Market Update: The Big Three Gulf Airlines


The first of our new series of Market Updates, a review of the three core Gulf airlines: Emirates, Qatar and Etihad. Our report covers the history of the region, the factors leading to high levels of traffic growth, and the future fleet of each airline.

Figure 1: Growth in the core Middle East carriers, 2005-2013

After the independence of the Gulf kingdoms from colonial rule in the 1950-70s there was a period of rapid economic development driven by the discovery of vast reserves of oil and gas under the deserts of Saudi Arabia and the other Gulf states, including Abu Dhabi, Iraq, Kuwait and Iran. The emergence of OPEC meant that wealth flowed into the region as oil flowed out.

The oil bonanza meant that the generally small local states had large amounts of capital to invest both within the region and globally. In the very long-term the revenues from oil/gas are time-limited, so national strategies by the more enlightened leaders were gradually introduced to diversify their domestic economies and invest through sovereign wealth funds in a balanced range of global assets.

The initial growth of domestic Gulf airlines in the 1980s was sporadic and limited by the performance of contemporary aircraft, which did not have the range or capacity to link the Middle East directly with many Asian or US destinations. Local infrastructure was poor and outdated. Airlines tended to be run badly, with high levels of direct government intervention, resulting in inefficient carriers which could not compete on international routes.

Gulf Air was an attempt during this period to create a co-ordinated regional airline by Bahrain, Abu Dhabi, Qatar and Oman. Internal stresses in balancing national interests and the rapid growth of Emirates led to Abu Dhabi leaving the alliance to set up Etihad independently in 2006. Gulf Air now remains as the national carrier of Bahrain, with a strategy more focused on regional connections. Each of the three most ambitious states or emirates in the Gulf now has their own independent network airline and hub airport, acting in competition with each other: Emirates at Dubai, Etihad at Abu Dhabi and Qatar at Doha.

Figure 2: Factors leading to high growth in the Gulf

  • Access to cheap capital

    The Gulf States have access to large cash reserves from oil and gas assets. This enables the states to finance high rates of airline capacity growth and also offer indirect support through airport development and infrastructure. The airlines form only one element of wider economic diversification strategies for each state, encompassing business, property and tourism development.

  • Intra-Gulf competition

    The independent states of the Gulf, including the UAE, Qatar and Bahrain, co-operate on many issues but also compete with each other. This competition, as well as variations in the level of conservatism and economic performance, leads to a dynamic political subtext to the strategic decisions taken by each airline.

  • Geographic location

    By virtue of its location, the Middle East is ideally placed to link up major global population centres. It is at the crossing point between Europe, Africa and Asia (a fact which has given the region its traditional trading strength for centuries).

  • Aircraft technology

    New-generation aircraft have enabled the Middle East hubs to compete directly with incumbent flag carriers on key intercontinental routes like the Kangaroo Route from Europe to Australia. The impact of these new aircraft, which often have a lower cost per seat than the fleets of the established airlines, cannot be underestimated when considering the rise of the Gulf carriers. The A380 and 777-300ER have given Emirates the core tools in terms of capacity, range and costs to compete directly with British Airways, Qantas and Singapore Airlines, each of which operates primarily older 747-400 aircraft.

  • Deregulation

    The natural resources of the Gulf States have enabled leverage to be applied to the developed economies for market access. Within the EU this has manifested itself in Open Skies agreements with a number of states, which have allowed Emirates and other airlines to break into markets such as the UK. Routes to secondary airports have shifted connecting passengers to Dubai that would otherwise have travelled across major European hubs.

  • Low(er) operating costs

    Gulf carriers have access to cheap capital, lower fuel costs, and lower labour costs than incumbent European or US carriers. The carriers vociferously claim that they are competing on a level playing field, with no access to preferential handling rates or local fuel discounts etc. This may be the case; however many of the higher cost elements are historic or structural elements such as higher taxation in European states, stricter labour laws, environmental taxes, a mature workforce, higher fuel costs at the respective main hub, or a generally older fleet.

  • Emerging market demand

    Demand from emerging markets is rising fast as a rapidly growing middle class has the time and money to consider travelling by air for leisure and business. The Gulf is located between the mature economies of Europe and the emerging markets of South East Asia, India, China and Africa. Gulf carriers offer connections to a wide range of these secondary destinations which, in aggregate, are becoming a significant source of passenger demand.

Review of core Gulf carriers

Emirates

Emirates was the first of the Gulf carriers to undergo a rapid phase of development, starting in 1985 but with a rapid expansion into new markets from 2000. It has been the model for more recent expansion from Qatar and Etihad, who are emulating its growth but lagging behind in terms of network by 5-10 years. Dubai is one of the more liberal Gulf states, and Emirates has been instrumental in delivering growth in tourism to the region, alongside considerable investment in hotels and other tourism facilities.

Figure 3: Emirates growth 2005-2013

20052006200720082009201020112012CAGR 05-12
Passengersm14.517.521.222.727.531.434.039.415.3%
change15.7%21.0%21.0%7.1%20.8%14.5%8.1%15.9%
Load Factor75.9%76.2%79.8%75.8%78.1%80.0%80.0%79.7%
change1.3%0.3%3.6%-3.9%2.3%1.9%0.0%-0.3%

The Emirates business model is based purely on long-haul flights, reflected in its high average aircraft size. The airline is a key strategic partner for Airbus and Boeing on the A380 and 777 programmes respectively.

Its competitors, the main European flag carriers, have tried to limit the airline’s growth, claiming that it benefits from unfair state subsidies. Yet recent developments, such as the partnership between Emirates and Qantas as well as other commercial arrangements between Gulf and European airlines perhaps represent an acknowledgement of the reality that the Gulf carriers will continue to grow and take market share on some routes.

Dubai has recently invested heavily in the existing Dubai airport (DXB), where Emirates operates from a purpose-built Terminal 3. The emirate is also developing a new Dubai World Central - Al Maktoum International Airport (DWC) which will have capacity for 160m passengers per year.

Figure 4: Emirates current and future fleet

In ServiceOrdersOptions
Airbus A330-2002303
Airbus A340-300/-5001300
Airbus A350-90005050
Airbus A350-10000200
Airbus A380365410
Boeing 747-400500
Boeing 777-2002755
Boeing 777-3001026159
TOTAL207190137

Emirates is the largest global operator of the A380 and has more than 50 of the aircraft on order. The scale of the airline means that it has significant input into the design of future aircraft variants, having been provided a strong impetus to the launch of the largest variant of the A350, the stretched A350-1000, as well as the future Boeing 777X (next-generation 777-300ER).

Figure 5: Emirates route network, 2000

Figure 6: Emirates route network, 2013

Qatar Airways

Qatar is a rising power in the Gulf based on huge reserves of natural gas. The state has engaged on an active strategy to raise its international profile with initiatives as diverse as the Al Jazeera broadcasting company, hosting of peace negotiations and securing the Football World Cup in 2014.

Figure 7: Qatar Airways growth 2005-2013

20052006200720082009201020112012CAGR 05-12
Passengersm6.047.108.889.7010.712.915.417.516.4%
change34.2%17.5%25.1%9.3%10.3%20.6%19.4%13.6%
Load Factor72.2%74.4%77.4%72.6%72.9%73.5%74.0%76.3%
change3.5%2.2%3.0%-4.7%0.3%0.7%0.5%2.3%

As with the other Gulf states, Qatar Airways forms part of this wider strategic plan. A huge new airport is in the process of being completed in Doha, which will enable Qatar Airways to grow rapidly over the next decade and become a major rival to Emirates. The airline will join the Oneworld alliance in October 2013.

Figure 8: Qatar Airways current and future fleet

In ServiceOrdersOptions
Airbus A320 ceo family4516
Airbus A320 neo family05030
Airbus A330-200/-3003209
Airbus A340-300/-6001708
Airbus A350-9000430
Airbus A350-10000370
Airbus A3800103
Boeing 787-88220
Boeing 777-2001430
Boeing 777-3002237
TOTAL12616963

The airline has an extensive short-haul regional network in the Middle East, in contrast to Emirates.

Figure 9: Qatar Airways route network, 2005

Figure 10: Qatar Airways route network, 2013

Etihad

Etihad is the national carrier of Abu Dhabi and was set up when Abu Dhabi withdrew from Gulf Air in 2006. The airline was conceived as a response to the rapid growth of Emirates, along a similar model but with a greater focus on quality as a strategy of product differentiation. The network has grown fast but the airline’s trajectory is a few years behind that of Emirates in terms of global network reach.

Figure 11: Etihad growth 2005-2013

20052006200720082009201020112012CAGR 05-12
Passengersm1.012.784.656.026.307.118.4010.339.3%
change198%175%67.5%29.6%4.6%12.8%18.2%22.6%
Load Factor57.6%59.9%68.8%75.2%73.6%73.9%75.8%78.2%
change8.6%2.3%8.9%6.4%-1.6%0.3%1.9%2.4%

The airline has recently engaged on a series of strategic acquisitions or equity shares in airlines such as Air Berlin, Air Seychelles, Virgin Australia, Aer Lingus and JAT.

Figure 12: Etihad current and future fleet

In ServiceOrdersOptions
Airbus A320 family20170
Airbus A330-200/-30029312
Airbus A340-500/-6001100
Airbus A350-10000120
Airbus A3800100
Boeing 787-90410
Boeing 777-200300
Boeing 777-3001630
TOTAL828612

The airline’s strategy differs from Emirates in the operation of single-aisle aircraft on regional routes within the Middle East. The network is hence a more conventional mixture of short-haul feed connecting with long-haul routes.

Figure 13: Etihad route network, 2005

Figure 14: Etihad route network, 2013

Summary: comparison of core Gulf carriers

EmiratesQatarEtihad
Passengers(2012, m)39.417.510.3
Number of Routes (2013)Middle East182817
Europe322917
Asia374233
Africa221712
Australasia522
North America854
South America211
Fleet (orders)Short-haul1 (0)45 (51)20 (17)
Long-haul207 (190)80 (118)62 (69)
PartnershipsQantasOneworld,
IAG (BA/IB)
Air Berlin,
Air France-KLM,
Virgin Australia,
Aer Lingus
and others
StrategyLong-haul
connections
over Dubai
Long-haul and
regional
connections,
new Doha
airport
Premium product,
global partnerships,
not the
same scale

The 'Big Three' Gulf airlines, despite operating from hubs located relatively close to each other, have subtly different strategies. Emirates, as the pioneer, has a well established long-haul network, competing fiercely with incumbent carriers for connecting traffic. Its recent partnership with Qantas reinforces this dominance on the core routes between Europe and Australia. Qatar Airways has huge ambition, and the impending opening of the new Doha airport, deliveries of new 787 and A380 aircraft and the entry of the airline into the Oneworld alliance will transform the carrier into a serious contender on many connecting routes. Etihad has focused on a more service-led offer, developing Abu Dhabi airport in parallel to create a regional network as well as long-haul connections.

This article is intended to give a top-level idea of the type of analysis that Aviation Economics can provide. We are in the privileged position of having direct access to a range of market data and analysis tools through our partnership with RDC Aviation. If you would like any more details, please do not hesitate to get in touch via the contact form at the top of this page.

Sources: Capstats, Flightglobal, Innovata Flight Maps

by Mark Scourse