Updated: Oct 8, 2020
(Editorial published in Aviation Business ME Magazine - Issue October 2014) www.aviationbusinessme.com
The Middle East Big Three have all adopted different strategies to grow: which one works best, which one to survive the Squeeze?
These are tough times for the airline industry. Buffeted by fluctuating fuel prices, overcapacity, and low-cost competitors, airlines are struggling to stay airborne and financially vulnerable. In Asia, low-cost carriers (LCCs) have seen passenger volume explode, causing the growth and profits of legacy endpoint and the non-Chinese Asian hub carriers to suffer. Already among the top performers in terms of growth and profitability and on track to be soon at least twice the size of any other long-haul carrier in the world, the Middle East Big Three (MEB3) carriers are squeezing the business of traditional global carriers with very different strategy and products.
Since its establishment in 1985, Emirates strategy has shied away from traditional airlines alliances One World, Star Alliance and Sky Team, saying it prefers to go it alone by buying planes and investing in products instead of buying shares. The much younger neighbor ‘down the road’ Etihad (2003) is building scale by acquiring network through organic growth, code share partnerships, minority investments in other airlines, and Abu Dhabi as hub to take also advantage of the Middle East strategic location on the world map with 60 percent of the world’s population within six hours. Last but not least, Qatar Airways (1994) is pursuing a third strategy model by joining the airline alliance One World. The long-term success of such strategic move is not just on gaining network benefits but also on integrating the back end of operations to gain cost and scale advantages with on top of that a very high end offering to passengers and the youngest fleet within the industry. To get a broader picture, Saudia strategy is also to be considered as a fourth model, focused on building from the indigenous catchment area with a population over 30 million – soon to be seen as one of the ‘MEB4’.
To survive and prosper in the face of these changing dynamics and ongoing margin pressures, virtually every participant in the industry must rethink its strategy, business model, and tactics to strengthen their competitive positions. De facto, the MEB3 as long-haul hub carriers and the low-cost carriers are better equipped to ride the storm and especially in Europe hurting very hardly the legacy carriers. The performance gap between these leaders and the traditional legacy airline or even weaker carriers is likely to increase, and this is definitely not unique to the airline industry, for two reasons. First Middle Eastern carriers are starting to grow stronger in terms of the attractiveness and effectiveness of their hubs by increasing the number of connecting flights from the expanded network of destinations and the overall capacity. They are doing this through better scheduling, routing, network coverage and massive investment on new aircraft and airport infrastructure. The second reason is that demand is evolving in these carriers’ favor. Because of geographic advantages, they are well positioned to participate in about 60 percent of global interregional flows (both point-to-point and connecting), including the Middle East to North America and Europe, India to North America, Europe to Africa, northeast Asia to the Middle East and Europe and from Australia and New Zealand to Europe.
The rapid expansion of Gulf carriers has obviously posed a particular problem for European legacy airlines. Did they underestimate the power of those highlighted strategies with strong vision and commitment to deliver? Aside from British Airways with a revenue-sharing agreement with Emirates for 17 years until 2012, the two other main European industry leaders Lufthansa and Air France are both planning to expand their low-cost units to respond to competition from Gulf airlines and budget rivals. This kind of thinking is not necessarily the best path to take, even under shareholders pressure and frequent flyers shifting to rivals with better overall customer experience. Using the power of air traffic agreement to limit airports access in particular country or beginning to calibrate its strategy to do something against particular competitor is definitely not the appropriate answer and the danger to fail is high. There are definitely a number of ways that industry participants can respond and prosper. Forward-looking companies will rethink their strategies and find ways to capitalize on the opportunities presented by the growth of travel and tourism worldwide.
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