Archive For The “Qatar” Category

The Declining ME3

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The results are grim. Etihad reported a loss of $1.9bn.  Emirates announced its first decline in profits in five years.  And Qatar is besieged and indications are to expect it to report 30% lower revenues because of the neighboring countries blockade of airspace.  What was once the future, and the center, of the Airbus and Boeing wide-body sales efforts has run out of steam with alarming speed.

To make things worse, the ME3 had big plans to “invade” the US.  With far better service levels and new aircraft, they were well placed to win over business travelers.  The threat was obvious to the US majors, who rather than compete, ran for cover in Washington DC.  These earlier proponents of Open Skies suddenly didn’t like the idea of competitors having access to “their” market.  US business travelers could easily have taken a US-flag flight to the Gulf.  But for equal (or less) money they could fly on an ME3 flight – where they are offered award winning service and industry leading cabin design.  The market spoke and the US majors shrank schedules to the Gulf due to a lack of traffic.

But it got even worse.  The US government decided to hit business travelers hardest when they imposed security regulations that forbade travelers from bringing laptops into the cabin from certain countries, including the home airports of the ME3.  For a business traveler, this is akin to saying “go away.”  Business travelers have zero tolerance for disruptions and immediately changed to flights connecting through the EU.  The impact was to freeze out ME3 business traffic. The ME3 quickly had to cut back US services.  The US majors are determined to rid themselves of the ME3 threat.

The security limits have since been lifted.  But the message was clearly received.

Not satisfied with their first moves, the US majors seem bent of following through with additional efforts to stop them.  American canceled its codeshare with Qatar, claiming it and the other members of the ME3 are receiving state subsidies.  Though Qatar seems determined to become a shareholder in that airline.  Delta has taken a 10% stake in AF/KLM, while welcoming that group as a fellow shareholder in Virgin Atlantic.  What United has planned is not reported as yet, but it is unlikely to sit out the opportunity to also cement its alliances with Star Alliance partners including Lufthansa, which competes against the ME3 in Europe.

These moves by the older network airlines speak to more than holding the ME3 at bay.  These moves provide old network airlines a chance to literally lock up markets.  This becomes a profound problem if one looks forward even a few years.  What was an opportunity for travelers to have more choice is being curtailed.  Consolidation does not and never will work in favor of the consumer or traveler.  Cutting choice only serves the interests of the supplier, never the buyer.  How the US airline consolidation was ever allowed remains a mystery for those familiar with antitrust law.  (Useful primer) This is a story that needs to be re-told and the implications, including the fact that consolidation has chilled new entrants, examined closely.  When six majors become three, competition is essentially eliminated.

On top of the competitive threats that consolidation brings, consider the plight of employees.  Pilots are in ever shorter supply.  A knee-jerk reaction in Congress to an unfortunate accident raised transport pilot requirements so high as to cause a pilot shortage in the industry. It was already nearly impossible for a cadet pilot to get a job at a living wage and repay their eduction, and the shortage is thankfully raising wages.  (US Regionals are paying new hires between $38,000 to $65,000k with bonuses plus training costs of about $30,000.) The cost of education and pilot training are prohibitive, causing a large drop ut rate. Regional airlines face wafer thin margins under today’s Capacity Purchase Agreement structure.  Meanwhile the regionals are seeing some new hires progressing quickly from joining the regionals to moving on to a major in under a year.  The pilot shortage is pulling people through the system – but that means regionals are continually searching for new talent.

Non-pilot employees don’t have an especially attractive career either.  Working for an airline has proven to be a rather good way to see your benefits and wages cut and have a high likelihood of losing your job to consolidation.   Look at the next chart and try persuading yourself that an airline job is a great career.  You must do more, earn less (never mind inflation) and run the risk of working in an industry known for retrenchments and layoffs.

The Bottom Line

The ME3 problems are ensuring they are a declining force in the US market.  But even as we understand that City States cannot typically generate sufficient traffic for a large carrier, we also can see what happens when truly open skies are closed.  The double-digit ME3 growth rates were unsustainable long-term, but the recent actions demonstrate why one should show them sympathy.  They were not beaten by competitors, but by governments.

We should show appreciation for their disruptive behavior that demonstrated to the traveling public what true airline service could be like, with modern fleets, innovative interiors, and world-class service.

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ME3 fleet growth

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It is quite remarkable how quickly the ME3 became tier one players in the global airline industry.

As the chart illustrates, Etihad is the smallest of the ME3.   Because Etihad was the smallest but had the same task of “showing the flag”, its management developed a strategy of acquiring key stakes in European airlines.  Typically, these airlines were in financial straits and a stake could be bought at a discount.  The strategy succeeded because Etihad had no problems acquiring landing slots anywhere in the EU.  Whereas its ME3 competitors struggled to acquire such slots. In the end, though buying stakes in poorly run airlines failed.

Qatar went down the alliance road, joining oneworld.  It was a smart decision.  Now Qatar is buying stakes in well-run airlines.  This looks like another smart move.  Given the blockade by its neighbors, Qatar appears to be overcoming the operational challenges.  Profits are going to be hit, but the airline keeps growing.

Emirates is aloof to alliances.  It also does not seem to follow anyone’s lead.  It remains the largest A380 customer and continues to use these to open new markets and move traffic away from other brands.  Now it is joining the 787 club, and will no doubt use these to pry open more markets and continue to drive the world’s aviation center of gravity to the Arabian Gulf.

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Sour Grapes: CAPA Man of the Year

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The Centre for Asia Pacific Aviation is a highly respected consultancy, and we at AirInsight have met their leadership team and respect their capabilities and ethics. They are an outstanding firm. Annually, they award “man of the year” honors to an industry participant. For 2017, the award was presented to Qatar Airways CEO Akbar al-Baker.

CAPA’s rationale for choosing Al-Baker was straightforward and logical. Qatar has faced a ban on the use of airspace by neighboring countries, and a ban on its flights in the region. That has required a reconfiguration of destinations, routes, and essentially a recalibration of Qatar’s entire network. The ability of Qatar to continue to grow and prosper under those circumstances, and to turn a setback into an opportunity is a credit to Akbar Al-Baker’s management skill.  Qatar Airways has faced difficulties that would be the equivalent of Canada and Mexico shutting off airspace to US carriers, and has adapted to conditions that its political opponents hoped would drive them out of business. Thanks to Al-Baker’s leadership, the airline continues to thrive.

Unfortunately, CAPA is now coming under fire from a lobbying group in the US, The Partnership for Open and Fair Skies, who have publicly criticized that selection and impugned CAPA’s integrity. Their spokesperson, Jill Zuckman, stated that “Cheater of the Year” would have been a more appropriate title, and that “This recognition should be viewed as nothing more than an unsubtle attempt by a CEO who is reliant on government subsidies to buy credibility from an organization that lives in the pocket of the Gulf carriers.”

Who is the Partnership for Open and Fair Skies? This group, according to their website, consists of American Airlines, Delta Air Lines, United Airlines, Air Line Pilots Association, Allied Pilots Association, the airline division of the International Brotherhood of Teamsters, the Association of Flight Attendants-CWA, the Association of Professional Flight Attendants, the Communication Workers of America and the Southwest Airlines Pilots Association.

While Delta, American, United and their unions have been waging a PR campaign against the growth of the ME3 in the US market, their PR folks may have gone too far in defaming a well-respect industry consultancy. CAPA has noted that it has no contracts with the ME3, and made the choice based on the actions of Qatar to counter the shut-down of airspace due to politics, a dangerous precedent that violates the principles of the Chicago Convention of 1945.

The Bottom Line

The Partnership for Open and Fair Skies went a bit too far, and is not doing a service to its members on the world stage. CAPA is a respected organization, and Akbar Al-Baker has done what no one thought possible – turning a threat to survival into a new network that has been able to stabilize the situation and reposition the airline towards growth in 2018, with the boycott still impending the viability of recent aircraft acquisitions. We stand with our colleagues at CAPA in our recognition for what Qatar has been able to accomplish in very challenging circumstances.

AirInsight also has no business ties to Qatar Aviation or the ME3, and join CAPA as a US-based organization in recognizing Akbar Al-Baker our Man of the Year as well, in support of our colleagues in Asia.

It is disappointing that some of the finest legacy carrier in the world, American, Delta, and United have opted for a strategy that we can only characterize as misguided against an internationally recognized consulting firm. While we appreciate the challenging nature of the competition from the ME3 that those carriers have been faced with, and in particular the velocity upon which this competition has been materializing, we reject any attempts at questioning the integrity of our CAPA colleagues with their selection of Mr Al Baker as their Man of the Year.

One can only wonder how Mr. Al-Baker’s assumption of the leadership of IATA’s general assembly in 2018 will impact the US3 legacy carriers on the international stage.  Stay tuned.

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Qatar Airways buys another airline stake

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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.

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Delta Versus the ME3 on Open Skies

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Delta Air Lines last week produced a 15-minute film to educate employees about the company’s aggressive stance against the ME3. That video can be viewed here. This film is the latest effort in Delta’s campaign to urge the US government to enforce Open Skies agreements with the United Arab Emirates and Qatar. For those who don’t want to watch a 15-minute video, a two-minute summary can be found here.Clearly, the videos are biased towards the position of the US Big 3, which is that the Gulf carriers are subsidized and the US carriers cannot effectively compete. But let’s examine why the ME3 have grown so substantially in recent years:

1. They offer the fastest connections between Europe and Asia, Europe and Africa, and the US and the Middle East, based on their geography
2. They offer far superior customer service, on newer aircraft, with better passenger amenities than their US counterparts
3. They offer competitive fares that are typically similar to both US and European legacy carrier fares
4. Their service levels are such that passengers that have flown with the ME3 typically do not choose to fly on US carriers once they’ve experienced the difference.

This may not be a matter of an inability to compete, but the lack of a willingness to improve on-board service to effectively compete with the service levels of the ME3.

A countervailing viewpoint can be found here and here, which while a bit harsh in calling out Delta, provides some balance. There are two sides to every story, and we find that the failure of US carriers to file an Article 12 complaint and instead lobby Congress somewhat telling.

We’ve flown on American, Delta and United internationally as well as on Emirates, Qatar, and Etihad. The difference (at least in business class services we’ve tried) is markedly better on the ME3, and our preference would be to fly on the ME3, ceteris paribus.

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ICAO and Qatar

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The International Civil Aviation Organisation (ICAO) declined to involve itself in the Qatar aviation crisis after the Gulf state filed a complaint against four countries that cut diplomatic, economic and transport ties with it.  We have been watching the impact of these cuts with interest.  It was generally thought these cuts and the limits imposed on Qatar’s home airline would create a serious negative impact.  The impact came and was serious, but the airline has managed to overcome these limits and keep growing.

Understandably, Qatar Airways felt it was being unfairly hurt by the politics.  It filed a complaint with ICAO.  ICAO’s response: ”After taking note of the Qatari complaint, the reply from the four counter-terrorism nations and hearing from the ICAO’s general secretariat about the flow of air traffic over international waters the ICAO Council acknowledged that political outstanding issues between these concerned states should be tackled in international forums away from the ICAO.”

Why did Qatar Airways turn to ICAO in the first place?  ICAO started off as being the outcome of  The Convention on International Civil Aviation, which was drafted in 1944 by 54 nations, and established to promote cooperation and “create and preserve friendship and understanding among the nations and peoples of the world.” More background is useful.

Known more commonly today as the ‘Chicago Convention’, this landmark agreement established the core principles permitting international transport by air and led to the creation of the specialized agency which has overseen it ever since – the International Civil Aviation Organization (ICAO).

ICAO’s core mandate is to help nation states achieve the highest possible degree of uniformity in civil aviation regulations, standards, procedures, and organization. In 1946, The Comité International Technique d’Experts Juridiques Aériens (CITEJA) recommended that a Committee on International Air Law be established within ICAO. Here is a good read about the functions of the Legal Committee of ICAO.  Besides this body, ICAO developed a series of rules about airlines and their ability to use airspace. These are known as Freedoms of the Air, and consist of five rules. The first two of these rules date back to 1945.  In 2015, at the 36th Session of the ICAO, there was an agreement by members on the “paramount role of international legal conferences aimed at promoting their ratification“. What is “their”?  That would be “the ratification of international legal instruments and the status of ratification of international air law instruments.” What does this pertain to?  The ICAO calling for universal ratification of the Transit Agreement.  Which brings us back to the first of the Five Freedoms.  The key item here is that air transport policy is moving towards open skies, aimed to use the shortest available routes.

The conclusion of the 36th Session stated: “There could be various reasons why the Transit Agreement has failed to achieve such universal acceptance as the Chicago Convention. External changes over the past seventy years as laid out above, though, provide sufficient motives to reconsider the value of the Transit Agreement. The Chicago Convention aims to achieve the sound and economic operation of international air transport services, and the Transit Agreement has the potential to facilitate the economical operation of international scheduled services by allowing airplanes to travel the shortest routes. That ICAO continues to call for the universal adherence to the Transit Agreement deserves further support and acclaim.”

Qatar Airways was, it appears, doing exactly what it is supposed to do – turn to ICAO and request it intervene to ensure the Five Freedoms are honored. ICAO, being part of the UN, won’t provide the help Qatar is entitled to request. Rather than deal with the sanctioning states, ICAO has thrown the problem “upstairs” to the UN.  The UN, being the gabfest it is, will now talk about talk and nothing is likely to happen.  With every state granted one vote, Qatar is going to either lose slowly or quickly. But a win won’t be forthcoming.

Qatar Airways will have to continue to bear higher operating costs from extended flight paths.  The non-response from ICAO serves further undermine the value of the UN as a whole as a solution to problems faced by nation states.

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