Have the MEB3 raised the bar too high for themselves?
This article was written by David Studden and first published here.
A quick pop-quiz. Guess which airlines have all of the below:
- Gleaming new fleets
- Premium products on the ground & in the air
- Competitive fares (some would classify them as cheap, I would like to call them competitive)
- Global route networks
The answer is pretty obvious – the Gulf Carriers or the MEB3 or the upstarts or the rich kids or the super-connectors, or by whichever other name you prefer to call them. Love them or hate them – they have created a huge gulf between the haves & the have-nots in the airline industry - by setting a really high bar for passenger experience.
Their lavish global spending on advertisements, brand campaigns & sponsorships have made them the poster kids & in many cases the punching bags for the media & other airlines alike; All this “noise” detracted focus on their biggest vulnerability – their dependence on the global market for connecting traffic - a model which is very vulnerable to price as John Grant of OAG points out in a recent Financial Times article.
The Trump Slump - The Middle East to North America market has been affected by a combination of factors in 2017, including the recently-lifted cabin ban on large portable electronic devices, as well as a wider impact from the travel bans to the US. But keep in mind traffic growth on the Middle East-US was already slowing in early 2017, in line with a moderation in the pace of capacity expansion.
Trauma Effect - Tim Clark, Emirates' CEO pointed out that in the past they have about one or two traumas a year, but now is averaging one a month. These traumas are varied & global – ranging from trade embargoes, terrorism, hurricanes, economic issues, political instability...
Too Much Growth - Morgan Stanley’s analysis of capacity trends shows a slowdown in growth by the three carriers from 15% globally in the last decade to around 5% on average in the first nine months of 2017. The question to be asked here is – are the Gulf Carriers running out of destinations or it is a case of other airlines getting their act together? (It's also a case of slowing oil revenues, impacting government spending)
Monetary Impact – Profitability for gulf carriers will drop from $1.1 million in 2016 to $400 million in 2017. Average revenue of only $1.78 per passenger versus $7.69 on a global basis. This clearly shows the vagaries of the price driven connection model!
Mega Orders - Emirates, Etihad Airways & Qatar Airways have a combined Boeing & Airbus aircraft backlog worth about $135 billion! The only market that has a high ratio of aircraft on order to aircraft in service is India! Will they stick to their order commitments or will there be some rationalization of orders? It been a pretty dramatic year as the chart below from FT highlights:
With no home markets of their own to rely on, the long term viability of their business model depended on how “open” & welcoming other countries were! This also meant that the model had to be based on their ability to attract passengers thru a combination of connecting the dots to popular destinations, good fares & premium on-board products. Take away any of these dimensions and their business model is in hot water.
Emirates' tag line of “Hello Tomorrow” and the WSJ article titled “A hard landing for the Gulf’s airlines” highlights the fact that tomorrow has come not just for passengers, but for the gulf airlines as well, a “tomorrow” that is much more competitive & inward looking than yesterday or today has been.
Going back to the WSJ article – “three carriers (we know which three!) face disruption to their role as ‘super-connectors’ as the state-owned groups fight to justify a business model built around hubs in a volatile region”. Good article – but perhaps with a little too much of gloom & doom built into to.
Emirates, Etihad & Qatar had been the officially crowned disruptions of the airline industry, untrammelled by the legacy of the past, but that title may be moving to a new breed of airlines – long haul low cost airlines, such as Wow, Norwegian, Scoot, Airasia X to name a few, airlines that have a radically different idea as to how airlines should operate!
Growth has been the mantra for many years for the gulf airlines - in 2006 they transported 26.5 million passengers, growing to 104.5 million passengers in 2016; and while growth will continue, albeit at a more measure pace, all three of them are taking a long hard look at their respective business models.
Keep in mind that they are aging – with the oldest, Emirates at 32 years old, in need of a possible overhaul of its business model, a model that was built on passenger volumes that had to be fueled by growth & access to markets! Etihad & Qatar had similar high growth ambitions, but their passenger volume ambitions were slightly more grounded – and each followed their own unique path – which now also needs to be redrawn as well.
Will they or wont’s they? That is... place an order for additional A380 aircraft during the Dubai Air Show in November? It is a tricky problem for Emirates as they perhaps have single-handedly kept the A380 program aloft for Airbus. They are the only airline capable & willing (with a nudge in the right direction) to give Airbus some breathing room to keep the A380plus flying with a fresh (though less ambitious) order.
But November will also be interesting as Emirates have been dragging their feet on a potential choice of the 787 or A350 (Tim Clark has indicated that the 787 or the A350 are off the table for now). I am sure that the punters are having a field day. But then again it could be an additional order for the Boeing 777x. (After all what is an airshow without some mega orders). My gut feeling – some A380plus + Boeing 777x orders could be the highlights of the show.
It looks like the worst of the storm has passed for Emirates, with recent talk about reintroduction of capacity into the US market, addressing its narrow body issue with the move for closer integration with sibling Flydubai, to opening up more ancillary revenue channels. But will all of this be enough – only the financial results for 2017 will tell.
A tactical retreat for Etihad, bruised but still not knocked out – by the Germans & the Italians – taking a hit of $1.87 billion, means that the world is a lot smaller for them now. They had to let go of some of the smaller investments as well – with the Etihad Partner model being watered down and has the risk of perhaps being retired prematurely. A few of the partners seem to be there to stay – especially Jet Airways making positive sounds (the signs are a little bit different).
The search is still on for a full time group CEO after the exit of James Hogan. It will be interesting to see who the new replacement is and what ideas he will bring with him!
Should be a relatively quiet air show for Etihad this time around; More of a period for them to stop looking into the rear-view mirror & start looking to the future!
Qatar Airways CEO seems to have got the thunder stolen from him, this year around - by grandmothers & sanctions – but the long shopping list & deep pockets are still very much in evidence.
Qatar Airways has a problem of plenty at the moment, plenty of planes I mean, with no-where to go thanks to the loss of key high yield feeder markets in the region. But I am sure that their route planning team will have plenty of pins in maps for potential destinations.
India seems to be put on the back burner for the moment – but you never know! We could perhaps have Air India being re-branded as Air Qatar :-)
Governments in the region remain committed to travel & tourism, but will now be much more measured and focused when it comes to investment & spending.
The competitive cost & labor base still remains, but could erode with the introduction of the value added tax [VAT] in 2018 – impacting the cost of living & tourism competitiveness. We will need to see which sectors governments will funnel this additional VAT revenue into!
Infrastructure still remains a big plus point and sets the region apart from other countries such as India or the US. Airport & infrastructure projects continue to move ahead in the region.
The region has the advantage of not being saddled with decades old legacies, decision paralysis, bureaucratic red tape or too many-cooks-spoil-the-broth syndrome! Yes, there are challenges, but none that can't be overcome.
In summary, we could perhaps agree that this is not a melt-down of the super-hubs or the super-connectors, rather it is more about a brief time out for retrospection, rebuilding & reinvention. Aviation ambitions of the region are still very much alive, but will now be more focused & measured.
It is perhaps time for airlines in the region to re-look at new horizons. You never know what new doors could open. But the same can be said for airlines around the world as well.