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If you can’t beat them join them – Gulf airlines

Emirates Airline

The entry of major Gulf airlines into alliances took many industry analysts by surprise.

October 21, 2012 1:26 by



At this week’s Abu Dhabi conference, however, the rhetoric was more about cooperation than competition.

“It’s a new era of global aviation,” Etihad’s chief executive James Hogan told reporters at the event.

“The old era, like any business cycle, has to change. We have to change or we die. I think we are seeing the result of all the Gulf carriers being innovative and taking advantage of our geographic positioning, and partnering with airlines who see that same opportunity.”

SHAKY OUTLOOK

Several factors appear to be behind the change of heart. One, analysts say, is the shaky outlook for the global economy and in particular the airline industry, which is prey to fluctuations in oil prices and currencies as well as demand. Even the Gulf carriers are not immune to these risks.

IATA predicts the world’s airline industry will make a combined net profit of $4.1 billion this year, less than half the $8.4 billion achieved in 2011. It expects profits will rise next year to $7.5 billion, but with the industry’s profit margin staying razor-thin at 1.1 percent in 2013 versus an expected 0.6 percent in 2012.

In this environment, teaming up to cut costs makes sense even for deep-pocketed Gulf airlines, which are not listed on stock markets and so do not disclose their profit margins.

“The logic for joining alliances is that it gives your network more reach. Qantas and Emirates are in an alliance as they see logic in using each others’ network. So it makes sense for both,” said Tyler, adding that he believed more such deals were imminent in the industry.

Another motive may be that Gulf carriers now see cooperation with other countries’ airlines as politically more helpful to their growth than a confrontational approach.

Emirates, Etihad and Qatar Airways are rapidly adding routes around the world. Meanwhile, weak economies have driven asset prices down to levels where acquisitions look attractive; Etihad has taken stakes in Air Berlin, Aer Lingus, Virgin Australia and Air Seychelles in the space of a few months. Qatar Airways has bought part of cargo carrier Cargolux.

But the Gulf airlines need the goodwill of national governments in other regions to secure new routes and have their acquisition plans approved. As these regions struggle economically, it is to the advantage of Gulf carriers to present themselves as allies of local airlines.

The Gulf airlines have been forced to defend themselves against claims of unfair competition by their European rivals, which have raised questions about state funding and alleged fuel subsidies. Entering alliances could help to insulate them against such attacks.

And the current strength of the Gulf airlines compared to other carriers puts them in a good position to negotiate the terms of their entry into the alliances.

“I guess necessity is the mother of invention here…The advantage the three gulf carriers have is they have network, a quality product and funding. They make attractive dance partners,” said Peter Morris, chief economist at aviation consultancy Ascend.



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