With the more than 400 wide-body aircraft on firm order by the three largest Middle Eastern carriers, one question is being asked frequently: Is there a market for all of these aircraft? In spite of what European competitors tend to say, the answer is mostly “yes.”
Analysts and experts believe that there are still a lot of international long-haul markets left for Emirates,and that have potential for new air services. “By virtue of geography, they are all exposed to many of the current growth markets,” says John Strickland, a London-based airline consultant.
For connections between China and Africa, two strongly growing regions, Dubai is ideally located as a connecting hub. And with ultra-long-haul aircraft like the-200LR available and the increased-gross-weight version of the around the corner, even more markets can be connected to Middle Eastern hubs that have been out of reach for the regions' airlines.
The capacity to be deployed is impressive by any standards. Emirates has 188 widebodies on firm order, among them 50 Airbus-900s. 20 A350-1000s, 75 A380s and 43 777-300ERs. Etihad is awaiting delivery of 20 , 25 A350-1000s, 10 A380s, 10 777-300ERs and 31 -9s. Qatar Airways bought 10 A320s, 20 A350-800s, 40 A350-900s, 20 A350-1000s, five A380s, nine 777-300ERs and 30 787-8s. That adds up to 432 widebodies, only a minority of which will be used to replace existing sub-fleets such as the 28 -200s that Emirates has been using much longer than initially planned to cover delays in new aircraft deliveries.
And more is expected to be announced at the Dubai air show this week, not only by Emirates but also by Qatar Airways, from which a large A380 order has been pending for months and was originally expected to be revealed at the Paris air show last June.
The most recent route launches by Emirates are showing a pattern that is likely to continue. It plans to begin services to Rio de Janeiro and Buenos Aires, Argentina, in January; to Lusaka, Zambia, and Harare, Zimbabwe, in February; and Seattle and Dallas, soon after. These destinations lie in three of the major growth regions for the carrier: Latin America, Africa and North America.
Seattle is a particularly interesting choice. Emirates has been lobbying the Canadian government to allow it to fly to Vancouver, but Canada is among the most restrictive countries in allowing more air services, and Emirates now has three weekly frequencies into Toronto. Seattle's proximity to Vancouver could probably help the airline attract some traffic that would have otherwise gone through the Canadian gateway.
Emirates' Seattle choice also shows that the U.S. West Coast is an area where the airline will add cities and introduce larger aircraft. Once the higher-gross-weight A380s become available, they will fly Dubai-San Francisco nonstop and later Dubai-Los Angeles. Emirates is using its own weight-reduction program for the aircraft interiors in addition to Airbus's work to increase range. The airline will replace some magazines with inflight entertainment system content. The amount of water carried is also being looked at, although executives note that the famous onboard showers are not negotiable. Emirates now serves the West Coast with 777s.
Qatar Airways, meanwhile, is focusing on expansion in Europe. The latest addition to its network is Oslo, which followed service launches to six other European destinations this year: Stuttgart, Germany; Venice, Italy; Sofia, Bulgaria; Bucharest, Romania; Budapest, Hungary; and Brussels. The carrier plans to operate to more than 120 destinations with a fleet of 120 aircraft by 2013, up from 100 aircraft and around 100 destinations today. In the next few weeks, it will start services to Entebbe, Uganda; Baku, Azerbaijan; and Chongqing, China.
Etihad Airways will commence flying to six new destinations in the next half year, including Male, Maldives; Mahe, Seychelles; Shanghai and Chengdu, China; Dusseldorf, Germany; and Nairobi, Kenya. The airline plans to take delivery of four 777-300ERs and three A320s next year to accommodate the increased capacity needs.
A recent in-depth study on the future network of Emirates, compiled by Royal Bank of Scotland (RBS) airline analyst Andrew Lobbenburg, notes that it will be “surprisingly easy” to find markets for the 90 A380s. The study assumes Emirates will generally not grow its share in established markets such as Western Europe to Asia, thus only presenting a “moderate challenge to European flag carriers.” However, the airline will benefit from disproportionate growth in strongly developing markets such as Eastern Europe to the Middle East, North Asia to Africa, South Asia to North America and North Asia to the Middle East. The same pattern is likely to be true for Etihad and Qatar, although most studies focus on Emirates.
Lobbenburg believes Emirates will add 21 new routes by 2015 and 25 more by 2020. Initially, the expansion will be mostly in China, Japan and Europe. Sixty A380s will operate predominantly on routes to Europe, Australia, China, Japan and the U.S., and a higher density sub-fleet will serve India; Jeddah, Saudi Arabia; and Nairobi.
By 2020, the network growth will shift more to North and Latin America, Africa, provincial India and China, and Eastern Europe. The A380s will fly even more frequently to North America and Latin America, although those services will depend on a longer-range version that is currently under development at Airbus. As many as 43 airports could then be being served by Emirates A380s.
In comparison to Qatar and Etihad, Emirates benefits from its relative maturity and huge network. “Emirates can add one new destination or only a new frequency on an existing route that multiplies into hundreds of new itineraries,” Strickland says. “It is a positive domino effect happening all the time.” The carrier has also grown much more slowly than its two rivals in Doha and Abu Dhabi, respectively.
Qatar Airways changed its strategy about a decade ago to reflect the global hub-connecting model, and thus it is still behind in size and corporate development. Etihad did not exist 10 years ago.
These differences among the three carriers are also reflected in their financial performances. With its network power, Emirates can add new routes relatively inexpensively, while Qatar and Etihad have to invest more as well as take more risks. So far, the owners of Qatar and Etihad have been willing to stem the losses, and both airlines have very deep pockets—Abu Dhabi generates $1 billion in oil revenues in a single day. That financial clout is an additional worry to the established carriers in the West. They simply cannot count on money being a limiting factor in the early phase of Qatar's and Etihad's build-up. Emirates seems to be well beyond the inflection point and is generating steady profits despite its still aggressive growth mode.
Unlike Emirates, neither Etihad nor Qatar Airways disclose detailed financial results or an annual report. Industry insiders believe start-up losses at Etihad are still enormous, while Qatar claims it is close to sustainable profitability. Etihad says it is targeting a break-even result for this year and has been profitable on an Ebitdar (earnings before interest, tax, depreciation and rent) basis.
While European airline executives in particular are alarmed by the competition from the three Middle Eastern carriers, it is actually not such a large threat. Infrastructure problems in the Middle East have the real potential to slow things down. For example, while Dubai's much-delayed Emirates-dedicated terminal did ease overcrowding considerably when it opened in 2008, with rapid air travel growth continuing, that new building is often full at peak times, as well. Airport authority Dubai Airports is adding another terminal that will mainly be used for the Emirates A380 fleet and contribute to bringing the airport up to its eventual capacity of 90 million passengers per year. Dubai is also becoming slot-constrained.
The new Al Makhtoum International Airport in Djebel Ali is ready in its initial stage, although Emirates is hesitant to move there because that would require it to move its entire operation at once, a decision the carrier would like to put off well beyond 2020.
At Doha Airport, Qatar Airways' ambitions are cramped: Passengers are bused to their aircraft, which are often parked on the other side of the runway because there is no space left nearer to the terminal. However, Doha's new international airport is almost complete and will bring ground processes up to world standards. Abu Dhabi is also expanding its existing airport and has plans to build additional new facilities that will provide a major capacity boost.
The current infrastructure limitations notwithstanding, European carriers have no qualms about fighting their Middle Eastern rivals through politics. For some time, they have been arguing that their Middle Eastern competitors are receiving government subsidies and should therefore not be granted more traffic rights into Europe—even though many European carriers themselves receive government support in some way or another.
However, Strickland says the traffic rights aspect “won't be unduly limiting” to the network expansion. And Emirates' senior vice president for public affairs, Andrew Parker, says that “even the most difficult countries are starting to change.” Canada has been reluctant to grant more traffic rights to Middle Eastern carriers, adhering to a much more protectionist aviation policy compared to others such as the U.S., which has an open-skies agreement in place with the United Arab Emirates.
Parker also sees a few African and former Soviet bloc countries that are still resisting opening up their markets. But one of the more immediate threats is India's efforts to protect financially devastated state-ownedfrom competition. India does not allow any A380 services into the country and is discussing whether it has been too liberal in the past in granting traffic rights to other airlines. Though India's restrictive attitude affects all foreign airlines, that it will not be a longer-term issue, Parker says.