The global airlines of the Middle East such as Etihad, Emirates and Qatar have been the focus of a lot of attention for the past several years.  Primarily because of their massive orders for aircraft and the size of the aircraft ordered.  Anticipated double digit growth that is implied in these orders as well as the competition that legacy airlines from the US, Europe and even Asia are experiencing has brought real competitive concerns to the discussion of the global airline industry.

Bill Swelbar writes about some of these competitive issues in a blog entry of his HERE.

The Swelbar blog is a great read for me because it looks at our industry with more objectivity than one often finds among airline blogs including my own.  His analysis of the evolving nature of competition and the next direction it appears to be taking particularly with respect to Etihad, Emirates and Qatar is dead on.  I do, however, think that rather than accept the competitive world, many governments will seek to protect their airline industries from this competition for far longer than might be suggested by Swelbar.

The inevitability of change is almost certainly true.  The pace of that change is what I question.  I also question the outcomes of that change.

Governments, even the US government, get fairly protective of airline industries because they serve not just a business need but a strategic need as well.   Airlines based in those countries and which must answer to those governments are viewed as necessary.  Those governments do not want a foreign owned domestic airline saying “no” to them in times of strategic needs.  Whether or not this is practical or even necessary anymore is another question.  I would actually argue that it is somewhat necessary but it could also be accomodated with new laws or even through the use of existing laws and still permit foreign ownership of airlines.

I also think that legacy airlines may be underestimated.  New airliners are going to make these airlines more competitive and allow them to offer more point to point services that remove the need for the interim hub connection to travel ultra long distances.  We’re already seeing this occur with the 777, 787 and A380.   Next generation 777s will strip away that need even more.  And as services go to a more “point to point” model, I think we’ll see less demand for the A380 over the next 10 years rather than more.   Sadly, I don’t think the 747-8i fits very well into this picture. More to the point, a 777-9x likely fills the 747 role better than even the latest model.

I also think that legacy airlines are, to a point, “getting it” when it comes to creating a business that is sustainable.  The capacity restraint shown over the past 4 years alone has been remarkable in the US airline industry and all airlines show no sign of losing that discipline.  This business seems to have finally understood the need for sustainability and profitability.

The one factor that, in my opinion, continues to be the wild card is the expectations of the financial markets on these airlines.  Airlines have an exceptionally bad reputation as an investment and those markets look for profits every quarter.  The nature of the airline business and the impact that the global markets can have on its profitability cause me to believe that airline profitability should, perhaps, be measured over a period of 3 years rather than a single financial quarter.

If in any 3 years an airline can demonstrate a profit, I would argue it is a healthy business.

I say this because I was struck by how much news it made when Southwest Airlines’ CFO predicted a loss for the 1st quarter of 2012 for that airline.  Once again, pundits immediately began speculating on whether or not Southwest was a sustainable airline anymore.  We’re talking about an airline that has had decades of annual profits in an industry where that is essentially unheard of.  A bad quarter does not make a bad airline.

I think that airlines such as Emirates, Qatar and Etihad may be driving the markets and competitive threat but I also think they may well influence world legacy airlines to get their acts in order even more.  It’s quite likely that we’ll see a few of those airlines fail.  It’s even more likely that we’ll see the bulk of them re-tool, evolve and compete successfully.  That’s good for the industry and that’s good for the consumer.

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