shattered vistas

A Surge of Airline Schadenfreude

The industry's mighty Arab conquerors can only look on in despair as their works crumble.

Remember the days when Arab conquerors were laying waste to the global airline industry? All of a sudden, it's feeling like a distant memory.

Shares of Chinese carriers surged Thursday, led by Cathay Pacific Airways Ltd.'s strongest gain in six years. The Bloomberg World Airlines Index, whose members have been under siege for years by their unlisted rivals in the Persian Gulf, has risen 24 percent in a year, and is just a sliver off record highs. Global industry earnings, which traditionally haven't covered airlines' costs of capital, are set to hit that target for the third year running, the International Air Transport Association said this week.

Even so, one corner of the aviation market is looking distinctly sickly. Ebit margins at Middle Eastern carriers will dip to their lowest level in at least six years during 2017, according to IATA, making the region the least-profitable worldwide. The fleet of aircraft that Emirates, Qatar Airways Ltd. and Etihad Airways PJSC have unleashed on the skies is being recalled to port: Passenger traffic growth will be just 7 percent this year, according to IATA, less than half its pace in 2012.

There's an obvious short-term explanation for the woes of Gulf carriers. The broiling tensions between Qatar and an alliance of rival Arab nations have put a spanner in the works of the region's attempt to turn itself into the world's aviation hub.

Qatar Air, which has been musing about setting up a carrier in India to connect the Gulf's 8.5 million-strong Indian workforce to their motherland, has been blockaded after Saudi Arabia, Bahrain, Egypt and the United Arab Emirates banned overflights and cut maritime links. Routing flights via Oman isn't likely to be a workable solution in the long term.

Revenue at the Doha-based airline could fall 30 percent as a result, Deena Kamel of Bloomberg News reported. Emirates and Etihad, despite being on the majority side of the dispute, could each lose 15 percent of revenue as well. 

Even before the Qatar-Saudi border was sealed, things had been looking tougher. The Trump administration's ban on laptops in the cabins of flights from Arab countries and Turkey dealt such a targeted blow to the Gulf carriers that Emirates Chief Executive Officer Tim Clark has voiced thinly-veiled skepticism about the motives.

That's probably warranted. U.S. airlines have been on the attack over Arab airlines' incursion into their home territory, and three months after the laptop ban was introduced, plans to widen it to Europe and elsewhere remain up in the air. No one is suggesting widening the restrictions to flights originating in the U.S.

Etihad, meanwhile, is having second thoughts about its rapid expansion under CEO James Hogan, who's been stripped of management authority ahead of his formal departure next month. The system of global alliances Hogan built is in disarray: The company is close to hiring financial advisers to look at selling its stake in Air Berlin Plc after years of losses, people familiar with the matter told Bloomberg News last month, and may deepen its ties with insolvent Alitalia SpA. Of its other stakes, only Jet Airways India Ltd. is really firing; Virgin Australia Holdings Ltd. remains at best fitfully profitable.

Emirates, the big beast of the three Gulf carriers, is facing equally fundamental problems. Yield, a measure of revenues per kilometer per ton of passengers and cargo, fell last year to the lowest level since 2006. The best way to improve that metric is typically to cut back on capacity expansion, but this was the raison d'etre that turned Emirates into the giant it is today.

The Gulf's carriers still have formidable strengths, and Emirates' move toward buying $8.7 billion more A380s suggests its confidence remains undimmed. But right now the region's airlines are in abeyance. No wonder the rest of the industry is smiling.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    Before it's here, it's on the Bloomberg Terminal.