An Overview Of The Transformation And The Expected Changes Of Middle Easts Air Travel Industry

An Overview Of The Transformation And The Expected Changes Of Middle East's Air Travel Industry Introduction: Over the past decade, there has been momentous change in the air travel industry in the Middle East. The rapid expansion of three Gulf-based airlines and the development of three major air travel hubs in the region has brought large amounts of new air service to these cities while the growing route networks of these carriers has put great pressure on other established airlines carrying passengers across the Eastern Hemisphere. Fifteen years ago, the region’s air travel market looked very different. A single airline, government-owned carrier Gulf Air, served as the flag carrier for Bahrain, Qatar, Abu Dhabi, and Oman. It operated services to Europe, Asia, Africa, and Oceania; however, lacking a central hub, it did not aim to service passengers traveling between those regions, focusing instead on origin and destination traffic to the Middle East. Traffic between these continents was left to the carriers based on each end of the route. One example of this is the Kangaroo Route wh ich refers to flights between Europe and Australia. Until the 2000’s, the Kangaroo Route was dominated by Qantas and British Airways who operated the flight with intermediate fuel stops in Southern Asia (Schofield, 2012). These long, point-to-point routes lack the efficiency and economies of scale that a centrally-located hub provides. In 1985, Emirates Airline began operations as a small carrier based in Dubai. This airline would eventually become a major rival to Gulf Air and spark the airline boom in the Middle East (â€Å"Our History†, 2012). Beginning in 2002, the states invested in Gulf Air began to withdraw and form their own state carriers with hubs in the capital of each. By 2006, Gulf Air was fully controlled by Bahrain and Qatar Airways, Oman Air, and Etihad Airways in Abu Dhabi had been formed. Since the inception of these carriers, three have grown dramatically through the expansion of their route networks, fleet sizes, and improvements to the airports at which they are based. These are Emirates, Etihad Airways, and Qatar Airways and have come to be known as the Middle East Three or ME3. In this memo, I will analyze the factors that have enabled the expansion of the ME3 and attempt to determine the effect the growth of these companies has had and will have on other air carriers. Findings: Changes in the Air Travel Market Some of the growth in the Middle Eastern air travel market can be attributed to trends that are affecting the industry globally. Long-haul air tickets have fallen over the past decade making intercontinental travel accessible to many more people. In the market for coach-class travel, consumers have become more price-sensitive and tend to opt for the lowest fare over other factors such as comfort or routing. This has led to the launch of numerous no-frills carriers and caused full-service carriers to increase seating capacity and decrease complimentary services in order to lower ticket prices and better compete. On the other hand, in the premium-class air travel market, competition has become centered on providing the most luxurious product in the sky (Smyth, 2008). The ME3 have outdone each other installing showers, private rooms, bars, and even an entire apartment in their first-class cabins. The introduction of codesharing and airline alliances has also enabled airlines to launch r outes that may previously have been unprofitable. Codesharing allows passengers traveling on one airline to seamlessly connect to a partner airline’s flight and stimulates demand for flights between the hubs of partner carriers. The ME3 all have extensive codeshare relationships with airlines from around the world, allowing them to sell tickets to a greater number of destinations and operate fuller flights (â€Å"What the,† 2005). Qatar Airways is also a member of the Oneworld alliance, enabling them to codeshare with all other member airlines as well as coordinate flight schedules and reciprocate frequent flyer benefits. Middle East Demographics and Geography Changes in the demographics and economies of Middle Eastern countries have also caused demand for air service in the region to grow, making expansion of the Middle East Three possible. Gulf nations have seen extreme growth in population largely due to immigration. Qatar’s population has seen average annual growth of around fifteen percent in the past decade (â€Å"Population growth,† 2015), while the United Arab Emirates has experienced a growth rate of around fourteen percent (â€Å"Demographic profile,† 2011). The population of expatriate and migrant workers in the UAE and Qatar has expanded rapidly as well in the past decade. Eighty-four percent of the UAE’s population and ninety percent of its workforce are made up of migrant workers, many of whom come from India, Bangladesh, and Pakistan (Malit, 2013). This has stimulated great demand for flights between Gulf countries and the home countries of their labor forces to serve workers beginning and ending their contracts and returning home to visit family. There has also been large economic growth in the Middle East. The UAE has averaged 4.66 percent year-over-year GDP growth in the past decade (â€Å"United Arab,† 2015), while Qatar has averaged 3.81 percent (â€Å"Qatar GDP,† 2015). This economic prosperity has created demand for skilled workers, especially in the finance and banking sectors. The Dubai Economic Council has even stated that â€Å"Dubai is heavily dependent on expatriates for continued economic growth and development† (Al Awad, 2008). Many of these expatriate workers come from Europe, East Asia, and North America. As companies open new offices in cities such as Doha, Dubai, and Abu Dhabi and send employees to these cities to conduct business, a great deal of corporate travel to the Gulf region is created, allowing air carriers to launch new routes and add capacity to other business hubs. The ME3 also have a geographic advantage. The hub cities of these carriers are located on or near the shortest route between Oceania and Europe and are centrally located in the Middle East region for connections to other cities in the region. They are also located close to the halfway point for travel between Europe and South Asia. These geographic factors make the ME3 ideally situated for handling connecting traffic between these regions using a hub and spoke model. Struggling Legacy Air Carriers The Gulf-based carriers have benefitted from the struggles and downfalls of other air carriers serving routes also covered by the ME3. A few examples of this are Air India, Kingfisher Airlines, and Qantas. State-owned Air India has faced severe financial woes since it chose to â€Å"aggressively dry and wet lease aircraft was taken to increase market share† in 2006 and unsuccessfully merged with Indian Airlines in 2007, according to an aviation analyst (Manju, 2009). They have since greatly reduced the scope of their operations, cutting routes and selling or leasing their long-haul aircraft to other carriers. The airline sold five of its long-haul Boeing 777 aircraft to Middle Eastern rival Etihad Airways and is focusing on growing its short-haul operations (â€Å"Air India,† 2013). Civil Aviation Minister Ajit Sing cited foreign competition as a cause of the troubles saying, â€Å"The airline cannot be complacent as there a lot of new airlines that are coming in. Both the management and employees of Air India must perform or perish† (Phukan, 2013). Another, younger, Indian air carrier, Kingfisher Airlines, did perish after experiencing a financial crisis stemming from its nonpayment of income taxes and subsequent bankruptcy. The carrier, which had been the second-largest in India by market share, suspended all operations permanently in 2012 (â€Å"Kingfisher Airlines,† 2012). The downsizing of Air India and elimination of Kingfisher from the marketplace has presented itself as a great opportunity for the ME3 carriers. Their hubs are geographically well positioned to serve traffic travelling between India and points westward and they are based in countries with large amounts of migrant labor traffic to India. Qantas Airways had historically dominated the Oceania to Europe market with its well-known Kangaroo Route; however the airline’s long-haul operations have been generating significant losses recently, causing the airline to implement cost-cutting measures and begin a restructuring campaign. This has involved Qantas’ elimination of 5,000 jobs, cessation of flights to Europe, growth of its low-cost subsidiaries, and formation of codeshare partnerships with other carriers to carry the airline’s Europe-bound traffic (â€Å"Qantas responds,† 2014). The Middle East-based carriers have again benefitted from this airline’s reduction in service. They have hubs that lie on the straight-line path between Australia and Europe and are capable of handling large amounts of connecting traffic between the regions. Qantas chose to discontinue its former flagship London service in favor of routing passengers through Dubai on flights operated by codeshare partner Emirat es (Leo, 2012). Future for Expansion The future for the Middle East Three continues to be bright. All three carriers have outstanding orders for significant numbers of large, long-haul, widebody aircraft. Qatar Airways has orders for aircraft that will expand its fleet by over 140 percent (â€Å"Our Fleet†). The Emirates fleet will expand by 130 percent and Etihad’s will grow by nearly 200 percent in the next decade (â€Å"Our fleet,† 2015). All of the ME3 carriers operate the world’s largest passenger aircraft, the 500-passenger Airbus A380. Emirates plans to operate a fleet of 140 of these aircraft and is already by far the largest operator of the aircraft type (â€Å"Our Fleet – The Emirates Experience,† 2015). The carriers plan to add new destinations to their route maps as additional capacity is added into the fleet with Qatar Airways opening at least four new cities within the next year. Etihad Airways has been especially aggressive in growing through the acquisition of stakes in other carriers. Etihad has purchased forty-nine percent stakes in struggling carriers Alitalia and Air Serbia, rebranded Switzerland-based Darwin Airlines as Etihad Regional to feed traffic from smaller European cities onto its Geneva to Abu Dhabi flights, and also has large holdings in Air Berlin, Air Seychelles, Virgin Australia, Jet Airways, and Aer Lingus. The airline has begun what it calls the Etihad Equity Alliance made up of all the carriers in which the airline has significant investment (â€Å"Etihad Airways’,† 2013). The airlines cooperate in a similar fashion to those in the big three traditional airline alliances; coordinating schedules, launching co-branded marketing campaigns, and enacting codeshare agreements. The home base hubs of each of the ME3 carriers are also undergoing significant improvement. Doha, Qatar’s airport was recently completely replaced to provide additional facilities for its main tenant, Qatar Airways and improve the passenger experience (â€Å"Hamad International†). The Dubai International Airport, home to Emirates, is currently completing its expansion Master Plan with a new Concourse D and expansion of Terminal 2 to be completed this year (Jain, 2011). Dubai has also opened a brand new airport called Al Maktoum International Airport to which some smaller carriers have moved, making room for the expansion of Emirates at Dubai International (Cohen, 2010). The Abu Dhabi International Airport is also being expanded with two new runways and an entirely new terminal complex to facilitate Etihad Airways’ growth (â€Å"Terminal Complex,† 2014). The expansion of these airports will allow the ME3 to further grow their operations, reduce congestion, and make the hubs more attractive as connecting points for transiting passengers. Response from Other Carriers Naturally, the extreme growth of the air travel market in the Middle East and the expansion of the Gulf-based airlines have impacted other players in the global airline market. This has led other air carriers to make changes to their operations in response. In order to compete with the ME3, Turkish Airlines has expanded their hub operation in Istanbul to accommodate more connecting traffic. Also well-positioned for handling traffic traveling from Europe to Asia, Turkish Airlines seeks to emulate the hub model of the ME3 in order to remain competitive (â€Å"Turkish Airlines,† 2013). The airline is also expanding its aircraft fleet with its fleet slated to expand by about seventy-five percent (â€Å"Turkish Airlines – Fleet,† 2014). Turkish Airlines is also promoting the construction of the Istanbul New Airport to allow the airline to expand further and alleviate congestion at Ataturk Airport. The development of the Middle Eastern air travel market by the ME3 and the population and economic expansion taking place in the area have also led to the launch of several low-cost air carriers in the region who target more price-sensitive travelers flying shorter routes. Air Arabia was founded in 2003 and operates from Sharjah, in an emirate not served by Etihad or Emirates. Profitable since its first year of operation, the airline’s fleet and route network continue to grow. Competing more closely with Dubai-based Emirates, low-cost carrier flyDubai launched in 2009 operating regional routes with coach-configured aircraft (Hofmann, 2009). They also continue to expand their fleet and move closer toward being a full-service carrier with the addition of a Business Class cabin in 2013 (Algethami, 2013). Fierce competition on the part of the ME3 has led to a number of airlines cancelling long-haul routes that are more easily served by the Gulf region’s hubs. As previously mentioned, the end of Qantas’ Kangaroo Route and their opting to partner with Emirates on the route signal that the ME3’s cost and geographic advantages have significantly impacted the operations of other players in the air travel market. British Airways also ended its Australia service and Air New Zealand cut its version of the Kangaroo Route, opting to fly to Europe via the Pacific with a stop in Los Angeles (Schofield, 2012). Numerous routes within the Middle East have also been impacted. Flights to countries such as Iran, Pakistan, and India have also largely been transferred from the local airlines of each nation to the ME3. The rapid growth of the ME3 has also led to some outcry from other airlines regarding possible unfair advantages possessed by the Gulf-based carriers. In the midst of a movement to begin an Open Skies agreement between the United States and United Arab Emirates in which carriers from each nation would have fewer restrictions on the routes and frequencies they operate between the countries, leaders of United, American, and Delta Air Lines recently issued a joint statement to the Department of Transportation in which they accused the ME3 of receiving â€Å"$42.3 billion in â€Å"quantifiable† subsidies since 2004, accompanied by other benefits including breaks on local airport infrastructure and services, exemptions from corporate taxes and advantages from â€Å"opaque† related-party transactions† and that this â€Å"clearly shows there has been subsidization of these carriers,† representing an unfair advantage (Carey, 2015). Conclusions: There are a number of factors that have enabled the Middle East Three to become dominant global air carriers. The near-dissolution of Gulf Air paved the way for three major hubs to form in Doha, Abu Dhabi, and Dubai, each with an independent airline. Increases in the amount of foreign investment and trade in the region have stimulated business traffic and immigration to the Gulf states, leading to greater demand for air travel. Global trends regarding consumer preferences in air travel purchases has helped validate the hub and spoke and high-density coach class configurations used by the ME3. The struggle and failure of other airlines serving destinations also served by the ME3 has allowed these carriers to easily expand into many lucrative markets. The growth of the ME3 has challenged other carriers to remain profitable on several long-haul routes and led to some effectively saying, â€Å"If we can’t beat ‘em, join ‘em,† and forming partnerships with the Gu lf carriers. The ME3 have helped cultivate the air travel market in the Middle East and enable new startup and low-cost carriers to launch. In order to better compete, some airlines, like Turkish, are attempting to emulate the ME3’s East to West hub model. All signs point to the ME3 continuing to expand for the foreseeable future. Each of the airlines has large aircraft orders outstanding and is working on improvements to its hub airport in order to facilitate further growth. The growth of the airline sector has also had a significant impact on the economy of the countries in which the ME3 are based. The Chairman of the Dubai Civil Aviation Authority said that the aviation industry â€Å"will contribute 32 percent to Dubais GDP by 2020† (â€Å"Thriving aviation,† 2014). The Middle East Three have benefitted from very fortunate geographic, demographic, and economic situations in their home region. Good planning and some possible government subsidies have enabled the rapid growth of these companies over the past decade. These carriers have become a force to be reckoned with in the global aviation market.