|Emirates pitchmen Pele and Cristiano Ronaldo celebrate it buying Alitalia.|
Emirates Airlines, Qatar Airways and Etihad Airways are pulling the global aviation industry's center of gravity toward the Persian Gulf. Sure, their convenient base -- at the crossroads of Asia, Europe and Africa -- has helped a great deal. But so too has their enthusiasm to radically expand their fleets and form strategic alliances with rivals from outside the Middle East.These airlines are also fairly young, and this helps since profitability is increased by running newer, fuel-efficient designs instead of ancient airborne gas-guzzlers:
Two of the Middle East's big airlines are fledglings. Qatar Airways was established in 1994, and Etihad in 2003. These latecomers have made up ground by investing in rivals with well-established routes and customer bases. Not even Emirates, the front-runner among the Gulf carriers, can be called an old duck. Not exactly; it was established in 1985. The Dubai, UAE-based airline has grown by creating new routes on its own.It certainly helps that they have substantial advertising budgets: witness the Pele / Cristiano Ronaldo ad they recently filmed to promote their Airbus A380s. The controversy with these Middle East carriers though is what the role of the state has been in ensuring their success:
Last year, though, it entered into a strategic alliance with Qantas and began code-sharing with the Australian flag carrier. The tie-up has also made it possible for the Gulf carrier to wink and ask Qantas to quit stopping over in Singapore and start using Dubai instead. Thanks to that nudge, Emirates is now getting more code-share passengers. In 2013, it moved into third place in the world in terms of revenue passenger kilometers, a key metric in the airline industry.
Profitability in the airline business is coming down to having fuel-efficient, technologically advanced aircraft. In November, Emirates placed the largest-ever aircraft order in civil aviation history, worth $990 million. It now has $162 billion worth of jetliners on order. Qatar Airways has $50 billion worth of passenger planes on order. All three of the Gulf carriers hope to lure passengers to their long-haul flights with new planes decked out in luxury and amenities like shower rooms, all delivered with top-notch service.
The three Gulf carriers have another advantage over their global peers: swift decision-making when it comes to making large-scale investments. Of course, pulling the trigger is easier when a company has some financial muscle, as all three airlines do. It is also easier when an airline knows it can count on government support for airport improvements or even construction.Therein lies the rub: if dirigisme is so outmoded in this day and age, why is it that the world's fastest-growing national carriers are state-owned Middle Eastern airlines? As I said, it may not be dirigisme the idea that is itself faulty but the execution. Sure their governments have lavished petrodollars on them, but they have been relatively well-spent petrodollars. Witness Emirates now buying 49% of Alitalia. In a tersely worded statement:
That support can also look like subsidization. Not only are all three airlines 100% state-owned, their governments are cash-rich. Qatar and Abu Dhabi have rivers of revenue flowing from oil and natural gas exports. An Australian newspaper in May reported that Etihad had access to an interest-free $3 billion loan from Abu Dhabi's government.
Alitalia and Etihad Airways today confirmed that they have agreed the principal terms and conditions of a proposed transaction whereby Etihad Airways will acquire a 49 per cent equity stake in Alitalia. The airlines will now move to finalise the transactional documents, that will include the agreed upon conditions, as soon as possible. The conclusion of the investment is subject to final regulatory approvals.Details of the conditions are to follow, but I am fairly certain that they will entail Etihad limiting the amount of "legacy" costs--debt and pensions--they are willing to take. I am sure the Italian government is nevertheless delighted to unload a large part of this money loser. Perhaps dirigisme works better when the government in question is authoritarian and not democratic? It's certainly well worth studying and may hold the key to understanding not only the future of European big business but also the commercial prospects of Middle Eastern economies as their energy reserves dwindle further.