Gulf aviation rebalances partnerships across networks

Airshows are often judged based on how many aircraft orders are produced. By that metric, the Dubai Airshow in Nov-2017 will continue the lull seen since record 2013 show that notably featured orders for A380s and Boeing 777Xs. More important was the lasting impression in 2013 of Gulf aviation’s global expansion being unstoppable.

At the 2017 Airshow, Emirates could place an order for 787s or A350s (although it is looking increasingly likely this could be deferred into 2018), medium sized widebodies that lack the public attention of the A380 that Emirates has come to symbolise. An order for a seemingly modest aircraft marks an adaptation to a new environment and may raise more questions about Gulf aviation’s confidence. Yet such an order would be another indicator of Gulf aviation recalibrating, preparing for the next phase of growth and ultimately seeking greater sustainability.

There are two developing maxims: bigger is not always better, and partnership expansion can be more fruitful than organic growth. These run contrary to previous strategies and take a different form at the region’s three most visible airlines, the Gulf superconnectors: Emirates, Etihad and Qatar Airways. Through aircraft and partnership adaptations, many airlines are rebalancing their networks. Two significant developments from Emirates will have long lasting implications. These are its forthcoming medium sized widebody aircraft order and its partnership with flydubai.

Emirates found success with a network strategy comprising serving markets at least daily with a 777-300ER or A380. After smaller and older aircraft types were phased out, Emirates’ 777-300ER with over 350 seats effectively became its smallest aircraft type. (Its handful of 777-200LRs are often earmarked for specific missions, operationally and strategically.) However Emirates appears to have saturated opportunities and markets with its existing production platform; new scales of growth are needed.

Emirates is due to place an order for medium sized widebodies. Emirates in 2014 cancelled its 2007 order for 70 A350s, 50 of them the smaller -900. The A350 and 787 are officially the aircraft in the running, but the favourite has come to be the 787.

Surely a contributing factor to Emirates’ decision is the future of the A380. Airbus has declined to build a re-engined A380 – dubbed the A380neo – that would take the A380 family into the late 2020s and 2030s.

Emirates needs a next-generation A380 to replace its existing A380s. Yet with the A380 programme already being limited in popularity (and thus profitability) and no major prospective A380neo customers besides Emirates, Airbus is unwilling to take the risk to build a new aircraft essentially for one operator.

Even with Emirates’ fleet needs, an Emirates A380neo order appears not enough to see the A380neo programme be sustainable. Emirates president Sir Tim Clark has even extolled the superjumbo’s benefits in a bid to drum up more customers for Airbus.

With Airbus unwilling to deliver an A380 replacement, Emirates is perhaps not inclined to giving additional business to Airbus in the form of the A350. Even though the A380 and A350 are two very different types, Emirates has entwined the issue in an apparent all-or-nothing deal.

Once Emirates receives its medium sized widebody, it can extend its network to reach markets currently not big enough for its “small” 777-300ER. Other markets could be right sized or see capacity broadly maintained but frequency increased.

Based on Apr-2017 data, Emirates and Qatar overlap on 109 destinations. Qatar serves 49 destinations that Emirates does not. Of Qatar’s unique 49 destinations, two are served by large widebody aircraft; two a mixture. But 11 are flown exclusively by medium sized widebodies; and then 34 points are flown exclusively by narrowbody aircraft.

There is an aeropolitical benefit from the widebody order. Key markets like India for Emirates have an air services agreement based on seats, not frequency. Having more aircraft types and smaller aircraft in the fleet allows Emirates more schedule combinations to try to utilise as many of the provisioned seats as possible.

Emirates’ widebody order has similar strategic objectives to its partnership with flydubai. The inability to compete effectively with the narrowbody aircraft at Etihad and Qatar that allow them to reach thinner markets, can be rectified by an ability to right-size existing services and boost regional frequencies (where there is strong O&D demand).

Hence, after resisting the urge since flydubai appeared on the scene, Emirates and flydubai in Jul-2017 announced a wide ranging partnership that will have them coordinating networks and increasing sales on each other’s network via codeshare.

Emirates earlier in 2017 had mooted having their own narrowbody operation, but this would conflict with flydubai’s existing presence. This raises the question of why they would stop at this level of cooperation when there could be a full merger. Although there is significant opportunity to increase Emirates-flydubai joint sales, the existing partnership traffic is low. Even once sales are ramped up, flydubai will still be anchored on traffic that is wholly within its network and often point-to-point Dubai. A full merger into Emirates’ operating and financial model risks losing the majority of traffic.

The Emirates and flydubai partnership does not merely add up to the sum of the parts. Although their opportunities are being combined, the two airlines themselves are not consolidating to one. The guiding principle then is that “1 + 1 equals 11”, representing the combined benefit but still two separate airlines.

Nor is the Emirates-flydubai tie up the classic dual brand strategy of the LCC being under the full service unit. Emirates and flydubai have the same Dubai government shareholder but one airline is not subservient to the other. The classic dual brand dynamics prevail: the larger full service airline is possessive and wants to dictate to the smaller LCC. The LCC meanwhile sees itself as a more agile model for the full service airline.

Debates between Emirates and flydubai will be inevitable, just as they have been at dual brand combinations. These debates can be healthy to find what Dubai has famously achieved: what exactly is the best outcome at the end of the day for the hub and for the economy.

A later decision for Emirates will be how to manage a post A380 future. With no future aircraft nearly as big as the A380, replacing the A380 means either using a smaller aircraft and thus reducing capacity or increasing frequency.

The question is most profound for Emirates since its network is built on A380s feeding A380 transfer traffic. For most other airlines, A380s are a token contribution to the fleet and used for high O&D routes with connecting traffic fed by a variety of aircraft. At Emirates, take out the A380 and the production model needs significant adjustment.

To use London Heathrow as an example, Emirates’ six daily services are mostly flown by the three class 517 seat A380. Boeing’s sample configuration for the 777-9X suggests a three class configuration of 349 seats. This is less than Emirates’ 354-364 seats on its 777-300ER, which is about two metres shorter than the 777-9X will be. A notable difference is that Boeing’s configuration suggests for the 777-9X direct aisle access seats in business, which Emirates offers on the A380 but not the 777-300ER. Boeing also proposes a two class configuration seating 414.

Assuming a theoretical Emirates 777-9X configuration of 390 seats, replacing Heathrow’s six daily A380s with six 777-9Xs will see a capacity reduction of 25%, or 762 seats. If Emirates wants to preserve the existing capacity generated by six daily London A380s, it would need to two more 777-9X flights for a total of eight. Those additional two sevices would need to be matched by growth across the network. Peak scheduling banks will need to accommodate more aircraft to maintain passenger volume.

Airports like Heathrow, Sydney and New York raise the practical matter of whether slots can be obtained and at the right times to facilitate hub transfers. Additional flights will not be an option for markets (such as Australia today) where traffic rights are based on frequencies, although presumably there will be some liberalisation.

This article was adapted from a feature that appears in the latest issue of Airline Leader – the strategy journal for airline CEOs. Visit Airline Leader to find out more.