Qatar Airways & global airlines industry impact: Severing of Qatar links by Saudi-led alliance

5 June 2017, Global – Following today’s decision by the Saudi-led alliance (Saudi Arabia, Egypt, Bahrain, United Arab Emirates) to cut off diplomatic and transport links with Qatar, we assess the impact on Qatar Airways and the global civil aviation industry.

BACKGROUND

Qatar Airways is one of the world’s largest airlines and a major global hub carrier operating long-haul flights between Asia and Europe and North America via Doha. In FY2016, it carried 26.7 million passengers with average passenger load factor of 75.3% as well as 0.9m tons of cargo; making it the world’s 6th largest cargo airline.  Qatar Airways has been embarking on perhaps the most aggressive expansion plans in the history of civil aviation, averaging 20% per annum in the past 10 years, and 22% per annum in the next 3 years based on its scheduled aircraft deliveries. It currently has 200 aircraft in service plus another 217 aircraft on order and 91 on option.

Closure of airspace

Qatar is literally bordered by the Saudi-led alliance on the North, South and West and Qatar Airways regularly flies through the airspace of its giant neighbour, Saudi Arabia. The closure of the Saudi-led alliance’s airspace to Qatar means that Qatar Airways’ flights bound toward Asia and Europe/North America will have to be rerouted through Iran and Turkey. Apart from the additional fuel costs and scheduling problems, it is unclear if there is even enough capacity along these air routes to accommodate rapidly growing Qatar Airways’s 64 daily flights to Europe, 91 daily flights to Asia Pacific and 11 daily flights to North America.   

Closure of land and sea transport links

Tiny Qatar’s only land border is with Saudi Arabia and coupled with the closure of sea transport links by the Saudi-led alliance, food and construction material imports into Qatar might be affected; raising the possibility that daily life and business operations in Qatar might be severely disrupted.

IMPLICATIONS

Damage to Qatar Airways’ reputation as a safe and reliable airline

The Saudi-led alliance has blamed Qatar’s support for terrorism as support for their decision to sever diplomatic and transport links. This comes shortly after the recent U.S carry-on electronics ban on U.S bound flights from Doha due to safety concerns in late March. The immense damage to Qatar Airways’ reputation as a safe and reliable airline should not be underestimated.     

20% of Qatar Airways’ total seat capacity will be directly impacted

Qatar Airways will be the most negatively impacted from the sanctions among the Gulf carriers as it has the largest market share of 69% on flights from Qatar to Bahrain, Egypt, Saudi  Arabia and United Arab Emirates. The magnitude of the impact will depend on how long these transport links closures last.

Chart: Airline market share on flights from Qatar to Bahrain, Egypt, Saudi Arabia and United Arab Emirates (1H17)

Chart: Airline market share on flights from Qatar to Bahrain, Egypt, Saudi Arabia and United Arab Emirates (1H17)

Bahrain, Egypt, Saudi Arabia and United Arab Emirates account for 20% of Qatar Airways’ total seat capacity in June 2017. In fact, Qatar Airways increased its seat capacity on routes from Qatar to these four countries by 22% y/y in June 2017.

Chart: Qatar Airways’ seat capacity exposure to each major route region (1H17)

Chart: Qatar Airways’ seat capacity exposure to each major route region (1H17)

Qatar Airways’ long-haul connecting travel market could also be hurt

As Qatar Airways is a major global hub carrier operating long-haul flights between Asia and Europe and North America via Doha, some of its international connecting passengers may switch to other carriers given their concerns about stopping over in Qatar. Qatar Airways has a 24% and 6% seat capacity exposure to Europe and U.S. routes.

Moreover, Qatar Airways will have to reroute some of its air routes as the four nations will close off their airspace to Qatar-flagged aircraft, resulting in higher fuel burn and possibly longer flight durations, thus incurring higher operating costs.

This could benefit other Gulf carriers, primarily Emirates and Etihad as well as the major Asia Pacific long-haul airlines, especially Singapore Airlines, which can capture some of the passenger and cargo traffic diverted from Qatar Airways.

Potential traffic diversion from Qatar Airways (and possibly other Gulf carriers) to Asia Pacific and European airlines on the Asia-Europe routes

Some travelers may choose to avoid flying the Gulf carriers altogether given the rising political tensions in the region. We estimate that the Gulf carriers likely carried 13 million passengers travelling between the Asia Pacific region and Europe via the Middle East. This amounts to 19% of the total number of passengers travelling between the Asia Pacific and Europe of 70 million based on our estimates. Some of these 13 million connecting passengers are likely to switch from travelling on Qatar Airways (and even the other Gulf carriers) to avoid hubbing in Doha and possibly the entire Middle East region.

This could provide an additional 13 million passenger market for the Asia Pacific and European airlines. We believe Singapore Airlines and Thai Airways will be the key beneficiaries from this potential traffic diversion among the Asia Pacific carriers.

Potential traffic diversion from Qatar Airways (and possibly other Gulf carriers) to Asia Pacific and U.S. airlines on the Asia-U.S. routes

On Transpacific routes, we estimate that the Gulf carriers likely carried 1.5 million passengers travelling between the Asia Pacific region and the United States via the Middle East. This amounts to 10% of the total number of passengers travelling between the Asia Pacific and the United States of 15 million based on our estimates. Some of these 1.5 million connecting passengers are likely to switch from travelling on Qatar Airways (and even the other Gulf carriers) to avoid hubbing in Doha and possibly the entire Middle East region.

This could provide an additional 1.5 million passenger market for the Asia Pacific and U.S. airlines. We believe Singapore Airlines is likely to be the key beneficiary from this potential traffic diversion among the Asia Pacific carriers.  See previous article: Update (21 April 2017): US, UK electronics ban on Middle-East flights could benefit airlines in Asia

Key risk is Qatar Airways re-deploying its excess capacity to other route regions

The expected decline in passenger travel demand for flights between Qatar and Bahrain, Egypt, Saudi Arabia and United Arab Emirates could potentially drive Qatar Airways to re-deploy its excess fleet capacity to Middle East-Asia Pacific routes as well as to other route regions. This would increase competition risk for the Asia Pacific airlines and drive average fares lower. The Gulf carriers’ large aircraft orderbook and substantial planned capacity increase in the next 3 years remains a key concern to the Asia Pacific airlines.

However, there could be a limit to how much demand stimulation lower fares could help Qatar Airways as they can mainly target to increase their origin & destination passengers (i.e. Qatar’s passengers who are travelling to Asia as an end destination or Asian passengers who are travelling to Qatar as an end destination) and will unlikely be able to entice connecting passengers to fly from the Asia Pacific to Europe or the U.S. via a stopover in Qatar. There may not be sufficient origin and destination traffic to justify a significant increase in flights between Qatar and the Asia Pacific region.

Chart: Qatar Airways’ capacity allocation on Asia and Oceania routes (1H17)

Chart: Qatar Airways’ capacity allocation on Asia and Oceania routes (1H17)

Oneworld alliance and other code-share airline partners of Qatar Airways could be affected

Qatar Airways is also a member of the Oneworld alliance and has its Asian code-share airline partners include Asiana, Bangkok Airways, Cathay Pacific, Japan Airlines, Malaysia Airlines which may be affected by this.

Indian Subcontinent and Southeast Asian airports have the largest exposure to Qatar Airways in the Asia Pacific region

Airports in the Indian Subcontinent and Southeast Asian regions will be most affected should passenger traffic on Qatar routes decline, resulting in Qatar Airways trimming capacity on these routes. 

Chart: Qatar Airways’ market share at Asia Pacific airports (1H17)

Chart: Qatar Airways’ market share at Asia Pacific airports (1H17)

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