Archive For The “British Airways” Category
Today it emerged that Qatar Airways has bought another stake in an airline. This time it spent $662m on a near 10% stake in Cathay Pacific. The move by the airline follows a pattern as the table illustrates. We can expect a move in India soon, too.
The green boxes are all members of the oneworld airline alliance. Qatar tried to get a stake in American and was rejected by its’ CEO. American and the other two US network carriers are embroiled in a dispute with the ME3. So the winds were not in favor of this deal, though Qatar Airways’ irascible CEO was willing to make the investment despite the dispute.
The Qatar investment in IAG has already proven to be very helpful. Qatar was able to send several A320s to London to help BA maintain its service during a recent labor dispute.
Qatar Airways is clearly focused on buying stakes in oneworld. Despite the regional problems with the UAE and Saudi Arabia, Qatar keeps building its airline. Investing in other reputable airlines is a smart move. Which is, perhaps, the mistake made by neighboring Etihad which bought stakes in weak airlines hoping to turn them around.
Looking at the members of oneworld, it could be the next stakes Qatar Airways acquires are in Qantas and JAL. These are well-run airlines, with excellent global brands. Thought both these airlines have seen stock prices rise because of their improved profitability, Qatar is not a short-term investor. Its MO appears to buy a stake of around 10% to get a board seat. By having significant stakes across the oneworld alliance, Qatar will continue to build its own brand and influence. Rather than react the way Doug Parker did at American, these other airlines might look at how collaboration with IAG has worked. This looks like a clean way to move towards consolidation of interests. And at considerably lower risk than the Etihad approach.
Qatar’s approach is not unique. American recently acquired a $200m stake in China Southern. Delta is moving towards owning 49% of AeroMexico and has 10% of Air France/KLM. Air France/KLM bought 31% of Virgin Atlantic, and with Delta’s stake, these two now effectively control that airline. The world’s big airlines are quietly consolidating their interests. This keeps alliances tighter than ever.
A British Airways Boeing 787-8 (G-ZBJG) was struck by lightning shortly after departure from London Heathrow on July 22nd en route to Chennai in India. The flight, BA35, continued on the 9 hour flight to India, but upon landing it was discovered that the aircraft had 42 to 46 holes in the fuselage from lightning strike damage. This was an unusual level of damage to a 787 and the worst outcome to date from a lightning strike to that aircraft type.
While the flight completed the trip safely, British Airways decided to return the aircraft to London on July 29th without passengers to undergo maintenance. A day later, the aircraft was returned to service, a week after the incident.
With metal aircraft, electricity can easily be conducted across the skin to a wing-tip or other edge from which lightning can easily be dissipated. Composite aircraft are built with metal foil, woven wire, or most commonly an expanded metal mesh to dissipate the impact of lightning strikes. The two aircraft with more than 50% composite material, the 787 and A350, utilize different approaches to lightning strike protection for their composite fuselages.
This incident, which caused a one week loss of revenue on a 787-8, indicates that while passengers remained safe, the aircraft required specialized maintenance that apparently could not be performed locally once the aircraft landed, necessitating an expensive ferry flight back to its home base.
Repairing damage to metal aircraft is fairly straightforward, as a “scab patch” is placed over a damaged area and riveted in. Composite aircraft require a more complex repair process that requires removing the damaged composites from affected areas, replacing them with new material that includes new lightning strike protection, and heating that area to cure and chemically bond the new material to the existing composites. This incident shows just how expensive that process can be on the Boeing 787.
Once again, Akbar Al Baker, Chief Executive of Qatar Airways is making news at the Paris Air Show in several areas. We will quickly summarize them here:
1. An Equity Stake in American
Today’s announcement that Qatar has approached American Airlines regarding a 10% equity stake has send AA’s stock price upward. An equity investment in American would help solidify Qatar’s oneworld status and provide a substantial incentive for feeder traffic in North America from American.
The offer is unsolicited, and the investor filing indicates that Qatar plans to acquire at least $808 million worth of shares in the company on US public markets. American indicates that the offer was unsolicited, and would not change the board composition, governance, management or strategic direction. American’s board must approve any investments of more than 4.75% of the outstanding shares.
Qatar already has a 20% stake in International Airlines Group, the parent of British Airways, Iberia, Vueling and Aer Lingus, as well as a 10% stake in LATAM Group in South America, both major oneworld partners.
American has been quite vocal in its protests against the Middle East three with the US government, seeking to restrict their operations in the US, and a spokesperson indicated that the proposed investment does not change their position on the issue. Today, the two carriers had limited code-sharing through oneworld, but there is a strong potential for growing the relationship.
This will be an interesting unsolicited offer to watch, and Warren Buffett is likely smiling today.
2. No MOM aircraft for Qatar
At the Airshow, Akbar Al Baker was a contrarian at the Boeing event, telling Boeing that “if they fine tune the 787-8, it could be a perfect mid-size aircraft.” and that “they don’t need to reinvent the wheel.” Qatar has been an early customer of new technology wide-bodies, including A350, 787 and 777-X, and doesn’t see a place for the NMA/797 in its fleet.
3. The Political Turmoil and Airspace Ban
With the remaining GCC countries currently prohibiting Qatar from their airspace, the airline has been forced to cancel 52 of more than its 600 daily flights. Al Baker indicated that the economic impact of the airspace ban has not yet been fully calculated.
The ban on the use of airspace has resulted in cancellation of flights to GCC countries and diversions. “Every single flight that we are now operating has to take a detour. Extra flying time is anywhere between five minutes and two hours.”
The airline plans to utilize the now spare capacity to accelerate the launch of new routes. Routes to Skopje, Sarajevo will be brought forward, and Ljubljana is under consideration. In addition, destinations in Iran that were under consideration but waiting for new aircraft can also be brought forward.
Al Baker indicated that ICAO needs to step in, as the actions of the GCC countries are in clear violation of the Chicago Convention to which they are signatories. Bahrain and the UAE claim they have open air space, but he indicated “That is a mere farce, because when we apply to pass through we are rejected, and we have documentation to prove it.”
The dispute in the GCC, which started a couple weeks ago, added on to the Saudi rejection of Qatar’s plan for Al Maha airlines within the kingdom, which was once favored. Instead, the license was awarded to an Egyptian group. But that is nothing compared to the restrictions of airports and airspace against the Doha-based carrier.
Qatar is up against a difficult situation, but has begun to put into place plans to limit the damage.
The Bottom Line: Qatar Airways has a fighting CEO and the ability to compete, and will continue to utilize every weapon at its disposal to do so. Even with a difficult political situation, Qatar is pragmatically moving forward under strong leadership.
There was a previous battle in world war two. The next one will not be violent but looks to be as belligerent. The next battle will be in the skies over the Atlantic as the newcomer LCCs pour capacity into the market and upset what has become a comfortable club for network airlines.
The belligerents include the network airlines from the US (American, Delta, and United) and the EU (Air France/KLM, British Airways, Lufthansa, and their partners). On the other side of this fight will be Norwegian, and soon JetBlue, with more to come. To try offset the disruptive role being played by Norwegian, British Airways and Iberia are offering LEVEL. Now Lufthansa is going to extend the reach of its Eurowings brand. Air France is creating something called Boost.
Norwegian probably could never have imagined such a competitive response. The EU competition is rolling out their big guns. LEVEL and Eurowings will deploy A330s. It’s not clear what Boost will deploy, but the bet would be A330s as well. These aircraft are cost effective and paid for. Norwegian will deploy 787s and MAX8s. JetBlue will deploy the A321neo and A321LR. Then there is WOW and Icelandair also growing their reach. These last two have home bases that will allow for disruptive use of single aisle aircraft in the market.
As we have seen numerous times before, the plans at airlines are easily disrupted by labor strife. The big three European airlines about to get into this battle have long histories with strikes. Air France’s decision to hire cabin crew for Boost at 40% less than its mainline has been described as “scandalous”. Lufthansa has just ended a long-running fight with its pilots. British Airways crews are getting annoyed again, too. No wonder LEVEL will be based in Spain.
Jean-Marc Janaillac Air France-KLM CEO noted “We are lagging behind in terms of competitiveness. Since we are a legacy carrier, we are old, with many layers of management. We are not agile and lean enough to be innovative. We need to reduce our unit costs and continue our productivity efforts in order to grow.” And there’s the rub. This comment applies to the network airlines on both sides of the Atlantic. The aircraft will not make the difference. It will be the people. Imagine the reaction at these airlines when and if the sclerotic layers are cut? The US airlines are further down the road on this, and although we have seen better financials, we have also seen what happens when exogenous factors like weather throw operations into a crisis. The management layers are a problem – until you need them. Since airline operations are subject to many exogenous factors, sometimes you need those people.
However, it is clear that newer airlines like Norwegian are doing things differently. The way they hire people saves the airline a lot of money. In the US, Norwegian faced pushback from local airline unions. And then, suddenly, the problem was gone. Is Norwegian more supple and flexible? Absolutely and the legacy airlines cannot match this. Their labor relations are much more complex and the legacy airlines can’t pivot as quickly. Recall the attempts by Delta (Song) and United (Ted) to invent sub-brands and how that worked out. Corporate culture is not something that grows more flexible over time.
The Atlantic market is getting more crowded and the network airlines are going to lose market share and revenues. Given their high costs, the size of the impact is not clear, but we can be sure the impact will be negative.