Analysis: The Rise, Fall, and Eventual Resurgence of the Middle East’s Airline Giants – Part I
MIAMI — The biggest aviation story of the last four decades (basically since deregulation of airlines in the United States) has been the rise of the Middle Eastern airline giants Emirates, Qatar Airways, and Etihad, as well as their rival to the north Turkish Airlines.
This characterization necessarily skips several other aviation megatrends in that period, notably the rise and (fall?) of Singapore Airlines and other East/Southeast Asian powers, consolidation in Europe and the United States, and of course most notably the explosive growth of Chinese aviation.
Even though Chinese commercial aviation is probably the bigger story numerically (dollars and cents, planes, enplaned passengers; pretty much by every conceivable statistical metric) it is more contained and has less broad based impact (for now). It also, by virtue of location, has less power to reshape the power structure of global aviation – Chinese hubs (like American ones) will primarily be about flying passengers to and from China.
Even as these four airlines have become global juggernauts, the last year and a half has presented unexpected challenges, and how they respond and move beyond the struggles of 2015 and 2016 will affect the destiny of multiple airlines across Europe, Asia, Africa, and Australia. With that in mind, it is worth taking a deeper look at the underpinnings of the MEB3+1’s dizzying rise, what has knocked them off course, and what the future may hold.
In Part I of our analysis of these carriers, we take a look at some of the factors behind the rise of the Middle Eastern airline giants.
How we got here
So, let’s start with the single biggest factor in the MEB3+1’s rise to success, political will.
Now many of you will have expected the first factor to be location but that is true for about a dozen carriers around the region. For example, Royal Jordanian, Gulf Air, and Kuwait Airways all have at least some of the locational characteristics of the actual MEB3 + 1, and arguably had more origin and destination (O&D) demand at the beginning of the 21st century than any of the MEB3+1 save Turkish Airlines.
Yet today Qatar Airways and Etihad are each nearly the same size as the other three airlines and Emirates only has more O&D thanks to the rapid rise of Dubai as the pre-eminent financial center for the Middle East and the Islamic world.
So to that point, the unifying factor behind the rise of the MEB3 + 1 has been sheer force of will from the government’s in question.
This isn’t rocket science: governmental support plus a favorable location has basically worked to create strong hubs repeatedly around the globe, whether its Panama City and Copa Airlines, Singapore and Singapore Airlines, Hong Kong and Cathay Pacific, or Keflavik and Icelandair.
And note that the key isn’t government protection of the home carrier – all the Middle East hubs and ones above (save for Hong Kong, which does protect Cathay Pacific – most notably recently via blocking Jetstar Hong Kong) are in fact governed by so-called Open Skies agreements which basically allow free entry and exit of competitors.
Instead it is the willingness of the government to invest in and then more or less get out of the way of aviation development that has been the defining factor. Far too often around the developed world, whether at the federal (UK and Heathrow) or local (flight caps at Amsterdam or curfews at Frankfurt) level, governments and so-called NIMBY (“Not In My Backyard”) residents work actively to achieve the exact opposite, choking growth at European hubs.
This is combined with burdensome regulation (tax-included pricing, 1500-hour rule, fuel or carbon taxes) to create a toxic environment for airline performance. It is no accident that the only OECD airlines delivering acceptable financial results are American ones, who have the small benefit of operating in an oligopoly. Fundamentally, the rise of the MEB3+1 is driven by this relative gap in political will, even if there are other factors at play.
A special mention must be given here for the acute incompetence of Indian aviation policy. It is an oft-repeated truism that the MEB3 only succeed because India’s airlines fail, and that if India’s airlines would get their act together, then the MEB3 would be in trouble. These claims fall flat, at least in the case of Turkish Airlines, which has virtually no exposure to India (admittedly not for lack of trying).
Qatar Airways is in much the same boat, and Etihad didn’t really get massively exposed to India till it bought into Jet Airways.
Emirates has certainly built its business on the back of India and it would undoubtedly be a less successful airline without Indian feed. There perhaps may have even been a period (2004-2008 roughly) when Emirates would have been terminally damaged by loss of access to India.
Today however, Dubai is too important a business and finance hub (you don’t get to 73 different airlines of service without substantial origin and destination [O&D] traffic) for India to be the defining factor. Still, the MEB3+1 would not be quite as large (dominated as they are by Emirates) or powerful without India’s utter policy incompetence and the resultant drag on its airline sector.
Arguably the same is true to a greater degree in Africa, where the MEB3+1 are the de-facto national carriers for long distance flying save for a few exceptions like South African Airways or Royal Air Maroc.
Location and long ranged aircraft each played their own role as well. Starting with the location, the MEB3 + 1 had the fortitude of building their businesses in an oil-rich region amidst a global resource boom, and fielding hubs set at the geographical intersection between the richest markets of yesterday (Europe), today (East Asia), tomorrow (South and Southeast Asia), and the day after tomorrow (Africa). Location also explains why no Indian carrier could replicate the success of the MEB3+1.
The underrated factor in their success (again minus Emirates which is an outlier on so many levels) is that they could fly narrowbodies to and from Europe. Narrowbodies have lower operating costs per seat than widebodies on pretty much every sector that both aircraft can fly, so the MEB3+1 were handed a massive cost advantage on routes to the west.
At the same time, the Middle East hubs are far enough east that flights to most of Asia are truthfully classified as medium haul (as opposed to long haul), once again saving costs by allowing the utilization of shorter ranged widebodies (think the A330-300 or eventually the 787-10).
The problem for India is that it’s simultaneously too far east for flights to Western Europe on narrowbodies and too far west for flights to East Asia. Truthfully if you’re looking for the geography in which a true MEB3+1 competitor would be optimized, it’s a geographic band from Dhaka, Bangladesh to Ho Chi Minh City Vietnam (roughly). They would basically represent the inverse of the MEB3 on a locational basis.