Qatar Airways: Banking on steady expansion Jan/Feb 2014

With plans for an IPO now on hold, Qatar Airways is concentrating on organic growth via more aircraft orders, developing a new hub airport at Doha and joining oneworld. What are the prospects for the second-largest of the Gulf’s “Big Three” airlines?

Qatar Airways was founded in 1994, although it was effectively relaunched in 1997 under new chief executive Akbar Al Baker, who has developed the airline into the Gulf mega-carrier that it is today. The flag carrier of Qatar now operates to 134 destinations, comprising 45 in the Middle East and Africa, 43 in the Asia/Pacific region, 30 in Europe and seven in the Americas (with the rest being specialist cargo destinations).

Qatar Airways is part of the Qatar Airways Group, which employs more than 30,000 worldwide (with the airline accounting for more than 17,000 of these), in everything from ground handling, catering and tour operating to Doha International Airport (which it owns 100%). 50% of the group is held by the Qatar state (via the Qatar Investment Authority, which is the country’s sovereign wealth fund) and the other 50% is owned by private Qatari investors, but a planned IPO via a dual listing in Doha and London was postponed in early 2012 given the poor global economic environment.

Al Baker says that the IPO will now not happen until 2017 at the earliest, so in the meantime it’s back to Plan `B’ for the airline (though executives argue this has always been its strategy) — steady but significant organic growth.

Fleet Growth

The driver for that strategy is fleet growth. As can be seen in the chart below, Qatar’s fleet has been growing steadily over the past 20 years and today stands at 129 aircraft (with an average age of less than five years), comprising 82 Airbus models — 32 A320s, 16 A330-200s, 13 A330-300s, 12 A321s, four A340s, three A330 freighters and two A319LRs — and 47 Boeing aircraft: 24 777-300ERs, nine 777-200LRs, nine 787s and five 777Fs. Qatar Airways also has a corporate jet subsidiary, which operates seven Bombardier aircraft — three Global 5000s, three Challenger 605s and one Global Express XRS.

However, the airline has significantly increased its orders over the last two years, with the outstanding firm order book growing from 136 aircraft as of 2011 to 172 today. They comprise 36 A320s, 14 A321s, five A330-200Fs, 43 A350-900s, 37 A350-1000s, 10 A380s, 21 787s, three 777-300ERs and three 777Fs.

At the Dubai air show in November Qatar announced a letter of intent to for 50 777-9x aircraft, worth $19bn at list prices, and to be delivered over a six year period starting in 2020. As of January 2014 that has not yet been turned into a firm order, though it is expected to be converted sometime this year.

Qatar negotiated jointly with Emirates for the 777 order (Emirates also bought 50 of the type at the Dubai air show) in order to get better terms and performance specifications, and the two airlines stood side-by-side at the show to announce their orders together. Further co-operation on jointly-beneficial issues is likely, with Al Baker saying that “we are close to Emirates vis-à-vis relationships, both at the management and at the top level”. Intriguingly Al Baker also hints at the possibility of a long-term merger between the airlines, although Tim Clark, Emirates president, has stated that this was unlikely as it would have “seismic repercussions { extellipsis} you would face the most formidable international airline group that has ever been formed. That’s why it will never happen.”

In terms of other widebodies, the first A350 should arrive in the second half of 2014 while the first A380 will arrive in April — though Al Baker says the airline won’t buy any more A380s to add to existing order of 10 aircraft.

At the Dubai air show Qatar also ordered five A330-200 freighters, with options for eight more, which Al Baker said would be converted into firm orders pretty soon. The first two aircraft arrive in 2014 and will be used alongside three existing aircraft of the same model on the airline’s network of 40 cargo routes. The A330-200F offers up to 70 tonnes of payload, which is less than some of the larger freighter alternatives but gives Qatar Airways more flexibility in the destinations it serves — particularly medium-sized cities that are underserved by cargo competitors.

With three 777Fs also on order, Akbar says that Qatar Airways aims to become one of the top five global cargo carriers over the next four years. Cargo (including dedicated freighters and belly-hold capacity in passenger aircraft) accounts for almost 30% of Qatar Airways’ total revenue, which is much higher than average for large carriers. Incidentally, Qatar’s busiest cargo route is between Doha and Hong Kong.

By 2015 Qatar’s fleet will increase to more than 170 aircraft, operating to 170 destinations, and with new aircraft arriving at the rate of two per month Qatar Airways will grow by 20% each year for the next five years.

Route network

The airline believes there are more than enough routes and destinations that can accommodate the new arrivals. Last year 12 new destinations were added — including Chicago, Clark International (Philippines), Addis Ababa and Chengdu — while in the first half of 2014 seven destinations will be launched, comprising Sharjah, Dubai World Central, Larnaca, Istanbul (Sabiha Gokc{c}en airport), Edinburgh, Philadelphia and Miami.

Further destinations will be added in the second half of the year, the first of which to be confirmed is Dallas/Fort Worth. That will be Qatar’s seventh US destination and the country is a major target for expansion, with destinations served almost doubling in 2014. That expansion accompanies a codeshare alliance with US Airways first signed in 2009 that was upgraded in December 2012, closely followed by a codeshare with American Airlines in 2013, as well a codeshare with JetBlue agreed in 2012.

China is another priority for Qatar Airways — a route from Doha to Hangzhou was launched in December that brings total mainland China destinations to seven, served by 45 non-stop flights a week, and further expansion into China is certain.

India is also of interest, but after the Indian government allowed foreign airlines to own up to 49% of local carriers from September 2012 Etihad’s purchase of a stake in Jet Airways led to persistent rumours of a potential acquisition by Qatar of a stake in an Indian airline (with SpiceJet regularly mentioned) — but these are nothing more than rumours according to airline sources. For the moment Qatar Airways is only interested in codeshares, with LCC IndiGo top of its wish list — although it is also talking with Go Air, Indigo, SpiceJet and even Air India. A major Indian codeshare deal may be announced this year, it is believed.

In Europe, central and eastern destinations are the priority, although Qatar Airways is reportedly close to agreeing the $20m purchase of an additional landing slot at London Heathrow Airport from Cyprus Airways — although the Cypriot airline’s pilots’ union is opposing the sale, saying that airline should find other methods to shore up its struggling balance sheet. Last year Qatar also opened a centralised customer contact centre covering the whole of Europe in Wroclaw, Poland

Closer to home, following the opening up of the aviation market there Qatar is launching a domestic airline in Saudi Arabia in the first half of this year, to be called Al Maha Airways. The carrier will initially operate between Riyadh, Jeddah and other major cities before expanding into secondary destinations. Saudi Arabia has a population of 27m, but is currently only served by flag carrier Saudi Arabian Airlines and National Air Services. However, Al Maha will have to overcome significant burdens, most particularly a price cap on domestic routes and the discounted fuel subsidies enjoyed by the flag carrier — although the Saudi government has apparently promised to resolve these issues. The long-term plan is for Al Maha to add international routes once a domestic operation is established.

New airport

As with the other Big Three carriers, Qatar Airways’ strategy is to connect destinations in the east, west and south with multiple frequencies to a core hub airport, which for Qatar is Doha — approximately 80% of Qatar Airways’ passengers transit through Doha.

However, the current Doha International airport is close to full capacity and so Qatar Airways will move its hub operation after it closes and is replaced to the new Hamad International airport in Doha (previously known as New Doha International Airport), which partially opened in December 2013 on land reclaimed from the Arabian Gulf at a cost of $14.5bn.

The airport is being managed by the Qatar Airways group and is just four kilometres from the existing Doha International airport. It is opening in phases, with an initial capacity of 24m passengers a year growing to 50m passengers a year by 2015. The airport was originally scheduled to open back in 2010 but faced a series of problems and delays, which Al Baker partly blamed on contractors. Hamad International will formally open in April 2014, at which date Qatar Airways will move its entire hub operation from the old airport in a huge logistical exercise for which the airline has been preparing for many years.

Additionally a 77,000m² new cargo terminal at Hamad International that opened in December 2013 will become one of the largest freight facilities in the world, handling around 1.4 million tonnes of cargo per annum once it is completed by 2015.

Alliances

Qatar Airways currently codeshares with 13 carriers, but crucially joined oneworld in October 2013, becoming the first of the Big Three Gulf airlines to join a global alliance. Initially there were some teething problems — the airline received adverse press coverage when it allegedly denied access to top-tier frequent travellers from oneworld partners into Qatar’s lounges at Doha and London. This may be a consequence of the brief one year period between Qatar being invited to join the alliance and actually joining — the usual preparation period is between 18 and 24 months. Unlike the views of Emirates and Etihad, joining an alliance is seen by Qatar Airways as being vital to its future since it secures access to a global network that even a giant Gulf carrier can’t develop on its own.

With significant organic growth the emphasis for Qatar Airways for at least the medium-term, Qatar may not be the most attention-grabbing carrier of the Big Three, and that profile isn’t helped by the fact that Qatar is traditionally reluctant to release any details about its financial results — though it says it has been profitable for the last few years. All we know about the 2012/13 financial year (ending March 31st), is that Qatar carried more than 18m passengers — some 1m more than in the previous 12 month period. This would indicate a revenue total of around US$9bn.

Qatar Airways will inevitably gain exposure given that Qatar has won the rights to host the 2022 FIFA World Cup (which were awarded to Qatar in December 2010) — even despite the growing concern over whether the event may have to be switch from the boiling Gulf summer to the cooler winter months. Building on that, last year Qatar Airways made a significant marketing move by signing a three year sponsorship deal with Barcelona FC (costing some £30m a year), and that has apparently boosted the airline’s profile not only in Europe, but in Asia and Africa as well.

The IPO postponement has also derailed any plans Qatar may have had for a major acquisition of a European carrier (see Aviation Strategy, December 2011), although there is talk that an investment into IAG might make sense for Qatar in the future. Unconfirmed reports suggest that early last year Qatar Airways offered to purchase the 12.1% held in IAG by Spain’s nationalised bank conglomerate Bankia, which was looking to offload its equity positions in several companies in order to raise capital after its near financial collapse. Bankia eventually exited its stake in June 2013 via a placement, and so for the moment organic growth is the focus for Qatar Airways.