Despite repeated statements from Qatar Airways officials reassuring shareholders of the company’s ability to hedge against the negative influences of the regional blockade since June 2017, it is assumed that the company will report a “very large loss”, the first signal of which was given by the giant airline’s chief executive officer on March 7.
Since Qatar’s economy has been coping with a regional blockade suddenly imposed by four Arab neighbors (Saudi Arabia, Egypt, UAE, and Bahrain), the country’s government has struggled for alternatives to minimize the consequences of what they claimed is an illegal action imposed on the Qatari people. Among different sectors constituting the fast-growing economy of one of the most prosperous countries in the region and the globe, Qatar Airways acts as a pivotal economic arm in aid of the country’s long-term goals. It is a source of non-oil income for an oil-rich nation in the Persian Gulf and more importantly, Qatar Airways plays a formidable role on the country’s endeavor attempts to gain prestige and acquire an influential position in the global aviation market.
The Doha-based aviation company has been one of the most successful aviation businesses in the region and around the globe over the past two decades. Despite the competition of the Middle East 3 (ME3) club, in which Qatar Airways faces two regional giants, the Dubai-based Emirates Airlines and the Abu Dhabi-based Etihad Airways, the Qatari company announced a 21.7 percent year-on-year net profit increase and 10.4 percent of annual revenue increase on March 31, 2017. The success of the Qatar Airways was remarkable when numbers were compared with Etihad Airways and Istanbul-based Turkish Airlines, which both announced fare hikes in the same period (see figure 1). The company is adding 10 new destinations in 2017: Adelaide, Australia; Atlanta, United States; Auckland, New Zealand; Helsinki, Finland; Krabi, Thailand; Marrakech, Morocco; Pisa, Italy; Mahé, Seychelles; Windhoek, Namibia; and Yerevan, Armenia. Qatar Airways is thus becoming one of the leading hubs in the region, playing a vital role in the expansive navigation industry.
Figure 1: Annual Revenues of top regional airlines (in bn. USD)
Source: annual statistics collected and converted into USD by the author
The sudden diplomatic crisis on June 5, 2017 was created by Saudi Arabia, the United Arab Emirates, Egypt and Bahrain, who cut diplomatic relations with Qatar and imposed a blockade on their Arab neighbor, closing their land, air and sea borders with the country. These nations accused the country of being a supporter of “terrorism” and feeding regional instability, and this not only shocked the Qatari government: it was a signal of tough days for the officials at fast-growing Qatar Airways as well. In one day, not only did Qatar Airways lose 20 destinations (11 percent of its network) but it also lost its ability to use its southern and eastern airspace as well, directly limiting Qatar’s air traffic and its operational costs. “It is painful because there are many routes that become as much as two to two-and-a-half hours longer, and there are routes that are narrow-body routes where we have had to convert to wide-body in order to carry enough fuel to go the longer distance,” Akbar Al Baker said in November 2017. The situation leaves no choice for Qatar other than using Iran and Turkey’s airspace, costing more fuel in addition to increasing maintenance costs as a result of the longer flights.
The second-biggest Persian Gulf carrier sought to minimize the effects of the blockade and come up with new alternatives to overcome obstacles imposed by the embargo. The very first step taken by Qatar Airways officials was to prepare the psychological groundwork to send positive signals to both consumers and investors, minimizing the effects of the blockade on the company’s performance. Statements said that the blockade had “failed in every aspect” and “There are so many other nice places in the world. So we have not lost anything” were used by Qatar Airways CEO Al Baker, refusing to say the company had lost out because of the blockade. Examining the aggressively expansionist policies of the company sheds light on another side of the coin. For the giant company, owning a large amount of capital and holding an internationally respected position in the aviation industry provided enough cards for the hands of its decision makers. It seems that the first tactic taken by the company in the short term was to replace lost destinations in the four blocked countries with new destinations across the world. Qatar Airways added new flights to Chiang Mai, Thailand; St. Petersburg, Russia and Penang, Malaysia, with direct service to Cardiff, United Kingdom and Mykonos, Greece planned to be connected later this year. Hamad International Airport is expected to be joined through Qatar Airways to airports in Germany, London, Portugal, Estonia, Malta, Philippines, Malaysia, Vietnam, Turkey, Greece, and Spain in next two years. Eight of these destinations were not included within the announced destinations in the company’s annual report published in March 2017, three months before the blockade; this is a sign of how the company has accelerated its expansion by flying to different regions. The common characteristic of all these destinations, which are mostly in either Europe or Asia, is that the company is prevented from flying over the four blockade countries airspace. In the case of successfully reversing the blockade, the company would have greater potential profits thanks to extended flight hours and a decrease in operating costs.
The longer the routes to new destinations are, therefore, the larger the aircraft that are needed to be added to the airline’s capacity. The previous high levels of investment in the infrastructure of the Doha-based company, which owns one of the most modern and brand-new airports in the world, have left Qataris with no concerns regarding their airport facilities, and this has been a source of confidence, allowing the company to order more 42 brand-new Airbus A350-1000s, which is one of the largest aircraft available on the market, costing the company $92 bn. The new orders would bring the company more possible business class seats, as well as better comfort and services for passengers. It can also be a sign that the company’s financial situation is stable enough to avoid moving toward reducing comfort standards on flights in order to be able to cut the price of operations in the manner of Etihad.
Considering previous solutions as short-term tactics for the company to overcome the blockade, Qatar Airlines seem not purely to be relying on a few tactical answers, and they are looking for more alternatives to put the industry in a more secure position. The long-term strategy designed by Qatar indicates that the country is probably willing to adopt a foreign direct investment strategy to create alternative sources of income in different parts of the world. In February 2018, Al Baker declared that the company was going to lunch a new airline in India with at least 100 planes, and at the very same time, Qatar Airways became a new shareholder of Air Italy with the aim of making Air Italy “a sustainable airline alternative for the people of Italy”. In addition, Qatar Airways announced a new agreement with JetBlue Airways to accelerate semi-private air services on the U.S. West Coast on April 10.
Despite the recent signals given by the company, a negative atmosphere and predictions of a tremendous loss have been created. The company’s accounts for the financial year are expected to be announced in a few weeks with the aim of eliciting more investments from stockholders. It will probably not be a surprise if the company shows a weaker performance in comparison to the past few years in the short-term, but new policies have introduced alternatives. Expanding destination networks, improving hardware capacity for longer flights and overcoming the situation in the long term, and diversifying investment in Doha are parts of the aggressive expansion of Qatar Airways into new markets.