End of an Era: Gulf carriers are in trouble, and the industry implications are enormous
It was a geopolitical earthquake for sure, and potentially a seismic shift as well for the region’s globally significant airlines. Last week, several Gulf nations, including Saudi Arabia and the U.A.E., suspended diplomatic and economic ties with Qatar, putting the very viability of Qatar Airways in jeopardy. Not only has the carrier lost access to many of its most critical markets like Dubai, Jeddah, Bahrain and Cairo. It perhaps even more importantly can’t fly through much of the region’s airspace, thereby extending the lengths of its flights. This means higher crew and fuel costs, a sharp reduction in productive aircraft time and a massive disruption to its flight schedules. But what happened last week was only the latest blow to the trio of airlines known as the Gulf carriers. Already, Emirates, Qatar Airways and Etihad are different airlines than they once were, slowing down markedly after more than a decade of hyper-expansion. Critics call them creatures of their governments, flying only with the support of lavish subsidies. Defenders call them creatures of superior geography, cost structures, infrastructure and customer service. Whatever the case, the Big Three Gulf carriers were inarguably creatures of the oil boom, benefiting enormously from the giant flows of money pouring into the region for the better part of 15 years, from the early 2000s until 2014.
Once the boom went bust, the impact was immediate. Gulf carrier yields plummeted as premium demand withered. Emirates, the sturdiest of the three thanks to a more sizable local market in Dubai, certainly enjoyed the lower fuel costs that came along with the oil bust. But from April through September of 2015 for example, its revenues shrank 4% y/y despite 16% more ASK capacity. Revenues inched up 1% last winter on 8% more ASKs, nudged upward only by a recovery in the oil price that also lifted its fuel bill. Its operating costs for the period thus rose 10% and left it with a winter-half operating margin of just 2%. Its 3% operating margin for its fiscal year that ended in March (these figures exclude its ground handling unit Dnata) put it somewhere in the same company as SAS and Thai Airways, and behind some epic strugglers like Air France/KLM, Jet Airways and Virgin Australia. Looking ahead, a Financial Times profile last week cited an internal Emirates memo saying forward bookings for even the summer peak appear extremely weak.
Qatar Airways and Etihad…
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