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Qatar Airways' 2011 outlook dampened by civil unrest

6-May-2011

Months of civil unrest in the Gulf states and North Africa has dampened Qatar Airway’s outlook for 2011, but have not yet put paid to the carrier’s chances of a profitable year.

Qatar Airway’s CEO, Akbar Al Baker, reported earlier this month that the airline’s first quarter 2011 passenger traffic was 3% below targetted volumes, while revenue was 6% behind its goal. The months of unrest - which has spread across Egypt, Bahrain, Libya, Syria, Yemen and Tunisia - have affected traffic to some of the carrier’s most important regional destinations.

Qatar Airways has already suspended all operations to Libya, while its operations to Egypt, Bahrain, Syria, Yemen and Tunisia account for more than 16,000 seats per week, a little over 8.5% of its total weekly capacity by seats offered. Manama is the carrier’s third largest destination by seats per week, after Dubai and London.

Qatar Airways' weekly seats to selected Middle East countries
(Week commencing 01-May-2011)

Profits and IPO still on the cards

Despite the unrest in the latter half of the financial year, Qatar Airways reported a net profit of USD205 million for the 12 months to 31-Mar-2011. Profitability is an important goal for the carrier, which has long maintained that it will conduct an IPO once it has three continuous years of profitability under its belt. Mr Al Baker has hinted that this could mean a 2013 or 2014 timeframe. A dual listing on the Doha and London stock exchanges would be pursued.

Improving March performance and strong indications for outlook

Mar-2011 traffic was notably less affected by the regional situation. While this is an encouraging sign for the carrier’s upcoming financial year, Mr Al Baker has cautioned that "if the conflict continues we will be affected further". Even so, the airline’s net profit for this financial year is expected to be "very healthy" according to the CEO. While the better monthly traffic is encouraging, there are few signs of a return to regional stability in the short term.

Despite the social turmoil, the IMF’s economic forecast for the region is still solid, particularly for oil and natural gas exporting countries. The body’s recent regional economic report forecasts GDP (excluding Libya) will increase 4.9% this year, compared with 3.5% in 2010. Economic growth for the six nation Gulf Cooperation Council – of which Qatar is a member – will average 7.8%, as the energy-rich states expand their production to make up for shortfalls from other producers.

The airline traffic outlook is similarly bright. Feb-2011 inter-Arab world traffic was up 11.3% according to the Arab Air Carriers Organisation, although traffic within North Africa and the Near East, as well as between the two regions, has been severely affected.

Feb-2011 AACO airlines traffic by region

Passenger Traffic within the Arab sub Regions

% change

Between Arabian Peninsula and Near East

8.30%

Within Arabian Peninsula

29.40%

Within Near East

-30.20%

Between Arabian Peninsula and North Africa

9.30%

Within North Africa

-12.60%

Between the Near East and North Africa

-20.50%

Monthly international passengers within the Arab world: Mar-2010 to Feb-2011 (% change)

Some Middle Eastern markets remain relatively unaffected however. Qatar Airways recently confirmed that it plans to increase its frequency of operations into Saudi Arabia by 71% with the introduction of Medina as its fourth destination in the country and additional frequencies on its Jeddah and Riyadh routes.

Expansion concentrated on intercontinental destinations

During Mar-2011, the carrier launched three times weekly service to Stuttgart, becoming the carrier’s fourth German destination and kicking off an capacity increase to Germany. Qatar Airways also added flights to Frankfurt and Munich and maintained its daily Berlin frequency, increasing weekly services to Germany from 24 to 34 flights.

Qatar Airways is also preparing to launch of services to three new destinations during the 2H2011. Daily flights Kolkata are to be added from 27-Jul-2011, taking the carrier's capacity in India to 95 services a week. The airline plans also plans to add two new European destination: a four times weekly service to Sofia from 14-Sep-2011 and a five times weekly service to Oslo form 05-Oct-2011. Bucharest, Budapest and Brussels routes are also due to be added this year.

The carrier has also announced a number of capacity expansions on existing routes. Highlights include three additional weekly frequencies to Kuala Lumpur, increasing the route to double daily. Two additional frequencies will also be added to Dar Es Salaam, bringing the route to twice daily as well. Muscat will see three more frequencies, increasing the route to three times daily. Bangalore will be upgraded from A320 to A330 equipment, marking the first anniversary of the route's launch. The twice daily Paris route will be raised to 16 times weekly, while Geneva capacity will increase to daily with the introduction of two new weekly frequencies.

Uganda, Azerbaijan and Georgia will also join operations from the carrier’s Doha hub in 2011. A new daily service to Entebbe is due to be launched in Nov-2011, marking the carrier’s first new route to the African continent since early 2007. Later in the same month, Qatar Airways will expand into the Central Asian nations of Azerbaijan and Georgia, introducing daily service to Tbilisi via Baku. The carrier also intends it add services to Shiraz, Venice and Montreal in Jun-2011, Kolkata in Jul-2011, Sofia in Sep-2011 and Oslo in Oct-2011.

Defence and attack in Europe

The continued expansion of Qatar Airways and other Middle Eastern carriers into Europe continues to create unease in European rivals. At a Feb-2011 address to the International Aviation Club in Washington DC the Association of European Airlines Secretary General, Ulrich Schulte-Strathaus, voiced his concerns over the new competitive threat from the expansion of Gulf carriers, particularly Emirates, Etihad Airways and Qatar Airways.

Mr Al Baker, among others, has come to the defence of Gulf airlines, and more crucially, national policy in relation to aviation interests. He argues that the expansion of carriers in the region is a natural result of their integration into national interests and their fleet plans are an outgrowth of their high-efficiency, low-cost approach, which has already been pursued successfully by airlines in the Asia Pacific.

Looking at strategic partners and targetted investments

While Qatar Airways has defended itself from European criticism, Mr Al Baker also views European airlines as potential partners for an equity tie-up or strategic partnership. The carrier would be open to selling a minority shareholding to one of the international airline groups when the carrier launches its planned flotation.

The CEO has expressed interest in acquiring a smaller European airline, but also keeping an eye out for potential strategic alliance with a strong European player, such as Lufthansa or British Airways. A partnership with Virgin Atlantic, which is already interested in an equity partner, has been ruled out though. The sale of any strategic stake before the carrier’s IPO has been ruled out – putting a two to three year timeframe on any potential buy-in.

Cargolux acquisition to go ahead

Any airline acquisition – in Europe or elsewhere - would need to be a stand-alone, profitable airline, which would not draw management resources away. These are a difficult - but not impossible - set of requirements and it appears that the carrier has already found a suitable candidate.

Qatar Airways confirmed in early May-2011 that it plans to take a 33% stake in Luxembourg-based all-cargo carrier, Cargolux. Qatar Airways was one of several parties interested in the stake in the airline and a deal is expected to be closed before the end of the month.

Cargolux operates a fleet of 14 B747Fs across a geographically diverse network, covering more than 70 destinations across five continents. It reported a USD59.8 million profit in 2010, rebounding from three straight years of losses, including a steep USD153.3 million loss in 2009. It is scheduled to take delivery of three B747-8Fs in 2H2011, the first of 13 it has on order. The carrier had been looking for a long-term strategic investor, and had been willing to sell up to 49% of its shares.

Cargolux is 52.1% owned by Luxembourg’s Luxair. Four domestic banks hold 39.6%, with the Luxembourg state controlling the remaining 8% directly. It is not clear whose stake(s) Qatar Airways will acquire. SAirlines had a 33.7% stake in the carrier that was sole back to existing shareholders in Dec-2009.

Despite the better financial performance last year, Qatar Airways is not buying into a carrier that is completely trouble free. Cargolux is still embroiled in the ongoing antitrust cases on price fixing. It has reached settlements with Canada, New Zealand and South Korea, but is still involved in an appeal against the EU’s EUR79.9 million penalty.

More B777s and B787 to come, and possibly more A380s

In early Apr-2011, Qatar Airways ordered another five B777s: two B777-300ERs for its passenger operations and three B777Fs for its cargo unit. Boeing had previously listed and accounted for the deals on its orders website, but had not identified the buyer.

Boeing also delivered the carrier’s 25th B777 in the same week. The carrier has another 16 B777s on order: 10 B777-300ERs, four B777Fs and B777-200LRs.

Also in Qatar Airway’s order book are 30 B787s. The carrier confirmed last month that it aims to take delivery of its first two B787s in 1Q2012, potentially as early as Feb-2012. The aircraft will be operated in two-class configuration, although the carrier not yet released full details regarding the seating configuration or other amenities that the aircraft will feature.

Qatar Airways was scheduled to take delivery of its first B787 in mid-2010. Mr Al Baker had been highly critical of Boeing’s handling of the programme, having threatened to cancel the order over the delivery delays.

The carrier has also confirmed it is in discussions with Airbus for more A380s. Qatar Airways have five A380s on order and is looking to increase this number to take advantage of the extra capacity the new Doha International Airport will offer, once it becomes operational in 2012. The airport’s terminals have been designed with consideration for the A380.

Not impressed with the A320neo

While the carrier is looking at plumping its A380 order book, it looks unlikely that it will be a customer for the A320neo. At the end of Mar-2011, the airline’s senior vice-president for the Americas, Dudley Snyder, stated the Bombardier CSeries is "far more appealing" than the alternative A320neo, creating speculation of an imminent announcement for an order of the aircraft type.

Qatar Airways has been looking for a replacement for its fleet of 32 A320-family aircraft used on regional routes. A long-anticipated order for CSeries has not yet materialised, although the progress Pratt & Whitney has made with the PW1000G powerplant has reportedly eased some of the carrier’s concerns. Talks were at a “very advanced” stage in late Mar-2011.

Qatar Airways has expressed its preference for an all-new aircraft, with Mr Al Baker stating that an all-new Boeing narrowbody would also win out over the A320neo. The airline has not completely ruled out the A320neo yet, saying it will wait for definitive performance data before making its final ruling on the aircraft.

A330 freighter conversions

Also announced recently is a plan to convert 15 A330s from passenger to freighter configuration, to expand its cargo unit. The carrier’s A330 fleet is 30-strong and averages between four and seven years old. Additional A330s could be converted if there is sufficient demand.

Qatar Airways’ freighter fleet is limited to three ageing Airbus A300s and two new B777s, with a third on the way. The A330s will be converted by Airbus in Germany by 2016.

The carrier has not made it clear if the conversion plan is directly related to its Cargolux acquisition, but it is a measure of its ambitions that it plans to be a “major player” in the cargo market within four years. Qatar Airways and Cargolux will “complement and supplement” each other according to Mr Al Baker, but it has not been announced how far their cooperation will go.

Expansion: A breathtaking trajectory

With 80 widebodies on order and more orders in the pipeline, a new airport in Doha under construction and now the acquisition of a stake in Cargolux, it's little wonder that Qatar Airways is in an expansive and expansionist mood. Like Emirates and Etihad Airways, the carrier’s breathtaking trajectory is ruffling the feathers of competitors all over the globe.

At a time when Qatar Airways plans to add more than 3500 staff annually over the next three years, adding 50% to its headcount by 2014. By 2013, it plans to serve more than 120 destinations with a fleet of over 120 aircraft.

The acid test will be whether it can maintain its profits in the face of the challenges of regional disruption and high oil prices and then proceed to an IPO. Given the volatility faced by the airline industry, three consecutive years of profitability, even for one of the most aggressive and well placed airlines in the Middle East, may prove a challenge.


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