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Middle East airlines will expand into the US in 2013, further shaking up alliance structures

23rd November, 2012

Gulf airlines will follow up their aggressive 2012 expansion into the US with a number of major new routes in 2013. Qatar Airways and Etihad Airways have both confirmed that they plan to add new US destinations in 2013 and Emirates will most probably join them, as it continues to fill out an already substantial US route network.

In a fast changing alliance scene, partnerships will be a focal point, as Emirates courts American Airlines, which currently partners with Etihad, but whose oneworld alliance is welcoming Qatar Airways. Etihad has a sizeable presence on American's network, but American has few codes on Etihad, making the relationship more one-sided than the two-way Etihad prefers. With Etihad looking for a larger strategic footprint, it may be looking for a new US partner if American cannot deliver.

According to Arab Air Carriers Organisation (AACO) data, just 2.4% of the organisation's airlines' available seats are operated to/from the Americas. That compares with 31.3% of seats into Europe, 18% into Asia and 8.8% into Australasia. However, for the 'Big Three' of Gulf aviation, the lucrative markets in the Americas are taking on increasing importance.

And one thing is certain. The momentum of the Gulf airlines is sufficient now that this US invasion will further shift the global alliance balance.

Emirates' fastest growing region is the Americas

Emirates has the most extensive US connections of the three major long-haul Gulf carriers. It operates to Dallas, Houston, Los Angeles, New York, Seattle, San Francisco and Washington DC. In addition to this, the carrier has a Toronto service in the severely constrained Canadian market and also operates to Sao Paulo, Rio de Janeiro and Buenos Aires.

Emirates routes to the Americas: Nov-2012

Destination

Weekly frequency

Aircraft

Seats per week

North America

     

Dallas/Fort Worth

7

777-200LR

1974

Houston

7

777-300ER

2604

Los Angeles

7

777-200LR

1974

New York

14

777-300ER/A380

6962

Seattle

7

777-200LR

1974

San Francisco

7

777-300ER

2604

Washington DC

7

777-200LR

1974

Toronto

3

A380

1476

South America

     

Sao Paulo

7

777-300ER

2604

Rio de Janeiro

7

777-300ER

2604

Buenos Aires (via Rio de Janeiro)

7

777-300ER

2604

Until 2011, the Americas was Emirates’ smallest geographic market in terms of revenue. Over the 2011/2012 financial year, revenue on routes into the Americas increased 21.3% year-on-year, putting the region ahead of the Middle East and Africa in terms of revenue earned. This is the second year that the Americas has led revenue growth at the carrier, after expanding 37% in FY2010/2011.

Emirates revenue break-down by region

In addition to Dallas/Fort Worth and Seattle services launched earlier in the year, the carrier added its Washington DC service in Sep-2012. Emirates is alone of the three Gulf superconnector airlines in not having any new US routes announced for 2013, although the carrier is still open to adding more destinations in the US.

In late 2011, Emirates revealed that it planned to expand its US network to at least 10 destinations. Despite the almost unprecedented rate of expansion at the carrier, it has really only been a lack of aircraft that has slowed the airline’s expansion into the US, although the financial crisis has also played a part in Emirates’ considerations. The carrier has juggled its A380 routes around the Americas, deploying the aircraft into New York and Toronto as the market demanded.

In the case of the Canadian route, the use of A380s has been to circumvent as much as possible the present restrictive bilateral air services agreement. Load factors into Toronto are consistently above 90% according to the carrier and have even touched 99%, even with a 492-seat A380. A political spat over the bilateral erupted in 2010 and so far there has been no move to revise the agreement, although the heat of the near-diplomatic incident has since dissipated.

Qatar Airways will add three more US routes

Qatar Airways has significant expansion plans for its US operations. In North America, it operates to Houston, New York, Washington DC and Montreal. In addition to this, the carrier flies to Sao Paulo and Buenos Aires.

Qatar Airways routes to the Americas: Nov-2012

Destination

Weekly frequency

Aircraft

Seats per week

North America

     

Houston

7

777-200LR

1813

New York

7

777-300ER

2345

Washington DC

7

777-300ER

2345

Montreal

3

777-300ER

1005

South America

     

Sao Paulo

7

777-200LR

1813

Buenos Aires (via Sao Paulo)

7

777-200LR

1813

The airline has already announced it plans to start flights to Chicago from 13-Apr-2013, and it wants to add Boston and Detroit within the next year, doubling its US network. The carrier has also dedicated Atlanta and Houston cargo services, as well as a Toronto cargo service, all operated with a Boeing 777F. An Atlanta passenger service is also on the way.

While launch dates for Atlanta, Boston and Detroit have not been announced, they are likely to come sooner rather than later. Qatar Airways’ global expansion plan calls for it to roll out around 15 new destinations per year and the US is one of its prime expansion targets.

The airline had hoped to open up more destinations in the US earlier than this, but a lack of aircraft has hampered its plans. The carrier’s aggressive expansion strategy is matched by its fleet strategy. Qatar Airways has more than 120 widebody aircraft on order, including 28 787s, 60 A350 and 10 A380s as well as long-range 777s. 

According to CEO Akbar Al Baker, the late delivery 787 was the “only thing” that delayed its US expansion plans. The airline received its first two 787s in Nov-2012, around three years later than it had originally planned. It is due to take delivery of three more before the end of the year.

However, the carrier has not earmarked any of its early 787s for deployment on US routes. Qatar's 787s are “all committed to European and Far-Eastern routes”, with London Heathrow as the first destination. The 787s could be deployed to certain east coast routes “in a couple of years' time” according to Mr Al Baker.

Etihad Airways sees the US as a key market, with strong premium travel flows

Etihad Airways CEO James Hogan announced recently that routes into the US are among the best earners for the carrier globally, with an average load factor of 81% on its routes to Chicago and New York and strong premium traffic on US routes to/from Abu Dhabi.

The carrier's codeshare tie-up with American Airlines provides it with behind gate access in the US to nearly 100 destinations in the US and Canada. During 1H2012, codeshares and strategic partnerships contributed USD281 million to Etihad’s revenue, or nearly a quarter of its revenue in the period.

Etihad Airways routes to the Americas: Nov-2012

Destination

Weekly frequency

Aircraft

Seats per week

North America

     

Chicago

7

777-300ER

2660

New York

7

A340-500/600

2300

Etihad plans to add a third route to the US in 2013, with a new service to Washington DC due to be launched in Mar-2013. The carrier says it sees a demand for premium services between the political capitals of the US and the UAE.

The carrier’s ambitions are not limited to just three US destinations. The airline is examining a number of other points in the US, particularly on the west coast. Mr Hogan believes that the UAE-US point-to-point market “will be supplemented by strong traffic flows over Abu Dhabi onwards to destinations across Asia, particularly the Indian Subcontinent”.

Unlike Emirates and Qatar Airways, Etihad does not have any routes to South America.

However, it will join its Gulf rivals in the South American market next year. The airline will launch its first route in South America in Jun-2013, with a daily service to Sao Paulo. Mr Hogan announced in Sep-2012 that Etihad is keen to expand its footprint in South America and is in discussion with South American-based carriers about potential commercial partnerships.

Partnerships will take centre stage; Etihad may be looking for a new partner – does Delta work?

Partnerships and alliances formed with Middle East network carriers have been the key theme for aviation over the last year, but these have mainly touched carriers in Europe and the Far East. Now it is America's turn for the jockeying – and with the attention will undoubtedly be some anti-competitive protectionist cries, echoing those of Air Canada and Lufthansa, who now begin to look rather isolated as the world moves on.

Emirates is eager to partner with American Airlines.

Emirates is partnering with another of American's close partners, Qantas, and while there are no immediate planned overlaps between the three, there could be interesting synergies in the future if Emirates-American comes to fruition. For example, Qantas and Emirates touch base in Dallas-Fort Worth with daily service and Emirates is keen to extend its reach across the Pacific from Australia.

Meanwhile Qatar Airways has been accepted into oneworld, whose sole US member is – none other than American Airlines.

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Much seems to be revolving around American as it currently partners with the last, but not least, of the Gulf triumvirate: Etihad.

Etihad has extensive codes on American's network, but American has few codes on Etihad's network; they are limited to Etihad's direct flights between America and Abu Dhabi as well as to Abu Dhabi from common European cities the two serve. American has no beyond codes from Abu Dhabi, a core element of Etihad's partnerships.

The arrangement resembles the earlier limited relationship between Etihad and Qantas in which Etihad gained access to Qantas' domestic network but Qantas coded only to Abu Dhabi and a few regional Middle East destination. That relationship of course was broken off as Etihad pursued a far wider alliance with Virgin Australia. Etihad may very well do the same in America, perhaps breaking off with American (although pressure from Emirates and Qatar on American may make the decision quite mutual).

Mr Hogan's partner choices in a now-consolidated US market are limited. Mergers have whittled major carriers effectively down to three: American, Delta and United (with US Airways keen to fold in with American). United had a relationship with Qatar Airways, but that ended in 2012; merger partner Continental was with Emirates, but that too ended.

Star Alliance, of which United is a member, has tended to be fiercely anti-Gulf, at least at the European end. Discussions between fellow Star carriers Lufthansa and Turkish Airlines could see Turkish (which is a network carrier that rivals the three in the Gulf) become part of Star's trans-Atlantic anti-trust immunity alliance, further limiting the opportunities for a Gulf partnership.

That would leave Delta as the last carrier standing. Etihad already has major (and growing) partnerships with the other lead partner in Delta's SkyTeam, Air France-KLM; and the alliance-agnostic Virgin Australia is also a partner with Delta, making for a nice fit which would also offset any potential Emirates pretensions for an extended geographic relationship with Qantas, at the same time reducing cross-alliance overlap concerns.

A Nov-2012 speech by Mr Hogan to the US-UAE business council could be seen in this context as Etihad seeking to stem fears that an insular US might propagate about an airline from the "Arab world", as well as Etihad laying the groundwork for wider reception in the US, organically and with partners. Indeed, Mr Hogan's speech was entitled “A new way of doing things: Together”.

One aspect of reaction to the Gulf airlines' expansion into the US has been an undercurrent of "concern" about the welfare of Jewish or Israeli travellers as they move through the Gulf – a feature which undoubtedly has more to do with subtle protectionism than any real travel risk. The US is hardly the only country which is home to Jews or Israeli nationals.

Gulf airlines are just starting to scratch the surface in the US and Americas. Partnership developments will become increasingly important, locally and for the global system

The existing UAE-US bilateral air services agreement allows near-unlimited upside for expansion, permitting carriers on either side to operate to any point in either country, with multiple airline designation and free determination of capacity. The US-Qatar open skies agreement equally has no restrictions on routes, frequency or capacity. Each has quite liberal associated codeshare and beyond provisions.

The UAE and Qatar continue to pursue new air services agreements aggressively, to open up as many possible markets for their home carriers. In late Oct-2012, the UAE and El Salvador signed a bilateral air services agreement, while Qatar signed an open skies agreement with Costa Rica in early Nov-2012. These may not be immediate targets for direct service, but they open up the capability to offer connecting services through US airline partners.

Between Mar-2012 and Mar-2013, Emirates will have added 22 new routes. Qatar Airways has already added 11 new routes this year with more to come. Etihad Airways has increased its network to 88 destinations, having started the year with 81.

Once the dust has settled from the latest round of US route launches, the Gulf carriers will still have plenty of room to continue their expansion into the Americas. Much of this will be organic, but of greater interest from a big picture perspective will be the rearrangement of partnership relationships.

Over the past few months, the Gulf airlines have demonstrated beyond any doubt their capability to rock the foundations of the global airline system.No longer are they the outsiders challenging the establishment. They have already irreversibly changed the face of European airline partnerships – in startlingly quick time. There is little reason to expect that, between them, Etihad, Emirates and Qatar Airways will be unable to force a readjustment of the balance in North America too.

Who knows, Air Canada may even become a convert? Expect the unexpected. After all, until a mere few weeks ago there were few more vociferous opponents of the Gulf airlines than Air France, now firmly embedded with Etihad.

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