The vast aircraft orders placed by airlines at this year’s Airshow in Dubai reflects the Gulf region’s rapid growth in the aviation industry. So how can this rapid airline growth be supported?
The global commercial aviation market has been growing at about 5% a year in recent years. Gulf carriers have comfortably outpaced this growth, achieving growth of around 10% annually as the Gulf has grown to become an important hub for long-haul flights. Around 80% of the world’s population live within a 10 hour flight of the Gulf, meaning that by routing through the Middle East, carriers are able to offer a link between the world’s major population centres in the developed and developing economies of the world. Even so, with Emirates alone scheduled to take delivery of more than 2 new widebody aircraft each month for the next 10 years, in order to keep these aircraft full massive network growth will be needed.
Aviation is a highly regulated industry, so it is not just a case of airlines identifying routes which are under-serviced and opening new flight routes. The Chicago Convention on International Civil Aviation of 1944 created a standardised set of civil aviation rights which could be negotiated between sovereign states, allowing (amongst other things) airlines of different nationalities to carry passengers and goods from their home states to other states and between other states. Route networks between countries are themselves controlled mainly by bilateral air transport agreements which exist under the framework created by the Chicago convention and which enable civil air transportation services to exist between signatory states. Therefore, prior to opening a new route, an airline needs either to operate under a bilateral agreement itself, or to partner with another airline which itself has the right to operate a particular route, creating a codeshare arrangement between the two airlines.
The UAE government has consistently supported the aviation industry, implementing an ‘open skies’ policy which allows foreign carriers access to the UAE as a hub, seeking to support its ability to build bilateral agreements with other sovereign nations and enabling reciprocal access to new markets. This government support, coupled with the airlines’ own efforts at building strategic partnerships with other airlines and networks has facilitated the airlines’ rapid growth and had a devastating impact on European competitors for long-haul passenger traffic. Carriers in markets other than Europe (especially the US), have been affected to a lesser extent to date, but it seems likely that future growth will be supported to a significant degree by traffic between the US and the Gulf by linking South Asian population centres and fast-growing African markets with the US.
The recent orders from Emirates, Etihad and Qatar Airways for the Boeing 777x are remarkable in that the three airlines consulted with each other and Boeing during the aircraft design process, able to direct Boeing to include features which will support their future expansion. A notable feature of the 777x is that it will have the range to access the whole of the North American continent, creating a bridge between the Gulf and the US. Although travel from Shanghai to Los Angeles via Dubai tends to be uneconomic, Shanghai to New York via Dubai begins to be competitive and journeys starting in, for example in Ho Chi Minh City to New York via Dubai can challenge any other airline’s product; a flight from Bangkok or Singapore to New York will often be the preferred option, especially once the Gulf airlines’ consistently high quality inflight experience is taken into consideration.
Codeshares and bilateral agreements
Codesharing arrangements are the quickest way in which an airline can grow its network, usually structured to allow an airline to use its aircraft in exercising bilateral rights belonging to an airline domiciled in another country. A spate of recent agreements have been seen between Gulf airlines and other carriers. Historically, Gulf airlines have professed a preference to grow independently of codesharing alliances, believing that the constraints of these partnerships outweighed the potential benefits. However, recent years have seen a change of direction with each of Emirates, Etihad and Qatar Airways embracing the opportunities offered by global partnerships, notwithstanding that each has adopted a different approach in doing so.
Emirates’ joint venture with Qantas has enhanced Dubai’s status as a hub (taking traffic from Singapore). Etihad has a jigsaw of alliances including a partnership with American Airways and a codesharing relationship with Air France-KLM (which could not have been envisaged just a few years ago). Its recently approved purchase of 24% of the Indian carrier, Jet Airways, also ensures Etihad a foothold in the important Indian market (arguably to the cost of Emirates’ own network in India). Another recent investment, in Darwin Airline of Switzerland goes a step beyond a codesharing arrangement, allowing Etihad to offer an Etihad branded service to Darwin Airline’s destinations. Qatar Airways became, at the end of October 2013, a member of the oneworld alliance (which includes American Airlines, British Airways, Japan Airlines, Cathay Pacific and Qantas), significantly broadening its global network and enabling it to set itself a target of opening a new route every month for the next five years.
In addition to the above examples of codesharing arrangements, there is a trend towards liberalisation of the application of air services rights as was recently seen in the approval of an Emirates service between Milan, Italy and JFK, New York. Italy’s civil aviation authority, generally considered to be restrictive in its application of air services rights, authorised the route notwithstanding that the same route is offered by the Italian flag carrier, Alitalia, as well as by Delta, United and American, acknowledging the economic benefits for the Italian economy, exporters, tourism and airports.
Following the opening of the Milan-JFK route US industry groups (the Air Line Pilots Association, Airlines for America and the US airlines themselves) have begun lobbying against the presence of Emirates on the route and it seems likely that challenges to the Gulf carriers’ US expansion plans will become more vocal as their market penetration increases. Therefore, while the Milan - JFK route represents a trend towards the erosion of protectionist barriers which will help to support the growth of the airline networks for the Middle East’s air carriers, there are still significant hurdles in many countries and continued progress in overcoming these barriers will need to be achieved in order to accommodate the continued rapid growth.
Gulf airlines will face considerable challenges in continuing their recent rapid growth, challenges which will need to be overcome in order to accommodate their recent aircraft orders. However, a combination of well-timed strategic codesharing alliances and a trend towards a more liberal approach in relation to bilateral agreements between nations should create opportunities for them to continue to meet their ambitious targets.