pose a risk for Etihad, which already is in dire straits financially. Yet it is mitigating some of the risks – Etihad has a partner Air Arabia and the LCC will be based in Abu Dhabi, instead of India, where foreign ownership laws prevent non-Indian entities from owning more than 50% of airline shares.

In addition, launching a low-cost carrier dedicated to serve the Indian market makes a lot of sense – despite rapid growth, full-service carriers in India are struggling, including the national flag carrier, Air India. One foreign investment example, which is also running at a loss, is Vistara – a joint venture between Singapore Airlines (SIA1) (SINGY) (49% stake) and Tata Sons (51% stake) so far has not been profitable, with the latest results in FY2019.

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But a low-cost carrier still requires a hefty sum of investment, as shown by AirAsia India, a joint venture between AirAsia Berhad (49% stake) and Tata Sons (51% stake). Despite rapid growth as passenger numbers jumped up by 54% in 2018 compared to 2017 (6.8 and 4.4 million, respectively), the airline is still running at a loss – $87 million (INR6.19 billion) read the last line in the airline’s FY2018 financial report. AirAsia India is yet to achieve a profitable year.

This might point to the fact why Qatar Airways aims to establish a partnership with IndiGo, instead of launching their own airline.

Qatar Airways to announce partnership with IndiGo

The Qatari flag carrier plans to announce a codeshare partnership with the Indian low-cost carrier on November 7, 2019, reports Bloomberg.

“It is not something about buying a stake, it’s commercial,” Chief Executive Officer of Qatar Airways, Akbar Al Baker, has reportedly noted. But the airline was interested in a stake at IndiGo for a long time now. Reports in 2015 indicated that Qatar Airways was looking to invest in SpiceJet, another Indian low-cost carrier. The Doha-based airline denied the rumors by claiming that “Qatar Airways confirms that the only airline it is interested in is the Indian carrier Indigo”.

Interest in IndiGo never dwindled. When Al Baker confirmed that it will not establish an Indian domestic airline in September 2018 due to confusing ownership laws, he once again reiterated that Qatar Airways would be interested in acquiring a stake in the Indian carrier, as IndiGo “is efficiently run, it is the largest domestic airline in India,” said Al Baker, “other than them, I’m not really interested,” he added.

Qatar Airways has been running at a loss since 2018, as the imposed blockade negatively impacted its expenses. Meanwhile, IndiGo has recently posted its biggest quarterly loss of $149.50 million (INR 10.6 billion) related to severe operational issues with its Airbus A320 aircraft.

However, the problems seem to be piling on for IndiGo. The Indian civil aviation authority, DGCA, has ordered both IndiGo and GoAir to replace their Pratt & Whitney PW1100G engines fitted on their A320neo aircraft by January 31, 2020, else they would be grounded. On August 28, 2019, DGCA issued a status update on the P&W engines, stating that the power plants are still suffering from issues with third stage Low-Pressure Turbine blades (LPT), main gearbox (MGB) failures and severe vibrations – already then, airlines were not permitted to accept aircraft deliveries or leases without LPT and MGB changes, or accept engines coming in from maintenance without the aforementioned changes.

Two co-owners of IndiGo are in a public fallout as well. On October 2, 2019, Rahul Bhatia sued his business partner, Rakesh Gangwal, for failing to keep in line with a shareholder agreement, reports Bloomberg. In July 2019, Gangwal accused Bhatia of fraudulent and unaudited deals with Bhatia’s companies, while the former accused Gangwal of not giving up his management rights and control within IndiGo.

Yet it seems like the low-cost carrier is resilient to the combination of engine issues and public feuds within its shareholder board – on October 29, 2019, the airline signed a record-breaking deal for 300 Airbus A320neo aircraft. “The choice of engine manufacturer for this order will be made at a later date,” noted IndiGo’s Chief Aircraft Acquisition and Financing Officer, Riyaz Peermohamed. However, it is more than likely to be CFM – on June 17, 2019, the engine manufacturer announced that it had reached a deal with the Indian airline for 280 LEAP-1A engines to power IndiGo’s 280 Airbus A320neo aircraft.

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Thus, if Qatar Airways signs a partnership with the biggest airline in India without assuming any commercial risk from the codeshare agreement, allowing the Qatari flag carrier to save money while still increasing capacity between Qatar and India. Potentially, Qatar Airways is also laying down the foundation to eventually acquire a stake at IndiGo.

On the other hand, Etihad, together with Air Arabia, will have a lot more control and flexibility over their new entity. With a huge Indian expatriate community in the United Arab Emirates, the same country where the low-cost carrier will be based, the potential market there is substantial enough to warrant such a move. In addition, slots will not be a headache, as Etihad has leftover slots from the demised Jet Airways. However, one operational burden is the fact that the new low-cost carrier will receive the majority of its aircraft together with Air Arabia, which plans to order new aircraft by January 2020. Growth under such circumstances will be difficult, as the queue for new narrow-body aircraft is only growing, whether it would be Airbus or Boeing jets.

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