Two trends in the Middle East airline industry have dominated headlines in the last decade. The first is the launch of premium carriers — such as Emirates Airlines, Qatar Airways, and Etihad Airways — which have taken luxury to new levels to appeal to an international jet set. The second is the rise of low-cost carriers (LCCs) — such as Fly Dubai, NAS, SAMA, Air Arabia, Bahrain Air and Al Jazeera — which have used a no-frills approach to make flying affordable to a larger group of people.
As carriers at each end of the spectrum gain more and more market share, they are putting pressure on the players left in the middle: traditional, full-service airlines that are caught up in the impossible task of trying to be all things to all people. They rely on a single product to serve both premium business passengers and budget travelers: The same seats, meals, flight attendants, reservations staff, check-in processes, and loyalty programs are expected to do double duty for those seeking a top-level experience as well as those on a $10-a-day vacation.
In the Middle East, the traditional airlines at risk are often national flag carriers. For instance, Wataniya and Al Jazeera are fighting to capture share from Kuwait Air; NAS and SAMA have begun competing with Saudia; and Egypt Air will come under pressure this year as Air Arabia Egypt launches its operations.
The weakening and even failure of a national airline has an impact far beyond its own operations. The citizens of a country that loses its national airline often lose many of their options for air travel, unless other carriers can profitably provide connectivity. National airlines act as global ambassadors to the customers they carry and a struggling national carrier can damage a nation’s reputation.
If traditional carriers are to succeed in the future, they will need to understand how to compete in an evolving industry.
Sizing up the competition
Premium carriers are the first threat to traditional carriers: In an effort to become global players, government-backed Gulf Cooperation Council luxury carriers are investing in new planes, expanding their networks, and intensifying their operations at a dizzying rate.
Gulf carriers Emirates Airlines, Qatar Airways and Etihad Airways are ranked among global leaders for high quality of service and expansive global networks: Qatar Airways is one of six airlines in the world with a five-star Skytrax rating; Emirates was nominated “Airline of the Year” twice; and Etihad has consistently ranked at par with Emirates and is considered a leading premier airline.
These three carriers have penetrated every major market in the world and grabbed market share from incumbents.
Government support has allowed these airlines to rapidly expand their fleets, forecasting their anticipated growth: The three combined have about 535 planned aircraft deliveries by 2015, and Dubai’s ruler Sheikh Mohammed bin Rashid Al Maktoum said in a recent interview with CNN that Emirates would order further aircraft at Britain’s Farnborough Airshow later this month.
Filling these planes will require Gulf carriers to gain market share from competitors. In the short term, they will primarily target Europe-to-Asia routes, which will set the stage for fierce global competition. Airlines that can offer outstanding service, efficient operations, and superb reliability — rather than sheer market presence — will enjoy the upper hand.
At the other end of the market, LCCs are making inroads with low prices and high efficiency. Nine LCCs launched in the Middle East between 2003 and 2010, with their market share increasing rapidly from 1.6 percent in 2005 to 7.1 percent in 2009. These airlines generally offer short flights, averaging 1,100 kilometers and 1.5 hours, with a turnaround time of about 25 minutes. LCCs’ low prices have led to increases in demand, but have also eroded airlines’ yields.
Not everyone wants to travel on a no-frills low-cost carrier, and so it is doubtful that they could survive simply by providing a cheap alternative for existing passengers. The beauty of the low-cost carrier model is that it has attracted new passengers, creating its own market.
Meanwhile, traditional carriers cannot make up the loss of passengers to low-cost carriers by creating new markets for travel. Rather, they rely on filling their aircraft with more connecting passengers, who are less profitable and ensure traditional carriers remain shackled to their costly connecting hubs and all the associated costs, such as baggage sorting and transfer lounges.
Getting out of no man’s land
The expense of maintaining the illusion of limitless service for full-price ticket holders makes it nearly impossible for traditional carriers to compete with LCCs’ low costs. And because there is a real limit to the service they can afford to offer, they also can’t extract the same price premium that high-end carriers enjoy.
Worse still, as traditional carriers’ profits evaporate, so does their ability to invest in the next generation of aircraft and systems, which might go some way to helping them out of their misery by providing lower running costs as well as a better experience for passengers.
Operating profit margins of network carriers have plummeted. Most large Middle Eastern airlines are simply not in a position to transform themselves into low-cost carriers or premium hub carriers.
National flag carriers, in particular, have a responsibility to act in the best interests of their countries, rather than merely considering what is best for their balance sheets.
But there are five steps that can help flag carriers to develop a new operating model that integrates some of the best elements of premium airlines, low-cost carriers, multiple-brand airlines, and multiple hub airlines.
1. Unmask the real network: point-to-point flying. Traditional carriers typically carry both connecting and point-to-point traffic. Although point-to-point traffic generally has better yields, traditional carriers configure their business for connecting passengers — for example, by building their schedule around their connections. More emphasis on larger point-to-point routes — such as intercity trunk routes, holiday destinations, and small regional services — would improve their competitive positioning.
2. Take pressure off the hub. A traditional hub-and-spoke network allows an airline to connect the largest number of cities with fewest flights, but suffers from two limitations: People generally end up going out of their way to travel via the hub, and arrivals and departures at the hub are arranged to maximize the number of connections, which leads to costly peaks in demand for ground services and severe congestion.
The solution is to use multiple hubs, which often reduces both problems by putting connections through the most convenient hub and reducing the distance of journeys. Also, by better allocating the main connections between two hubs, peaks at each can be reduced, easing pressure on both of them.
3. Give customers only what they want. Premium airlines are masters at understanding what services their customers are willing to pay more for. Often national carriers can tailor their services to exploit cultural or behavioral idiosyncrasies in their passenger base that will increase loyalty.
4. Remember that less is more. LCCs’ ruthless cost-cutting highlights just how much excess costs most airlines carry.
Traditional airlines can mimic LCCs’ use of as few aircraft types as possible, reduced turnaround times and higher utilization, their simplified and automated ground services and their flexible labor arrangements.
5. Share the pain. Many small or mid-sized airlines cannot generate the scale or cost benefits of large airlines; such carriers can save as much as 5 to 10 percent of their total costs by merging with a similar-sized airline.
There is no question that traditional carriers are squeezed by new competitive circumstances, as well as industry changes that have been difficult for everyone. But with the right strategy, they can find their way out of no man’s land.