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When the head of the association of European Airlines gave a speech in January to the International Aviation Club warning them about the rise of Gulf carriers and suggested the competition be addressed by the International Civil Aviation Organisation, he hit a nerve that Qatar Airways CEO, Akbar Al Baker, simply couldn’t ignore.
In an unprecedented move, the boss of Qatar’s national flag carrier published an open letter in which he claimed that Ulrich Schulte-Strathaus’ comments were “factually incorrect and unfounded”.
Although the secretary general of the European body responded with his own letter, Al Baker remains convinced that if anyone needs to look at their business model, it is European not Gulf airlines. “Today Europe stands for open markets, competition, opportunities for businesses and these people are doing exactly the opposite,” he tells Arabian Business.
“They should stand up to the challenge of competition and in my opinion they should realise that the Arab carriers are not going to go away; quite the contrary we are only going to get stronger,” he continues.
“The more criticism they apply to us, the more they will expose themselves to the public opinion that they want to monopolise the travel market to the benefit of themselves, to the detriment of the interests of the traveling passenger.”
Qatar Airways, which is half-owned by the Gulf Arab state’s sovereign wealth fund, Qatar Investment Authority, has made no secret of its ambitious expansion plans. The Doha-based carrier, along with Abu Dhabi’s Etihad Airways and Dubai-based Emirates Airline, is one of the world’s largest airliner customers with orders for 80 Airbus A350s, 60 Boeing 787s and five Airbus SAS A380s. This year alone it will take delivery of ten new aircraft, increasing its fleet size to 110.
The Gulf state, the world’s largest exporter of liquefied natural gas, is also ramping up investment at home in a bid to diversify its economy away from oil. It is currently building a new $11bn airport, which is scheduled for completion in 2012, and which will have the capacity to accommodate 50 million passengers a year.
The huge investments made by Gulf states in their airline industries have, however, been heavily criticised by their European rivals who claim the carriers are effectively being subsidised and benefiting from unfair competition.
But Al Baker is insistent that rather than worry about the competition, these carriers are the ones that need to concentrate on improving their own service. “The main problem is that they are not standing up to the challenge, they are not making themselves efficient and they are not making sure that their product is in line with the demand of the traveling passenger,” he says.
Does he think European carriers are simply scared of the competition? “I think so; they do not want anyone to compete so that they can charge very high fares to their passengers because they are administratively inefficient so their cost base is high, as simple as that.”
One of Schulte-Strathaus’ biggest criticisms is that Gulf carriers are not competing on an even playing field compared to their European rivals but Al Baker is quick to point out that his airline is run in exactly the same way as any other. “I think they are mistaken. There is a level playing field; we operate as a business the same way they operate as a business. They are always crying wolf [and saying] that the Gulf carriers are subsidised by the state.”
He points to the fact that Qatar Airways has confirmed it will dual list its shares on Qatar’s bourse and an international stock exchange, following three consecutive years of making a profit, as proof that they operate the same as any other European carrier.
“They [Gulf airlines] are supported by the state, subsidised no, but supported yes because they are the owners of the companies, the same way I have always said it and I will say it again that Lufthansa, Air France, Iberia and all these airlines…were all government-owned.
“Only in the recent past that they have been privatised, the same way we are also going to privatise. We are going to go for an IPO so what is the problem?”
If the airline’s rapid growth is anything to go by an IPO could come sooner than expected. The carrier has already completed two years of its three-year target. For the financial year ending 2010-2011 it expects to post a net profit of over $250m, up from $205m in the previous year.
“We have already done two years of continuous profit and hopefully we’ll have a third year. So we are hoping for it to happen earlier than I have said. It could be [in 2012],” he says, adding that the second international bourse entry date will not be announced until nearer the time.
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There is thus far little clue as to the actual size of the stake in Qatar Airways that will be listed, but it’s likely that investors — both local and global — will be keenly interested in owning a stake in one of the world’s most successful airlines.
But it’s not just European airlines that have been vocal in their concern over increasing competition. In November, both Etihad Airways and Emirates Airline were denied fresh landing slots in Canada, which sparked a widespread diplomatic row between the two countries.
The UAE responded with the closure of Camp Mirage, a secret military base located outside Dubai and used to supply Canadian troops in Afghanistan, before announcing that Canadian citizens would no longer receive free visas.
Qatar Airways will in June launch its first route to Canada’s second largest city, Montreal. The carrier has rights to fly to four cities with three frequencies a week but is hoping to expand the network to daily flights in spite of the spat between the Canada and the UAE.
“I think [Canada] is currently underserved, a lot of passengers are going through the USA because there are not enough carriers [offering] international services out of Canada unless you want to go by Air Canada,” he says.
Canada’s protectionist attitude towards Gulf carriers is to the detriment of the passengers, he adds. “I think that Emirates’ request for additional rights to Canada is legitimate. Qatar Airways will be asking for additional flights because, quite simply, there is a protectionist tendency towards Air Canada.”
“Like I said about European [carriers], it’s in the interest of the travelling public in Canada to have competition of high quality airlines like us and Emirates.” He adds that only a new government is likely to change the current situation, although how likely that is given that prime minister Stephen Harper’s conservative government was recently assured a position until 2015 is unknown.
In addition to its new Canadian route, the airline is also ramping up its network of routes and last month announced it would increase flights on several existing routes as well as add new ones. At last month’s Arabian Travel Market it launched three new routes to Uganda, Azerbaijan and Georgia, all of which will begin before the end of this year.
It is not just holidaymakers and business travellers that the carrier is eyeing amid its expansion plans. It also has its sights set on increasing its cargo capacity in a bid to become “one of the major players” in cargo by 2015. Last month, the carrier confirmed it will take a 33 percent stake in Europe’s largest all-cargo airline, Cargolux, and will convert fifteen Airbus SAS A330 passenger jets into freighters to expand its cargo unit.
In this, Qatar Airways will be treading in the footsteps of Emirates, whose SkyCargo subsidiary has been an integral part of its recent success. While freight is generally seen as the less glamorous part of the air transport industry, air cargo is vital to the health of the world economy.
And there’s plenty of money to be made from freight as well; SkyCargo makes up roughly 20 percent of Emirates Group revenues — considerably more than any other Gulf airline, and among the highest ratios in the world.
Undeterred by any criticism of its rapid growth Al Baker is also overseeing the expansion of the airline’s corporate jet division, Qatar Executive. The subsidiary was launched in 2009 and already has a fleet of three Bombardier aircraft, which will grow to six by the end of August. However, one area that is still on hold is that of low-cost operations. Although rumours have consistently linked the Qatar flag-carrier with a budget operation, Al Baker has thus far opted not to deploy his considerable resources on putting a low-cost carrier into the air.
In that regard, Qatar differs from the UAE (which has two successful budget carriers), Kuwait, Bahrain and Saudi Arabia — all of whom have run low-cost operations to varying degrees of success. But Al Baker says that Qatar Airways is ready and waiting for the right time to come along. The carrier even has a jet lined up and prepared for when the low-cost maths make sense.
If, for example, the Saudi domestic aviation sector opens up to international carriers, there could well be an opportunity for Qatar Airways and other Gulf carriers there - again, if the routes prove to be financially viable.
Further acquisitions of well-established airlines could also be on the cards, confirms Al Baker, adding that they are not currently in any talks with any carriers. “We will always be looking at acquisitions that will have synergies with Qatar Airways,” he says.
“If there is an opportunity for us whereby a well established, efficient airline wants a strong partner yes then we will look at it but we will not be interested in airlines that are sick or that needs support to stay afloat. We want it to be a business proposition which is a win-win situation for both of us,” he adds.
Yet another massive feather in Qatar’s cap will be the opening of the long-awaited New Doha International Airport, which is scheduled to launch at some point next year. The $11bn facility, built from reclaimed land, comes at exactly the right time for the Gulf state. Not only will it ease the creaking strain on the current Doha International Airport, but it will also have more than enough time to bed in before its biggest test - the FIFA World Cup in 2022.
Qatar Airways’ estimated $250m profit in the last financial year has also come despite the major elephant in the room for the aviation industry during 2011 — the sky-high oil price. And, like other airlines the world over, the carrier has also been affected to a certain extent by the ‘Arab Spring’.
“Everyone has been impacted, not only us, European carriers, Eastern carriers, everyone has been badly impacted by the political upheavals in the Middle East and of course the natural disasters in Japan,” Al Baker points out. “But we are confident that this will be overcome, our industry is very cyclical, it’s always going up and down and I’m sure it will come back up again; we are a very resilient industry.”
Al Baker is certainly not wrong in that regard. Just last week, German carrier Lufthansa said that regional unrest had wiped out an estimated ten percent of projected revenue for the entire year.
“The safest haven in times of turmoil is my country, Qatar — it is the most stable, the most secure country in our entire turbulent region,” the Qatar Airways CEO adds. “Unfortunately the trend is that they put the entire Middle East in one box and we are not, people don’t realise that we are a completely different region within the Middle East.”
Also confirming that Qatar Airways is well on track to achieving its ambitious growth plans is the news that in February next year it will receive the first delivery of the long awaited Dreamliner. Al Baker has been vocal about his disappointment of Boeing’s delays, threatening to pull its order and move the business to its rival Airbus, but says the problem has now been resolved.
“We were very close to cancelling our order two years ago. Since then there has been a change in the Boeing administration to the better. They understand, [and are] more prone to solving the problems of customers than in the past, so we are happy and we will stay with them,” he says.
With deliveries firmly back on track, a possible earlier than planned IPO and an expansion plan to rival most, maybe it’s time European carriers took stock of Al Baker’s advice before it really is too late.
The European view
“The Gulf Big Three argue that they are merely leveraging their geographical position astride the major trade routes, and targeting transfer traffic in the same way that European and South East Asian carriers have traditionally done. To which I answer: yes, fine, so long as the competition is fair, so long as the playing-field is level. The problem is that we do not believe that there is a level playing-field between the European and the Gulf carriers.
How can we believe that, when our competitors are institutionally linked with their governments and regulatory bodies, their airports and service providers?
When there are no meaningful competition rules, no consumer-protection rules, no environmental protection rules as we have in Europe? When we have no choice of ground handler, or catering supplier, where we can only conduct business through an appointed sales agent, where we may not recruit staff from the local airlines?
The order commitments of all three airlines represent a mountain of debt liabilities which, when measured against the companies’ net worth, are incompatible with the rational investor principles which underpin the competition rules that European airlines are expected to observe.”
The Gulf view
“The crux of the matter in what Mr Schulte-Strathaus is saying lies in his remark that “these (Gulf) airlines are efficient, they have extremely low unit cost yet deliver consistently high service quality. They also have the full support of their domestic political institutions.” I couldn’t say that better! Is it a mistake to be efficient and to have a low unit cost?
Is it wrong for governments to be supportive to their national interests?
Is he advocating that airlines which have high unit cost and do not deliver consistently high service quality should be protected from efficient low cost and high service airlines?
Mr Schulte-Strathaus is saying that we are driven by a “policy which is not compatible with that of the US, Europe, Australia, China, Canada, and so on.” I’m really lost here! Most of these governments are signatories of the Agenda for Freedom brokered by IATA, which calls for free market access. In fact, even the director general of IATA, Giovanni Bisignani, recently called upon the Canadian government to respect the liberal market access principle and avoid protectionism. Does Mr Schulte-Strathaus advocate that this policy of liberalisation should only apply when his member airlines are the beneficiaries?”