Dynamics in the long-haul aviation market:
The growing Gulf threat and its sustainability
J.N. Rompas
University of Amsterdam, Faculty of Economics and Business Studies
MSc Business Studies – Strategy, Master Thesis (6314M0218), Student-number – 10347143
Supervisor: Jaap G. de Wit
A B S T R A C T
The competition in the market of intercontinental air passenger services has become increasingly more dynamic, due to the continuously expanding Gulf carriers. This paper exposes the competitive positioning of three Gulf carriers (Emirates, Etihad Airways, Qatar Airways), relative to that of three European carriers (KLM, Lufthansa, British Airways), in two dimensions (cost and network). Although all Gulf carriers are pursuing network expansions, substantial intra-Gulf carrier differences were found in their expansion strategies By identifying and analyzing 22 airline characteristics that are indicative of competitive advantages (both created and fixed), it is shown that the Gulf carriers seem to enjoy an advantageous position compared to the European carriers for the majority of them. Regarding purposeful strategic positioning, a major driver for numerous competitive advantages is shown to be the specific market focus that exists among the Gulf carriers. Furthermore, it is shown that substantial fixed advantages are identified originating from the distinctive airport and governmental interactions, thereby favoring Gulf carriers’ external environment over that of the European carriers. Even if the created advantages are ignored, the externally induced advantages would still continue to persist. Moreover, if European carriers are able to uplift most of the external barriers that inhibit them to compete equally, thereby eliminating governmental and airport induced competitive advantages, the relative geographical position towards specific emerging economies remain fortunate to the Gulf carriers. While the analysis showed a lower favorability in terms of O&D passengers, the Gulf location is, and will remain to be, in the ideal position to act as a T&T intersection between numerous current and emerging economies, which signals a positive future in terms of growth opportunities that may arise from these markets.
Date: Tuesday, 1-July-2014
Word count: 21,313 2 J.N. Rompas
Contents
Contents ...... 2 List of Tables and Figures ...... 3 Acronyms ...... 4 Introduction...... 5 CHAPTER 1: Literature review ...... 6 1.1 Golden Age ...... 6 1.2 The New Millennium ...... 7 1.2.1 Business model innovation: Low-Cost Carriers ...... 7 1.2.2 Full-Service Carriers and the long-haul market ...... 9 1.3 The third wave ...... 10 1.3.1 Maturing short- medium-haul markets ...... 10 1.3.2 The Gulf carrier evolution ...... 11 1.3.3 European Full-Service Carrier’s answer ...... 11 CHAPTER 2: Theoretical framework ...... 14 2.1 Cost advantages ...... 14 2.1.1 Airline input cost structure ...... 14 2.1.2 Aircraft induced operating costs...... 16 2.1.3 Key cost indicators ...... 21 2.2 Network advantages ...... 21 2.2.1 Connectedness and Connectivity strategies ...... 22 2.2.2 Aerodrome characteristics ...... 28 2.2.3 Key network indicators ...... 31 CHAPTER 3: Research design ...... 32 3.1 Research question ...... 32 3.2 Research methods ...... 32 3.2.1 Data collection ...... 32 3.2.2 Data analysis ...... 33 3.3 Research context ...... 33 3.3.1 European full-service carriers ...... 33 3.3.2 Gulf carriers ...... 34 3.4 Strengths and limitations ...... 34 CHAPTER 4: Findings ...... 35 4.1 Theoretically imitable strategic advantages ...... 35 4.1.1 The pursuit of growth ...... 35 4.1.2 Benefits in Network characteristics ...... 42 4.1.3 Fleet features and utilization ...... 45 4.2 Externally determined advantages ...... 49 4.2.1 Country specific regulations and benefits regarding airline costs ...... 49 4.2.2 Abu Dhabi, Doha and Dubai Airport ...... 53 CHAPTER 5: Conclusion & Discussion ...... 70 5.1 Threats, Opportunities and Responses ...... 72 5.2 Limitations ...... 73 5.3 Future research directions ...... 73 References...... 75
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List of Tables and Figures
Tables Table 1. Airport charges and Governmental taxes. Table 2. ASK in millions for CY2012 and CY2013. Table 3. Emirates collaborations regarding code-sharing and joint frequent flyer programs as of December 2013. Table 4. Equity partners Etihad Airways as of June 2014. Table 5. Members of the OneWorld airline alliance as of May 2014. Table 6. Global airline alliances and Gulf carriers as of June 2014. Table 7. Average weekly frequency per route per airline as of May 2014. Table 8. Average aircraft age as of May 2014. Table 9. Generated ASK per employee for CY2013. Table 10. Tax rates per country for December 2013. Table 11. Fuel prices per region in USD per barrel as of April and May 2014. Table 12. Airlines and their main base of operating. Table 13. Passenger Service Charges and Passenger Safety & Security Charges per airport in USD as of January 2014. Table 14. Airport capacity in flight movements for CY2013. Table 15. Population per country and main base city. Table 16. Economy ranking based on ‘ease of doing business’ as of June 2013. Table 17. Top 3 regions and destinations served in terms of available seats, based on the weekly flight as of May 2014. Table 18. Transit & Transfer attractiveness for European and Gulf carriers for the current top markets as of May 2014. Table 19. BRIC and MINT country capitals and correspond airports. Table 20. Transit & Transfer attractiveness for European and Gulf carriers for the BRIC and MINT capitals. Table 21. Summary of cost and network indicators for, Emirates, Etihad Airways, Qatar Airways, KLM, Lufthansa and British Airways.
Figures Figure 1. Hub and Spoke system. Figure 2. Multi-hub network. Figure 3. Flight offerings Gulf carriers and European full-service carriers. Figure 4. Full-service carriers their possible choice of network structure. Figure 5. Airline input cost structure as defined by IATA. Figure 6. CASK functions per aircraft capacity, route length and aircraft efficiency. Figure 7. Economies of Scope and Density. Figure 8. Types of Hubs and Traffic. Figure 9. Growth of network size of, Emirates, Etihad Airways and Qatar Airways for CY2010-2013. Figure 10. Gulf carriers’ relative network size in destinations, for CY2010, CY2013 and European carriers’ relative network size as of May 2014. Figure 11. Passengers transported for Emirates and KLM in millions for CY2007-2013. Figure 12. Code-sharing partners Etihad Airways as of December. Figure 13. Average distance travelled per passenger in kilometers for CY 2013. Figure 14. Passenger Load Factor for Emirates, Etihad Airways, KLM, Lufthansa and British Airways. Figure 15. Fleet composition as of December 2013. Figure 16. Ratio fleet ownership and leasing as of December 2013. Figure 17. Average capacity per operating aircraft for CY2013. Figure 18. Average cost per employee in USD for CY2013. Figure 19. Landing Charges for DXB, AUH, DOH, AMS, FRA and LHR in USD as per January 2014. Figure 20. Parking Charges for DXB, AUH, DOH, AMS, FRA and LHR in USD as per January 2014. Figure 21. Airport capacity in flight movements for CY 2013. Figure 22. GDP per capita, per country. Figure 23. International Tourist Arrivals in millions for CY2012. Figure 24. Current Top destinations and regions served in terms of available seats as of May 2014. Figure 25. BRIC and MINT economies and their geographical positions.
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Acronyms
Abbreviation Definition First occurrence AMS Amsterdam Airport Schiphol 4.2.2. ASK Available Seat per Kilometer 2.1.2.b AUH Abu Dhabi International Airport 4.2.2. BA British Airways 3.3.2 BRIC Brazil, Russia, India, China 2.2.2.b CASK Cost of Available Seat per Kilometer 2.1.2.b CWC Carriers-Within-Carriers 1.3.3 DOH Doha International Airport 4.2.2. DXB Dubai International Airport 4.2.2. EK Emirates 3.3.2 EU-FSCs European Full-Service Carriers 3.3.1 EY Etihad Airways 3.3.2 FFP Frequent Flyer Program 4.1.1.a FRA Frankfurt Airport 4.2.2. FSCs Full-Service Carriers 1.1 GDP Gross Domestic Product 2.2.2.b H&S Hub and Spoke 1.1 IATA International Air Transport Association 1.3.3 ÌCAO International Civil Aviation Organization 2.1.2.c KL KLM 3.3.2 LCCs Low-Cost Carriers 1.2 LH Lufthansa 3.3.2 LHR London Heathrow Airport 4.2.2. MINT Mexico, Indonesia, Nigeria, Turkey 2.2.2.b MTOW Maximum Take-Off Weight 2.1.2.c O&D Origin and Destination 2.2.2.b PSC Passenger Service Charge 4.2.2.a PSSC Passenger Security & Safety Charge 4.2.2.a QR Qatar Airways 3.3.2 RPK Revenue Passenger Kilometer 1.3.3 T&T Transit and Transfer 2.2.2.b USD United States Dollar ($)
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Introduction
As per 2014, the commercial airline industry is estimated to generate an astonishing USD 743.000.000.000 in revenues (International Air Transport Association, 2013). On top of that, air traffic is expected to grow the upcoming years, indicating the significant role the aviation industry has taken in our society. This paper addresses two key groups regarding this industry, namely European and Gulf full-service carriers, and their relative competitive competition.
Research has shown that the airline industry has been subject to different waves of change, causing airlines to adapt and evolve over time (Franke & John, 2011). However, due to the recent dynamics in the airline industry, a more current analysis of the industry remains absent. This paper attempts to provide a detailed overview of the current and emerging strategies and their future effects on the airline industry. For which the emphasis is set on the continuously expanding Gulf carriers and their strategies.
The first Chapter of this paper consists of a literature review that reflects on the past developments of the aviation industry, in order to provide a more complete picture of the current state of the industry. Chapter two will clarify the chosen framework and selected indicators that identify potential competitive advantages. Subsequently, Chapter three will explain the chosen research method and selected cases used in the analysis. Additionally, the chosen cases will be compared in Chapter four, in terms of the discussed indicators. Finally Chapter five will discuss the findings, conclude with the paper’s limitations and suggest future research directions.
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CHAPTER 1: Literature review
The last 25 years the aviation industry has been subject to a variety of major phenomena, each impacting the industry in a specific way. These different waves of impacts disrupted the airline industry, changed the market structure and thus caused incumbent firms to adapt and evolve over time.
1.1 Golden Age
In the ‘90s, due to the liberalization of the European market, as well as the European-United States transatlantic market, the airline industry experienced a significant growth. This led to the so-called “Golden Age” for airlines, a period which was largely characterized by airlines that competed based on Porter’s concept of differentiation (Porter,
1980). Airlines following this type of strategy are often referred to as full-service carriers (FSCs) (Hunter, 2006).
FSCs place their emphasis on increasing offered product value, which indicates a business model focused on revenue optimization (Franke, 2004).
Furthermore, during this period, network expansions became of great importance, encouraging the exploration of connectivity possibilities. An increase in connectivity was eventually achieved through the introduction of hub-and- spoke systems (H&S) (de Wit, 1995). These systems exist when air traffic is focused on one center airport (hub), which functions as the main connecting point, receiving and distributing passenger to other airports, as illustrated in
Figure 1 (Dennis, 1994). This type of system, where passengers’ itineraries include a change of plane at a hub airport, also provides additional competitive advantages (e.g. increased production efficiency) (Brueckner & Spiller, 1991;
Nero, 1999).
S S1 3
H3
S S 2 4
Figure 1. Hub and Spoke system.
The rise of H&S systems, combined with FSCs’ hunger for network expansion, triggered the emergence of global alliances (Evans, 2001; Fan, Vigeant-Langlois, Geissler, Bosler, & Wilmking, 2001). This, in turn, enabled the
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Figure 2.
S S1 5
H1 H2
S S2 6
Figure 2. Multi-hub network.
Initially, the previously mentioned differentiation strategy of FSCs resulted in airlines differentiating mostly in their on-board services. However due to the rise of H&S systems, FSCs’ differentiation in product offerings was complemented by the increase of differentiation in connectivity. Although the FSCs offered a different degree in product offerings and connectivity, air travel passengers remained constrained to choose mostly between airlines with relatively similar strategies.
1.2 The New Millennium
Around the new millennium, the “Golden Age” came to an abrupt end. This was due to several events among which, an economic downturn and the fear of terrorism. This downturn, had struck the previously dominating FSCs hard, which, together with the continuously increasing air transport liberalization, paved the way for the success of low-cost carriers (LCCs) (Dobruszkes, 2009; Franke, 2004).
1.2.1 Business model innovation: Low-Cost Carriers
Even though LCCs existed before 2000, their success only became apparent after the second major disruption of the market, which in turn stimulated the rise of new LCCs. Although the LCCs had different origins, such as offshoots of FSCs or derivatives of regional operators, they all deviated from the classic FSCs in terms of their business model
(Dobruszkes, 2006). Rather than engaging the market based on product differentiation, focused on revenue optimization, LCCs’ strategies were based on Porter’s concept of cost leadership and thus focused on cost minimization (Franke, 2004; Porter, 1980). This led to minimal product offerings, often defined as a ‘no-frills’- strategy (Franke, 2004; Williams, 2001). However, complementary services, such as in-flight meals, often remained available through additional charges. Eventually this type of additional revenue generation, also defined as ‘ancillary
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8 J.N. Rompas revenue’, became of great importance in the LCC business model (Graham & Shaw, 2008). After the initial period of success, the new LCC model was increasingly confronted by market saturation. This caused many LCCs to attempt to differentiate themselves from other LCCs by altering their product offerings, such as long-haul services (e.g.
Norwegian Air Shuttle), which were not associated with the traditional LCC business model (Alamdari & Fagan,
2005).
The LCC business model and success have been popular topics in the literature (Dobruszkes, 2006; Francis,
Humphreys, Ison, & Aicken, 2006; Hunter, 2006; Müller, Hüschelrath, & Bilotkach, 2012; Sarker, Hossan, & Zaman,
2012; Tretheway, 2004). In the literature there is some agreement, that the original operations of Southwest airlines and Ryanair exhibit the ‘purest’ form of a LCC (Dobruszkes, 2006; Francis et al., 2006; Tretheway, 2004). They are recognized as the pioneers and leaders of the rise of LCCs and are therefore often used as a benchmark for classifying airlines’ business models (Klophaus, Conrady, & Fichert, 2012; Mason & Morrison, 2008). Although many studies list several aspects associated with LCCs, such as point-to-point travel and fleet homogeneity, consensus about an exact definition of a LCC remains absent.
Thretheway (2004) for example, states that the LCC business model is defined as offering a very simple and low- cost service targeted at passengers with simple itineraries. Whereas Dobruszkes (2009) is more specific, stating that
‘pure LCCs’ can be identified based on their fare price, claiming that LCCs offer half the airfare price compared to
FSCs and/or retain a maximum rate of EUR 0.10 per km. In turn, Lenartowics, Mason & Foster (2013) define LCCs by comparing them to FSCs, in terms of their network structure, whilst Alderighi, Cento, Nijkamp & Rietveld (2012) state that LCCs are simply airlines that are designed to achieve cost advantages compared to FSCs. Adversely,
Wensveen & Leick (2009) adopt the perspective that all airlines, regardless of their business model, essentially have the same root costs (fuel, labor and maintenance) and therefore claim that there is no such thing as a LCC business model. Although definitions vary widely, it is apparent that these type of airlines experienced significant growth during this period (Dobruszkes, 2009).
This growth and emergence of LCCs made substantial inroads in the market for short- and medium-haul air travel, by adding a new dimension to the domain of air travel, thereby providing passengers a choice between two types of carriers that differ greatly in their business models.
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1.2.2 Full-Service Carriers and the long-haul market
Whilst LCCs were disrupting the short- and medium-haul market, competition in a number of long-haul markets was driven by another group of carriers. This increase in rivalry was mostly triggered by the rise of airlines from the
Persian Gulf, which provided transfer alternatives for the major European hubs between Europe, Central and South
East Asia, as well as Africa (See Chapter 4).
The phenomenon of Gulf carriers is also an issue of research that has been of interest to many researchers (de Wit,
2013; McKechnie, Grant, & Katsioloudes, 2008; O’Connell, 2011; Vespermann, Wald, & Gleich, 2008). Whilst the
Gulf area provides a basis for several airlines, the main focus has been on full-service Gulf carriers that service intercontinental flights and operate large hub-and-spoke systems. From an international point of view, these airlines
(e.g. Emirates, Etihad Airways and Qatar Airways) emerged as global competitors, becoming a serious threat for, specifically, European FSCs in the intercontinental traffic market. The literature assigns their success to a combination of multiple factors.
Hooper, Walker, Moore & Al Zubaidi (2011), emphasize the benefits of the location of the Gulf area due to its geographical centrality. Such argument refers to Ricardo’s concept of ‘comparative advantages’, which concern advantages that stem from productivity differences due to country specific characteristics, relative to other countries
(Maneschi, 1992). Gains from such ‘comparative’ advantage are thus a result of differential efficiency (Stoelhorst &
Bridoux, 2008). In this specific context the difference in efficiency is then, according to Hooper et al. (2011), reflected in the geographical favorability of the Gulf area regarding air transport networking. However, in contrast, Grimme
(2011) notes that for some routes, the geographical location of the Gulf actually results in detours compared to
European FSCs. He allots Gulf carriers’ success to their focus on secondary airports, that enables provision of
‘secondary-hub-secondary’ flights compared to European FSCs’ ‘secondary-hub-hub-secondary’ offerings, as seen in
Figure 3. However, on primary destinations both European and Gulf carriers provide similar single hub transfer flights, causing such advantage to disappear in these markets.
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European full-service carriers
H1 H2 S1 S5
Gulf carriers
H S 3 1 S5
= European carriers flight
Figure 3. Flight offerings Gulf carriers and European full-service carriers.
Furthermore de Wit (2013) stresses that the location of the Gulf area positively affects the Gulf carriers’ operations by means of differing external environments compared to FSCs. This causes, among others, cost advantages for Gulf carriers (e.g. lower taxes and airport related charges). These cost advantages are complemented by the cost advantages that arise from their modern and fuel-efficient fleet, which according to Vesperman et al. (2008) explains most of Gulf carriers’ success. A similar explanation is chosen by O’Connell (2011) who states that higher operating margins compared to European FSCs mostly explains the rise of Gulf carriers. Finally Squalli (2014) states that the local governments’ ownership enables inimitable synergies, which lie at the heart of the Gulf carriers’ success.
To sum up, the Gulf carriers, whilst acting as an imperfect substitute for the European FSCs, disrupted the market for long-haul transfer travel, by increasing the travel options for passengers in the long-haul market (Grimme, 2011).
This increase in offerings, in combination with the comparative advantages that Gulf carriers have over other FSCs, caused segments of the relatively stable long-haul market to be subject to much fiercer competition.
1.3 The third wave
The most recent increase in the dynamics of airline business models arose because of the accumulation of different phenomena impacting the aviation industry. Among these phenomena were global issues, such as the rise in oil prices and the financial crisis of 2008, as well as industry specific issues, such as the growth limitations for LCCs and the continuous growth of Gulf carriers (Franke & John, 2011; O’Connell, 2011) .
1.3.1 Maturing short- medium-haul markets
Today, due to maturing markets, LCCs are forced to adapt their business models in order to sustain their growth
(de Wit & Zuidberg, 2012; Sarker et al., 2012). As a consequence, the upcoming dynamics in the airline industry are
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Alamdari, 2007).
Sometimes it is concluded that the clear distinction between LCCs and FSCs is becoming ambiguous, supporting the emergence of hybrid carriers. Hybrid carriers are airlines that have incorporated features from both the traditional
FSC as well as the traditional LCC business model (Klophaus et al., 2012). Establishments of such type of carrier, originate from both FSCs as well as LCCs, as a reaction to the market developments (Dennis, 2007). Elaborating on this perspective, several frameworks were developed in order to classify airlines based on their business model, showing that indeed a business model continuum is more appropriate than a clear distinction of two types of airlines
(Daft & Albers, 2013; Lohmann & Koo, 2013; Mason & Morrison, 2008).
Indications can also be found in the literature that signal a shift in market focus by means of business model innovation, towards the long-haul traffic market (e.g. intercontinental premium only and intercontinental low-cost)
(Franke & John, 2011). Thereby, considering a maturing low- and medium-haul market, supporting the idea of the long-haul market as the new major battle arena for airlines (Wensveen & Leick, 2009).
1.3.2 The Gulf carrier evolution
Considering specific segments of the long-haul market, the continuous growth of the Gulf carriers adds another dimension to the competitive environment. Fleet and airport expansions indicate that the growth of Gulf carriers is far from declining (Topham, 2013). Since the Gulf area’s regional demand has already proven to be insufficient for filling the current capacity, Gulf carriers will seek their growth in certain long-haul markets, thereby increasing the pressure on European FSCs (Vespermann et al., 2008).
1.3.3 European Full-Service Carrier’s answer
Next to the previously mentioned developments, European FSCs are taking actions in order to maintain and gain their share of the market. Their competitive response towards the LCC threat, with regards to short- and medium-haul flights, consists of different reactions (Fageda, Jiménez, & Perdiguero, 2011; Morrell, 2005). Some FSCs are adjusting their business model, focusing more on cost reduction, thereby partially adopting the LCCs strategy, (Dennis, 2007) whilst others respond by setting up low-cost subsidiaries in order to compete with the LCCs more directly (Dennis,
2007; Homsombat, Lei, & Fu, 2014).
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In order to achieve cost reductions, FSCs are taking on different approaches. These approaches consist of, among others, exploiting secondary hubs, changing catering charges, reducing labor costs and reducing distribution costs
(Dennis, 2007). Of these approaches, the implementations of the latter two are considered to be most difficult for FSCs
(Fageda et al., 2011). In order to achieve a full adaptation of the LCC business model, therefore competing more adequately with the LCCs, some FSCs have chosen to set up low-cost subsidiaries.
The response that encompasses the creation of low-cost subsidiaries, thereby forming a new organization structure, is often defined as the carriers-within-carriers (CWCs) structure (Graham & Vowles, 2006). This structure provides two options with regards to classifying the airline’s network. The airline can either choose for a “point-to-point” network or a “mixed” network (Lin, 2012). In the former, the FSC’s original one-stop flights are replaced by the
CWC’s non-stop flights, whereas in the latter, both the FSC’s non-stop flight as well as the CWC’s one-stop flight are offered, as illustrated in Figure 4.
One-stop flight network
H1
S1 S2
Point-to-Point network
H1
S1 S2
Mixed network
H1
S 1 S2
Figure 4. Full-service carriers their possible choice of network structure.
The CWC business model itself is not new, however current developments within this model have been somewhat ambiguous (Graham & Vowles, 2006; Pearson & Merkert, 2014). Even though its success has yet to be determined, these new developments will most certainly have an impact on the competition.
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In order to comprehend potential effects of the aforementioned developments, a more detailed understanding of the key players in the industry has to be established. However, because a full industry analysis is beyond the scope and time of this research, the focus of this paper is set on the dynamics in the long-haul market. As aforementioned, increasing competition in specific segments of the long-haul market, is driven by the continuously expanding Gulf carriers. It is therefore not unexpected that the Middle East has evolved into the world’s fastest growing market in terms of air travel. In June 2014, the International Air Transport Association (IATA) reported the Middle East carriers to have experienced the highest growth worldwide, indicating the significance of their potential future impact on the overall industry (International Air Transport Association, 2014b). In 2013, the Middle East carriers achieved, with an
11.9 percent increase in Revenue Passengers Kilometers (RPK), more than 1,5 times the growth of the world’s second fastest growing region, Asia, whose carriers realized a ‘mere’ increase of 7.2 percent, whereas the European carriers realized an RPK growth of 4.0%. By identifying the key players from the Middle East, along with understanding their success as well as their current and future growth strategies, upcoming industry developments may be better comprehended.
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CHAPTER 2: Theoretical framework
The effects Gulf carriers have on the aviation industry as a whole are based on their degree of success, which originate from their established competitive advantages. The current literature has adopted different perspectives towards Gulf carriers, exposing several competitive advantages of the major Gulf carriers, which are often linked with each other. This paper adopts the perspective of two asserted key advantages enjoyed by Gulf carriers, namely: Cost advantages and Network advantages. Although these concepts are intertwined, both notions are treated separately in order to simplify theorizing and to avoid circular references.
In order to comprehend how these advantages are applicable for carriers from the Gulf, a framework identifying the main drivers for airline cost and network advantages is developed. By exploring the underlying factors, thus enabling a comparative analysis, a more complete understanding of the Gulf carriers’ development and effect on the industry is possible. This Chapter explores important cost and network indicators, which will subsequently be analyzed and compared in Chapter 4, regarding the selected cases.
2.1 Cost advantages
An extensive analysis of the airline industry has shown that, for the last 40 years, the airline industry operated at an average net margin of 0.1% (International Air Transport Association, 2011).Such a margin illustrates the significant size of airlines’ costs relative to their generated revenue, and provide an explanation of the industry’s overall struggle with cost control. Since a complete overview of the cost structure of airlines is beyond the scope of this research, the following section will briefly outline the general input cost structure of airlines, after which selected key cost inputs will be discussed in detail.
2.1.1 Airline input cost structure
The asserted cost advantages of Gulf carriers can be explained by exploring the key drivers for their cost structure, which can be segmented into various groups. The adopted cost-categorization is modeled after the IATA endorsed cost structure, and exists of an initial separation of non-operating expenditures and operating expenditures. Doganis
(2002) describes the former as expenses that are not directly related to an airline’s own air service operations and concludes that:
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“The nature of each airline’s non-operating costs ... is probably unique [and thus] inter-airline comparisons of
… non-operating costs are of little value” (p. 78).
Since a comparative analysis is the main focus of this paper, airlines’ cost structures will further be discussed in terms of operating expenditures.
The operating expenditures of an airline have been defined and discussed by different authors, specifically in the context of Gulf carriers (de Wit, 2013; O’Connell, 2011). Following Doganis (2002), operating expenses can be subdivided into direct operating costs and indirect operating costs, which is grounded on cost classification based upon aircraft dependency. In other words, operating costs that change when the aircraft type changes are considered direct operating costs, whereas operating costs that are unaffected by such changes, are classified as indirect operating costs.
A complete illustration of the specific categories and the associated sub-categories can be found in Figure 5. Since, as aforementioned, assessments on all sub-categories are not relevant and possible, the focus of this paper is centered on potential cost advantages in terms of direct operating costs. These costs are assumed to reflect possible cost advantages at best, and are thus considered most suitable for this analysis.
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Input Cost Structure
Non-Operating Operating Costs Costs
Retirement of Direct Indirect property or Operating Operating equipment Costs Costs (DOC) (IOC)
Station and Interest paid Flight ground on loans operations expenses
Loss of Maintenance Passenger affiliated and services companies Overhaul
Other (such as Depreciation Ticketing, currency and sales and losses) Amortization promotion
Government Subisidies/ General and Taxes administration
Other operating costs
Figure 5. Airline input cost structure as defined by IATA.
Source: Doganis (2002).
The direct operating costs are identified in the form of three sub-categories, which are comprised of 12 distinct cost groups. However, in the context of this paper, the direct operating costs are explained by five distinctive cost groups that overlap with those identified by Doganis (2002). These five groups account, on average, for more than 70 percent of the operating costs of airlines and are discussed below (International Air Transport Association, 2011).
2.1.2 Aircraft induced operating costs
The recognized cost groups are costs associated with employment, fuel, charges and taxes, maintenance and aircraft ownership.
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(a) Labour costs Labour costs, which exists of employee costs for flight crew as well as engineering personnel, depend on the number of employees and the average cost per employee. During its evolvement, the aviation industry has been built upon the aspect of safety, which is pursued by the extensive set of different rules and regulations. With regards to labour policies, rules and regulations are deeply rooted in the authorization of operating activities, such as flight and maintenance licensing. These operating licenses are often linked to specific aircraft types and can therefore create constraints in personnel deployment, especially in the case of heterogeneous fleets.
The number of required employees, can thus be controlled for, by enhancing deployment possibilities through preserving a uniform fleet. Furthermore advantages in labour costs are also dependent on the governmental labour policies and costs of living of the countries in which the airline operates. Such policies and living costs determine the average wages of employees, which can differ significantly per region and country (International Air Transport
Association, 2011).
(b) Fuel Airlines’ most significant operating costs exist of fuel costs, which, on average, accounts for 25.4 percent of airlines’ total operating costs (International Air Transport Association, 2011). Fuel costs are dependent on two factors, fuel prices and fuel consumption.
Over the years, average jet fuel prices have fluctuated significantly, ranging from USD 28.8 (2003) to USD 111.8
(2012) per barrel (International Air Transport Association, 2014c). Although the prices airlines pay for jet fuel are derived from company specific contracts, which are unobtainable for this research, differences in regional prices for jet fuel may, to a certain extent, indicate cost advantages for airlines.
Whereas airlines’ influence on jet fuel prices is limited, airlines are able to exert full control over their fuel costs in terms of fuel consumption. Cost advantages in fuel consumption depend on the efficiency of such consumption and is explained by means of the Available Seat per Kilometer (ASK) metric. This metric is often used as a basic indicator of aircraft performance and is defined as the available seats times the kilometers flown. The ASK of a flight is thus dependent on both the route length and aircraft seat capacity. A closely related metric that incorporates airline expenses, is the average Cost per ASK, also known as CASK.
These metrics can be paired with the concept of economies of scale, which hold that an increase in an airline’s output results in a smaller increase in costs, and may therefore lead to substantial cost advantages (Wei & Hansen,
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2003). Since the application of this concept, in the literature regarding airline operations, has been somewhat ambiguous, clarification of this concept is provided below (Jara-Díaz, Cortés, & Ponce, 2001).
Economies of scale, in this context often referred to as economies of technological scale, arise when changes in aircraft seat capacity occur, for example by utilizing larger aircraft or operating denser seating configurations. This will, for a fixed network hence a similar flight route, increase the ASK, as indicated in Figure 6. From this perspective, due to the distribution of the high, fixed fuel costs over a larger amount of seats, fuel costs per seat will decrease for increasing ASK (Caves, Christensen, & Tretheway, 1984; Flores-Fillol, 2009; Jara-Díaz et al., 2001).
Economies of Technological Scale Airline Economics Aircraft Efficiency CASK CASK CASK
Aircraft capacity Route length Aircraft age
Figure 6. CASK functions per aircraft capacity, route length and aircraft efficiency.
Source: Doganis (2002).
Moreover, airlines are, regarding fuel-cost savings, naturally enticed to increase their route length, for example by shifting their focus from short-haul to medium- and long-haul flights. Operating longer routes, assuming utilization of the same aircraft, will increase the ASK, since the route length will increase. This leads, due to the distribution of high, fixed fuel costs over a larger distance, to a decrease in fuel costs per kilometer and consequently to a decrease in CASK. This phenomena is presumed to be a fundamental characteristic of airline economics, for which research has shown that, for US carriers, 17.6% of the difference in unit costs was explained by the difference in average stage length (Caves et al., 1984). A third way to gain fuel-cost advantages is through the deployment of newer, more efficient aircraft. Such aircraft efficiency is based on both engine performance and aircraft design, and can substantially impact fuel consumption. More efficient aircraft can therefore lead to cost savings per flight, whilst operating a similar route length for a similar amount of passengers.
It must be noted that the previously mentioned concepts refer to decreasing CASK, thus cost per seat. However, in practice, fuel costs are not spread across available seats, but over the amount of paying passengers. It is evident that an increasing load factor, thus a higher amount of passengers, will positively affect the spread of fuel cost per passenger. Whereas the concepts mentioned earlier are focused on the CASK, load factors are indicative of the actual
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2014 19 amount of passengers. Following this reasoning, higher load factors decrease the actual cost per passenger, therefore increase the generated revenue per passenger.
To sum up, airlines can achieve lower fuel consumption per passenger, hence lower their CASK, by increasing the
ASK, which can be done by increasing the stage length and aircraft capacity, or by utilizing more efficient aircraft.
However, in practice, the notion of load factors plays an important role, regarding the actual decrease in costs per passenger instead of per seat.
(c) Charges & Taxes The third cost input that is considered, exists of the charges and taxes that airlines are obligated to pay for operating.
Due to the variations in airport policies and national governmental institutions, airlines tend to differ in their costs structure, in terms of charges and taxes, per, respectively, airport and country (Whitley, 1992; Zuidberg, 2014).
According to the International Civil Aviation Organization (ICAO) (2000), taxes and charges differ in the purpose for what they are raised and state that:
“… charges are levies to defray the costs of providing facilities and services for civil aviation while taxes are levies to raise general national and local government revenues that are applied for non-aviation purposes.” (p. 3).
Therefore, charges to which an airline may be subject to, exist of airport charges such as landing-, passenger service- andATC-charges, and, taxes, such as corporate- and income-tax. The general charges and taxes to which an airline may be subject to can be found in Table 1 (Zuidberg, 2014).
Table 1. Airport charges and Governmental taxes. Airport Charges Governmental Taxes Passenger Facility Charges Individual Income tax Security Charges Corporate Tax Take-off/Landing Fees Parking charges Source: (Zuidberg, 2014).
Because variations exist on both charges and tax level, significant competitive cost advantages can arise, depending on the airports in the network. Differentiation in airport charges originates from the different elements used to determine these charges. Important variables influencing these costs are the Maximum Take-Off Weight (MTOW), flight destination, noise production and emission output (Zuidberg, 2014). It must be noted that although charges may differ per airport, airlines that utilize the same airport will experience equal charge expenses. Hence, overall cost advantages are expressed in terms of applicable charges and taxes for airlines´ main bases. In contrast, because IATA’s
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20 J.N. Rompas policy advocates tax limitations through stimulating reciprocal agreements between countries, multiple taxations for airline operations are avoided. Thus, taxes enable airlines with similar operations to differ in their tax expenses, due to the different tax responsibilities per country.
(d) Maintenance Another major operating expense arises from airlines’ maintenance activities, which consists of unscheduled and scheduled maintenance. Since the former is a function of quality, usage and misfortune, gaining cost advantages through fewer unscheduled maintenance activities is deemed unlikely. Furthermore, the frequency of scheduled maintenance is also expected to be similar among airlines, due to the mandatory maintenance activities as a function of flight hours.
However, both scheduled and unscheduled maintenance costs are based upon labour costs and component prices.
Thus competitive cost advantages in maintenance, may be gained through exploiting a homogeneous fleet thereby enabling maintenance synergies (Al-kaabi, Potter, & Naim, 2007). In terms of labour costs, such synergies can lead, to the reduction of needed skill variety and thus in required labour forces. Another effect of a homogeneous fleet may exist of a decrease in aircraft component inventories through, for example, component cannibalizing or bulk component purchases.
(e) Amortization and depreciation The fifth considered operating expense consists of amortization and depreciation costs. Both concepts relate to the gradually disbursement of assets, for which the former refers to intangible assets, whereas the latter applies to tangible assets (Berk & DeMarzo, 2007). Although amortization and depreciation can be applied on many different assets, the focus here lies on airlines’ depreciation expenses in terms of aircraft purchases. The purpose of aircraft depreciation exists of, spreading aircraft purchasing costs over multiple years and generating a financial reserve funded by the depreciation rates (Doganis, 2002). Since the rate of aircraft depreciation is determined by the airline, cost advantages are dependent on the type of strategy the airline choses.
Depreciation expenses are directly added to the operational expenses, thus lower rates of depreciation positively affects operational expenses. However low rates of deprecation increase the total time-span of pay-off. Conversely, choosing high depreciation rates negatively influence short-term depreciation costs, but will benefit the airline in the long-run since higher non-operating profits are generated when the aircraft are sold. Another advantage of high depreciation rates concerns protecting profits through the tax write-off nature of depreciation rates. However, airlines
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2014 21 do not necessarily require aircraft ownership in order to operate. Nowadays, aircraft leasing has proven to act as a suitable substitute, for which Doganis (2002), notes that,
“… during the last twenty years a growing proportion of aircraft are leased in, rather than purchased” (p. 90).
Costs that arise from aircraft leasing are similarly recognized as operating expenses, but are, to a certain extent, not determined by the airline itself. An advantage of aircraft leasing, consists of the freedom airlines obtain since aircraft leases are less restrictive than aircraft purchases, whereas aircraft purchasing locks the airline into long-term depreciation costs, aircraft leasing requires relatively short commitment periods. Leasing also eliminates the risk of selling aircraft below the desired or market value. Finally, leases provide airlines the opportunity to operate the preferred type of aircraft whenever they want (Aercap, 2014).
Both aircraft purchases and aircraft leasing have advantages and disadvantages and airlines may choose to adopt either one, or a mix of both notions. Overall cost advantages through depreciation, are thus not adequately reflected in lower depreciation costs. However, comparisons of airlines’ fleet financing, in terms of ownership and leasing, may indicate airlines’ view as to which of these two notions they consider most advantageous.
2.1.3 Key cost indicators
Identifying potential cost advantages in operating expenditures, is attempted by means of analyzing the key cost indicators discussed earlier. The variables that influence cost inputs for airlines are considered to exist of national labour policies, fleet homogeneity, passenger load factor, fleet efficiency, route lengths, aircraft capacity, (main) airport charges and home country taxes. Furthermore, airlines’ choice for aircraft ownership or aircraft leasing, indicates the specific advantages airlines aim to exploit.
2.2 Network advantages
The second dimension that is considered, in terms of competitive advantages, concerns the advantages that may arise due to an airline’s network structure. Air traffic networks for airlines and airports have been extensively discussed in the literature (Brueckner & Spiller, 1991; O’Kelly & Bryan, 1998; Verma, Araújo, & Herrmann, 2014; Y. Zhang,
2010). A common starting point has been the separation between H&S and point-to-point networks (Caves et al.,
1984). However, considering the focus of this paper, a different approach is more appropriate. On the issue of
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22 J.N. Rompas competitive network advantages, this paper adopts the perspective of competition on two separate, complementing dimensions.
The first dimension concerns competition based on the airline’s connectivity abilities. By adding new destinations to its current network, airlines are able to exert full control of its competitive strength in this dimension. Whereas, competition in the second dimension, which concerns competing through the airline’s main base, is more fixed and therefore less controllable in terms of gaining network advantages.
2.2.1 Connectedness and Connectivity strategies
In its most basic form, an airline’s product exists of air transport from point A to point B. Hence, adding a new destination, which can be understood as adding a new product, indicates an increase in the airline’s product scope
(Jara-Díaz et al., 2001). The amount of products offered are then equivalent to the amount of different destinations an airline serves and therefore indicative of the network size of an airline (Caves et al., 1984). As Aguirregabiraia & Ho
(2010) note, an airline’s network can be seen as
“… a set of city-pairs that the airline connects via non-stop flights” (p. 1).
Thus, as a result of serving a new destination, the airline’s network, as defined above, increases by one, whereas the total one-stop connections increases by the amount of initial destinations. Since airlines are able to combine their products (for example adding route C to network A-B, not only creates A-C, but also B-A-C and so forth), additional destinations enhance existing product offerings significantly, which demonstrates complementarities between different products (Gimeno & Woo, 1999). The aforementioned synergy, benefitting from the complementarity between multiple products, thereby considerably increasing the amount of offered one-stop connections, is often known as economies of scope (Panzar & Willig, 1981). This is further explained by Teece’s (1980) definition of economies of scope, who states that:
“Economies of scope exist when for all outputs y1 and y2, the cost of joint production is less than the cost of
producing each output separately.”(p. 2)
The notion of economies of scope is then applicable in the following setting. Suppose airline X operates routes A-
B, airlines Y operates routes B-C and airline Z operates route A-B-C. These combined operations are naturally
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2014 23 operated at lower costs when airline X adds destination C to its network (A-B), thus creating a new network (A-B-C), as explained above. This effect of economies of scope is also known as economies of spatial scope. However, Romero-
Hernandez & Salgado (2005) note that when an airline serves Y different destinations, it is potentially able to serve Y
* (Y-1) different routes between these destinations, whereas the emphasis is on ‘potentially’, since such reasoning does not incorporate differences between the actual and potential flight routes served by an airline.
A second implication of adding new routes to an airline its network is the increase in passenger feeds to the initial network. Adding new destinations will generate a new inflow of passengers that enable new feeding opportunities for existing routes, which, in turn, raises the demand for existing routes. This increase in demand allows for higher load factors and greater exploitation of economies of technological scale, through utilization of larger aircraft. It may be evident that adding destinations in the form of ‘inter-hub’- linking will have the greatest impact on exercising economies of scope, due to the larger amount of passenger inflows in the airline’s network (O’Kelly & Bryan, 1998).
However, increasing the network size is not a necessity for achieving higher passenger inflows. Pursuing a larger passenger feed into the airline’s network may also be achieved by increasing the flight frequency of the current flight routes. Following Mason & Morrison (2008), high flight frequencies are expected to indicate effective use of aircraft and cost savings. Since, for a fixed network, higher frequencies means more passengers, and thus a thinner spread of the overall fixed costs (e.g. aircraft ownership costs and overhead costs) over a larger number of passengers. This concept is also known as economies of density, and requires a sufficient travel demand for the existing route. The significant role of traffic density is proven by Douglas (1984), who found that for US carriers, for a given size of network, 45.0% of the difference in unit cost was explained by the difference in the density of service.
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24 J.N. Rompas
Economies of spatial Scope
stop stop - destinations # of # one of
# of non-stop destinations
Passenger inflow into the network
CASK
# of non-stop destinations
Economies of Density CASK
Flight Frequencies in Network
Figure 7. Economies of Scope and Density.
Source: Doganis (2002); Mason & Morrison (2008))
The effects of network expansion are shown in Figure 7. These effects imply that an airline may continue to operate new destinations despite negative profits, because operating the new destination can considerably benefit other routes
(Aguirregabiria & Ho, 2010). In order to operate new destinations, airlines may choose different strategies to expand their network. The growth strategies airlines may choose from, exist of the strategic typologies of mergers & acquisitions, alliances, and organic growth, which are not mutually exclusive (Lyons, 1991). The choice of growth strategy may differ per airline, whereas Zou, Chen, & Ghauri (2010) indicated that the different growth strategies require diverse resources and are associated with distinct performance outcomes.
(a) Acquisitions Increasing the number of destinations an airline serves through acquiring existing airlines is seen as the most costly and most risky strategic option (Zou et al., 2010). Besides the high costs, potential integration difficulties place a great risk on this type of expansions (Hoskisson & Hitt, 1990). Such integration difficulties often encompass the assimilation
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2014 25 of required resources and cultural differences, which may destabilize the acquiring airline’s internal processes
(Carbone & Stone, 2005). Nevertheless, if successful, acquisitions allow airlines to rapidly obtain external assets (e.g. connectivity possibilities, knowledge or aircraft), and provides relative quick entry in new markets (e.g. cheap and fast access to slots), without experiencing time-consuming physical adjustments (Merkert & Morrell, 2012; Zou et al.,
2010).
In general, a choice for acquisition growth is presumed to require sufficient financial resources and acquisition experience, and is often motivated by profit performance (Zou et al., 2010). However, King, Dalton, Daily, & Covin
(2004) their meta-analysis established that, on average, acquisition growth has no or a negative effect on the acquiring firm’s financial performance and noted that such growth
“… may be no more difficult to successfully execute than other alternative strategies for business growth and
development.” (p. 10)
On the other hand, Iatrou & Mason (2009), found that airline acquisitions do have a considerable positive effect on airline operations, especially through the enhancement of the exploitation of economies of scale, density, scope and financial synergies. Although acquisition growth can deliver substantial benefits, it has several great hurdles to overcome. The most essential factors constraining acquisition growth consists of, regulatory mechanisms in the form of anti-trust concerns, labour issues and foreign ownership rules (Fan et al., 2001; Iatrou & Mason, 2009). Such anti- trust regulations often hold the assumption of an increase in price, due to the expected decrease in competition that follows airline acquisition. However, Threteway (2008) cautions the approach for assessing airline mergers, as they may generate wrong conclusions. He claims that due to the classical textbook approach towards acquisition assessments, other important factors like economic efficiency in the form of higher quality services are often disregarded.
Moreover, Merkert & Morell (2012), suggest that an airline may limit the disadvantages by retaining the acquired airline as separate operating entities, but that acquisition growth is decreasingly beneficial for airlines that produce less than 32 billion ASK. They concluded that airline acquisitions will become inevitable for airlines to survive, however only to a certain degree. They advise limited operational growth, regardless of the type of growth strategy, for airlines that process over 100 billion ASK, because in such cases further growth would
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“... not make any sense in terms of scale efficiency. In fact, they would be even counterproductive as
diseconomies of scale apply”. (p. 2, 862)
(b) Alliances Another strategic option, alliances or partnerships between airlines, is a more common phenomenon in the airline industry (Bilotkach & Hüschelrath, 2012). This growth strategy is often motivated by risk reduction, due to risk sharing, which helps to encourage airlines to follow new or innovative paths (e.g. new flight routes or markets) (Lyons,
1991). Furthermore, they offer growth opportunities through learning and cooperation and allow airlines to combine their resources (e.g. flight routes or knowledge) or to obtain complementary resources. (Zou et al., 2010). In addition to the benefits mentioned above, airlines may often engage in alliances if cross border cooperation is the case, since alliances enable airlines to circumvent foreign ownership rules and anti-trust restrictions for cooperation, which, as mentioned before, form the major obstacles for acquisition growth (Bilotkach & Hüschelrath, 2012). The main outcome of engaging in such collaborations, exist of a rapid increase in connectivity through the establishment of code-sharing and interline agreements.
Codeshare agreements
The former option, code-sharing, is achieved by engaging in partnerships, often in the form of non-equity alliances.
Code-sharing entails the addition of flights by offering air travel on flights operated by other airlines, thereby assigning multiple flight numbers to a single flight. Code-sharing encourages higher load factors, stimulate greater aircraft capacity, and is often paired with airlines sharing their customer loyalty program (Bilotkach & Hüschelrath, 2012).
However, such additional exploitation of economies of technological scale is outweighed by the exploitation that is paired with airline acquisition (Iatrou & Mason, 2009).
Interline agreements
Similar to code-sharing, expanding product offerings through interlining also requires, although to a lesser extent, collaboration with other airlines. Interline agreements encompass the handling of passengers on itineraries that include multiple airlines (International Air Transport Association, 2014e). In such cases one airline issues one ticket for multiple flight segments, for which the first segment is operated by the issuing airline and the subsequent segments are operated by others. Passengers that utilize airline interline agreements pay one ticket price to the issuing carrier,
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2014 27 who then divides the revenue among the interlining airlines. Such a mechanism allows an airline to attract more passengers, due to the ability to offer connections that lie outside the airline’s own network.
Both code-sharing and interline agreements refer to collaborations between two airlines for a specific operation.
However, due to the rise of global alliances, which consists of collaborations of airlines, an airline is able to gain immediate access to a wide range of code-sharing and interlining opportunities with different airlines. Whereas one- on-one airline alliances have their greatest positive effect on economies of scale, joining a global airline alliance has its most substantial effect on economies of scope (Iatrou & Mason, 2009). In this case alliances have a more positive effect than any other growth strategy, since none of them can
“… match the network reach of an eight- nine- or sixteen-member alliance. After all, the main drive behind
alliance formation was … the desire to expand their geographic scope of their network so as to achieve global
scale” (Iatrou & Mason, 2009, p. 4).
Thus, establishing growth through alliances is built on networking relationships and is focused on gaining competitive advantages in, for example, knowledge, new markets and business legitimacy (Zou et al., 2010). However, engaging in alliances also comes with certain risks, such as the continuing contrasts of cooperation and competition between the allying airlines. Whereas cooperation may lead to increasing inter-airline dependency, competition will, due to opportunism, negatively impact the reliance on trust and thus increase costs (Das & Teng, 2000).
(c) Organic growth A third approach for increasing product offerings is through organic growth, which refers to the addition of new destinations by simply operating new destinations, without support from other carriers. Organic growth allows greater potential to enter niche markets and to build market share (Zou et al., 2010).
Organic growth is most likely to be successful when the airline possesses strong marketing capabilities and is often driven by performance measurements in the form survival. The survival rate is expected to be the highest for airlines following an organic growth strategy, due to their focus on gaining optimal control of their operations, which results in the ability to respond more adequately to changes in the market (Zou et al., 2010). In comparing both acquisitions and alliances, Iatrou & Mason (2009) conclude that:
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“It is not the positive impact of mergers but also their negative aspects that are by far greater than those of
alliances” (p .5)
Thereby indicating that it is more risky for airlines to choose acquisitions growth over alliance growth. Whereas an organic growth strategy bares the lowest risk, it also, relatively, achieves the slowest growth in network size.
Airlines may differ in their choice of strategic growth option, considering their different objectives and resources.
Therefore, due to the focus of different types of measurements of performance outcomes, a strict comparison between these strategies in terms of competitive advantages is reasoned unsuitable.
2.2.2 Aerodrome characteristics
Despite the increasing deregulation of the airline industry, general exercise of routes fully outside airlines’ home country has been relatively low, causing airlines to focus their operations on one main airport (Forsyth, 2011). This central focus is also a result of both legal restrictions and cost savings that arise from operational synergies.
Concentrating on one central airport creates a glass ceiling to the opportunities in terms of operating routes, and thus ascribes a key role to both the main base’s capacity as well as its geographical location in gaining network advantages. Consequently, the following section will adopt a perspective in terms of the airline’s main base, which is recognized as the airport that is based in the airline’s home country and receives the highest degree of operation activity.
(a) Airport capacity Growing in network size, thus adding new destinations to its current network, requires sufficient capacity at the airline’s main hub, whereas increasing transit and transfer traffic is specifically most demanding in terminal capacity.
Although airport capacity depends on many factors, it is often expressed by two variables, namely arrival and departure capacity per hour (Gilbo, 1993). Hence, advantages in terms of airport capacity, can be measured by the difference in average and maximum runway capacity utilization of the airline’s main base. Such differences indicate the airport’s ability to meet demand and to provide maximum connectivity between a maximum cluster of arriving flights, followed by a maximum cluster of departing flights. When an airport is unable to meet the capacity demand, air traffic congestion may arise that can have negative implications for the airport (over-investment in capacity) and the airline
(higher slot costs) (A. Zhang & Zhang, 2006). Furthermore, Gilbo (1997) showed that for US carriers, excess demand tends to cause delays that result in an average additional operating cost of USD 1600 per hour. Even more extreme
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2014 29 were the findings of Milan (1997), who found average costs associated with delays, for European carriers, to be USD
1330, USD 2007 and USD 3022 per hour for medium, large and heavy jets (as cited in Wu & Caves, 2000). Thus, airport capacity advantages refer to the capacity utilization margin of the European and Gulf carriers’ main bases.
(b) Geographical location Another network advantage that may arise from the airline’s main base is grounded in its geographical position, whereas the ability of an airport to generate geographical comparative advantages for airlines refers to the airport’s ability to attract passengers. This paper attempts to assess airport attractiveness in two different dimensions, specifically on the two different functions airports fulfil in terms of air passenger travel.
In one function, the airport provides air traffic entry/exit, whereas in the other, the airport provides connections between air traffic. Passengers that utilize the first function are called Origin & Destination (O&D) traffic, whereas passengers exploiting the second function are termed Transit & Transfer (T&T) traffic.
Origin & Destination Traffic
Naturally, attracting O&D traffic is dependent on the local geographical position of the airport. Network advantages are then measured in airports’ distance to attractive locations regarding economic development, size, and business and leisure attractiveness. Such values are proposed to be indicated by the corresponding characteristics of the countries in which the main bases are situated. Economic development and size can then be related to the country its Gross Domestic Product (GDP) per capita and the total population of the country, whereas the attractiveness for business and leisure is represented by the ease of doing business and amount of international tourists of the country.
Transit & Transfer Traffic
Contrasted with attracting O&D traffic, the ability to attract T&T traffic relies on the regional and global geographic position of the airport. Hence, network advantages are dependent on the airports’ geographical position relatively to other airports and attractive markets. An additional division of T&T traffic can be made, based on the route length of the connecting flights, which is derived from the H&S concept mentioned earlier where air traffic is concentrated on one central airport, as shown in Figure 8 (Aguirregabiria & Ho, 2010).
The first form of T&T air traffic flow concerns connecting long-haul flights through one main airport, which then operates as an hourglass hub (Burghouwt & de Wit, 2005). The airport attractiveness then, depends on the global geographic positioning for both the inbound as well as the outbound flight.
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Hourglass Hub
D D1 4
H 3 D D2 6
D 3 D6
Hinterland Hub
D1 S S1 4
H3 D2 D4
S3 S6
D3
Figure 8. Types of Hubs and Traffic.
The second form of T&T connecting activity occurs when an airport connects shorts-haul flights with long-haul flights. Here the airport acts as hinterland hub for which its attractiveness is dependent on both the regional geographical positioning as well as global geographic positioning (Dennis, 1994). However, the emphasis of this paper, regarding T&T traffic, is set on the hourglass functionality of the airport.
Since global geographical advantages are considered relatively to other airports and markets, a distinction has been made between current markets, and growing markets. Current markets are identified as the destinations and regions that presently receive the strongest focus of the European and Gulf airlines, whereas growing markets are identified as several economic centers, in terms of developing countries. Identifying the latter countries, is based on O’Neil’s
(2001) well-known BRIC acronym, representing Brazil, Russia, India and China, which refers to the four developing countries that showed the highest economic potential, whereas the IATA (2011) suggests that:
“The BRIC economies have very underdeveloped travel markets and are likely to be a very large source of new
travel demand in the decades ahead.” (p. 5)
However, it is argued that these four economies have, to a certain extent, not lived up to their expectations, consequently giving rise to the acronym MINT. The MINT countries, which stand for Mexico, Indonesia, Nigeria and
Turkey, are perceived as the new important upcoming players in the world economy, but are yet to gain such popularity
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2014 31 and support as the BRIC-economies (Adibe, 2014). Thus, these eight countries are estimated to achieve the highest economic growth in the upcoming years and are therefore deemed appropriate to act as potential future air travel markets.
The section above concerns the geographical advantages of the airport in terms of attracting passengers. It may be evident that attracting O&D and T&T passengers for one airport can differ greatly with other airports. However, the volume of O&D passengers is assumed to be relatively small, since it only concerns air travel demands from either passengers starting or ending their air travel at the relevant airport. Conversely, the volume of T&T traffic is considerably larger, since such traffic covers multiple demands from and to different regions. Thus, it seems that although attracting a larger volume of O&D passengers in terms of the geographical position of an airport is beneficial, its geographical positioning for attracting T&T is reasoned to be of a substantially higher value.
2.2.3 Key network indicators
To sum up, airlines’ operations with regards to flight frequency and number of destinations served, indicates their strength in terms of connectivity. Whereas both characteristics indicate passenger inflow, the latter is also indicative of the scope of the airline’s different product offerings which is determined by their preferred expansion strategy.
Regarding airport network advantages, an airline’s main base capacity utilization margin, and local, regional and global geographical positioning act as an important measure for assessing airlines’ network advantages, for which the latter aspects refer to the relative distance and positioning towards attractive cities and markets.
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32 J.N. Rompas
CHAPTER 3: Research design
3.1 Research question
This paper attempts to address the current dynamics in long-haul aviation market, by stating the following research question:
“To what extent do the Gulf carriers’ characteristics generate an increasing and sustainable threat to the European carriers?”
The outcome of this research is expected to contribute to a better understanding of airline competition in long-haul markets, whereas awareness is hoped to be created, regarding the current threats and opportunities in the airline industry.
3.2 Research methods
Due to the “real-life” context and interpretive approach of the phenomena, a qualitative method is considered most appropriate (Gephart, 2004). This paper intends to establish a clear illustration and to unravel potential effects of the aforementioned industry developments. Since these dynamics have not been addressed, in its current specific context, in the literature, the nature of this research tends to be exploratory (Ryan, Scapens, & Theobald, 2002; Saunders &
Lewis, 2012). Moreover, an inductive method of reasoning is appropriate, since general conclusions regarding the impacts of the dynamics on the airline industry are intended to be developed (Bryman, 2012). Additionally, the research is focused on contemporary events for which, because of the “real-life” context, control of events is not possible. These conditions enable a situation where a case study approach is most suitable (Yin, 2009). Furthermore, by setting airlines as the chosen unit of research, a comparative analysis is possible, which allows a multiple-case research design where each case represents a distinctive airline (Yin, 2009). The multiple-case approach is conducted in a parallel structure, meaning the cases are being studied concurrently (Thomas, 2011). With respect to the feasibility, boundaries are established by narrowing down the focus towards specific airlines and airline characteristics.
3.2.1 Data collection
The required data consists of airline information, such as, product offerings and employed growth strategies. The relevant data is collected through database research, documentary analysis and interviews. The main data source for
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2014 33 this paper exist of data from the CAPA ‘Centre for Aviation’ database, which holds information regarding the airline industry, such as, number of flights and fleet information. Access to this database is provided through Mr. de Wit, as part of his supervisory role. The documentary analysis is performed based on a variety of internet resources. Important resources are, among others, newspaper articles, company documentations and public reports, which are all publicly available. Newspapers articles contain information about the current and future developments of airlines and are especially relevant due to their topical nature. Company documentation, such as annual reports, are expected to include information that, to a certain extent, indicate the changes in business models that airlines have experienced and its effects on the airline’s performance. Public reports often contain an independent analysis of the airline industry conducted by governmental bodies, such as, the IATA and the ICAO. Finally, due to the particular cases, distinctive in-depth interview questions have been set up and directed to specific airline professionals.
3.2.2 Data analysis
By looking at different aspects of the operations such as, flight routes operated, number of aircraft utilized and the engagement in (non-)equity alliances, a comparative analysis has been established, in terms of the different growth strategies employed by Gulf carriers and its effects. Through establishing a chain of evidence and processing the findings based on relevant strategy-theories, this paper attempts to provide conclusions on the future developments in some of the specific market segments of the airline industry.
3.3 Research context
Furthermore, the appropriate cases have been selected by means of a theoretical sampling method. This method exists of purposeful sampling which, by selecting key cases, guarantees the inclusion of airlines that are of inherent interest for the dynamics being researched (Eisenhardt & Graebner, 2007).
3.3.1 European full-service carriers
Although the main focus lies on Gulf carriers, in order to successfully explore the potential effects of the current dynamics in long-haul market, an analysis of European full-service carriers must also be included. The selection of
European full-service carriers is based on the following conditions: They must (1) have their main base located within
Europe and (2) offer a substantial network of scheduled intercontinental full-service passenger flights to Africa,
Central Asia and South East Asia. Three airlines that meet these conditions and which are subject to direct competition
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34 J.N. Rompas from the Gulf carriers are, KLM (KL), Lufthansa (LH) and British Airways (BA). Since KLM is part of the ‘Air
France-KLM’ group (AF-KLM) and British Airways belongs to the ‘International Consolidated Airlines’ group
(IAG), both Air France (AF) and Iberia (IB) are considered to be accordingly represented by KLM and British Airways and are thus excluded from this analysis.
3.3.2 Gulf carriers
The Gulf carriers that will be examined must meet the following requirements: They must (1) for obvious reasons, be situated in the Gulf region, and (2) operate scheduled intercontinental, full-service passenger flights to Africa,
Central Asia, South East Asia and Europe. Three airlines are chosen that meet these requirements, which are, Emirates
(EK), Etihad Airways (EY) and Qatar Airways (QR).
3.4 Strengths and limitations
One of the weaknesses of this research is the accessibility of airline representatives. Although interview-questions were set-up and advanced to specific airline professionals, the response rate has been minimal (1 respondent). Due to the locations of the airlines’ main bases, difficulty arose to access the specific airline experts, and thus in conducting interviews. This affects the construct validity by means of limited triangulation (Yin, 2009). Furthermore, the chosen data collection methods limits the available data and, may yield data which was originally collected for different purposes.
However, using a documentary analysis brings an inexpensive form of data collection and leads to the data being readily accessible. Also the chosen data collection methods will mostly result in quantitative data, which decreases the chance of data loss during the data collection and processing phase (Appleton & Cowley, 1997).
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CHAPTER 4: Findings
The west coast of the Persian Gulf is comprised of, the United Arab Emirates, Qatar, Bahrain, Saudi Arabia and
Kuwait. Although these countries house home bases for several airlines, this paper, when exercising the term ‘Gulf carriers’, refers to the three largest airlines within the United Arab Emirates and Qatar. In the following Chapter these airlines, which, as mentioned before, encompass Emirates, Etihad Airways and Qatar Airways will be discussed in terms of the identified cost and network indicators compared to the European Carriers KLM, Lufthansa and British
Airways. Subsequent tables also refer to these six airlines, except where data are unavailable. The findings for these airlines are represented in two sections, separating manageable advantages and externally induced advantages.
4.1 Theoretically imitable strategic advantages
The following section analyzes the competitive advantages between the airlines, as a result of their strategic decision making. These possible advantages are assumed to be the outcome of purposeful strategic positioning and therefore, in theory, to a certain extent imitable by other airlines.
4.1.1 The pursuit of growth
Although the Gulf carriers resemble each other on many aspects, their growth strategies could not be more contrasting. This difference is a reflection of the choices these airlines have made, and clearly demonstrates the absence of constraints in their adoption of specific strategies.
The enormous growth of the Gulf carriers in their network size is illustrated in Figure 9. In the period of 2010-
2013, the average combined growth rate has been 10.51%, which represents an increase in total network size of the three Gulf carriers, from 265 destinations to an astonishing total of 357 destinations.
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20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0% EK EY QR
2010 2011 2012 2013
Figure 9. Growth of network size of, Emirates, Etihad Airways and Qatar Airways for CY2010-2013.
Sources: Emirates (2013); Etihad Airways (2014a); Qatar Airways (2014b).
When looking at the network size of each Gulf carrier, it is apparent that their relative proportions have not changed radically, as seen in Figure 10. However, despite the steady and strong growth, the Gulf carriers’ network size is fairly lesser in comparison with that of the European carriers. Such difference can be explained by the major difference in company lifetime. Whereas the European carriers have an average age of 65 years, the Gulf carriers are relatively young, with an average age of 20 years.
Gulf carriers CY 2012
Gulf carriers CY 2013
May 2014
0% 20% 40% 60% 80% 100%
EK EY QR KL LH BA
Figure 10. Gulf carriers’ relative network size in destinations, for CY2010, CY2013 and European carriers’ relative network size as of May 2014.
Sources: CAPA (2014c).
Nevertheless, if the Gulf carriers are able to continue their rate of network expansion, it is a matter of time before they match the network size of the European carriers. It should be noted that the network size is not equivalent to the
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2014 37 operational size, since it excludes consideration of flight routes, frequency and aircraft capacity. Including these operational concepts leads to the comparisons of ASK per airline, as shown in Table 2.
Table 2. ASK in millions for CY2012 and CY2013. ASK ASK % Increase 2012 2013 2012-2013 (in millions) (in millions) Emirates 200,687 236,645 17.9 Etihad Airways 61,000 71,100 16.6 Qatar Airways naa na na KLM 100,727 103,739 3.0 Lufthansa 191,902 193,807 1.0 British Airways 158,247 161,444 2.0 Source: Emirates (2013); Etihad Airways (2014a); KLM (2013); Lufthansa (2013); British Airways (2013).
a na = data not available.
This indicates that although Emirates serves fewer destinations, their ASK is relatively high, with British airways being the average performer in ASK. It also shows that the growth rate of European carriers’ ASK is considerably lower than that of the Gulf carriers. The Gulf carriers are achieving such high growth rates by rapidly expanding their existing network, which is a result of their differing growth strategies.
(a) Emirates Emirates is, despite being relatively young, the oldest player in the Gulf area. In its 28 years of existence, Emirates was able to grow into one of the world’s largest airlines, transporting over 39 million passengers in 2013. Comparing
Emirates’ development with that of European Carrier KLM, illustrated in Figure 11, signifies the relatively steady growth and course in which Emirates is heading.
45 M 40 M 35 M 30 M 25 M 20 M 15 M 10 M 5 M M EK KL
2007 2008 2009 2010 2011 2012 2013
Figure 11. Passengers transported for Emirates and KLM in millions for CY2007-2013.
Sources: Emirates (2010; 2011; 2012; 2013); KLM (2013).
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Emirates is achieving such developments by adopting several different growth strategies. One of those strategies concerns airline partnerships, of which Emirates, during its existence, has entered in twice. In 1998 Emirates purchased
43.6 percent ownership in Air Lanka, Sri Lanka’s flag carrier. However, after rebranding it Emirates sold its stake to the Sri Lankan government in 2010, ending its relationships with Air Lanka (Jain, 2009).
Emirates’ second partnership concerns a non-equity alliance with Australia’s flag carrier Qantas Airways as of
2013, which was initially planned for 10 years, but only granted a 5-year approval from the ‘Australian Competition and Consumer Decision Commission’ (Harper, 2013). This partnership increased Emirates’ product offerings, by adding a total of 58 one-stop domestic destinations to Emirates’ network. Despite the major increase in offerings, future partnerships like that with Qantas are predicted to be unlikely (Trenwith, 2013). However, growth in network size has also been realized through other forms of airline collaborations, such as code-sharing and a joint frequent- flyer program (FFP) as seen in Table 3. Whereas the former is focused on attracting potential new passengers, the latter is directed at retaining current passengers.
Table 3. Emirates collaborations regarding code-sharing and joint frequent flyer programs as of December 2013. Codeshare FFP Agreements Air Malta Yes Air Mauritius Yes Alaska Airlines Yes EasyJet Yes Japan Airlines Yes Yes Jet Airways Yes Yes Jet Blue Airways Yes Yes Jet Star Yes Korean Air Yes Yes Oman Air Yes Philippine Airlines Yes Qantas Yes Yes South African Airways Yes Yes TAP Portugal Yes Yes Thai Airways International Yes Virgin America Yes Sources: Emirates (2013); IATA (2014a).
Main strategy
Although these two strategies aid Emirates’ network expansion, their main growth has been realized through network developments via an organic growth strategy. Emirates’ adoption of, and noticeable emphasis on, such a strategy is reflected in the relatively steady and incremental rate of network expansion, compared to the fluctuating growth rate of the other Gulf carriers, as seen in Figure 10. However, with 132 destinations it is still larger than both
Etihad Airways and Qatar Airways, and thus able to benefit most of the advantages that arise from economies of scope.
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(b) Etihad Airways In November 2013, Etihad Airways celebrated its 10th anniversary and achieved its third consecutive year of net profit, increasing its profit with 48 percent from USD 42 million to USD 62 million. (Corwell, 2014; Etihad Airways,
2014a; Etihad Airways, 2014c). Similar to Emirates, Etihad Airways is seeking its growth through multiple, complementary, strategies. Although Etihad’s activity in network expansions through code-sharing, has been considerably higher than that of Emirates. As of 2013, Etihad is operating codeshare agreements with over 45 airlines, as reflected in Figure 12.
50
45
40
35
30
25
20
15
10
5
0 2005 2006 2007 2008 2009 2010 2011 2012 2013
Figure 12. Code-sharing partners Etihad Airways as of December.
Source: Etihad Airways (2014a).
These code-sharing partners are dispersed among the three global airline alliances and have provided Etihad
Airways with more than 420 additional one-stop destinations from their home base (Etihad Airways, 2014a).
Main strategy.
Although this strategy has increased Etihad Airways’ network enormously, Etihad Airways overall growth has been explicitly more focused on growth through acquisition. This strategy, in contrast with that of Emirates, has led
Etihad Airways to acquire stakes in seven different airlines over the last three years, as indicated in Table 4. In 2012-
2013, these acquisitions delivered more than 1.2 million passengers to the Etihad network and jointly added USD 820 million of partnership revenue to Etihad’s total revenue (Etihad Airways, 2014a).
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Table 4. Equity partners Etihad Airways (EY) as of June 2014. Air berlin Air Aer Lingus Virgin Air Serbia Jet Airways Etihad Alitalia Seychelles Australia Regionala Stake 0.29 0.40 0.049 0.199 0.49 0.24 0.333 0.49 Since 12/2011 01/2012 05/2012 08/2010 08/2013 11/2013 11/2013 tbab Destinations Served 147 6 63 63 32 71 18 103 Source: Etihad Airways (2014a); Alitatlia (2014).
a Formerly known as Darwin Airline b tba = to be announced; This acquisition is yet to be completed. However agreement on the principal terms and conditions of Etihad Airways’ offer has been established on 25 June 2014.
Thus, so far, Etihad Airways’ choice for such relatively risky growth strategy has been fruitful. However, several acquisitions, such as those of Jet Airways and Air Berlin, have gone through costly delays and were opposed by several institutions regarding anti-trust regulations. Furthermore, from a similar point of view, Etihad Airways’ developments have been explicitly criticized by different airlines, requesting judicial sanctions (El Gazzar, 2014). Such critics are believed to have direct negative impacts on brand reputation as well indirect negative impacts on operations. Recently, in April 2014, the European Commission has even initiated an investigation into foreign investments in European carriers, including, among others, Etihad Airways’ stakes in Air Berlin and Etihad Regional (CAPA, 2014a; Reuters,
2014a). On top of that, Etihad Airways’ proposed deal, covering a 49 percent stake in the Italian carrier Alitalia, is, although the deal has yet to be finalized, also being investigated by the European Commission (Parker & Sharman,
2014).
(c) Qatar Airways The third Gulf carrier, Qatar Airways has been operating air passenger flights since 1994. Of the three Gulf carriers,
Qatar Airways is currently the only major Gulf carrier that does not disclose any type of annual report regarding its operations. Therefore the available financial and operating statistics are limited and are often estimates by aviation analysts.
However, based on these estimates and the publicly available information, Qatar Airways’ prominent growth strategy can be illustrated. Qatar Airways is the first, and presently the only, major Gulf carrier that has opted a growth strategy through entering a global airline alliances. It is a member of the OneWorld alliance, which houses, as of May-
2014, 15 airlines, as shown in Table 5.
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Table 5. Members of the OneWorld airline alliance as of May 2014. Airlines IATA Destinations code Air Berlin AB 108 American Airlines AA 272 British Airways BA 190 Cathay pacific CX 53 Finnair AY 67 Iberia IB 102 Japan Airlines JL 73 LAN Airlines LA 93 TAM PZ 59 Malaysia Airlines MH 81 Qantas QF 76 Qatar Airways QR 129 Royal Jordanian RJ 59 Sibir Airlines S7 88 SriLankan Airlinesa UL 36 Total 1486 Sources: CAPA (2014e); IATA (2014a); OneWorld (2014a).
a Most recent member, as of May 2014.
This membership has led to codeshare agreements with numerous airlines and increases the likelihood of future collaborations. Currently Qatar Airways has codeshare agreements with 14 airlines, excluding the remaining 11 airlines of the OneWorld alliance, with which Qatar is expected to be collaborating sooner or later. Besides future codeshare agreements, the OneWorld alliance provides interline ticketing and a joint FFP, between all member airlines, which both positively affect customer wellbeing (OneWorld, 2014b). Although Qatar Airways is the only
Gulf carrier who entered a full-membership in one of the three global alliances, both Emirates and Etihad Airways are indirectly associated with a substantial number of members of the various alliances, as seen in Table 6.
Table 6. Global airline alliances and Gulf carriers as of June 2014. SkyTeam Star Alliance OneWorld
Emirates Codeshare with 1 airline. Codeshare with 3 airlines. Codeshare with 1 airline. Korean Air South African Airways Japan Airlines TAP Portugal Thai Airways International Partnership with 1 airline. Qantas
Etihad Airways Codeshare with 7 airlines. Codeshare with 6 airlines. Codeshare with 4 airlines Air France Aegean Airlines American Airlines Alitalia Air Canada Malaysia Airlines Czech Airlines Air New Zealand S7 Airlines Kenya Airways ANA SriLankan Airlines KLM South African Airways Korean Air TAP Portugal Equity stake in 1 airline. Vietnam Airlines Air Berlin
Equity stake in 1 airline. Alitaliaa
Qatar Airways Codeshare with 2 airlines. Full Member ANA Asiana Airlines Sources: Emirates (2014); Etihad Airways (2014b); Qatar Airways (2014a); SkyTeam alliance (2014); Star alliance (2014); OneWorld alliance (2014a); Alitatlia (2014).
a This acquisition is yet to be completed. However agreement on the principal terms and conditions of Etihad Airways’ offer has been established on 25 June 2014
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As shown, Emirates is relatively reserved in their global alliance interactions, signaling their independence, whereas Etihad Airways is establishing solid ties with all three of them.
The striking difference in growth strategies between the Gulf carriers signals their different opinions on the idea of achieving growth. As the theory indicated, organic growth requires a solid primary market position. Of all three
Gulf carriers, Emirates is operating a significant higher air traffic flow, thus supporting the notion of a strong initial position. Growth through acquisition, adopted by Etihad Airways, is believed to involve sufficient financial resources.
Whereas recent publications confirmed beliefs that Etihad Airways is financial backed by the Abu Dhabi royal family, thereby indicating that it has no major difficulties fulfilling such financial requirements (Reuters, 2014b). Finally, alliance growth, as discussed before, seems most applicable for gaining competitive advantages. Specifically advantages in terms of network size are expected to be realized when adopting such a strategy. This corresponds with
Qatar Airways’ relatively small operation (compared to the other Gulf carriers) and therefore higher need to adequately compete in network size. Thus, based on the findings, it seems that the three Gulf carriers’ choice of main strategy is in line with theories of achieving growth.
4.1.2 Benefits in Network characteristics
Although airlines’ choice of network operation is dependent on factors such as the current demand and regulatory policies, decisions of operating a certain network remain unrestricted. Thus, decisions regarding route lengths and flight frequencies are limited, but not enforced upon airlines and therefore, in theory, completely within their own decision making power. However, a major determinant for such strategic decisions exists of the geographical location of attractive markets and the airline’s main base. Consequently, in practice, thereby incorporating said factors, airlines are, to a certain extent, restricted in their decision making.
(a) Route lengths A first key network characteristic consists of the airline’s average stage lengths which, as aforementioned, refers to a decrease in fuel costs per mile for increasing distance. By analyzing the ASK, Passengers Transported and Load factor, the average distance per passengers can be computed, as shown in Figure 13.
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Whereas the average route length per passenger for the three European carriers is 3,029 km, the two Gulf carriers jointly have an average of 4,805 km, which expresses a 58% longer average distance per passenger, indicating a much thinner spread of total fuel consumption per kilometer.
5000
4000
3000
2000
1000
0 EK EY QR KL LH BA
Figure 13. Average distance travelled per passenger in kilometers for CY2013.
Sources: Emirates (2013); Etihad Airways (2014a); KLM (2013); Lufthansa (2013); British Airways (2013).
note Data for Qatar Airways has not been made available for this paper. note Lufthansa Passenger Airlines inclusive of GermanWings and regional airlines (LH); SWISS (LX), Austrian Airlines (OS) and Lufthansa Cargo (LCAG) as of December 2013
This strong difference clearly illustrates the distinctive forms that European and Gulf carriers have regarding their product offerings. Whereas European carriers offer mixed routes ranging from short- to long-haul, Gulf carriers are evidently aiming on the long-haul market. This dissimilarity provides the Gulf carriers, in terms of their overall operations, with a lower fuel consumption rate per mile, relative to the European carriers, thus strengthening the assertion of cost advantages for the Gulf carriers.
(b) Flight frequency As aforementioned, flight frequencies impact airline operations by increasing the passenger inflow at the airline’s main base, and decreasing the CASK due to the distribution of overall fixed costs.
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Table 7. Average weekly frequency per route per airline as of May 2014. Top three most common Average flight frequencies frequency Emirates 7, 14, 21 10 Etihad Airways 7, 13, 3 9 Qatar Airways 7, 4, 14 11 KLM 7, 3, 21 18 Lufthansa 7, 13, 2 13 British Airwaysa 7, 14, 3 13 Sources: CAPA (2014d).
a As of June 2014.
As seen in Table 7, all six carriers’ most common flight frequency is similar, whereas all carriers are offering most of their flights seven times per week. However, when looking at the average flight frequencies, the European carriers score significantly higher. This indicates that the European carriers are more extensively exploiting the concept of economies of density. The explanation for this difference relates to the average route length as mentioned before. Due to the higher average route lengths, Gulf carriers are simply, physically, not able to maintain such high average frequencies.
(c) Passenger load factor One of the notions that enhance cost advantages concerns the passenger load factor, which comprises the average utilization of aircraft capacity. Although this measurement does not directly imply competitive advantages, it enhances the cost advantages as mentioned before.
0.90
0.85
0.80
0.75
0.70
0.65 EK EY QR KL LH BA
2010 2011 2012 2013
Figure 14. Passenger Load Factor for Emirates, Etihad Airways, KLM, Lufthansa and British Airways.
Sources: Emirates (2013); Etihad Airways (2014a); KLM (2013); Lufthansa (2013); British Airways (2013).
note Data for Qatar Airways has not been made available for this paper.
As seen in Figure 14, both Emirates and Etihad Airways do not possess significant gains regarding their passenger load factor. Actually, whereas Emirates reports an average of 79.45% (total average is 79.80%), Etihad Airways’
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2014 45 average load factor is, at 76.62%, markedly lower. However, as aforementioned, passenger load factor implies the extent to which competitive advantages are exploited, but do not constitute a competitive advantage itself.
4.1.3 Fleet features and utilization
Both the Gulf as well as the European carriers discussed in this paper, are offering passenger and cargo air transport services. Although both services may utilize similar aircraft, for example by utilizing a passenger aircraft’s belly for cargo storage, this is not always the case. Airlines may also opt to dedicate aircraft solely to cargo transport, which is then called a freighter aircraft. Freighter aircraft and passenger aircraft require different aircraft configurations and are thus, when looking at passenger transport services, not related in terms of aircraft utilization. Accordingly, the following statistics only refer to the carriers’ passenger aircraft.
(a) Fleet homogeneity As previously mentioned, fleet homogeneity positively affects operating costs, in terms of both labour costs and maintenance costs. As illustrated in Figure 15, obtaining fleet homogeneity tends to differ considerably per airline.
This difference can partly be explained by the different markets these carriers serve. Emirates, for example, does not operate any narrow-body aircraft as a consequence of their explicit focus on the long-haul market. In contrast,
Lufthansa’s fleet, due to their mixed market focus, is split into narrow- (32%) and wide-body (68%) aircraft.
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Emirates KLM
Etihad Lufthansa
Qatar British Airways
A330 A340 A350 A380 B747 B767 B777 B787 MD-11 A318 A319 A320 A321 B737 B757
Figure 15. Fleet composition as of December 2013.
Source: CAPA (2014c).
note Aircrafts categorized per “aircraft-family”. Excluding Embraer E170 and Embraer E190 for British Airways and Embraer E190 for KLM.
In 2013 both Emirates and Etihad Airways operated four types of aircraft, whereas Lufthansa operated eight different aircraft. Less differences exist between Qatar Airways and KLM that respectively operate seven and five aircraft types. However, more striking is British Airways, which operated the most heterogeneous fleet, with 11 different types of aircraft. Thus Gulf carriers, apart from Qatar Airways, are proven to operate a much more homogeneous fleet. As aforementioned, such relatively high fleet homogeneity is assumed to positively affect costs
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2014 47 in terms of labour and maintenance. Although the true cost savings of operating a homogeneous fleet are incomputable, it is evident that such savings exist, and that they are of a far greater degree applicable to the Gulf carriers.
(b) Fleet efficiency Besides a homogenous fleet, airlines strive to operate the newest aircraft for several reasons. One of these, is the fact that a young fleet applies modern technology and thus operates a lower fuel consumption rate in terms of necessary and generated thrust.
Table 8. Average aircraft age as of May 2014. Average Age (in months) Emirates 78 Etihad Airways 65 Qatar Airways 66 KLM 128 Lufthansa 137 British Airways 155 Sources: CAPA (2014c); British Airways (2013).
Due to their short existence and recent rapid growth spurt, the Gulf carriers’ fleets is fairly young compared to the older European carriers, as seen in Table 8. However, the substantial younger fleet of the Gulf carriers is not just the result of their relatively young existence. It is furthermore being reinforced by their choice of aircraft procurement.
Although all six airlines have chosen a mix of aircraft ownership and leasing, their chosen proportions vary greatly as illustrated in Figure 16. As seen, both Emirates and Etihad Airways prefer aircraft leasing over ownership, whereas
Qatar Airways and KLM do not seem to favor either one. In contrast Lufthansa and British Airways strongly indicate a preference for aircraft ownership. This clear difference in preference is supportive of the difference in average fleet age, due to the relative ease of frequent fleet renewal that is paired with aircraft leasing.
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EK 35.5%
EY 38.9%
QR 49.2%
KL 46.2%
LH 97.1%
BA 86.3%
0% 20% 40% 60% 80% 100%
Owned Lease
Figure 16. Ratio fleet ownership and leasing as of December 2013.
Source: CAPA (2014c).
(c) Aircraft capacity Another major cost advantage that can arise from fleet characteristics, is cost savings through the aforementioned concept of economies of technological scale. It may be evident that airlines’ market focus also relates to the average capacity of their aircraft, since a stronger focus on long-haul routes requires larger planes, which, in turn, allow for greater capacity compared with short- and medium-haul aircraft. This corresponds with the established average capacity per operating aircraft, illustrated in Figure 17. Both Etihad Airways and Qatar Airways outperform the
European carriers in terms of average capacity, relatively with 252 and 248 offered seats per aircraft. However,
Emirates, due to their large B777-300ER and A380-800 fleet, exercises an average capacity of 359 seats per aircraft, which is even expected to increase due to their large A380-800 orders. This difference indicates the extent to which
Emirates is superior in its ability to spread the fuel costs per flight among a larger amount of passengers, compared to both the other Gulf as well as the European carriers, thereby applying the principle of economies of scale.
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400
350
300
250
200
150
100
50
0 EK EY QR KL LH BA
Figure 17. Average capacity per operating aircraft for CY2013.
Source: CAPA (2014c)(2014); Airbus (2014); Boeing (2014)
note Average capacity calculated based on typical 2, or 3-class (when applicable) seating configurations. note Aircrafts categorized per “aircraft-family”. Excluding Embraer E170 and Embraer E190 for British Airways and Embraer E190 for KLM.
With regards to the cost advantages discussed above, Gulf carriers seem to enjoy a favorable position in terms of average route length, fleet homogeneity, fleet efficiency and average aircraft capacity. As repeatedly mentioned before, these manageable cost advantages are, most often, a natural effect of the distinctive market focus of the
European and Gulf carriers. However, it should be noted that, although the airline’s market focus is, in theory, controllable by the airline, in practice the airline’s market focus is a result of a combination of various geographical locations, which are obviously uncontrollable by the airline.
4.2 Externally determined advantages
The subsequent section considers the extent to which external factors generate competitive advantages between the airlines. The benefits that may arise from such factors lie outside airlines’ control and are rooted in country- and airport specific characteristics.
4.2.1 Country specific regulations and benefits regarding airline costs
The first set of external factors that are discussed, are those that provide airlines with cost advantages in terms of labour and fuel expenses, and revenue taxation.
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(a) Labour policies One of the most obvious input costs exists of labour costs, which largely depend on the salaries paid per employee.
Since labour wages are often considered to be, to some degree, related to product prices, it can be argued if such costs differences are truly indicative of cost advantages. However the comparison in this paper rests on the argument that airlines compete in a globalized market. This forces airlines to compete on product prices on a global scale, whereas competition for labour, is more dependent on the local environment.
Nevertheless, in order to strengthen this argument, it is appropriate to determine a measure of employee value. An attempt to quantify overall employee value is provided by computing the average ASK generated per employee, as seen in Table 9.
Table 9. Generated ASK per employee for CY2013. Generated ASK Emirates 4,963.400 Etihad Airways 5,253.048 Qatar Airways naa KLM 2,908.951 Lufthansaa 4,847.478 British Airways 4,195.966 Sources: Emirates (2013); Etihad Airways (2014a); KLM (2013); Lufthansa (2013); British Airways (2013).
a na = data not available.
As expected, due to the different network structure, both Emirates and Etihad Airways produce significantly more
ASK per employee relative to the European carriers. However, surprisingly, although British Airways also operates with a mixed market focus, their generated ASK per employee is more similar to that of the Gulf carriers. It is evident that, disregarding costs, employees’ production seems to be higher for the Gulf carriers than for the European carriers, which is again due to their strong focus on long-haul operations.
When looking at the financial aspects of the airline’s labour force, the average costs per employee, as shown in
Figure 18, is considered to be an appropriate indicator. Unfortunately employee expenses for Etihad Airways and
Qatar Airways were not available for this paper. It is therefore appropriate to argue for the existence of competitive labour (dis-)advantages for all Gulf carriers, due to the assumption that Emirates’ employee features are reflective of all three Gulf carriers.
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EK
EY
QR
KL
LH
BA
$- $40,000.00 $80,000.00 $120,000.00 $160,000.00 $200,000.00
Figure 18. Average cost per employee in USD for CY2013.
Sources: Emirates (2013); KLM (2013); Lufthansa (2013); British Airways (2013). note Currency rates according to XE currency converter as of 16th April 2014. note Lufthansa Passenger Airlines inclusive of GermanWings and regional airlines (LH); SWISS (LX), Austrian Airlines (OS) and Lufthansa Cargo (LCAG) as of December 2013. note Data for Etihad Airways and Qatar Airways has not been made available for this paper.
It is interesting to see that Emirates’ average cost per employee is far lower (USD 51,557.57), than that of the average European carriers (USD 110,987.22), indicating much lower labour expenses. The relative cost for KLM and
Lufthansa is even higher, considering that British Airways’ average labour expense (USD 58,348.06) is almost similar to that of Emirates. Thus, not only do the Gulf carriers realize higher productivity per employee, their employees are also less costly in terms of average employee expenses. Although lower average expenses per employee indicate lower gross salaries per employee, the difference in the airline’s expenses and the actual net received pay per employee are dependent on the taxation regime.
(b) Country taxes The two types of taxes relevant for this paper exist of corporate tax, and individual income tax. The rates of these taxes differ per country and are stated in Table 10.
Table 10. Tax rates per country as of December 2013. Corporate Tax Individual Income Rate (%) Tax Rate (%) United Arab Emirates 20 - 50 0 Qatar 10 0 The Netherlands 25 52 Germany 29.58 45 United Kingdom 23a 45 Sources: KPMG (2014).
a As per April 2014, the UK corporate tax rate decreased to 21%.
Although the corporate tax rate in the United Arab Emirates is set at 20%-55%, such taxation is not valid for both
Emirates and Etihad Airways. According to KPMG (2014), corporate tax in the United Arab Emirates is,
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“… currently only enforced on foreign oil companies engaged in the exploration and production of oil and
branches of foreign banks”
Furthermore, in Qatar, the 10% corporate tax rate is only generally applicable for foreign investors (KPMG, 2014).
Qatari entities, such as Qatar Airways, are exempted from these taxes. Thus, with respectively a 0% corporate tax rate for the Gulf carriers, and an average corporate tax rate of 25.86% for the European carriers, a significant cost advantage is created. However, it should be noted that such national tax rates are only levied on European carriers, whenever profit is generated.
With regards to the tax rate for individual income, the Gulf countries also prove to be far more attractive. Since a
0% individual income tax rate will, as aforementioned, positively affect employee net salary, thereby allowing lower gross salaries, thus lower employee expenses for the Gulf airlines.
As a result of the major difference between the Gulf countries and Europe, it can be concluded that Gulf carriers enjoy a far more attractive position in terms of taxation regimes and tax expenses.
(c) Fuel prices Another important determinant of airline costs consists of the price paid for jet fuel. In their annual reports British
Airways noted an average price USD 132.23 per barrel of jet fuel, whereas Emirates and Lufthansa noted an average fuel price of respectively USD 127 and USD 108.73 per barrel, indicating the different fuel prices per airline (British
Airways, 2013; Emirates, 2013; Lufthansa, 2013).
Since airlines often refuel after flight (especially long-haul flights), refueling outside their home base is not unusual. Therefore major variance in the prices that airlines pay for jet fuel may arise. Thus, the average fuel price that airlines pay depend on their market focus and the airports they serve, and do not seem to adequately reflect fuel cost (dis)advantages.
A more suitable pointer of fuel cost advantages consists of the fuel prices at the airlines’ home bases, since that is where airlines uplift most of their fuel. Such airport-related fuel prices are expected to be reflected in the regional fuel prices. These prices, as shown in Table 11, indicate that fuel prices are lowest for the region of the Middle East and among the highest for Europe.
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Table 11. Fuel prices per region in USD per barrel as of April and May 2014. April 2014a May 2014b Asia & Oceania 122.7 120.8 Europe & CIS 124.1 122.6 Middle East & Africa 121.0 119.2 North America 124.0 122.2 Latin & Central America 128.2 125.5 Average 124 122.1 Sources: IATA (2014d).
a As of the 25th of April 2014 b As of the 9th of May 2014
Thus, although the European and Gulf carriers may pay similar prices for jet fuel in foreign airports, the prices
Gulf carriers pay at their home bases are expected to be lower, thus more favorable, compared to the European airports.
4.2.2 Abu Dhabi, Doha and Dubai Airport
As discussed earlier, airlines’ main base play a key role in their operations and can thus be recognized as an important instrument for achieving competitive advantages. Main bases are considered to be influential in gaining both cost and network advantages.
Whilst the European carriers have been operating from the same, gradually and incrementally expanding airports, the Gulf carriers are currently in the process of shifting their operations to new airports, tailored to fit their growth plans. However, since these airport expansions have not been fully operationalized, the analysis in this paper is mostly concerned with the airports as of December-2013, and considers these airport expansions whenever possible. The airlines and their respective main bases, as of 2013 are provided in Table 12.
Table 12. Airlines and their main base of operating. Main base IATA code Emirates Dubai International Airport DXB Al Maktoum International Airporta DWC Etihad Airways Abu Dhabi International Airport AUH Qatar Airways Doha International Airportb DOH Hamad International Airport DOH KLM Amsterdam Airport Schiphol AMS Lufthansa Frankfurt Airport FRA British Airways London Heathrow Airport LHR a The new ‘Al Maktoum International Airport’ is also known as the Dubai World Central Airport and is already partially operational. b Doha International Airport handled its last commercial airline operations at 27-May-2014, shifting all its operations to Hamad International Airport.
(a) Airport charges As aforementioned, airports affect airlines’ operating expenses via airport charges. The type of charges airports lay upon airlines are for a large part consistent, however, the methods for calculating such charges vary markedly per airport. The most often used determinants of these charges, consists of different flight factors such as, aircraft type
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54 J.N. Rompas and amount of passengers. Since a complete list of charges for all possible scenarios lies outside the scope of this paper, specific settings are chosen to illustrate the differences in airport charges.
Landing charges
A major airport charge exists of the landing charges, which are computed in various ways. In calculating the landing charge DBX, AUH and AMS use the MTOW of the aircraft as a basis. In contrast LHR applies the aircraft’s noise production for its landing charge computations, whereas FRA uses a combination of both the MTOW and noise production as cost determinants. Finally, DOH utilizes its own 9-class classification system for determining the appropriate landing charge. Since the airports discussed in this paper employ different inputs for calculating the parking charge, a comparative illustration is provided by means of three landing scenarios, as shown in Figure 19.
$3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $- A320-200 B777-300 A380-800
DXB AUH DOH AMS FRA LHR
Figure 19. Landing Charges for DXB, AUH, DOH, AMS, FRA and LHR in USD as per January 2014.
Sources: Airportcharges.com (2014); Airbus (2014); Boeing (2014); XE (2014).
note Currency rates according to XE currency converter as of 16th April 2014. note All scenarios concern Flight (Point-to-Point with connected handling), Time of Arrival (1200 LT) 1 Aircraft (A320-200), MTOW (68.000 kg), Noise Category (AMS-‘B’; FRA-‘R4’; LHR-‘4 High’), Category (DOH-‘E’; FRA-‘6’) 2 Aircraft (B777-300); MTOW (299,370 kg); Noise Category (AMS- ‘B’; FRA-‘R4’; LHR-‘4 High’), Category (DOH-‘D’; FRA-‘6’) 3 Aircraft (A380-800); MTOW (560,000 kg); Noise Category (AMS- ‘C’; FRA-‘R4’; LHR-‘4 Low’), Category (DOH-‘A’; FRA-‘9’)
On average, the Gulf airports charge less than 60% (USD 1065.00 vs. USD 1877.68) of the European airports’ charge for the landing of a B777-300, and even less than 25% (USD 275.86 vs. USD 1161.20) of the European charge for the landing of an A320-200. Furthermore, great variation exists between the European airports, whereas LHR, as a result of its computation method, charges relatively high prices for both the A320-200 and B777-300. In turn, LHR its landing charge for the A380-800 is remarkably lower than for the other airports, whereas AMS its landing charge
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2014 55 for such a flight is by far the highest. Thus, Gulf airports seem to be either equally or less demanding in terms of landing charges compared to the European airports.
Parking charge
The second charge that is considered, consists of payments for aircraft parking. Similarly to the landing charges, comparison between the costs of parking is illustrated for a fixed setting.
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$- 0.00 2.00 4.00 6.00 8.00 10.00 12.00
DXB AUH DOH AMS FRA LHR
Figure 20. Parking Charges for DXB, AUH, DOH, AMS, FRA and LHR in USD as per January 2014.
Sources: Airportcharges.com (2014); Airbus (2014); Boeing (2014); XE (2014).
note Currency rates according to XE currency converter as of 16th April 2014. note These charges reflect the following scenario: Aircraft type (Boeing 777- 300), Flight (International), Time of Arrival (0800 LT). Specifics (Wingspan = 64.80 m, Length = 73.9 m, Overall =- 45000m2, MTOW = 299,370 kg)
As seen in Figure 20, parking charges for DXB, AUH, DOH and AMS are relatively equal for the first six hours, after which the airports start increasing their charge. However, both FRA and LHR are considerably more expensive for the first hours, whereas LHR remains the most expensive airport in terms of parking charges. However it should
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56 J.N. Rompas be noted that although the required turnaround time for short and long-haul flight vary, parking time is assumed, on average to be lower than six hours.
Passenger Service Charges
A charge that is computed more consistently among the airports, is the passenger service charges (PSC). Although all airports calculate this charge based on the amount of passengers per flight, some airports further discriminate between the types of passenger. As illustrated in Table 13, DXB, AUH, AMS, FRA and LHR all distinguish between
O&D and T&T passengers, whereas the Gulf airports do not charge the latter. This difference may indicate the different air traffic these airports favors to attract.
Table 13. Passenger Service Charges and Passenger Safety & Security Charges per airport in USD as of January 2014. DXB AUH DOH AMSb FRA LHR (EK) (EY) (QR) (KL) (LH) (BA)
O&D Passenger Service 20.42 20.42 0.00 20.60 29.28 57.41 Charge Passenger Safety & 1.36 1.36 0.00 17.51 1.65 0.00 Security Chargea Total 21.78 21.78 0.00 38.11 30.93c 57.41d
T&Te Passenger Service 0.00 0.00 0.00 8.56 17.42 43.07 Charge Passenger Safety & 0.00 0.00 0.00 9.81 1.65 0.00 Security Charge Total 0.00 0.00 0.00 18.37 19.07 43.07f Sources: Airportcharges.com (2014); de Wit (2013); XE (2014).
note Currency rates according to XE currency converter as of 16th April 2014. a The used values per airport are DXB – Passenger Security and Safety Fee, AUH – Passenger Security and Safety Charge, AMS – Security Service Charge, FRA – Security Charges. b AMS does not charge transit passengers. c The O&D rate for FRA comprise the ‘Domestic and EU’ ‘European non – EU’ and ‘Intercontinental’ rates. d The O&D rate for LHR comprise the ‘Domestic and EU’ and ‘Intercontinental’ rates. e Both DXB and AUH recognize T&T passengers as passengers that continue their travel within 24 hours of arrival. f The T&T rate for LHR comprise the ‘Transfer/Transit EU’ and ‘Transfer/Transit non-EU’ rates.
The major exceptions, besides the zero charge for T&T for all Gulf airports, are DOH, through the absence of passenger charges, and LHR, which charges more than twice the average rate per passenger. This is even more striking, considering the Air Passenger Duty (APD) tax, which is taxed on O&D passengers to and from the United Kingdom, which varies from 21.93 USD to 654.56 USD per passenger (Her Majesty's Revenue and Customs of the United
Kingdom, 2013).
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Passenger Security & Safety Charge
The final charge that is considered, is the passenger security and safety charge (PSSC), which, as shown in Table
13, also differs greatly per airport. This charge is absent for DOH, which does not charge for security and safety services and for T&T passengers for DXB and AUH. However, more surprising, is the nonexistence of a passenger security and safety charge at LHR.
When comparing passenger related charges, Gulf airports provide cost advantages for O&D passengers, and even more for T&T passengers. Especially DOH, which does not have any passenger related charge. Furthermore, LHR, despite the absence of the PSSC, is most costly for both O&D and T&T passengers.
(b) Capacity Besides the airport charges, airlines neither have any control over the costs they incur of delays. As mentioned before, delays are often the result of a mismatch between airport capacity and demand. Thus by providing excess capacity, main bases do not only minimize the risk of delays, but also stimulate airlines to expand by operating new destinations or higher frequencies.
The chosen capacity measurement concerns runway capacity, for which Gelhausen, Berster, & Wilken (2013), state that
“The time unit of measuring capacity should be defined in such a way as to allow for a continuous utilization of the runway by the demand for aircraft movements. In practical terms, that means a period of no more than one hour
or two should be taken.” (p. 5)
Unfortunately hourly specific data has not been made available for this paper. However, based on the available data, a monthly unit of airport utilization is provided, in order to illustrate the current capacity margins of the airports, as shown in Figure 21.
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58 J.N. Rompas
Dubai International Airport Abu Dhabi International Airporta Doha International Airportb
34000 16000 32000 12000 14000 30000 10000 12000 28000 8000 10000 26000 6000 8000 24000 6000 4000 22000 4000 20000 2000 2000 18000 0 0 Jul-13 Jul-13 Jul-13 Jan-13 Jan-13 Jan-13 Jun-13 Jun-13 Jun-13 Oct-13 Oct-13 Oct-13 Feb-13 Sep-13 Feb-13 Sep-13 Feb-13 Sep-13 Apr-13 Apr-13 Apr-13 Dec-13 Dec-13 Dec-13 Mar-13 Mar-13 Mar-13 Aug-13 Nov-13 Aug-13 Nov-13 Aug-13 Nov-13 May-13 May-13 May-13
Amsterdam Airport Schiphol Frankfurt Airport London Heathrow Airport
40000 35000 41000 38000 33000 39000 36000 31000 37000 34000 29000 35000 32000 27000 33000 30000 25000 31000 28000 23000 29000 26000 21000 27000 Jul-13 Jul-13 Jul-13 Jan-13 Jan-13 Jan-13 Jun-13 Jun-13 Jun-13 Oct-13 Oct-13 Oct-13 Feb-13 Sep-13 Feb-13 Sep-13 Feb-13 Sep-13 Apr-13 Apr-13 Apr-13 Dec-13 Dec-13 Dec-13 Mar-13 Mar-13 Mar-13 Aug-13 Nov-13 Aug-13 Nov-13 Aug-13 Nov-13 May-13 May-13 May-13
Capacity Average 95 percentile
Figure 21. Airport capacity in flight movements for CY2013.
Source: CAPA (2014)
a No data was available for the months April and May. Based on the total number of movements (135213) the remaining number of movements (21835) has been equally divided resulting in 10917.5 movements for both April and May. b Referring to Doha International Airport, due to the short period of operational activity of Hamad International Airport.
Following Gelhausen et al. (2013) their approach, a 5-percent peak value has been calculated and set as the capacity
value to estimate capacity reserves. When comparing the average amount of movements per month with the 95
percentile of movements per month, an approximation of the capacity constraints is calculated, as provided in Table
14. The most extreme cases are found for AMS, who has a relative low utilization rate and FRA, which continuously
operates around their 5-percent peak capacity.
Table 14. Airport capacity in flight movements for CY2013. Average 95 percentile Utilization Movements movements in 2013 DXB (EK) 30,829.42 32,527.85 94.78% AUH (EY) a 11,267.75 11,963.45 94.18% DOH (QR)b 13,999.58 14,730.15 95.04% AMS (KL) 35,463.75 40,058.45 88.53% FRA (LH) 35,098.50 35,103.45 99.99% LHR (BA) 39,129.33 41,363.50 94.60% Source: CAPA (2014b).
a No data was available for the months April and May. Based on the total number of movements (135213) the remaining number of movements (21835) has been equally divided resulting in 10917.5 movements for both April and May. b Referring to Doha International Airport, due to the short period of operational activity of Hamad International Airport.
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These figures indicate that DXB, AUH, DOH and LHR are operating at similar utilization rates. However, planned airport expansions are able to present a more detailed illustration of future developments. These airport expansions, or shifts, do not only indicate changes in capacity advantages, but also convey the size of operations these airlines are pursuing. For example, Emirates’ anticipated growth is reflected in its plans to operate Dubai World Central (DWC), the largest airport in the world. This aerotropolis, which can roughly process 160 million passengers per year, is already partially operational and is expected to be fully operationalized in 2027 (Dubai World Central, 2014).
Etihad Airways’ main base, AUH, expansion consists of an entire new terminal, titled the Midfield Terminal
Complex which will have the capacity to, annually, handle 30 million passengers (Abu Dhabi Airport, 2014). The terminal building is situated between two runways, thereby increasing its effectiveness for handling T&T passengers.
Finally, Qatar Airways’ move from DOH (Doha International) to DOH (Hamad International), provides it with a main base that can currently handle 30 million passengers per year, and which is further planned to process up to 50 million passengers in the future (Doha Hamad Airport, 2014).
The European carriers are also encouraging their main bases to enlarge current capacities, but find it more difficult to achieve such expansion, due to the absence of regulative permission. The absence of such approval stems from the densely populated areas in which these airports are situated. For instance, AMS is, due to historical agreements with its surrounding community, limited to 510,000 movements per year till 2020. AMS has therefore been encouraging permission and agreements to push numerous (mostly charter) flights to Lelystad airport, in order to be able to provide more capacity to the scheduled passenger flights (ANP, 2014) This plan has, after a long period of negotiations and resistance, been approved for implementation as of 2018, but does not however, change the movements constraints for AMS (Rijksoverheid, 2014). Furthermore, LHR’s proposed expansion, a third runway, has been heavily discussed, criticized and opposed for over 10 years (Aldred, 2014). After several governmental approvals and an equal amount of withdrawals, LHR has recently published a new expansion plan. However, such an expansion has yet to be approved, let alone be constructed (Heathrow Airport, 2014). The only European airport that is currently expanding is FRA, through the construction of a third terminal. This terminal is expected to be completed in 2017 and will increase FRA passenger capacity with 25 million (Airport-Technology, 2011; Fraport AG, 2014).
Thus, it seems that, regarding current airport capacity, the European and Gulf carriers face similar capacity utilization margins. However, looking at future plans, European airports seem to be restricted in their expansions,
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60 J.N. Rompas thereby limiting the growth potential for the European carriers, whereas the Gulf airports seem to support, or even stimulate, significant growth for the Gulf carriers, by providing additional capacity.
(c) Geographical positioning In the midst of the Middle East lies the Persian Gulf, also known as the Arabian Gulf, which owns its name from
Iran’s original title, Persia (United Nations, 2006). Many scholars have emphasized the advantage of its geographical location, which has been an historical center for international trade (Hooper et al., 2011). The following section will focus on the advantages of the geographical position of the European and Gulf airports, in attracting O&D and T&T air traffic.
Origin & Destination passengers
The attractiveness of airports regarding O&D passengers is, as discussed earlier, dependent on the local geographical position of the airport which is reflected in the specific home country’s characteristics.
The first set of country characteristics, that are indicative of an airport its O&D traffic attractiveness, are the GDP and population size. Whereas, regarding GDP and air travel demand, a recent IATA (2011) analysis showed that:
“… once real GDP per capita reached $15,000-$20,000 the number of trips by air per head of population levels
out.” (p. 5)
As indicated in Figure 22, all airlines’ home countries generate excess USD 20,000 GDP per capita, indicating that the domestic air travel demand per inhabitant is equal between these countries.
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$100,000.00
$90,000.00
$80,000.00
$70,000.00
$60,000.00
$50,000.00
$40,000.00
$30,000.00
$20,000.00
$10,000.00
$- 2010 2011 2012
UAE QA NL (EK) (QR) (KL) GE UK $ 20,000 (LH) (BA)
Figure 22. GDP per capita, per country.
Source: The World Bank (2014).
However, when looking at the population of these countries and the airport’s corresponding cities, provided in
Table 15, it is evident that the Gulf carriers are strongly outnumbered. Whereas the location of FRA airport is situated in a highly populated country, Germany houses several other airports that decrease FRA airport’s attractiveness for
O&D passengers. Thus, an additional measure in terms of city populations seems necessary. Regarding city population, the European airports, especially LHR airport, are by far enjoying a more beneficial local geographical position in terms of population size.
Table 15. Population per country and main base city. Country and Populationa corresponding city (millions) Emirates United Arab Emirates 9.210 { Dubai 1.089 Etihad Airways United Arab Emirates 9.210 { Abu Dhabi 0.527 Qatar Airways Qatar 2.051 { Doha 0.797 KLM The Netherlands 16.755 { Amsterdam 1.069 Lufthansa Germany 80.437 { Frankfurt 0.692 British Airways United Kingdom 63.612 { London 8.278 Sources: UNV (2013), The World Bank (2014).
a Main base population as per December 2012 and Country population as per December 2013.
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62 J.N. Rompas
An airport’s geographical advantages for O&D traffic, is furthermore dependent on the home country’s attractiveness for business and leisure. The former is proposed to be reflected in the home country’s relative ease of doing business, whereas the latter is measured in terms of the home country’s international tourist arrivals.
Although the attractiveness of countries, in terms of business, can be measured in various dimensions, this paper utilizes the economic ranking for the ‘ease of doing business’ according to the International Finance Corporation. This ranking is based on the average of the relative ranking of countries on 10 different dimensions, such as, starting a business and trading across borders (International Finance Corporation, 2014). As seen in Table 16, the United Arab
Emirates seems to rank average, relative to the other four countries, whereas Qatar ranks the lowest, indicating the disadvantage for attracting O&D business passengers for the Gulf airports.
Table 16. Economy ranking based on ‘ease of doing business’ as of June 2013. Ranka
United Arab Emiratesb 23 Qatar 48 The Netherlands 28 Germany 21 United Kingdom 10 Sources: International Finance Corporation (2014); The World Bank (2014).
note The ranking ranges from 1 – 189. a The ranking is averaged for the country’s ranking on the following 10 dimensions: Starting a business, Dealing with construction permits, Registering property, Getting credit, Protecting investors, Paying taxes, Trading across borders, Enforcing contracts, and Resolving insolvency. b Of the six countries, only the United Arab Emirates was identified as one of the 29 countries that improved the most in ‘the ease of doing business’.
Furthermore, as seen in Figure 23, the characteristic to attract O&D traffic in terms of international tourists, is also substantially more extant for European airports’ local geographical location.
United Arab Emirates
Qatar
The Netherlands
Germany
Unitd Kingdom
0 10 20 30 40
Figure 23. International Tourist Arrivals in millions for CY2012.
Source: UNWTO (2014).
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Thus, it can be concluded that, regarding local geographical positioning, European airports occupy a substantially more advantageous location for attracting O&D traffic.
Transit & Transfer passengers
Regarding T&T passengers, the regional and global geographical positioning play an important role. As mentioned before, geographical advantages in attracting T&T air traffic are separated into current and future markets.
The top three regions as well as the top three international flight routes in terms of seats, are provided in Table 17.
These top three regions and destinations indicate the main geographical markets on which the European and Gulf carriers are directing most of their seats.
Table 17. Top 3 regions and destinations served in terms of available seats, based on the weekly flight as of May 2014. Emirates Etihad Qatar KLM Lufthansa British Airways Airways Airways 1st top destination Hong Kong Bangkok London Heathrowa London Heathrow London Heathrow New York (HKG) (BKK) (LHR) (LHR) (LHR) (JFK) 2nd top destination Kuwait London Heathrow Dubai New York Berlin Madrid (KWI) (LHR) (DXB) (JFK) (BCN) (MAD) 3rd top destination Mumbai Jeddah Kuwait Paris Paris Rome (BOM) (JED) (KWI) (CDG) (CDG) (FCO)
1st top region Europe (West) Middle East Middle East Europe (West) Europe (West) Europe (West) (%) overall seat capacity 24.95 19.78 26.52 42.16 51.98 49.56 2nd top region Asia (South) Europe (West) Europe (West) Asia (South East) Europe (East) America (North) (%) overall seat capacity 16.96 19.40 18.62 27.74 19.97 20.54 3rd top region Middle East Asia (South) Asia (South) America (North) America (North) Europe (East) (%) overall seat capacity 12.39 15.84 15.84 7.28 11.85 7,83
Sum (%) of 54.30 55.02 60.98 77.18 83.80 77.93 overall seat capacity Sources: CAPA (2014d).
a Inbound flight, LHR-DOH.
Considering the initial division of geographical markets generated more than 12 different markets, such high percentiles for the top three markets indicate a strong focus on specific markets. However, clear differences exist as to what extent the airlines differ in their focus strength. The Gulf carriers are directing, on average, 56.76% of all their capacity to their top three regions, whereas the European carriers are distributing an average of 79.63% of their seats towards three regions. This indicates a stronger focus, thus stronger dependence, on specific regions for the European carriers.
Besides the differences in focus strength, the European and Gulf carriers also differ as to the top three regions and destinations that receive most of their attention, as is illustrated in Figure 24. Although inter-European and inter-Gulf similarities were expected, such a high homogeneity in region focus among the European and Gulf carriers is remarkable.
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64 J.N. Rompas
European top Gulf top European and European top Gulf top regions regions Gulf main bases destinations destinations
Figure 24. Current Top destinations and regions served in terms of available seats as of May 2014.
Source: Bing Maps (2014). note Map retrieved from http://mapsof.net/uploads/static-maps/world_country_borders_map.png.
The three Gulf carriers are most homogeneous in their region focus, whereas all their top three regions are similar and include Europe (West), the Middle East and Asia (South). The three European carriers are directing their main attention towards Europe (West and East) and America (North). Whereas KLM’s top regions are more dispersed, due to its focus on Asia (South-East), Lufthansa and British Airways have chosen their main focus to be more concentrated.
Specifically the inclusion of both West and East Europe the European carriers’ top three regions, and the fact that five of the six top destinations are located within Europe (West), shows the relative short geographical distance between its main markets and destinations. Finally, an interesting note concerns the European as well as Gulf carriers’ strong focus on Europe, whereas all carriers are directing either most or second-most of their capacity at Europe (West).
Main base geographical advantages, in terms of T&T, for current markets, is then analyzed for the top markets identified above. Consequently, assessing the attractiveness of the different main bases to act as T&T airports for air traffic between the top markets, yields justification of the market choices and focus, and insights as to potential traffic stealing between European and Gulf carriers.
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Mapping out air traffic between the top markets, produces Table 18, in which ‘Quadrant 1’ represents the Gulf carriers’ top traffic regions and ‘Quadrant IV’ that of the European carriers. Attentiveness is cautioned towards preserving a clear distinction in assessing competitive geographical positioning concerning the O&D and T&T functionality, whereas the following results refer to the latter. For example, air traffic between Asia (South) and Europe
(West) is attracted to utilize the European as well as the Gulf airports for T&T purposes, whereas air traffic between
Asia (South) and the Middle East is expected to only be attracted to Gulf airport utilization regarding T&T traffic. In contrast, air traffic between Europe (West) and Europe (East) is clearly only attracted to European airports for T&T handling.
Table 18. Transit & Transfer attractiveness for European and Gulf carriers for the current top markets as of May 2014.
East)
- (East) Asia (South) Europe (West) Middle East America (North) Asia (South Europe Europe (West)
Quadrant I Quadrant II Asia (South) ʘa •b ʘ •••d • ʘ Europe (West) ʘ ••c X •• •• Middle East ʘ • • ʘ Quadrant III Quadrant IV America (North) ʘ •• •• Asia (South-East) • ʘ Europe (Central/East) •• Europe (West)
a ʘ =Potential competition in terms of geographical location for Gulf and European airports. b • = Geographical advantage for Gulf airports c •• = Geographical advantage for European airports d ••• = No T&T attractiveness for either Gulf or European airports
In Quadrant I, Gulf airports only possess geographical advantages for traffic between Asia (South) and the Middle
East, whereas air traffic between the other regions is also attracted to European airports, while in Quadrant IV
European airports are more frequently favorable for T&T traffic. Thus, both choices of market focus for European and Gulf carriers seem appropriate. However, in four of the nine initial market sets (for both Quadrant I and IV),
European and Gulf airports are similarly attractive for T&T opportunities. This indicates the possibility for European and Gulf carriers to provide substitute products that serve similar markets.
This is even more applicable when both European and Gulf carriers’ top markets are merged, as shown in Quadrant
II. For example, if the Gulf carriers were to increase their capacity for America (North), the competition will rise for
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66 J.N. Rompas both America (North) and Asia (South), and, America (North) and the Middle East. In contrast, the geographical location of the Gulf airports seems to be advantageous for network expansions in Europe (East).
It seems that for the current top markets, due to the appropriate market focus of the European and Gulf airports, the geographical advantages of both the European and Gulf carriers are largely exploited. However, for specific segments of the existing market-sets (Quadrant I and IV), T&T traffic attractiveness for European and Gulf airports balance each other out, thereby eliminating the comparative advantage of geographical location.
As mentioned earlier, in order to estimate potential future markets, a focus on both the BRIC and MINT countries is deemed appropriate. Since these countries differ in size and, in most cases, contain multiple megacity and airports, the focus has been narrowed down to the countries’ capitals and corresponding airports, which are provided in Table
19, and illustrated in Figure 25.
Table 19. BRIC and MINT country capitals and correspond airports. Capital Main airport IATA code Brazil Brasília Brasília–Presidente BSB Juscelino Kubitschek International Airport Russia Moscow Domodedovo International DME Airport India New Delhi Indira Gandhi International DEL Airport China Beijing Beijing Capital PEK International Airport
Mexico Mexico City Benito Juárez International MEX Airport Indonesia Jakarta Soekarno–Hatta CGK International Airport Nigeria Abuja Nnamdi Azikiwe ABV International Airport Turkey Ankara Esenboğa International ESB Airport Source: IATA (2014a).
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European and BRIC and Gulf main bases MINT capitals
Figure 25. BRIC and MINT economies and their geographical positions.
Source: Bing Maps (2014). note Map retrieved from http://mapsof.net/uploads/static-maps/world_country_borders_map.png.
Because the current emphasis lies on T&T traffic, the analysis is further limited to air traffic between the BRIC and MINT cities, therefore not considering O&D traffic to and from, DXB, AUH, DOH, AMS, FRA and LHR.
Nevertheless, traffic between the MINT and BRIC economies is, however, considered in terms of air T&T traffic for the airports listed previously, thereby referring to the airports’ hourglass functionality, as mentioned before. The chosen approach generates 56 flight routes, of which 28 distinct city pairs. Evaluating these city pairs, in terms of the
European and Gulf carriers’ home base’s geographical positioning, regarding the attractiveness of T&T opportunities, have resulted in Table 20.
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Table 20. Transit & Transfer attractiveness for European and Gulf carriers for the BRIC and MINT capitals.
K BSB DME DEL PEK MEX CG ABV ESB
BSB •• • • ••• • ••• ••• DME ••• ••• •• ••• ••• ••• DEL ••• • ••• • • PEK ʘ ••• • ••• MEX • ••• ••• CGK ••• • ABV ••• ESB
a ʘ =Potential competition in terms of geographical location for Gulf and European airports. b • = Geographical advantage for Gulf airports c •• = Geographical advantage for European airports d ••• = No T&T attractiveness for either Gulf or European airports
Of the 32 city pairs, 16 pairs, such as BSB-MEX, are considered not to be attractive for either European or Gulf airports concerning T&T traffic purposes. Furthermore, the European airports seem to be able to generate a favorable geographical position for only two city pairs, specifically BSB-DME and DME-MEX. In contrast, a total of nine city pairs appear to provide the Gulf airports with a geographical advantage regarding T&T traffic opportunities. Finally, the city pair PEK-MEX is considered to be equally attracted to utilize European as well as Gulf airports as viable options for T&T traffic.
However, the aforementioned attribution of city pairs to either European or Gulf airports does not mean that such a T&T traffic flow is a necessity, it only indicates the favorability of European or Gulf airports as T&T airport for potential one-stop flight routes. Another interesting observation, is the attractiveness of European and Gulf airports to act as T&T airports for O&D traffic from the BRIC and MINT countries to these airports. Whereas the Gulf airports are able to act as intermediate destinations for the routes between Europe (West) and India, and Europe (West) and
Indonesia, the European airports seem to lack the ability to do likewise.
It is evident that the Gulf airports are attractive for a substantially higher amount of city pairs regarding T&T possibilities than the European airports. This favorability offers the Gulf carriers with a global geographical advantage that signals a positive future in terms of growth opportunities that may arise from emerging markets.
To sum up, regarding local geographical position, thus O&D attractiveness, the European airports enjoy an advantage over the Gulf airports. This is applicable in terms of population size of both the country and airport’s corresponding cities and from a business and leisure perspective. Additionally, when considering airport T&T traffic
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2014 69 attractiveness for current markets, both the European and Gulf airports appreciate comparative advantages. However for specific market-sets these advantages offset each other, resulting in no relative geographical advantage for either
European or Gulf airlines. Finally, when stressing future growth markets, Gulf airports are thought to enjoy greater geographical advantages, which enables them to attract substantially more T&T opportunities, compared to the
European airports.
Thus, Gulf airports are better suited for T&T traffic than for O&D traffic, based on their geographical position.
Specifically T&T traffic for emerging markets is suggested to offer Gulf airports with great geographical advantages, over the European airports.
Concerning the fixed competitive advantages, as argued above, Gulf carriers are enjoying advantages in both the labour force and expenses, country taxes, fuel prices, landing charges, parking charges, future airport capacity and geographical positioning for attracting T&T traffic from future markets. European carriers only seem to hold fixed comparative advantages in terms of O&D attractiveness, through their local geographical positioning. No clear advantages were found for the current airport capacity, and the attractiveness for T&T traffic in terms of current markets.
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CHAPTER 5: Conclusion & Discussion
The findings of the previous analysis have yielded some interesting insights in the roots of both the cost and network advantages of the Gulf carriers. A complete overview of the results can be found in Table 21.
It can be seen that for the 22 main indicators, Gulf carriers find themselves in a more advantageous position for 16 of them. Whereas the six factors for which European carriers are most advantageous, namely, ‘Network Size’,
‘Passengers Transported’, ‘Flight Frequencies’, ‘Passenger Load Factor’, ‘Population’ and ‘International Tourist
Arrivals’, are mostly of second order importance. For example, as mentioned before, ‘Passenger Load Factor’ is very advantageous, but even more so if paired with high aircraft capacity or larger stage lengths, whereas the aspects of
‘Population’ and ‘International Tourist Arrivals’ contribute to the local geographical position of the airport, but not to its, more valuable, regional and global geographical position.
Thus, it seems that, indeed, for the overall comparative analysis in this paper, the Gulf carriers possess advantages in both cost and network dimensions, over the European carriers.
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Table 21. Summary of cost and network indicators for, Emirates, Etihad Airways, Qatar Airways, KLM, Lufthansa and British Airways. Average Total Average Emirates Etihad Qatar KLM Lufthansa British
Gulf Average European (EK) Airways Airways (KL) (LH) Airways carriers carriers (EY) (QR) (BA)
Network Size [number of destinations] 113 145 176 113.3 72.6 114.2 120.4 178.8 168.1
Available Seat Kilometers [in millions] 153,872.5 153,347.0 152,996.7 153.8 46.2 naa 67.4 126.0 104.9 Passengers Transported [in thousands] 22,963.7 35,282.2 47,600.7 171.5 50.1 78.4 115.8 332.1 174.0 Average Route Lengths [in kilometers] 4,805.2 3,739.6 3,029.2 99.6 100.4 na 69.7 51.1 68.4
Operational Frequency [in flight frequencies] 10.0 12.3 14.7 100.0 90.0 110.0 180.0 130.0 130.0 Passenger Load Factor [%] 78.9 80.8 82.1 + 0.8 pts - 0.9 pts na + 6.9 pts + 0.2 pts + 2.4 pts
Homogeneity [number of aircraft types] 5 6.5 8 80 80 140 100 160 220
Average Age [in months] 69.6 104.8 140.0 112.1 93.1 94.8 184.5 196.6 222.4 Fleet Average Capacity [passengers per aircraft] 286.2 246.2 206.1 125.6 87.9 86.5 76.7 54.1 85.2
Employee production [in produced ASKs] 5,108,224.0 4,437,028.8 3,989,565.3 97.2 102.8 na 56.9 95.2 82.1 Costs per Employee [in USD] 51,557.6 106,154.2 124,353.0 100.00 na na 178.63 354.01 190.94 Corporate tax [%] 0.0 12.6 25.2 - - - + 25.0 pts + 30.0 pts + 21.0 pts Individual income tax [%] 0.0 23.7 47.3 - - - + 52.0 pts + 45.0 pts + 45.0 pts
Governmental Regional fuel prices (April 2014) [in USD/bbl.] 121.0 122.6 124.1 100.0 100.0 100.0 102.6 102.6 102.6
Landing charge A320-200 [in USD] 275.9 718.5 1,161.2 100.0 80.5 119.5 166.7 139.8 956.3 B777-300 [in USD] 1,065.0 1,471.3 1,877.7 114.0 91.8 94.1 190.1 91.1 247.7 A380-800 [in USD] 2,053.7 2,079.9 2,106.2 110.6 89.1 100.3 147.5 101.1 59.1 Parking chargeb [in USD] 60.4 404.3 748.3 118.1 0.0 181.9 0.0 978.47 2737.1
Airport PSC and PSSC Origin & Destination [in USD] 14.5 28.3 42.2 150.0 150.0 0.0 262.5 213.0 395.4 Average Gulf carriers = unless100, indicated otherwise. Transit & Transfer [in USD] 0.0 13.4 26.9 - - - 18.45c 19.07 c 43.07 c Capacity Utilization [%] 94.67 94.52 94.37 + 0.11 pts - 0.49 pts + 0.37 pts - 6.14 pts + 5.32 pts - 0.07 pts
Population Home Country [in million] 6.8 30.2 53.6 135.0 135.0 30.1 245.5 1178.8 932.2 Main Base [in million] 0.8 2.1 3.3 135.4 65.5 99.1 132.9 86.0 1029.2 Ease of doing business [ranking] - - - 3d 3d 5d 4d 2d 1d International Tourist Arrivals [in thousands] 6374.7 15,169.7 23,964.7 140.8 140.8 18.4 191.5 477.0 459.3 Geographic BRIC/MINT favorability [number of city pairs] 9 5.5 2 100.0 100.0 100.0 22.2 22.2 22.2 note Currency rates according to XE currency converter as of 16th April 2014. a na = data not available. b For a 6 hour parking time. c Charge relative to Gulf carriers in surplus in USD ($). d Relative intergroup ranking, for which BA (United Kingdom) is 1st.
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5.1 Threats, Opportunities and Responses
In order to answer the question “To what extent do the Gulf carriers’ characteristics generate an increasing and sustainable threat to the European carriers?”, various airline characteristics have been discussed. The analysis of these chosen characteristics indicates that therecent dynamics for European carriers, specifically the introduction of CWC structures, may, partially eliminate the numerous competitive advantages that are enjoyed by the Gulf carriers.
Furthermore, the analysis shows that a great part of the Gulf carriers’ advantages, stems from their strong concentration on the long-haul market. European carriers may, in order to decrease specific competitive disadvantages, revise their market focus from mixed markets to mostly long-haul markets. Thus adopting a CWC structure, thereby ‘outsourcing’ their short- and medium-haul service to subsidiaries and becoming more similar to the Gulf carriers, in terms of market focus, appears to be an appropriate response from the European carriers.
Of the three European carriers considered in this paper, British Airways seems to be most similar, in terms of operations, to the Gulf carriers. For example, regarding average route length and average aircraft capacity, British airways bears the greatest resemblance with the Gulf carriers. This can be explained by the strong O&D market that was found for LHR. This enables British Airways to maintain a relatively stronger long-haul market focus with only a limited European feeder system, compared to KLM and Lufthansa, and thus enables British Airways to exploit the benefits that arise from such focus. Thus, in terms of purposeful competitive advantages, British Airways is able to compete most adequately with the Gulf carriers.
However, as described before, a major role is also played by external parties and their impact on airline operations.
Especially the effect of different governments and airports have shown to provide the Gulf carriers with substantial network and cost advantages. Although several European carriers have repeatedly protested against this ‘unlevel’ playing field, referring to the externally shaped competitive advantages, by requesting equal competitive conditions, currently no major European changes in both governmental and airport behavior has taken place that indicates
‘levelling’ the so-called playing field (European Commission, 2013).
Nevertheless, if such changes were to occur, thereby eliminating governmental and airport induced competitive advantages, the Gulf carriers would still continue to enjoy comparative advantages in terms of their global geographic position. While the analysis showed a lower favorability in terms of O&D passengers, the Gulf location is, and will remain to be, in the ideal position to act as a T&T intersection between numerous current and emerging economies.
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5.2 Limitations
A major drawback for this paper consists of the absence of certain data. Whilst data regarding the European carriers has largely been made available in the form of Annual Reports and CAPA data, this has not been true for the Gulf carriers. Whereas Emirates also disclose sufficient information both Etihad Airways and Qatar Airways do not.
Although Etihad Airways published several facts sheets, the information provided has been filtered and selected only for specific factors. Even more cautious in their information disclosure practices is Qatar Airways, which does not only limit their published information, but also rounds up the numbers that are published.
Furthermore the analysis provided, concerns a macro analysis of the industry in terms of six specific full-service
European and Gulf carriers. Although such an industry analysis provides insights in the dynamics between these two groups of carriers, it is apparent that such a comparison does not hold unconditionally for other airlines. This is irrespective of the fact that the chosen European and Gulf carriers are assumed to be sufficiently representative of the population in these two groups (European and Gulf full-service carriers). Complete industry dynamics are driven by multiple distinct types (LCC and FSC) and groups (e.g. African, American and Asian) of airlines, which should therefore not be neglected. Nevertheless these findings are consistent with Grimme (2011) in the sense that they indicate multiple factors that enable the Gulf carriers to pose as a significant threat to the European carriers.
5.3 Future research directions
As aforementioned, this analysis has indicated a general insight in the cost and network advantages of the Gulf carriers, of which many of those advantages may be investigated even further. For example, more detailed specifics of the effect of fleet homogeneity on cost savings in labour and inventory, or, incorporating the airline’s labour costs distribution in the analysis for determining the true labour savings of front line employees, seem to be appropriate research directions.
Another interesting aspect which is, to a certain degree, disregarded in this analysis, is the threat Gulf carriers pose towards each other. Attempting such an analysis is expected to yield intriguing results, since many of the competitive indicators used in the current analysis will have somewhat similar values among the Gulf carriers. Potential findings are then likely to pair intra-Gulf airlines differences to specific airline characteristics, thereby providing current knowledge with additional understandings into the concept of airline competition. Such an analysis may also provide
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Furthermore, the geographic analysis that has been conducted in this paper has been based on optimal great-circle routes. However, a more detailed study that considers notions such as ETOPS and military restrictions, is able to estimate more realistic flight paths and may thus produce divergent results. Especially the latter may, concerning the unrest in the Middle East (e.g. the recent conflicts in Libya, Egypt, Iraq and Syria), stimulate opposing results due to
“… substantially reduced airspace thanks to military restrictions, [which] is beginning to inhibit growth”
(CAPA, 2013, p. 29).
This paper has attempted and has succeeded in exposing various specific airline characteristics in relation to airline performance. By linking theoretical concepts with real-life data, an impression of the advantages between the
European and Gulf carriers has been illustrated, which shows the presence of substantial forced and fixed, competitive and comparative advantages for Gulf carriers. These advantages, which concern both cost and network advantages, have strengthened the Gulf carriers’ ability to pressurize the European carriers. It can even be said that such an ability, inspires and validates the Gulf carriers’ continuous expansions and constant hunger for growth.
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