Gulf megacarriers merger unlikely

Merger talks among the Gulf's major airlines would be unlikely in the near term as each carrier posts robust growth and increasing regional as well as international market share, according to an analyst at Boston Consulting Group (BCG).

GCC-based carriers Emirates Airline, Etihad Airways and Qatar Airways have been aggressively expanding their fleet and route network despite a challenging global travel market, which in recent years saw legacy airlines in Europe and North America consolidating to survive the turbulence. "Given the growth and the competitive advantage of [their] business models, there is no structural push for the [Gulf] airlines to [consider merging]," says Rend Stephan, Partner and Managing Director at BCG's Dubai office. Stephan also cited the strong support that the GCC carriers receive from the governments they represent as a significant advantage. "If you add the fact that even though they operate independently, these megacarriers are linked with their [respective] countries from an overall planning perspective, [as such] you would find it even more difficult to think that any two carriers would [need to merge]. There is no economic incentive for that," he says. In a report published this month, BCG highlighted the observation that megacarriers in the region are "well positioned to compete aggressively with more financially constrained carriers" because they have developed their hubs for long-haul routes. While volatile fuel prices remain a challenge even for Gulf carriers, compared with their peers the three airlines enjoy significant cost advantages such as fuel-efficient fleet and cheaper landing fees at their hubs. They likewise have the ability to attract talents worldwide as they offer income-tax-free remuneration packages, says Stephan. All three carriers operate the world's youngest fleet of modern Airbus and Boeing jets. Dubai-based Emirates, for instance, currently flies 153 aircraft to over 100 destinations globally and has an outstanding order of 199 passenger jets - a far cry from its maiden two-aircraft fleet 26 years ago. The BCG report, which was authored by Stephan, Tom von Oertzen and Dale Schilling, noted that Emirates' move to consolidate its fleet to just three types of aircraft namely Boeing 777s, Airbus A380s and A350s, has been a prudent strategy to "simplify its maintenance and crewing operations, reduce fuel costs and wield significant operating-cost advantages over carriers that deploy older, more complex fleet."

Meanwhile Qatar Airways, which began operations in 1994, has also been bullish as it reaches more than 100 destinations worldwide using a fleet of 98 aircraft. It continues to embark on an aircraft-buying spree, spending over $40 billion (Dh147bn) for an extra 200 Boeing and Airbus aeroplanes and preparing to serve more destinations in the near future, according to its company website. The airline's development reflects the economic progress of its hydrocarbon-rich country. Qatar's economy has shrugged off the financial slowdown and is expected to post a 20-per-cent GDP growth in 2011 - the highest rate among the six-nation Gulf countries, according to the International Monetary Fund. Qatar has also reportedly invested $11bn in the construction of a new international airport in Doha, which will be capable of handling 50 million passengers annually and is expected to open in 2012. Abu Dhabi-based Etihad Airways, the youngest of the Gulf megacarriers, has also taken off successfully after commencing services in 2003. As of March 2011, Etihad has already built a fleet of 57 aircraft, serving nearly 70 destinations in 45 countries. Over the next 10 years, Etihad aims to receive its order of 103 new aircraft composed of Boeing 787, 777 and Airbus A330, A320, A380, A350 jets, the airline said on its website. Growth could pose challenge BCG anticipates Gulf airlines to continue expanding in the next five years, but the consulting firm believes that these megacarriers will face the common challenge of managing the pressure that their expansion plans exert on their margins. "The Middle Eastern megacarriers will be challenged to maintain profits while also realising aggressive expansion plans in an increasingly competitive and overcrowded marketplace," the report said. But the Big Three's widening business reach also poses a challenge to international legacy carrier and airline alliances. "The challenge for the global airline alliances will be to match the sheer size and reach of the networks run by Middle Eastern megacarriers, which will increasingly 'own' certain intercontinental-traffic flows," the consulting firm said. Middle East airlines' profits to soar in 2011 Earnings forecast for Middle East carriers this year remain very bright at $800m, soaring from the $100m projected in June as passenger traffic increases, the International Air Transport Association (Iata) mentioned in a report published on Tuesday.

"Holding up against potential demand shocks associated with political instability, the region's carriers grew passenger traffic 8.3 per cent compared to a capacity increase of nine per cent in the first seven months of this year," says Iata. In July, Middle East carriers recorded the second highest passenger demand at 9.7 per cent, year on year, next to Latin America's 10.3 per cent growth rate. European carriers posted a 9.3 per cent increase in demand as the region's travel sector remains blighted by the euro zone's ongoing sovereign debt crisis and lacklustre economy, Iata figures have shown. Consider also reading: Emirates airline profits seen flying higher: analysts Fuel takes up 43pct of airline costs: Emirates' Clark GCC airport projects to reach $90bn, carriers upbeat Etihad Airways says no passenger decline despite global gloom IATA: 2012 airline industry profit may fall 29pct View related videos: Swiss airline sees drop in Mideast traffic Air Arabia stretches its wings with new Amman hub Aviation chiefs urge 'Open Skies' policy UAE welcomes tourist influx amid Mena chaos