Blog du PDG

What next for the Gulf carriers?

Ecrit par Ravindra Bhagwanani sur . Publié dans CEO Blog

ME328 July 2017

The three big Gulf carriers find themselves, all of a sudden, in difficult conditions, although for very different reasons. As this is new territory for at least two of them, it will be interesting to watch what this will mean for their FFPs.

Today is Friday, the day of relaxation in Muslim countries. But many airline managers in the Golf region might not spend such relaxing times these days since things have really gone sour for them over the last couple of months.

If you look at their problems, recent laptop bans and travel restrictions by the US administration might have hit them equally and added to their woes, but they were certainly not responsible for the majority of issues. Emirates suffered from a downturn in many business travel markets at a time when it was trying to push up its yields. Qatar Airways has all of a sudden lots of spare capacity after the diplomatic conflict between Qatar and its neighbours, to such extent that it even started to wet lease aircraft to partners such as British Airways and Royal Air Maroc. Etihad finally took the full hit of its failed investment strategy and announced a record loss of 1.87 billion USD for 2016 yesterday – before things actually worsened for them in the current year. It attributes half of that loss to its investments in Alitalia and Air Berlin. (And even if they position this as kind of excuse or force majeure and place themselves as victim, let’s just recall that it was their management decision to engage with these carriers in first place and virtually control them now!)

To put this figure in a simplified relation: Etihad carried 18.5 million passengers (=segments) in 2016. So, for each passenger segment, they lost 100 USD at a group level – for a typical roundtrip connection flight hence 400 USD per ticket. If they added that price to each ticket, it is easy to imagine what would happen to their passenger numbers – a kind of uncomfortable and unhealthy vicious circle.

You may also add the troubles at Turkish Airlines in front of the security and political issues at their home to that picture of evaporating dreams.

In a nutshell, it seems that the best times for the ME3 carriers are indeed over and that they will have to learn to face a harsher reality than what they knew until here, often feeling like in a never-ending fairy tale lasting more than 1,001 nights.

The carriers will have to apply new strategies to turn their fortunes around. Emirates with its visionary management team – and nevertheless acting from a position of force – seems to be best placed as the announced tie-up with FlyDubai demonstrates. On the other side of the spectrum, Etihad’s main strategy seems to consist of increasing its shareholding in Alitalia from 49 to 100% – what might not really inspire confidence. Harsh cost cutting measures – such as the abolition of the popular chauffeur service for premium customers – are definitely required, but are not well perceived by the public.

It will though be interesting to see what happens to their Frequent Flyer Programs. So far, FFPs have played, historically, rather an underdog role at the ME3 carriers compared to other carriers of the same size. In order to attract passengers in big numbers, they relied much more on the excellent service (those three airlines would usually all appear among the Top 5 airlines of any service ranking!), the strength of the network and a lower cost structure, resulting from economies-of-scale due to their size and lower labour costs than in other markets.

The FFPs played only a secondary role in their marketing mix in front of that situation. I’ll always recall that discussion I had with Emirates’ Sales Director in Germany, inviting me to their office just after I started my business in 1996, explaining to me that they would not need an FFP because they had such a great product. That position was revised a few years later as we all know – but the attitude might not have fully evolved from that thinking.

While all three FFPs are different – and Etihad Guest actually standing out a bit since they try nevertheless to be more innovative than others -, they all lack of generosity and attractiveness to make really a difference in the decision process of customers, at least for the majority of their customers not based in their home markets. While this might not have been appreciated by everybody, the overall success of the airlines finally proved them to be right. As much as many clients would not choose a US carrier if it were not for the FFP-related benefits, customers would typically choose Golf carriers for all other good reasons than their FFPs.

But with all the current headwinds, it is obvious that the loyalty strategies should become more important. Most visibly, this would need to start with revaluating the generosity of their programs – although this will add costs in first instance. Loyalty is a long term game, which requires upfront investment before harvesting the results. If you wait to do these required investments until times are so bad that you desperately need the results as the ME3 have done, things definitely become trickier. But there is hardly an alternative.

Early signs are not promising though. Qatar Airways is turning to its customer basis to push one sales promotion after the other, further depressing its yields rather than increasing them. Emirates and Etihad remain inactive as always without any true effort to engage customers beyond the top elite members – beyond, where a loyalty program should make the difference. There is no doubt though that all three airlines have actually the tools to do much better. Customers will definitely be receptive for such signals. But as they won’t result in any reversed fortunes from one day to another and as there is indeed no light at the end of the tunnel in sight for these carriers, they’d rather not wait too long until their loyalty departments wake up to the reality and do something they never really had to do in the past: To fight every day for the loyalty of their customers.

Welcome to the true and sometimes cruel world outside of your fantasy lands!