US, UK electronics ban on Middle-East flights could benefit airlines in Asia

24th March 2017, Global - We assess the impact of the United States and United Kingdom’s ban on “large electronics devices” (larger than a cellphone/smartphone) from carry-on luggage for international direct flights originating from specific countries in the Middle East and Africa. In summary, we expect the biggest negative impact to fall on Emirates, Qatar Airways, Etihad and Turkish Airlines.   

Emirates, Qatar Airways and Etihad each have 15%-16% capacity exposure to the U.S. routes and similarly for Turkish Airlines. Turkish Airlines also has a 3% capacity exposure to the U.K. which will also be negatively impacted by the U.K.’s electronic devices ban. We estimate that there are 7 million connecting passengers travelling to/from the Asia Pacific on routes that hub in the airports affected by the electronics ban and some of this traffic is likely to divert to the Asia Pacific airlines instead.

As the Gulf carriers and Turkish Airlines have historically gained more market share on long-haul routes between Southeast Asia/South Asia and the United States and the United Kingdom, we expect the major Southeast Asian/South Asian long-haul carriers, in particular Singapore Airlines, Thai Airways and Jet Airways, to be the bigger beneficiaries of this traffic diversion. Based on our estimates, every 5%/4%/3% gain from this diverted traffic could potentially boost Singapore Airlines, Thai Airways, Jet Airways’ net profit by 2.1%, 1.5% and 1.3% respectively and 4.6%, 3.2% and 2.8% respectively if this ban leads to contagion, resulting in the Asia Pacific-U.K. passengers choosing to avoid Dubai, Doha and Abu Dhabi as well even though these air hubs are not included in the U.K.’s ban.

North Asian carriers that rank among the top 10 largest airlines on the Asia-U.S. routes in terms of market share (see Crucial Perspective's earlier article on 1H17 Airline Capacity), such as Cathay Pacific, EVA Airways and Korean Air, are likely to capture some of this traffic diversion as well. (The detailed earnings impact for the major carriers are found in the tables below.)

+ Background of the electronics ban:

Based on updated intelligence about terrorist threats to commercial aviation, the United States government on 21st March 2017 announced a ban on “large electronic devices” from carry-on luggage for direct flights originating from 10 specific airports: Queen Alia International Airport (AMM), Cairo International Airport (CAI), Ataturk International Airport (IST), King Abdul-Aziz International Airport (JED), King Khalid International Airport (RUH), Kuwait International Airport (KWI), Mohammed V Airport (CMN), Hamad International Airport (DOH), Dubai International Airport (DXB), and Abu Dhabi International Airport (AUH).  This was followed by a similar U.K government electronics ban from carry-on luggage for inbound flights to the U.K from Egypt, Jordan, Lebanon, Saudi Arabia, Tunisia and Turkey. 

Chart: List of airports and airlines affected by U.S. “large electronic devices” ban

Electronics Ban: United States

Chart: Countries and airlines affected by U.K “large electronic devices” ban

Electronics Ban: United Kingdom

+ Impact on the business & premium leisure travel segment

The “large electronics devices” ban from carry-on luggage will severely affect the lucrative business travel segment for the affected airlines as business travellers are usually required by their employers to carry-on their laptops during flights due to security concerns over the theft of confidential corporate information and equipment. Furthermore, many business travellers need their laptops to work during the flights, facilitated by the growing availability of wifi access onboard. The premium leisure travellers who pay extra for business and first class tickets to ensure a seamless and hassle-free travel experience are also likely to re-rout to other unaffected airports so as not to have to check-in their expensive laptops and tablets.

+ Safety concerns and impact on the leisure travel segment

Although the U.S. and U.K. have not issued any new advisory to its citizens against travelling to/from the affected countries, there could still be safety concerns (whether real or perceived) among existing and potential passengers as the U.S. and U.K. ban on “large electronic devices” stems from updated intelligence on terrorist threats to commercial aviation in these specific countries. Should other countries such as Canada (source: The Globe and Mail, 21 Mar 2017) impose a similar ban, there will be additional concerns among travellers about whether it is safe to fly from these affected countries. Emirates’ CEO Tim Clark commented that he is concerned that “there is a contagion effect that other European and Asian countries may follow the U.S. lead(source: CNNMoney, 22 Mar 2017). 

The U.S. electronics ban is to be implemented within 96 hours of the announcement by the U.S. government while the U.K. ban is also expected to come into force within days. Undoubtedly, the ban will be extremely inconvenient for the passengers of the affected flights and given the short timeframe, there are questions as to whether this ban can be implemented without massive disruptions to the operations of the affected airlines and their hub bases. The detrimental impact on the reputations and traffic at these major connecting air hubs and their affected home-based carriers especially Emirates, Qatar Airways, Etihad and Turkish Airlines should not be underestimated.  Therefore, we expect the leisure travel demand segment to be hurt as well.

MOST NEGATIVELY IMPACTED AIRLINES

We expect long-haul passengers to be less inclined to fly between the Asia Pacific and the United States and the United Kingdom (and vice versa) via a stopover in the Middle East.

+ Emirates, Qatar Airways, Etihad and Turkish Airlines will be the most negatively impacted

Among the Gulf carriers, Emirates is the most dominant with the largest market share at 45% on Middle East-USA routes, well ahead of Qatar Airways’ 23% and Etihad’s 15%. The Americas contributed 14% of Emirates revenue in FY16 (year to March).

The 3 major Gulf carriers Emirates, Qatar Airways and Etihad each have 15%-16% capacity exposure to the U.S. routes and similarly for Turkish Airlines. Turkish Airlines also has a 3% capacity exposure to the U.K. and will also be negatively impacted by the U.K.’s electronics ban.

If the EU and Canada also implement such a ban, the impact on the Gulf carriers and Turkish Airlines would be even larger as they each have 23%-35% capacity exposure to Europe (including the U.K.) and 16%-17% capacity exposure to North America (including the U.S.).

Chart: Major Gulf carriers and Turkish Airlines’ capacity exposure by route region

Electronics Ban: Gulf carriers and Turkish exposure

Chart: Airline market share on Middle East-USA routes

Electronics Ban: Mkt share on ME-USA route

KEY BENEFICIARIES

We expect this ban to benefit the Asia Pacific airlines that compete with the Gulf carriers on long-haul flights between Asia and the United States and the United Kingdom. The key beneficiaries are the major Southeast Asia and South Asia long-haul carriers, particularly Singapore Airlines, Thai Airways and Jet Airways.

We also expect the long-haul North Asian carriers with large network access to the U.S. such as Cathay Pacific, EVA Airways and Korean Air to capture some of this traffic diversion from Southeast Asia to the U.S. via their air hubs.

+ 1.5 million connecting passengers between Asia Pacific and the United States via the Middle East could be up for grabs

In 2016, we estimate that around 2.1 million U.S citizens visited the Middle East from the United States and 1.4 million Middle Eastern residents visited the United States from the Middle East. In addition, we estimate that the Gulf carriers likely carried 1.5 million passengers travelling between the United States and the Asia Pacific region via the Middle East. This amounts to around 11% of the total number of passengers travelling between the Asia Pacific and the United States of 13.2 million based on our estimates. Some of these 1.5 million connecting passengers are likely to switch from travelling on the Gulf carriers to avoid hubbing at the affected airports. This could provide an additional 1.5 million passenger market for the Asia Pacific airlines.

A significant portion of these travellers are likely to be travelling from/to Southeast Asia and South Asia due to the limited number of direct flights. Moreover, the flight duration for Southeast Asia/South Asia-U.S. flights via the Middle East operated by the Gulf carriers tends to be fairly similar to the flight duration for Southeast Asia/South Asia-U.S. flights operated by the other Southeast Asian/South Asian carriers. Some examples below:

A Singapore-New York flight via Dubai operated by Emirates takes 23 hours (if passengers manage to secure the flight connection with the shortest layover) which is the same flight duration for a Singapore-New York flight via Frankfurt operated by Singapore Airlines. The average fares of the Gulf carriers tend to be priced more attractively than Singapore Airlines’.

A Mumbai-New York flight via Abu Dhabi operated by Etihad takes 21 hours (if passengers manage to secure the flight connection with the shortest layover) versus 19 hours for a Mumbai-New York flight via Frankfurt operated by Air India.

In contrast, flights between North Asia or Australia and the U.S. with a stopover in the Middle East are relatively less attractive given their much longer travel time and will require low fares to attract passengers:

A Beijing-New York flight via Doha operated by Qatar Airways takes 25 hours (if passengers manage to secure the flight connection with the shortest layover) versus 13 hours for a Beijing-New York direct flight operated by Air China.

A Sydney-Los Angeles flight via Dubai operated by Emirates takes 45 hours versus 14 hours for a Sydney-Los Angeles direct flight operated by Qantas.

As such, the passengers are likely to switch to the hub carriers in the Southeast Asia/South Asia regions. We believe Singapore Airlines is likely to be the biggest beneficiary from this potential traffic diversion among the Southeast Asia and South Asian carriers. We estimate that every 5% gain of this 1.5 million passenger market could potentially boost Singapore Airlines’ FY18 net profit forecast by 1.2% on a full year basis. The main limitations to growth would be slot constraints at some of the major airports in the U.S. 

Singapore Airlines lost market share and revenue on the Asia-US routes in recent years when it suspended non-stop direct flights between Singapore and Los Angeles and Singapore and New York following the decommissioning of its five A340-500s which were economically unviable during the high fuel price period. This opened Singapore Airlines to more competition from other hub carriers as the duration of its Asia-US flights services became more similar to other competitors.

The carrier’s recent launch of direct flights from Singapore to San Francisco following the delivery of the A350-900 aircraft as well as the Singapore-New York non-stop direct flights on the A350-900 ultra-long range aircraft when they are delivered from 2018 should enable Singapore Airlines to regain market share in the Asia-US route region, especially premium traffic which will be higher-yielding. This will more than offset the negative impact of lower traffic feed from its codeshare partner Turkish Airlines which is affected by the “large electronic devices” ban by the U.S. and U.K.

Chart: Singapore Airlines’ Americas route region passenger revenue contribution (2005 to 2016)

Electronics Ban: SIA- America contribution

+ 4.0 million connecting passengers between Asia Pacific and the United Kingdom via the Middle East could be up for grabs

As the U.K. “large electronic devices” ban does not apply to the major Gulf carriers’ air hubs in Dubai, Doha and Abu Dhabi; we do not expect significant passenger traffic diversion to the Southeast Asian and South Asian carriers. However if due to their own perceptions of safety, the U.K.-bound passengers choose to bypass the major Gulf carriers’ air hubs then the impact will be even greater given this larger passenger market.

In 2016, we estimate that around 1.4 million U.K. citizens visited the Middle East from the United Kingdom and 1.1 million Middle Eastern residents visited the U.K. from the Middle East. In addition, we estimate that the Gulf carriers likely carried 4.0 million passengers travelling between the United Kingdom and the Asia Pacific region via the Middle East. We estimate that 51% of the 8 million passengers travelling between the Asia Pacific and the United Kingdom per annum is carried on connecting flights operated by the Gulf carriers hubbing in the Middle East. Following the “large electronic devices” ban, we expect some of these passengers to switch from hubbing in the Middle East to an alternative hub, most likely in Southeast Asia or in South Asia as well as switch to major North Asian long-haul carriers in the Asia-Europe route region such as Air China and Cathay Pacific given their wider network reach and higher flight frequencies.

A large part of these travellers are likely to be travelling from/to Australia, Southeast Asia and South Asia as the flight duration for these flights to the United Kingdom via the Middle East operated by the Gulf carriers tends to be fairly similar to the flight duration for Southeast Asia/South Asia/Australia-U.K. flights operated by the other Southeast Asian carriers. Some examples below:

A Sydney-London flight via Dubai operated by Emirates takes 23 hours (if passengers manage to secure the flight connection with the shortest layover) which is the same flight duration as a Sydney-London flight via Singapore operated by Singapore Airlines. The average fares of the Gulf carriers tend to be priced more attractively than Singapore Airlines’ as well.

A Mumbai-London flight via Abu Dhabi operated by Etihad takes 13 hours (if passengers manage to secure the flight connection with the shortest layover) versus a 10 hour Mumbai-London direct flight operated by Air India.

A Singapore-London flight via Doha operated by Qatar takes 17 hours (if passengers manage to secure the flight connection with the shortest layover) versus a 14 hour Singapore-London direct flight operated by Singapore Airlines. The average fares of the Gulf carriers tend to be priced more attractively than Singapore Airlines’ as well.

In contrast, flying between North Asia and the U.K. with a stopover in the Middle East is relatively less attractive and will require lower fares to attract these passengers:

A Shanghai-London flight via Dubai operated by Emirates takes 18 hours (if passengers manage to secure the flight connection with the shortest layover) versus a 12 hour Shanghai-London direct flight operated by China Eastern Airlines. This is a less attractive option to the more time-sensitive business and premium leisure travellers.

+ 1.5 million connecting passengers between Asia Pacific and the U.S. and U.K. via Turkey could be up for grabs

In 2016, we estimate that around 1.1 million U.K. citizens visited Turkey from the United Kingdom and 0.2 million Turkish residents visited the U.K. from Turkey. In addition, we estimate that 0.9 million passengers travel between the United Kingdom and the Asia Pacific region via Turkey. Like the connecting traffic via the Middle East, most of these passengers are likely to be travelling from/to Australia, Southeast Asia and South Asia. We also estimate that 0.6 million passengers travel between the United States and the Asia Pacific region via Turkey.

We believe Singapore Airlines is likely to be the biggest beneficiary from this potential traffic diversion. We estimate that every 5% gain of this 1.5 million passenger market could potentially boost Singapore Airlines’ FY18 net profit by 0.9% on a full year basis. The main limitations to growth would be slot constraints at London Heathrow airport and some of the major airports in the U.S.

We summaries the potential increase in the number of passengers carried and net profit impact from gaining this connecting traffic in the tables below.

POSITIVE EARNINGS IMPACT

+ Singapore Airlines

Largest potential upside for Singapore Airlines

Singapore has an “open skies” agreement with the United States and the United Kingdom which came into effect in late January 1997 and end March 2008 respectively. Singapore Airlines is therefore able to add additional capacity to these markets (and even flights between the U.K. and the U.S.) by using larger aircraft and/or increasing flight frequencies where there are available airport slots.

Estimating the potential earnings impact on Singapore Airlines:

We estimate that every 5% connecting passenger traffic to/from the US and UK that is being diverted from the affected air hubs in the Middle East and Turkey to Singapore Airlines could potentially boost its FY18 net profit by 2.1% (or 4.6% if passengers travelling to/from the U.K. decide to avoid hubbing in Dubai, Doha and Abu Dhabi even though they are not in the U.K.’s list of “large electronic devices” ban) on a full year basis.

Singapore Airlines: Potential upside on the number of passengers carried and net profit from traffic diversion following the implementation of the U.S. and U.K. electronics ban for every 5% market share gain

Electronics Ban: SIA earnings upside

Apart from Singapore Airlines, Singapore Changi Airport’s dominant airline service provider, SATS Limited will also benefit from the increased flights, passengers and in-flight meals handled at Singapore Changi Airport if its customer Singapore Airlines gains share which will more than offset its loss of handling volume from the Gulf carriers. Emirates is handled by SATS’ competitor Dnata in Singapore.

+ Thai Airways

Estimating the potential earnings impact on Thai Airways:

We estimate that every 4% connecting passenger traffic to/from the U.S. and U.K. that is being diverted from the affected air hubs in the Middle East and Turkey to Thai Airways could potentially boost Thai Airways’ 2017 net profit by 1.5% (or 3.2% if passengers travelling to/from the U.K. decide to avoid hubbing in Dubai, Doha and Abu Dhabi even though they are not in the U.K.’s list of “large electronic devices” ban) on a full year basis.

Thai Airways: Potential upside on the number of passengers carried and net profit from traffic diversion following the implementation of the U.S. and U.K. electronics ban for every 4% market share gain

Electronics Ban: Thai Airways earnings upside

+ Jet Airways

Estimating the potential earnings impact on Jet Airways:

We estimate that every 3% connecting passenger traffic to/from the U.S. and U.K. that is being diverted from the affected air hubs in the Middle East and Turkey to Jet Airways could potentially boost Jet Airways’ FY18 net profit by 1.3% (or 2.8% if passengers travelling to/from the U.K. decide to avoid hubbing in Dubai, Doha and Abu Dhabi even though they are not in the U.K.’s list of “large electronic devices” ban) on a full year basis.

Jet Airways: Potential upside on the number of passengers carried and net profit from traffic diversion following the implementation of the U.S. and U.K. electronics ban for every 3% market share gain

Electronics Ban: Jet Airways earnings upside

+ Cathay Pacific Airways

Estimating the potential earnings impact on Cathay Pacific Airways:

We estimate that every 3% connecting passenger traffic to/from the U.S. and U.K. that is being diverted from the affected air hubs in the Middle East and Turkey to Cathay Pacific Airways could potentially boost Cathay Pacific Airways’ 2017 net profit by 1.0% (or 2.7% if passengers travelling to/from the U.K. decide to avoid hubbing in Dubai, Doha and Abu Dhabi even though they are not in the U.K.’s list of “large electronic devices” ban) on a full year basis.

Cathay Pacific Airways: Potential upside on the number of passengers carried and net profit from traffic diversion following the implementation of the U.S. and U.K. electronics ban for every 3% market share gain

Electronics Ban: Cathay earnings upside

+ EVA Airways

Estimating the potential earnings impact on EVA Airways:

We estimate that every 2% connecting passenger traffic to/from the U.S. and U.K. that is being diverted from the affected air hubs in the Middle East and Turkey to EVA Airways could potentially boost EVA Airways’ 2017 net profit by 1.0% (or 2.2% if passengers travelling to/from the U.K. decide to avoid hubbing in Dubai, Doha and Abu Dhabi even though they are not in the U.K.’s list of “large electronic devices” ban) on a full year basis.

EVA Airways: Potential upside on the number of passengers carried and net profit from traffic diversion following the implementation of the U.S. and U.K. electronics ban for every 2% market share gain

Electronics Ban: EVA earnings upside

+ Korean Air

Estimating the potential earnings impact on Korean Air:

We estimate that every 2% connecting passenger traffic to/from the U.S. and U.K. that is being diverted from the affected air hubs in the Middle East and Turkey to Korean Air could potentially boost Korean Air’s 2017 net profit by 0.6% (or 1.3% if passengers travelling to/from the U.K. decide to avoid hubbing in Dubai, Doha and Abu Dhabi even though they are not in the U.K.’s list of “large electronic devices” ban) on a full year basis.

Korean Air: Potential upside on the number of passengers carried and net profit from traffic diversion following the implementation of the U.S. and U.K. electronics ban for every 2% market share gain

Electronics Ban: Korean Air earnings upside

+ Philippine Airlines

Estimating the potential earnings impact on Philippine Airlines:

We estimate that every 0.5% connecting passenger traffic to/from the U.S. and U.K. that is being diverted from the affected air hubs in the Middle East and Turkey to Philippine Airlines could potentially boost Philippine Airlines’ net profit by 0.4% (or 1.0% if passengers travelling to/from the U.K. decide to avoid hubbing in Dubai, Doha and Abu Dhabi even though they are not in the U.K.’s list of “large electronic devices” ban) on a full year basis.

Philippine Airlines: Potential upside on the number of passengers carried and net profit from traffic diversion following the implementation of the U.S. and U.K. electronics ban for every 0.5% market share gain

Electronics Ban: PAL earnings upside

+ All Nippon Airways

Estimating the potential earnings impact on All Nippon Airways:

We estimate that every 2% connecting passenger traffic to/from the U.S. and U.K. that is being diverted from the affected air hubs in the Middle East and Turkey to All Nippon Airways could potentially boost All Nippon Airways’ FY18 net profit by 0.4% (or 0.8% if passengers travelling to/from the U.K. decide to avoid hubbing in Dubai, Doha and Abu Dhabi even though they are not in the U.K.’s list of “large electronic devices” ban) on a full year basis.

All Nippon Airways: Potential upside on the number of passengers carried and net profit from traffic diversion following the implementation of the U.S. and U.K. electronics ban for every 2% market share gain

Electronics Ban: ANA earnings upside

+ Air China

Estimating the potential earnings impact on Air China:

We estimate that every 2% connecting passenger traffic to/from the U.S. and U.K. that is being diverted from the affected air hubs in the Middle East and Turkey to All Nippon Airways could potentially boost Air China’s 2017 net profit by 0.3% (or 0.9% if passengers travelling to/from the U.K. decide to avoid hubbing in Dubai, Doha and Abu Dhabi even though they are not in the U.K.’s list of “large electronic devices” ban) on a full year basis.

Air China: Potential upside on the number of passengers carried and net profit from traffic diversion following the implementation of the U.S. and U.K. electronics ban for every 2% market share gain

Electronics Ban: Air China earnings upside

+ China Eastern Airlines

Estimating the potential earnings impact on China Eastern Airlines:

We estimate that every 2% connecting passenger traffic to/from the U.S. and U.K. that is being diverted from the affected air hubs in the Middle East and Turkey to All Nippon Airways could potentially boost China Eastern Airlines’ 2017 net profit by 0.3% (or 0.7% if passengers travelling to/from the U.K. decide to avoid hubbing in Dubai, Doha and Abu Dhabi even though they are not in the U.K.’s list of “large electronic devices” ban) on a full year basis.

China Eastern Airlines: Potential upside on the number of passengers carried and net profit from traffic diversion following the implementation of the U.S. and U.K. electronics ban for every 2% market share gain

Electronics Ban: China Eastern earnings upside

Estimating the potential earnings impact on Garuda Indonesia:

We estimate that every 0.5% connecting passenger traffic to/from the U.S. and U.K. that is being diverted from the affected air hubs in the Middle East and Turkey to Garuda Indonesia could potentially boost Garuda’s 2018 net profit by 0.2% (or 0.4% if passengers travelling to/from the U.K. decide to avoid hubbing in Dubai, Doha and Abu Dhabi even though they are not in the U.K.’s list of “large electronic devices” ban) on a full year basis. However, note that Garuda is targeting to launch services to the U.S. only from the end of 2017 so any earnings impact this year will be limited.

Garuda Indonesia: Potential upside on the number of passengers carried and net profit from traffic diversion following the implementation of the U.S. and U.K. electronic devices for every 0.5% market share gain

Electronics Ban: Garuda earnings upside

KEY RISK TO THE ASIA PACIFIC AIRLINES

The expected decline in passenger travel demand for flights between the Middle East and the U.S. and U.K. is likely to drive the Gulf carriers to re-deploy their excess fleet capacity to Middle East-Asia Pacific routes as well as to other route regions. This could potentially 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 2 years remains a key concern to the Asia Pacific airlines.

Chart: Global airline sector seat capacity growth (2016 to 2021)

Electronics Ban: Global Airlines Seat Capacity Growth

However, there could be a limit to how much demand stimulation lower fares could help the Middle Eastern airlines as they can mainly target to increase their origin & destination passengers (i.e. Middle Eastern passengers who are travelling to Asia as an end destination or Asian passengers who are travelling to the Middle East as an end destination) and will unlikely be able to entice connecting passengers to fly from the Asia Pacific to the U.S. or U.K. via a stopover in the Middle East. There may not be sufficient origin and destination traffic to justify a significant increase in flights between the Middle East and the Asia Pacific region. Increased trade flows and business activities between the Asia Pacific and the Middle East as well as the construction of more tourist attractions are needed to help boost origin and destination traffic between the two regions.

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