Tuesday, 27 June 2017

QATAR: Should Or Will Qatar Airways Buy Stake In American Airlines?

Qatar Airways’ intent to acquire up to 10 per cent of American Airlines, variously described as confusing, misguided and ill-conceived by the chief executive of its target, may have created a window for US carriers to renew their efforts to curb the expansion of their Arabian Gulf rivals into the North American aviation market at a critical time when demand has been relatively soft.

The open skies dispute, led by allegations from airlines in the United States of unfair competition by Gulf carriers, had simmered down in the last year after a drawn-out and fractious period involving harsh words, a concerted lobbying effort on the part of the American companies and the unrelenting addition of capacity to the United States by Emirates, Etihad Airways and Qatar Airways.

Since the US president Donald Trump’s inauguration in January, a series of actions by his administration, particularly the ban on the use of electronic devices such as laptops on flights to the US from Gulf airports, had resulted in a fall-off in demand. Emirates began moving spare capacity on to other markets, including Asia. This appeared to remove some of the impetus for the dispute, which US carriers were intent on keeping up, having written in March to Mr Trump urging him to act.

With Thursday’s surprise announcement that Qatar Airways was weighing a passive investment in American Airlines, the reaction from some quarters of the US aviation sector has been reminiscent of the conflict at its height in February 2015, when the then Delta Air Lines’ chief executive, Richard Anderson, brought up the 9/11 attacks when hitting back at his Gulf rivals.

On Thursday, Doug Parker, American Airlines’ chief executive, bristled at suggestions that Qatar Airways’ move could be driven by an intention to soften up US resistance to the expansion of foreign airlines.

If that is their motivation, it is misguided and ill-conceived, Mr Parker told CNBC. All this is doing is strengthening our resolve to defend our airline, which we will continue doing vigorously. In a letter to employees following the news, Mr Parker reminded them that foreign investors could not own more than 24.9 per cent of a US airline. In fact, to acquire more than 4.75 per cent of American Airlines requires board approval.

American Airlines is publicly listed on the Nasdaq stock market.

Mr Parker was quick to seize the opportunity to reiterate his company’s stance on competition from Gulf carriers and when contacted by The National, the lobby group leading the campaign to persuade the US government to curb their expansion also jumped at the chance to state their case loudly.

American Airlines remains a strong and committed member of the Partnership for Open and Fair Skies, which opposes foreign government subsidies that violate international agreements with the US and threaten the jobs of more than 1.2 million Americans, said the partnership’s spokeswoman Jill Zuckman.

Gulf carriers, meanwhile, have always denied allegations of unfair competition and have pointed to the failure of US carriers to provide customers with the level of service they expect. In short, Gulf carriers said their US rivals just didn’t like any kind of competition.

Still, the move by Qatar Airways has come at a convenient time for the US aviation industry, which has been hit by a series of ugly incidents underlining the very same customer service failures highlighted by Gulf rivals. In April, a video of a man being forcibly carried off an United Airlines flight went viral, sparking fierce criticism.

Only a few weeks afterwards, an American Airlines cabin crew member was suspended after allegedly hitting a mother with her baby’s stroller. Then in May, a Delta sales agent smacked a phone out of a 12-year-old boy’s hand, sparking a lawsuit.

Since Thursday, in contrast, the noise has been about American Airlines as an attractive investment and its shares spiked briefly on the day. Based on Wednesday’s closing price, a 10 per cent stake would be worth US$2.39 billion, according to data from MarketWatch. Qatar Airways called American Airlines a "strong investment opportunity" and said it would initially be interested in investing about $800 million.

In a letter to the employees, Mr Parker wrote that if Qatar Airways simply views American Airlines as a solid financial investment in that case we would agree with them. Your results are earning the confidence of our customers and our shareholders every day.

Almost a year ago, it seemed as if the US campaign against Gulf airlines had floundered when its government confirmed it planned to take no action. Following Mr Trump’s win, there had been some expectation that this could change. However, despite the laptop ban, which was put in place for security reasons, the Trump administration has shown little direct interest in the open skies dispute. There has also been plenty of other news to keep the conflict low key.

Now it is firmly at the top of the business agenda again at a time when Gulf carriers have more pressing matters to tackle, such as relatively sluggish demand.

Last week, Etihad announced a wave of new measures to boost revenue from economy class travellers including being able to pay for a "neighbour free" seat and the chauffeur services usually reserved for premium passengers. Earlier this year, Emirates started offering premium lounge access for a fee.

In May, the group reported the airline’s profit for the last financial year tumbled by 82.5 per cent, with margins dropping, as it lowered ticket prices to maintain passenger volumes. In the region, 2016 was marked by capacity outstripping demand.

Through the first half of this year, the trend has abated somewhat with Middle East carriers showing that demand growth has rebounded. Overall, the operating environment will remain challenging globally, according to the International Air Transport Association. Heightened tension in Europe over terrorism risks has also complicated the outlook in a key market for Gulf airlines.

With demand on routes to the US hampered by the laptop ban and repeated attempts by the Trump administration to restrict travel for citizens from Muslim nations, 2017 has not been typical of recent years in terms of expansion of flights into the American market.

In fact, Emirates in April said it would reduce capacity to Boston, Los Angeles, Seattle, Orlando and Fort Lauderdale. Etihad, however, this month offered some optimism, saying it would operate an all-A380 service on its Abu Dhabi-John F Kennedy route in response to passenger demand. Last week, Emirates’ president, Tim Clark, said he was hopeful of demand returning on its flights to the US.

"I’m hoping that the trauma of a few months ago in March is starting to even out. I’m hoping we can get operations back to where they were," he said.