New world order

As the big Gulf carriers flirt with possible new alliances and partnerships, CEO Middle East investigates why they are now suddenly deciding that going it alone is no longer an attractive option.
Making friends The three big Gulf carriers are seeking alliances with other airlines, but in very different ways.
By Shane McGinley
Tue 18 Jun 2013 01:39 PM

Since Dubai set up Emirates Airline in 1985, the Gulf region has gone from a small regional aviation player to one of the mammoths of the industry. The three big carriers – Emirates, Abu Dhabi’s Etihad Airways and Qatar Airways – have dominated aircraft order books, airshow news headlines and helped the Middle East become one of the few regions in the world to regularly report profits amidst the doom and gloom of the global recession.

Although the big three had always prided themselves on going it alone and avoiding alliances or partnerships, there was a seismic shift last year when it was announced Emirates had struck a partnership with Aussie carrier Qantas, Etihad was to codeshare with arch rival Air France/KLM and Qatar Airways was to join the oneworld airline alliance.

At this year’s Arabian Travel Market (ATM) this feeling of alliance building and partner proposals became even more pronounced with new suitors being sounded out and initial flirtations being made. Maybe it is the mix of airport opening delays, aircraft groundings or a basic need to balance the books that are the motivators, but the big executives seem to be increasingly in the mood to talk to those once perceived as direct rivals.

First out of the stalls is Qatar Airways CEO Akbar Al Baker who, as always, is very direct in his belief that an alliance with Dubai-based Emirates Airline would be a good thing for him and a good thing for the region.

“We are always open [to an alliance]… I think now the closeness between Emirates and Qatar Airways will really make a very strong airline,” he says. Despite the Doha-based airline announcing it is set to be fully integrated into the oneworld alliance from September, Al Baker points to Emirates’ recent alliance with Australian rival Qantas as a clear example the Dubai airline was open to integration.

“You never know: Did you ever expect only one year ago that Emirates and Qantas would get together? Things in aviation can move fast. Integration of Emirates and Qatar Airways will benefit this region and will make the two airlines even stronger than they are today.”

Al Baker first suggested such an alliance during a speech to the Arab Air Carrier Association’s AGM in Algeria in late 2012, but the idea was soon shot down by Tim Clark, president of the Dubai-based carrier.

“You put the two together and you would face the most formidable international airline group that has ever been formed,” Clark told UK-based Aviation Week. “That’s why it will never happen.”

“Can you imagine the Europeans allowing two or three of the Gulf carriers coming together and then moving into Europe,” he said, adding such a merger would have had “seismic repercussions in the aeropolitical framework”.

In response to Al Baker’s latest overtures, Clark once again pours cold water on the idea: “I know that Mr Al Baker is quite keen to see an alignment ... actually there’s a certain amount of that going on anyway. Whether or not you’ll see the airlines coming together is something else.

“It’s not something that we’re actively contemplating. I know that there is a kinship between the two carriers and I like to think we have it with Etihad as well; a friendly competition that goes on and that’s healthy for the whole region.

“If you start stitching up the three together, you might find there’s a formidable block of capacity. And I like to think that we can charter our own courses, do our own thing [and] remain friendly competitors, as we do… That’s as far as we want to go at the moment.”

“Tim Clark is right when he says that global regulatory headaches would be hard to overcome,” believes aviation analyst Saj Ahmad at StrategicAero Research. “Emirates for one doesn’t need Qatar Airways in any shape or form. I’m not sure you could say the same about Qatar Airways and its need of Emirates, given that the Dubai-based airline is a lot more established, has a stronger financial footing and is growing faster than any airline in the world.”

Alliances certainly do work for Emirates as Clark revealed that its Qantas alliance, which launched on March 31, has seen the number of Emirates passengers booking tickets to regional Australia using the Qantas codeshare arrangement increase by five times. At the same time, Qantas CEO Alan Joyce says his airline has seen European bookings increase six-fold compared to its previous alliance with British Airways (BA).

One reason Clark may be looking over the shoulder while talking to Al Baker is because he has his eye on a potential union with Lufthansa, despite years of disagreement with the German government over landing rights.

The Dubai-based carrier has for years been involved in a bitter dispute with the German government over the right to fly to Berlin. It claims the refusal to open up the capital amounts to protectionism, while former Emirates executive vice chairman Maurice Flanagan has also accused Lufthansa of encouraging Canada to block Emirates’ expansion into the North American country.

“Lufthansa hates us with a passion,” Flanagan said a year ago. In a massive about turn, Clark says relationships in the international aviation industry were changing rapidly and if Lufthansa modernised, Emirates would consider an alliance.

“It has been a difficult time but we move on and you never say ‘never’ to any bilateral commercial agreement that can be sustained over a period of time,” he says. “The way the alliance structures [and] the relationships are starting to unglue [is changing the industry]. Who would have ever have thought that Air France, one of the bastions of per-determinism with regard to the Gulf carriers would open its doors and set up a code share with, in this case, Etihad?”

While Lufthansa’s regional vice president Carsten Schaeffer admits there is history of tensions between the airlines, he says any alliance would only happen if such an arrangement was a “win-win situation for both airlines” and he doesn’t sound too convinced that it would be.

However, the airlines already have some subtle links: Dnata, the airline services arm of Emirates Group, the Dubai carrier’s parent company already has a joint venture deal with Germany’s Lufthansa Group’s Sky Chefs catering unit.

“I suspect this is more to do with Emirates wanting greater access in Germany than it is about really wanting to partner up with Lufthansa. Of course, you could argue that after all the lies Qantas spread about Emirates getting free fuel and free landing slots at Dubai, Emirates still entered into a wide-ranging five-year deal with Qantas so the same may happen with Lufthansa,” says Ahmad. “Lufthansa still is in no mood to change its structurally inefficient operating methods to become a better-run entity… Emirates has been profitable for 25 straight years with very good reason - the likes of Lufthansa would do well to examine that,” he adds.

Back in Doha, Al Baker is also looking further afield for a more willing partner: India. While he denies the Gulf carrier is interested in buying a stake in an Indian carrier, dismissing such rumours as the work of ‘rogue dealers’ looking to boost their share price, he says he is in the mood for some kind of codesharing partnership to get a bigger foothold in the Indian market.

“We are talking to IndiGo to see how we can strike a relationship with them. IndiGo is an airline that is not for sale. We only want to do a codeshare partnership with them,” Al Baker says.

“There is already an approach between the management of the two airlines. We want to get into a situation where we work together because they are the best airline in India today. I am in touch with IndiGo’s co-founder Rahul Bhatia. And we hope that we will be doing this soon,” he reveals.

While Abu Dhabi-based Etihad Airways recently bought a 24 percent stake in Jet Airways, Al Baker says he is not interested in anything more than a codesharing partnership. “I don’t have so much money to buy stakes in airlines,” he claims.

Al Baker reiterates his denial of any interest in SpiceJet and says he believes the ongoing rumours are just tactical moves by the airlines to boost their share prices.

“You know there are always rumours. Around six months ago I did a statement to the press not to believe such rumours as the shareholders deliberately put out such rumours to boost share prices.

“There is an airline that made an announcement about Qatar Airways interest in them and this boosted their share price by seven percent. There was another airline that mentioned this and it had an impact of nearly 11 percent on their share price. These are being used by certain rouge dealers to maximise their profit.”

However, Al Baker says Qatar Airways has “not asked for any [additional] seats into the Indian market” and the carrier is “operating within our capacity.” The Doha carrier currently operates 95 flights to 12 Indian cities.

While set to join oneworld in a matter of months, Qatar could find itself with even closer ties to Iberia and BA if rumours the Gulf state is looking to buy a stake in their parent company International Airlines Group (IAG) prove to be true. Qatar has approached IAG to ask whether the company would welcome it as a shareholder, the Financial Times has claimed, citing two people close to the matter.

The source claimed in the report an initial approach was made last year, though it wasn’t clear which Qatari entity would buy the Bankia stake. A third person familiar with the matter told the paper that IAG had informed Bankia of the interest from Qatar about three months ago.

“This would make sense given the links they’ll have as partners in the Oneworld alliance, but to be fair to BA/IAG, there is nothing stopping IAG buying up that stake held by Bankia,” says Ahmad. “As of now, it’s unclear what will happen to that stake - except to say that if Qatar wanted it that badly, they’d have bought it by now. That they have not suggests they aren’t in a rush or aren’t interested.”

It’s not just the big players who are talking alliances and partnerships. Low-cost carrier Flydubai revealed it would be open to going into partnership with London-based no-frills carrier Easyjet in a bid to open up the budget market between Dubai and Europe. Late last year, investors looking to develop Jordan’s Queen Alia International Airport said UK-based low-cost carrier easyjet was interested to expand its network of routes to Europe from its Gulf base in Amman.

As the same time, Flydubai operates to the Jordanian capital and any partnership between the two low-cost carriers would offer their customers a cost-effective option between Dubai and Europe, without competing in each other’s target markets.

“We co-operate wherever there is room to co-operate. Specifically with easyJet out of Amman - not right now. But we are always open-minded about doing more co-operations. There are a lot of untapped markets,” says Flydubai CEO Ghaith Al Ghaith.

European low-cost carriers are increasingly being courted to enter the Middle East market. Last year, Lebanese Tourism Minister Fady Abboud said authorities in Lebanon were in talks with low cost carriers, including easyJet and Ryanair, about starting operations to the country in a bid to boost a tourism industry.

With all this recent talk, one wonders why alliances are suddenly now en vogue among the region’s boardrooms.

“It’s about leveraging strength in a new market with less risk. Qatar Airways - well, they are doing the same as Etihad, but have gone a stage further with integration into the Oneworld alliance - not only does that give them access to a lucrative Heathrow market and partnership with BA, but they can also take advantage of American Airlines revival and possible merger with US Airways to gain better access to the US,” says Ahmad. “Emirates is the one calling the shots.”

As the power games continue it will surely make for exciting times ahead, especially as the Dubai Airshow 2013 gets ready to be staged later this year and the main players dance around each other once again.

Consolidation in the global industry

In December last year, Delta bought a 49 percent stake in Virgin Atlantic that had been previously held by Singapore Airways. The joint venture means closer cooperation between the two airlines on the lucrative New York-London route.

International Airlines Group (IAG), set up in 2011, was formed from the merger of British Airways and Spain’s Iberia. IAG also bought out the rest of the shares that it did not already own in Spanish low-cost carrier Vueling earlier this year.

Air France and Dutch carrier KLM merged in 2004 to form Air France/KLM. The company also holds a series of equity stakes in other carriers, ranging from Kenya Airways to Royal Air Maroc.

The deregulation of the American aviation industry resulted in a long string of mergers. The most recent have included the tie-ups between American Airlines and US Airways, Delta and Northwest, and United and Continental. There are now just four major carriers in the country.

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