06-Oct-2014 2:37 PM

Emirates Airline makes rare partnership move with TAAG in Angola's small but lucrative market

Analysis

Emirates Airline is the world's largest international carrier based on ASKs. That formidable size - over 50% that of second-largest Lufthansa - means Emirates can be relatively independent but also perhaps needs to limit forays in the partnership arena in order to remain focused on its core and growing business. Conversely, its size can put off potential suitors. A strategic Emirates partnership move is a rare occurrence, and its latest comes just 18 months after beginning its landmark partnership with Qantas in Australia, a significant market where Emirates at the time had 84 weekly flights. In contrast, the latest partnership is with TAAG in Angola, where Emirates has a mere seven weekly flights.

The TAAG-Emirates scale may be smaller than Emirates-Qantas, but it will be far deeper. Emirates will manage the airline, including naming a new CEO, reviewing the airline from operations to livery and appoint four Emirates managers to the airline.

Emirates will not take an equity stake in TAAG, but otherwise the deal has the hallmarks of Emirates' longtime partnership with SriLankan, which eventually dampened Emirates appetite for getting too involved in other airlines. There could undoubtedly be benefit to Emirates: Angola is a restricted but high-yielding market. Yet TAAG, in need of restructuring, has been unable to capitalise on its home market. But there also appear to be political undertones to the deal, with the UAE focusing on trade to Africa, and in particular oil-rich Angola.

Summary

Emirates Airline has announced a strategic partnership with TAAG, the Angolan national airline, which will involve Emirates managing the airline and appointing four senior managers to work for TAAG.
The partnership will be a 10-year management concession agreement without equity.
Emirates will develop a new business plan for TAAG, including fleet and route network strategies, and will help train TAAG staff.
The partnership has political undertones, with the UAE focusing on trade to Africa and Angola being a key market due to its oil-rich economy.
Angola heavily restricts traffic rights, which could be a challenge for Emirates, but the partnership could help TAAG improve its prospects in the European market.
TAAG has been in need of restructuring and the partnership with Emirates is seen as a step towards putting the airline on a sound path.

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Emirates to have a TAAG management contract - without an equity stake

Emirates on 30-Sep-2014 announced a strategic partnership with TAAG, building on a partnership announced in Dec-2013. That initial deal had two aspects: first, developing operational and commercial cooperation in training, passenger and cargo services, and frequent flyer programs; and second, develop the partnership into "comprehensive strategic partnership".

Since that announcement unconfirmed reports speculated on further details of the Emirates-TAAG partnership, including TAAG using Dubai as its hub for Asia and the Middle East while Emirates could use Luanda as a hub for Latin America and that Emirates could even lease aircraft to TAAG.

Such details remain unconfirmed. What Emirates did announce, in summary:

a 10-year Management Concession Agreement subject to various approvals
agreement is without equity
Emirates to appoint four senior managers to work for TAAG
Emirates would develop a new business plan for TAAG including fleet and route network strategies
seeking synergies between Emirates and TAAG
continued cooperation across codesharing, cargo and frequent flyer cooperation
Emirates to help train TAAG staff
TAAG to explore business opportunities with dnata, including passenger and cargo handling, flight catering and travel services (dnata is part of the Emirates Group)

Emirates President CEO Tim Clark told Gulf News that Emirates would also appoint a new CEO of TAAG, and this person would likely come from outside the Emirates Group. Further, Emirates would review TAAG's structure and also livery. The latter may seem insignificant, but TAAG's attempt to change its livery last decade was rebuffed.

Mr Clark did not go into the commercial arrangements but remarked: "Obviously we are not doing it for nothing. It's a satisfactory arrangement for us."

Emirates commenced service to Luanda in 2009 and in 2013/2014 was able to increase service from three or four weekly to a daily operation, whereas most intercontinental carriers are restricted to two weekly flights.

Dubai International Airport to Luanda Quatro de Fevereiro International Airport (seats per week, one way): 19-Sep-2011 to 29-Mar-2015

TAAG partnership is a rare strategic partnership from Emirates

Emirates' partnerships are few. Even codeshares are not that common relative to other airlines. Emirates once managed Sri Lankan as part of its 44% stake in Sri Lanka's flag carrier, but sold its stake back to Sri Lankan government after relations soured. The experience dampened Emirates' appetite for equity involvement.

The Emirates-Qantas partnership was launched without equity and Emirates has since rebuffed any suggestions of interest in taking an equity stake. Emirates has reiterated it remains open to more strategic partnerships where they make sense. Emirates courted American Airlines - so far unsuccessfully - but the TAAG deal is Emirates' largest since the Qantas arrangement. It should not be expected the TAAG deal will lead to a sudden increase in partnerships.

See related reports:

Airline partnership has heavy UAE-Angola political undertones

The Emirates-TAAG agreement was not low key. It was signed by H.E. Augusto da Silva Tomás, the Minister of Transport for Government of Angola and His Highness Sheikh Ahmed bin Saeed Al Maktoum, Chairman and Chief Executive, Emirates Airline and Group. The deal was announced just prior to the African Global Business Forum hosted in Dubai, which the UAE used to promote its intent to invest further in Africa. The UAE has been looking to grow bilateral ties with Angola and benefit from its fast-growing economy.

Much economic growth is due to oil, with Angola being the second-largest oil producer in Africa after Nigeria, although Angola could overtake Nigeria. Angola's non-oil trade with the UAE was much smaller, reported to be in 2012 AED6.7 billion (USD1.8 billion), placing Angola in a distant 37th largest place in the ranking of Dubai's trade partners. Such small trade alone is hardly justification for an airline partnership.

Mr Clark seemed to reflect on the larger implications (or even drivers) of the Emirates-TAAG deal: "We think we can enhance the ties between Angola and here. There are lots of opportunities for Dubai entities [in Angola]," Mr Clark told the Gulf News.

Angola heavily restricts traffic rights - a blessing and challenge for Emirates

From the limited information so far, it seems the Emirates-TAAG deal will look at opportunities similar to one of the equity deals Etihad Airways has made. This involves areas like management change, management training, and cost synergies. Operationally, where the deal will likely garner the most attention, Emirates will look to grow TAAG's own network while TAAG uses and feeds Emirates' Dubai hub.

TAAG sits on opportunity since Angola has heavily restricted traffic rights. Most European carriers only operate two weekly flights, an increase - seen as "progressive" - from their one weekly flight allocation. TAP stands out with service in Oct-2014 that is 10 weekly. The situation had been political, with Angola at times retaliating for its placement on the EU's "black list". More recently, however, TAAG's new-generation fleet has been cleared to serve Europe.

TAAG's challenge is a limited fleet and also lack of feed. While TAAG offers some connections beyond Luanda, it lacks the huge feed European carriers have, not just from Europe but also other regions including North America. TAAG's largest European market looks likely to remain Portugal due to colonial ties. Emirates could help improve the prospects of other point-to-point European routes, or alternatively TAAG could access more European destinations via Emirates' Dubai hub. While this entails a circuitous route via Dubai, such Europe-Africa via Middle East traffic flows are already present, and there will be little competitive pressure if Angola remains a closed market.

Emirates may find itself in a difficult position if it, the champion of liberalisation, manages an airline in what remains a highly closed off market. The aeropolitical regime ultimately comes down to the Angola government and not TAAG (and thus Emirates). But detractors will undoubtedly make that process of association and call Emirates hypocritical, even if its influence over traffic rights is small and control non-existent.

Summary of European carriers in Angola: 2004-2014

Airline	Initial Service	Frequency Development	Frequency in Oct-2014	Oct-2014 Routing
Aeroflot	2004	Twice monthly, exited in 2012	n/a	n/a
Air France	prior to 2004	Weekly, progressing to twice weekly in 2009	2x weekly	Non-stop Paris CDG-Luanda
British Airways	2005	Weekly, progressing to twice weekly in 2009	2x weekly	Non-stop London Heathrow-Luanda
Brussels Airlines	prior to 2004	Weekly, progressing to twice weekly in 2009	3x weekly	Brussels-Luanda-Kinshasa-Brussels (no local traffic between Luanda and Kinshasa)
Iberia	2011	Twice weekly	2x weekly	Non-stop Madrid-Luanda
KLM	2011	Progressed to twice weekly in 2012/2013	2x weekly	Non-stop Amsterdam-Luanda
Lufthansa	2008	Progressed to twice weekly in 2009/2010, 3x weekly in 2014	3x weekly	Non-stop Frankfurt-Luanda
TAP	prior to 2004	3x or 4x weekly in 2004/2005, 4x/5x weekly in 2006, progressed to daily in 2007/2008, peak of 10x or 11x weekly in 2011, since then seasonal 10x only	10x weekly	Non-stop Lisbon-Luanda

Angola in Apr-2014 said that Qatar Airways and Singapore Airlines were interested in serving Angola but Angola was still considering matters, with the country partially waiting on its new airport at Luanda. Turkish Airlines is due to commence Luanda service in 2015, further indicating there is demand not being met. Yields to Luanda are often some of the highest for airlines that serve the route. TAP said that in 2013 Angola accounted for 20% of its revenue, disproportionately higher than TAP's capacity share to Angola.

Emirates will help restructuring at loss-making TAAG

TAAG does not release regular traffic or financial performance, but Expansão reported TAAG in 2012 had revenues of USD650 million and an operative loss of USD200 million - a negative 30% margin. This fell well short of plans to have revenues of USD896 million in 2012 and a net profit of USD60 million in 2012 compared to a net loss of USD72 million in 2009 (operating profit/loss figures not stated). 2013 performance is not known to be publicly available, but it is unlikely TAAG was able to reverse such a significant loss.

There can be discussion of TAAG's future growth, but Angola's H.E. Augusto da Silva Tomás saw the more immediate priority of restructuring TAAG and putting it on a sound path. As he said in a statement: "This agreement today marks a very decisive step towards the restructuring of TAAG. With Emirates, our new partner and a leader in the world of civil aviation, equipped with know-how, technology and experience, TAAG is starting a new era of growth and progress which will also positively impact the development of Angola."

TAAG's intercontinental network covers Europe, Middle East, Asia and Latin America

Angola has clear aspirations for TAAG to be a global carrier; losses have deterred not the existence of TAAG but merely TAAG's independence. TAAG has invested in a new fleet that it deploys on long-haul routes to Europe (Lisbon and Porto), the Middle East (Dubai), Asia (Beijing) and Latin America (Havana, Sao Paulo and Rio De Janeiro).

TAAG Fleet Summary: as at 4-Oct-2014

Aircraft	In Service	On Order*
Total:	14	2
Boeing 737-200	2	0
Boeing 737-200C	1	0
Boeing 737-700	4	0
Boeing 737-700C	1	0
Boeing 777-200ER	3	0
Boeing 777-300ER	3	2

TAAG Network Summary (at 4-Oct-2014)

Total non-stop passenger destinations	31
Domestic	13
Africa	11
Asia Pacific	1
Schengen Europe	2
Other Europe	0
Latin America	3
Middle East	1
North America	0
Total non-stop freight destinations	0
Domestic	0
Africa	0
Asia Pacific	0
Europe	0
Latin America	0
Middle East	0
North America	0

Just over one-third of TAAG's international capacity is in Africa while Portugal and Brazil are TAAG's two largest foreign countries based on seat deployment. Of TAAG's five largest international markets, only two (South Africa and Namibia) are within Africa.

TAAG international seat capacity by region: 29-Sep-2014 to 5-Oct-2014

TAAG international seat capacity by country: 29-Sep-2014 to 5-Oct-2014

TAAG thus found itself in the difficult position of trying to support long-haul traffic to Angola without a sufficient African network to support connections. The mere number of African destinations and frequency was low enough, but often connecting times did not work out either.

Although Angolan demand is growing, TAAG is still small and no match for network carriers. In contrast, about 54% of Ethiopian Airlines' international seat capacity is within Africa while for South African Airways the figure is about 70%. TAAG was also likely missing out on point-to-point opportunities for African traffic, although here intra-Africa bilaterals can be heavily restrictive, and ironically more restricted than with countries outside Africa, a not uncommon phenomenon in Africa.

Some re-balance should be in order, although TAAG had hoped in 2014 to add either London or Paris. Long-haul traffic could be aided by Emirates, but short-haul could be expanded. A greater African network from Luanda could potentially help Emirates, which has been restricted by bilaterals in Africa, but Angola's geography is not ideal, and Emirates has sought to down-play using Angola as a hub.

TAAG was reported to drop its Asian and Latin American routes, instead using Emirates. While Dubai would be a convenient stopover to Asia, it would be circuitous to Latin America. However, it is difficult to see TAAG making Latin American flights sustainable in the short-term given its current network. TAAG operates to Dubai only three times weekly but this will likely be increased. Emirates and TAAG do not yet codeshare on respective Dubai-Luanda services.

Outlook: Angola and TAAG seek hub role for Central Africa. Emirates must tread carefully

Angola's aspirations for TAAG were probably overly-optimistic. TAAG's links were to strategically important long-haul destinations even if they lacked sustainability and could be better served by others. Neglected were low-hanging fruit to other African points that are not necessarily glamorous but provide critical intra-Africa links for trade and growth. The cycle is vicious: attention is given to the high profile long-haul routes while short-haul routes often remain difficult to launch due to continued failure to implement the liberalisation policies of the Yamoussoukro Declaration, sadly approaching its 15th anniversary with barely a hint of action.

Angola had the prestige, and cash, to keep the objective of a national airline going despite handfuls of airlines - African and intercontinental - asking for more capacity without any cost. Angola is investing in a USD2.2 billion airport infrastructure programme, supported by the African Development Bank, according to CAPA's Airport Construction and Cap Ex Database, and will need a surge of flights to justify it. TAAG says it wants to be "the hub" (original emphasis) for Central Africa, but as Yamoussoukro shows, declarations are easier than implementation.

Into this broken cycle of missed opportunity and protectionism comes Emirates, the straight-talking carrier that promotes liberalisation. Emirates' TAAG deal was followed by Emirates saying it will grow its business 40% in Africa, including about 10 new destinations over the next decade, adding to its existing 22 passenger and six freight destination.

Emirates could very well help TAAG and Angola (and in the process, itself) and leave the deal at that. Alternatively - and optimistically - Emirates' approach to liberalisation may become contagious in Angola and beyond. This form of intervention, with or without equity, is becoming a valuable option for smaller countries which have airline aspirations, but which suffer the inability to achieve profitability. As an agent for change, Emirates may in this way become a catalyst for what the continent needs - intra-African services on a viable footing.