airlines from the gulf vs. european majors: es o e gu s u...

Airlines from the Gulf vs. European majors:Gulf airlines improve their handicaps

es o e Gu s u opea ajo s

December 2010

Yan Derocles

+33 (0) 1 44 51 88 57 [email protected]

Olfa Taamallah

[email protected]

Challengers are already showing their mettle

A i i t tAn aggressive expansion strategy

Market share gains

Middle East currently accounts for 10.7% of international passenger trafficTo continue their expansion, Gulf airlines have rapidly seized the opportunity offered to them by the « sixth freedom of the air ».To sustain their growth over the medium term, these airlines hold 14% of Airbus backlog and 11.2% of Boeing’s.Leading clients of the A380and the A350 accounting for 45% and 42% of the backlog. Equal important position at Boeing with 27.8% of B777 and 15.7% of B787 backlogs.

Geographic breakdown of deliveries of long-haul aircraft in value terms Ranking of top ten countries in terms of demand for passenger aircraft(in number and value terms) over the 2009-2028 period

Middle East24%

South America3%

North America9%

Africa4%

Passenger aircraft demand By US$ value (billions) 1 United States 5,096 United States 450.32 China 3,272 China 439.53 United Kingdom 1,229 United Kingdom 154.04 Germany 1,175 India 141.55 India 1,093 Germany 141.46 Russia 1 004 Japan 114 2

Asia-Pacific36%Europe

24%

Source: Flight global

6 Russia 1,004 Japan 114.27 Ireland 615 UAE 98.28 Australia 551 Russia 89.99 Japan 548 Singapore 79.3

10 Brazil 542 Australia 74.2

Source: Airbus

Strictement confidentiel[Date]2



The forces present

3 airlines have a predominant position in the market : Emirates (Dubai), Etihad (Abu Dhabi) and Qatar Airways (Qatar) → the three airlines account for more than 25% of air traffic in the Middle-East.Emirates is among the leading players worldwide in terms of international traffic.Over the last 10 years, Emirates has generated average annual traffic of 22.4%.In 2009, Qatar Airways was ranked fourth best worldwide for the quality of its services by Skytrax.

Emirates Airline Etihad Airways Qatar Airways

Key figures for Emirates, Etihad and Qatar Airways (financial year)

Emirates Airline Etihad Airways Qatar Airways

2008 2009 Change (%) 2008 2009 Change (%) 2008 2009 Change (%)

Passenger Traffic 22 730 895 27 454 000 20.8 5 988 523 6 276 409 4.8 9 702 629 10 211 669 5.3

Fleet Size 127 142 11.8 42 52 23.8 64 72 12.5

No.of Destinations 99 102 3.0 56 75 33.9 77 89 15.6

Passenger Load Factor (PLF%) 76 78 3.0 75 74 -2.3 73 72 -1.4g ( )

Revenue Passenger km(RPK million) 101 762 126 273 24.1 24 159 27 805 15.1 36 203 40 409 11.6

Available Seat km (ASK million) 134 179 161 756 20.6 32 104 37 763 17.6 49 848 56 412 13.2

Cargo Carried (Tons) 1 408 300 1 580 000 12.2 30 8721 218 845 -29.1 401 683 458 248 14.1

Skytrax Ranking (Stars) 4 4 4 4 5 5


Source: Companies



Rapid capacity development

Trend in capacity offered over the last 8 years shows that Emirates has developed more rapidly than its European counterparts : CAGR of 21.5% vs. 4.1% for Lufthansa (lfl), 3.3% for Air France (lfl) and 0.7% for British Airways.Europe currently represents 12% of the traffic of the Gulf’s 3 principal operatorsEmirates serves close to 13 destinations in Europe (with 193 weekly frequencies), Etihad and Qatar Airways serve respectively 9 and 18 d ti ti (83 d 172 kl f i )destinations (83 and 172 weekly frequencies)

Trend in capacity offered Emirates: breakdown of capacity offered by region

Etihad: capacity offered by region Qatar Airways: capacity by region

150,000

200,000

250,000

300,000

SK in

milli

ons

MiddleEurope 14%

Latin America

0%Asia Pacif ic

8%

Africa7%

North America

2%

India

Europe 11%

Africa3%

Asia Pacif ic

3%

North America

1%

Europe11%

Africa7%

Asia-Pacif ic

4%

North America

2%

0

50,000

100,000

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

AS

Emirates Air France-KLM Lufthansa British Airways

Middle East 52%

India Subcontin

ent 17%

14%

Middle East 65%

India Subcontin

ent 17% Middle

East 62%

India Subcontin

ent14%


Source: Oddo Securities Sources: Centre for Asia Pacific Aviation (week of 12 January 2009)



High growth forecast

According to IATA, middle eastern carriers continue to post the most robust growth in capacity (13.7% in October and 13.2% YTD) and in traffic (18% in October and 18.6% YTD). Traffic growth estimated at 19.5% for 2010.The ICAO estimates that the Middle East will post robust growth out to 2012 (15.5% for 2010, 12% for 2011 and 11.5% for 2012).Over the 2010-2029 period, Boeing estimates that the traffic between the Middle East and Asia is likely to increase at an annual pace

f 7 5% E Middl E t t ffi i lik l t i t l li f 6% t ti l f th i ti t ffiof 7.5%. Europe-Middle East traffic is likely to increase at an annual clip of 6% →potential of growth in connection traffic.Airbus estimates the next 20-year growth for the region at 6.8% per annum (vs. 5.9% est. in 2009).

Monthly trend in traffic in the Middle East vs. Europe and the industry worldwide Monthly trend capacity in the Middle East vs. Europe and worldwide industry

10%

15%

20%

25%

30%

10%

15%

20%

25%

-15%

-10%

-5%

0%

5%

n-06

r-06

ul-0

6

ct-0

6

n-07

r-07

ul-0

7

ct-0

7

n-08

r-08

ul-0

8

ct-0

8

n-09

r-09

ul-0

9

ct-0

9

n-10

r-10

ul-1

0

ct-1

0

-15%

-10%

-5%

0%

5%n-

06

r-06

ul-0

6

ct-0

6

n-07

r-07

ul-0

7

ct-0

7

n-08

r-08

ul-0

8

ct-0

8

n-09

r-09

ul-0

9

ct-0

9

n-10

r-10

ul-1

0

ct-1

0


Source: IATA

Ja Ap Ju Oc

Ja Ap Ju Oc

Ja Ap Ju Oc

Ja Ap Ju Oc

Ja Ap Ju Oc

Middle East Europe Industry

Ja Ap Ju Oc

Ja Ap Ju Oc

Ja Ap Ju Oc

Ja Ap Ju Oc

Ja Ap Ju Oc

Middle East Europe Industry



Reasons underpinning this success

Hubs located at the crossroads of routes to Europe, Africa, Australia and Asia and proximity of markets the size of India and China (a mere of two-and-a-half hour flight) → Gulf airlines take advantage of the shift to the East as the centre of world trade.Fleets are far younger than the ones operated by major European competitors (3.6 years for Etihad, 4.6 for Qatar Airways and 6.2 for Emirates)G lf i li i t i l h l i ft bli th t id t li k b t th i ti h b i th ld’Gulf airlines invest in long-haul aircraft enabling them to provide non-stop links between their respective hubs in the world’s major citiesGulf airlines enjoy diverse financing sources and have access to export credits.

Fleet age of Middle-Eastern airlines vs. European majors Stage length in an A380 non-stop from Dubai

Airlines Country Fleet Age

Emirates UAE 6.2

Qatar Airways Qatar 4.6

Etihad Airways UAE 3.6

Gulf Air Bahrain 7.7

Middle East Airlines Lebanon 3.7

Saudi Arabian Airlines Saudi Arabia 12.1

Syrian Arab Airlines Syria 10

Kuwait Airways Kuwait 15.8

Air France-KLM France 9.5

Lufthansa Germany 13


Lufthansa Germany 13

British Airways UK 12.4

Source: Airfleets Source: Airbus




Operating costs are a major competitive advantage : over the past ten years, Emirates has generated an operating margin of 10.6%on average vs. 2.7% for the four European majors. Only Ryanair generated a higher operating margin at 21.1%.In 2009, we estimate Emirates’ competitive advantage at close to 50% vs. European majors.In 2009, Emirates unit payroll costs averaged 60% less than those of standard European airlines, with fuel costs 30% lower and

it hi t 40% lunit ownership costs 40% lower.

60 L f h70

Comparison of unit costs, excluding fuel Comparison of unit revenues

Lufthansa

Air France-KLM

British Airways

Iberia

EasyJet30

40

50

60

€ ct

s

Emirates

Ryanair

LufthansaAir France-

KLM

British Airways

IberiaEasyJet

30

40

50

60

€ ct

s

EmiratesRyanair

0

10

20

0 1000 2000 3000 4000 5000

Km

0

10

20

0 1000 2000 3000 4000 5000

Km





Profitability targets are sometimes a secondary concern and the development of aviation is a deliberate strategic direction.Investments by the Gulf States in the civil aviation sector has been estimated at more than $200bn out to 2020 (just under $120bn due to be spent in the UAE alone on new aircraft) .Massive investment in airport infrastructure : double digit growth in passenger traffic ( 2000-2009 CAGR of 14.3% for Dubai airport

d 11 4% f Ab Dh bi Ai t) l t $20b t t i t t f i t d i t i f t t i th UAE land 11.4% for Abu Dhabi Airport), almost $20bn target investments for airport and airport infrastructure in the UAE, same scale announced in Saudi Arabia by 2020.Dubai International Airport is ranked 15th in terms of passenger traffic and 4th in terms of in terms of international passenger trafficin 2009.

C i t ffi th C i t ffi th

20%25%30%35%40%

Comparing passenger traffic growth Comparing passenger traffic growth

-10%-5%0%5%

10%15%

2001 2002 2003 2004 2005 2006 2007 2008 2009 1S2010


2001 2002 2003 2004 2005 2006 2007 2008 2009 1S2010

CDG Paris airport Frankfurt airport Dubai Airport

Abu Dhabi airport Doha airport Heathrow airport

Source: respective airports

The anticipated growth for Gulf-based airlines poses major risks for European players

Seven major risks identified…

1. Creation of an emerging player in the freight segment : in less than 10 years, Dubai has become the 8th airport platform for air freight (vs. 25th in 2001) ahead of Frankfurt, London Heathrow and Amsterdam and is just 6% below Paris CDG.

2. Offensive on upmarket niche leisure markets : a number of Gulf airlines are positioned on the leisure premium segment such as the Seychelles and Australia

3 A di i f di t th th E A i k t G lf i t ti th i iti i i A i P ifi3. A diversion of medium-term growth on the Europe-Asia market : Gulf carriers are now accentuating their positioning in Asia-Pacific, India and Africa → the risk for European airlines lies in the reduction of the rate of growth in traffic originating from these regions.

Year Ranking Total cargo traffic Yoy ch. in %2009 8 1 927 520 5.6%2008 11 1 824 992 9.4%2007 13 1 668 505 11.0%

Dubai airport's worldwide positioning in the freight segment

27.8% 29.4% 29.8% 29.8% 28.5% 27.9%

12.6%

9.4% 9.7% 10.6% 10.6% 11.5% 11.2%

8.9%8.9% 11.6%9.7% 8.1%

Geographic breakdown of sales at Emirates

2006 17 1 503 697 14.4%2005 18 1 314 906 12.5%2004 18 1 169 286 22.2%2003 19 956 795 21.9%2002 21 784 997 24.2%2001 25 632 224

Sources: ACI, Oddo Securities

16.4% 16.1% 14.8% 14.8% 11.4% 11.6%

36.7% 36.7% 35.9% 35.9% 37.4% 36.7%

27.9%

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10


Sources: ACI, Oddo Securities 2004 05 2005 06 2006 07 2007 08 2008 09 2009 10

Gulf Middle East and Iran Europe &Americas

East Asia andAustralasia

West Asia andIndian Ocean

Africa

Source: Emirates annual reports



4. Emergence of an African hub : the risk of a transformation by a Gulf airline of an international African airport of a significant scale into a real African hub, thereby capturing part of the premium clientele based in Africa, notably for Air France and Lufthansa.

Comparative Time Travel : Traffic Between Africa and Asia

Beijing AF-KL : 23:45 / 26:00 Emirates : 16:55 / 17:05 6 50 / 8 55

Delhi AF-KL : 18:45 / 21:00

Hongkong AF-KL : 25:15 / 27:30 Emirates : 16:40 / 12:40 -8:25 / -14:50

-6:50 / -8:55

Nairobi AF-KL : 8:30 Emirates : 5:10 3:20

LagosAF-KL : 6:10 Emirates : 8:20 +2:10

AF-KL : 18:45 / 21:00Emirates : 12:50 / 12:40 -5:55 / -8 :20

8:25 / 14:50

Sources: Airlines websites


-3:20Sources: Airlines websites



5. Market share losses in the premium segment and notably on North American and Asian destinations: in 2009, the Middle Eastrepresented 12.1% of premium traffic worldwide and 11% of premium revenues (respectively 10.3% and 8.6% in June 2010) (IATA).

6. A more intense bilateral cooperation with an Asian or US player can generate additional leverage for Gulf airlines and therefore increase the degree of risk for European Airlines.

7 Gi th i f th d ti k t th l ti i l d th li k b t th i ht l ill t li th7. Given the size of the « domestic » market, the overpopulation is clear and the link-up between the eight players will streamline the market and strengthen the remaining players.

Recap of European airlines' exposure to risks

Air France-KLM Alitalia British Airways Iberia Lufthansa Finnair SAS

Creation of an emerging player in the freight segment - - - - - - - - - -

Emergence of an African hub - - - - - - - - -

Attacks from upmarket leisure market players - - - - - - - - - - -

Attracting a share of the forecast growth in the Europe-Asia market - - - - - - - - - - - -

Market share losses in the premium segment - - - - - - - - - -

Potential alliance between non-aligned players - - - - - - -

Sector consolidation in the Gulf - - - - - - -


Source: Oddo Securities

Risk is greatest for Lufthansa and Air France-KLM

But safeguards exist…

Lufthansa and Air France-KLM are theoretically the most vulnerable due their hub-focused organization and weighting of cargo (respectively 11.6% and 8.7% of total sales) but also their high presence in Africa.In our view, Lufthansa is the most at risk due to the decentralized German market (Frankfurt , Munich, Dusseldorf and now Berlin as potential entry points) and a more liberal and conciliatory attitude of German government until recently, which lowered the barriers to entry.

However, there are a number of factors to suggest that competition from Gulf-based airlines vs. European majors should be put into perspective:

Lobbying is working at last…at least in the short term : recent talks show a clear change in direction notably in Germany; in theLobbying is working at last…at least in the short term : recent talks show a clear change in direction notably in Germany; in the medium term, the UAE still holds certain cards to overcome this protectionist movement (they may threaten the Europeans with cancelling the order for 118 A350 and switching to Boeing)Replacement vs. growth.. : the fact that Gulf companies are keen to keep a young fleet will oblige them to use some of the future deliveries to replace their oldest aircraft → the growth in capacity, which averaged 20% annually over the 10 past years, should therefore be closer to 10% over the next decade.therefore be closer to 10% over the next decade.Although Europe represents about 12% of traffic for the main Gulf players, their investment are now mainly turned towards Asia.Improvement in the €/$ exchange rate (+5% since the beginning of the year) since the UAE dirham is pegged to the dollar.


airlines from the gulf vs. european majors: es o e gu s u...

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