British Airways a good pick for Qatar

The UK flag carrier is enjoying rising profits. That has prompted Qatar Airways to consider increasing its 10 per cent stake in the resurgent airline.

The chief executive of Qatar Airways, Akbar Al Baker, centre, exchanges a gift with IAG chief, Willie Walsh, as American Airlines chief executive, Tom Horton, looks on in New York. AP Photo

LONDON // British Airways (BA) was last month revealed as the United Kingdom’s most popular brand, beating the likes of Rolex, the BBC and Lego, and knocking Visa off the top spot.

The fact that the airline has been able to top a list of 1,500 brands despite regular traveller grumbles about its frequent flyer scheme and the difficulties of European air travel in general these days, says much about what a strong business the airline is.

The airline's newest shareholder, which acquired its stake in January, will be rightly pleased with its investment. Qatar Airways spent £1.2 billion (Dh6.65bn) buying 10 per cent of International Airlines Group (IAG), BA's parent company.

Since the 2011 merger of British Airways and Iberia, the Spanish flag carrier, BA has been owned by IAG. IAG is one of the “big three” European airline operators — alongside Air France-KLM and Lufthansa — and reported a €1.4bn (Dh5.59bn) profit in 2014, €600 million up on the year before. BA’s contribution to that number was operating profits of £975m.

And according to Willie Walsh, the IAG chief executive and the ultimate BA pilot, IAG profits in 2015 should be even higher — close to €2.2bn.

BA’s lucrative transatlantic routes and lower costs — after a period of heavy cost-cutting following the merger — are the main factors behind the leap in profits.

This year, the slump in the oil price, which lowers fuel costs for airlines, will also help profits climb as will an increase in capacity, the carrier says.

BA likes to boast that it not only brings the world to London, but it also connects the world through London. It has strong Middle East, North American, European and African networks and serves more than 180 destinations in 70 countries.

In the key North Atlantic city pair, London to New York, BA has a 38 per cent share of the market, giving it a clear lead over second ranked British competitor Virgin Atlantic’s 24 per cent. BA also code shares with American Airlines on the route and the two airlines together have 49 per cent of seats on this city pair.

The Qatar deal came amid close ties between the airlines, forged when IAG sponsored Qatar Airways into the Oneworld Alliance.

Most of the largest passenger airlines worldwide are members of one of three major alliances: the Star Alliance, Oneworld, or SkyTeam. Alliances provide a network of connectivity and convenience for international passengers and international packages. They also provide convenient marketing branding to facilitate travellers making inter-airline codeshare connections within countries.

Mr Walsh says he is delighted to have Qatar Airways “as a long-term supportive shareholder.” He says: “We will talk to them about what opportunities exist to work more closely together and further IAG’s ambitions as the leading global airline group.”

Akbar Al Baker, the chief executive of Qatar Airways, is more forthcoming. He says he expects the deal to lead to further commercial ties and codeshare arrangements with IAG.

In a further show of Arabian Gulf airlines’ ambitions to expand, Mr Al Akbar adds that Qatar Airways may yet increase its shareholding in IAG. “IAG represents an excellent opportunity to further develop our ‘Westwards’ strategy,” he says. “Having joined the Oneworld Alliance, it makes sense for us to work more closely together.”

Qatar’s move helps the airline to foster a strong working relationship with a resurgent BA, but it also strengthens the IAG and BA hand against a backdrop of consolidation among Europe’s flag carriers.

European airlines have seen their business mauled by low-cost, short-haul airlines in the past 15 years and are now being challenged by the big three Gulf airlines — Emirates Airline, Etihad Airways and Qatar Airways. Ten years ago the Gulf airlines ran 19,000 flights a year to and from Europe. By last year, the figure was 37,000.

BA does not take the competition posed by the Gulf carriers lightly.

“They have built an efficient business model. That’s key for competition,” says a BA spokesman. “BA is competing through its strong cost discipline, the introduction of new and more efficient aircraft into its fleet and determination to fulfil its challenging financial targets.”

In other words, its British-based passengers have been lured on to the Gulf carriers and BA must work hard to win them back. Qatar Airways can help BA to improve its business — bringing more Asian and Middle East passengers through code-sharing arrangements — and will benefit from the upside, if, as may well become the case, IAG becomes the dominant consolidator in Europe.

As far as the Middle East is concerned, this is a critical market for BA.

“British Airways has been flying to the Middle East for over 80 years,” says the BA spokesman.

“The airline is committed to the Gulf and has increased its capacity to the region by 40 per cent in the past five years due to high demand from passengers.

“This winter British Airways is offering its customers 70 flights a week between the Gulf countries and London Heathrow.”

Qatar Airways could also use code-sharing to give it access to US secondary cities just as US airlines are lobbying hard to block Gulf carriers’ access to US skies.

BA is one of the few airlines globally to operate both the Airbus A380 and Boeing 787 and is in the middle of a fleet replacement programme that has been long in the planning. It took delivery of 22 new aircraft last year, including five Airbus A380s and four Boeing 787s. Between now and 2020 it plans to introduce a further 50 long-haul aircraft — 33 787s, four A380s and 13 A350s.

But while new fleet additions — and the development of new seat types and sleeping arrangements — may excite passengers, investors are wondering what the airline group might do on the merger front. Mr Walsh and BA have now swept up Iberia, British Midland — a short-haul British operator — and Vueling, a European budget airline. A possible offer for Ireland’s Aer Lingus has stalled due to political opposition. Analysts say BA’s parent has the financial strength and confidence to become the primary consolidator among European airlines.

“In all, IAG has travelled a long way,’ says Keith Bowman, an equity analyst at Hargreaves Lansdown stockbrokers. “A difficult acquisition of Iberia is largely behind it, while the group continues to outperform rival flag carriers such as Air France.

“Management outlook comments inject optimism, while hopes that Aer Lingus can eventually be acquired remain high.”

Mr Walsh recently suggested that, beyond Aer Lingus, there was nothing left to look at on the European front but it could be that he has his eyes on the Asian sector — still an area of comparative weakness for the airline. Malaysia Airlines — pushing through its own recovery plan — could be a target.

Finally, there is the Heathrow factor. The UK's biggest airport is a strength and a weakness for BA. The airline controls more slots than any other at the airport and London is one half of the five leading city pairs in the world in terms of passengers carried — London to New York, Singapore, Dubai, Hong Kong and Los Angeles.

But it is a weakness because Heathrow is capacity-constrained and UK politicians are not necessarily going to allow Heathrow to build another runway. The findings of the independent runway commission in the UK, which should determine where the next runway to serve London should be built, are expected.

BA is so frustrated by this long-running stalemate that it no longer makes an argument for Heathrow. “The case for extra hub airport capacity for the UK is overwhelming and its creation is long overdue, but there’s no political will to address this issue,” the BA spokesman says.

“BA has set up its business plan considering this scenario and that was the logic behind the acquisition of bmi in 2012.”

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