Is Gulf carriers' premium proposition under threat from ultra low cost carriers?

  • Is Gulf carriers' premium proposition under threat from ultra low cost carriers?
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  • Is Gulf carriers' premium proposition under threat from ultra low cost carriers?
    Emirates onboard A380 lounge
  • Is Gulf carriers' premium proposition under threat from ultra low cost carriers?
    Etihad's Residence apartments
Published: 10 September 2017 - 9:15 a.m.
By: Shayan Shakeel

It was in March that Emirates President Tim Clark foresaw storm clouds over Middle Eastern skies. Warning of low cost carriers such as Norwegian Airlines, the industry "ain't seen nothing yet," he said.

It seems he was right.

Flights to Dubai popped up on Norwegian Air's website last week. Europe's third largest low-cost carrier, which made a name for itself by flying passengers across the Atlantic for as little as a cab fare between Dubai and Abu Dhabi, showed sample Dubai-Amsterdam return flights in November will ring up a total cost of AED 1,100. In contrast, Emirates' flights for the same trip came up at AED 2400.

Norwegian isn't the only carrier threatening the Gulf's big airlines. Singaporea-based Scoot is promising to fly passengers out of India onward to Europe-via 5th freedom rights-for as low as AED 1488.

Since the turn of the millenium, the Gulf's big full service carriers have succeeded by creating a reality distortion effect around premium experiences on 'Very Large Aircraft'. But the future of the industry, it seems, is tilting toward low cost long haul travel at 'Very Low Fares'.

Emirates, Etihad and Qatar were able to bring back an era of air travel luxury at what were perceived to be relatively reasonable prices. But with astoundingly low fares on carriers such as Norwegian and Scoot, their offering might force consumers to feel they are premium prices for economy seats.

With their vast network, integrated airports, as well as duty free and inflight services, Middle Eastern carriers have managed to hold their own against similar competition on short-haul routes. India's largest airline, Indigo, for instance, offers fares to and from Dubai often at half the cost of similar itineraries on Emirates. But the latter's access to long-haul routes, and multiple daily frequencies give it an unparalleled advantage.

Long-haul routes, especially into Europe, pose a uniquely different challenge. For one, European aviation has seen a vast erosion of legacy full service carrier market share to low cost carriers such as Ryan Air and Norwegian. Ultra-low cost carriers with more fuel efficient aircraft capable of flying long haul, and now extending their reach into the Middle East, seem to be indicating that passengers are willing to sacrifice a lot of ancillaries in return for lower fares and similarly wide networks.

Once glamorous and a privilege, flying today is losing its mystique to become a mass transport system similar to the train or metro, says Leonard Favre, managing partner, 1BlueHorizon. "The comfort of superior service and luxurious premium cabins are not essential anymore as passengers want to fly more frequently with the same budget."

So far, Middle East carriers have responded to the threat by doubling down and upgrading the aircraft used to fly to routes in Europe. Etihad this week announced it would deploy its new state-of-the art 787 Dreamliner on flights to Amsterdam. Both the UAE's carriers have already deployed A380s to Paris. Emirates has gone a step further by flying it's A380 on the route to Nice, and adding helicopter transfers to Monaco. The carrier has also upgraded its on-board A380 lounge and first class experience.

That however, brings their profitability into question: It's been said that overcapacity in the industry (complicated by low oil prices, geo-politics, etc) have depressed yields. A380s and Dreamliners will add more capacity to an already over supplied European market; this year's European capacity growth rate might be lower than OAG's estimated 10 year average at 11.4% but is still a double digit growth rate at 10.2%.

That should only serve to depress yields further, especially as more capacity comes online from the ultra-LCCs, consequently resulting in even lower profits for Middle East airlines.

Will the Gulf's gamble on premium win? That is to say, will passengers opt for premium experiences on legacy carriers over fractional fares on ultra low cost carriers?

Gulf carriers aren't waiting for an answer, opting to introduce new ancillary services as a way to boost revenue.

Emirates now offers business and first class lounge access, as well as advance seat selection, all for a fee. One spokesperson last year told Aviation Business that the Dubai-based carrier would also be introducing zero-baggage fares soon, although that hasn't happened yet. Etihad too has curtailed its chauffeur service to premium passengers unless they request it for a fee. It's also found a novel way to offload any half-empty flights by allowing passengers to pay for up to two empty seats next to theirs.

Emirates, proactive as always, is hedging its bets even further. Earlier this year it announced it would enter a new mode of operation with Dubai's own low-cost carrier Flydubai, to be unveiled at the end of 2018. That would, theoretically, allow it to gain efficiencies from a more diverse fleet array as well as allowing it to offload routes with a smaller preference for premium travel to Flydubai, which offers unbundled services in economy and a bundled business class cabin as well.

It's not dissimilar to what has transpired in Europe. "The ability of LCCs to offer a product that mimicked that of the legacy carriers on short-haul, but at a considerably lower price, made it obvious that it was only a matter of time before the bigger LCCs began providing feed to the long-haul network of other legacy carriers in some shape or form," according to Farve.

There have been rumours that there might also be a tie-up between the UAE's full service carriers, Emirates and Etihad. So far, that is pure conjecture. Etihad, is in the middle of untangling itself from liabilities stemming from failed equity stakes in struggling European carriers.

The UAE’s national airline has also indicated an interest in a total takeover of Alitalia by putting in a non-binding bit for Italy’s now insolvent carrier that it has a 49 percent stake in. Complete ownership would allow it tremendous reach over Europe, and the ability to feed its own airlines on the continent without needing 5th Freedom rights like the one Emirates just received from Switzerland.

However, doing business in Europe isn’t the same as doing business in the Middle East, and Etihad would do well to remember the Swissair bankruptcy saga at the end of the 90s, says Favre. “The famous ‘hunter strategy’ developed by McKinsey led to bankruptcy after that airline became known as a ‘flying bank’. Etihad, so far, has also failed to understand the differences between doing business in the Middle East and in Europe.”

What would also be pertinent to keep an eye on regional competitors. “Neighboring countries are fast catching up with similar quality services, in Oman, Kuwait, Saudi Arabia and even in Iran. The last two, especially, offer an incomparable competitive advantage, with their respective domestic markets of 30 and 80 million people,” added Favre.

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