Middle east meets west - the challenge Qantas must win

Middle Eastern airlines such as Emirates have copied Asian airlines in challenging iconic Western airlines. AAP

This week a stoush over foreign ownership has erupted between Qantas and Virgin Australia over Virgin’s A$350 million capital raising that will see three foreign airlines - Etihad Airways, Air New Zealand and Singapore Airlines - substantially increase their holdings.

The raising has resulted in the shares of the three airlines rising from 63% of Virgin to 70% as the company issues new shares.

Qantas CEO Alan Joyce claims the deal significantly disadvantages his airline given the foreign ownership rules on Qantas. Under the Qantas Sale Act foreign ownership of Qantas is restricted to 49%. Joyce argues the capital injection amounts to Virgin being subsidised by what are essentially government-owned airlines. Qantas even circulated an online petition claiming foreign airlines would control Virgin.

However, Virgin Australia Chairman Neil Chatfield has told shareholders at the company’s annual meeting in Brisbane there will be no change in control and Virgin would continue to be Australian-owned.

Middle East versus West

But beyond the inflamed rhetoric, the larger theme being played out is of pressure from Asian and new Middle Eastern carriers on iconic Western brands, outperforming on service, price and infrastructure. The main challenge for Western brands such as Qantas is retaining - if not regaining - competitive advantage.

Emerging Middle Eastern airlines such as Etihad and Emirates are not only fast building their brands, they are also increasingly buying into Western airlines. In addition to its Virgin Australia holding, Etihad has shares in airberlin, Air Seychelles and Aer Lingus.

The acquisition of 24% of India’s Jet Airways is next in line, and at the 2013 Dubai Air Show, the purchase of one third of a small Swiss carrier, Darwin Airlines, was announced. The new operation, to be branded as Etihad Regional, will connect Southern Switzerland and other regional cities to Zurich, which will then link to new daily Etihad flights between that city and Abu Dhabi.

At the same time, Dubai’s Emirates is on the verge of becoming the world’s largest airline, collaborating with Qantas, and also talking to Doha’s Qatar Airways about future collaboration. Middle Eastern airlines order new planes such as the A380, extend their network, and draw cabin crew from a global pool of candidates. In contrast, Western brands struggle to survive and adapt to the new market forces.

The Middle East’s focus on building strong airline brands such as Emirates, Qatar and Etihad, coupled with the establishment of modern and convenient airport hubs, is a real game changer for the entire global airline industry.

Copying the Asians

This move copies the approach of Asian brands such as Singapore Airlines, which, thanks to an upgrade of Changi Airport, has become an international hub. Japan Airlines and Thai Airways have also pushed for global networks and South Korea has positioned its airlines Asiana Airlines and Korean Air with a sophisticated customer-focused service approach, while Seoul’s Incheon Airport has been ranked as the world’s best.

Malaysian Airlines also aspires to a Singapore Airline-like brand positioning, and newcomers like Indonesia’s Garuda have also recently upgraded their planes and service. Hong Kong’s Cathay Pacific has long been a strong brand linking east to west, and new mainland Chinese airlines such as Air China, China Southern and China Eastern are fast gaining ground and market share.

Essentially, Middle Eastern governments are now copying the Singaporean approach - but oil rich Middle Eastern governments can invest their petro dollars and make things even bigger.

Both Asian and Middle Eastern carriers also have cost advantages over Western brands; for example Emirates uses cheap labour out of India and the Philippines in its airline, airport and tourism sectors.

In the old days, American, Australian and European brands benefited from a prime location when the world economic centre was the Western markets - but now Asian and Middle Eastern carriers have the location advantage. Some 75% of the world’s population can be reached within a seven hour flight from Dubai, and Singapore, Hong Kong, Bangkok and Seoul remain major Asian hubs.

Differentiate or die?

Western brands may eventually have just one option - to attain a differentiation advantage.

That is challenging, however, since this position is also already occupied by the service-oriented Asian and Middle Eastern carriers. Admittedly, there has been a convergence of brand positioning in Asia towards those service-oriented and Asian hospitality positioned brands such as Singapore Airlines and the aforementioned followers.

But Middle Eastern brands have fast copied and adopted the same approach, with Emirates, Etihad and Qatar now also winning customer survey awards. Western brands, in contrast and at the risk of oversimplification, are plagued with cost pressures such as expensive jet fuel and staff costs (subsequently further reducing their service standards); they engage in complicated union negotiations and face strike action, plus they have an ageing infrastructure.

A lack of business focus from some Western governments (in contrast to some Asian and Middle Eastern ones), as well as low profitability (or even losses) that do not allow upgrades of planes, service and infrastructure, means Western carriers are in major trouble.

Customer loyalty programs are unlikely to retain customers on Western planes if they can get superior service at equal or lower prices on Asian and Middle Eastern brands, plus the big alliances such as Star Alliance, OneWorld and SkyTeam have for some time included Asian and Middle Eastern carriers.

While Qantas might be hopping mad over the proposed capital injection into Virgin, all Western airlines, many grappling with thin margins, need to regain competitiveness by tapping into all capital - including both the financial and human - if they want to rescue their brand equity and firm up profitability and long term sustainability.