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Qatar Airways in a quandary

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what, me worry? qatar airways ceo akbar al baker on board a QR a350. pic/shukor yusof

There were reports that Akbar Al Baker, the CEO of Qatar Airways (QR), left the 73rd IATA AGM in Cancun in a hurry on a private plane early Monday morning. Al Baker isn’t one who would exit a major event such as the IATA AGM unless something major has come up.

Indeed, something big is happening in Qatar. The Gulf state is in crisis after Saudi Arabia, the UAE, Bahrain, Yemen, Egypt and Libya severed diplomatic ties on June 5. The move, presumably designed to isolate Qatar and starve it into submission, was ostensibly taken by the six nations due to Qatar’s support for the region’s Islamist groups, including Egypt’s Muslim Brotherhood, and its cosy ties with Iran, a perennial enemy of the Saudis.

That’s what it looks like on paper although some suspect the real reason behind it is nothing more than gas, specifically natural gas. Here’s Bloomberg’s  take on it. It’s possible this is the cause of the schism; in 1995 Qatar made its first shipment of LNG from the world’s largest reservoir that it shares with Iran.

The wealth gas has generated for Qatar is staggering: it has an annual per capita income of USD130,000 and is the world’s largest LNG exporter, second only to Russia’s Gazprom. Qatar has a population of just 2.7 million but in recent years have grown increasingly influential and vocal on the international stage. Standard & Poor’s has a sovereign credit rating of AA with negative outlook on Qatar.

Its flag carrier Qatar Airways now ranks among the world’s best. Its publicly funded international network Al-Jazeera has lured many top anchors from other stations, it is the major sponsor of one of the world’s best soccer clubs (Barcelona), and it has won the right to stage the FIFA World Cup in 2022.

But it is QR and the Hamad International Airport (HIA) in Doha that will be hardest hit by this blockade. In 2016 Al Baker said the airline’s full-year profit quadrupled, driven by cheaper oil and a growing international network.

Since the punitive measures were announced on Monday, Emirates and Etihad have stopped flying to Doha. Discount carrier FlyDubai, Bahrain’s Gulf Air and Egyptair are also suspending flights. One doesn’t need to be a mathematician to calculate the losses QR and HIA will suffer daily until the crisis is resolved – it’s huge.

Just within the Middle East region alone, QR flies to 50 destinations. Geographically it will be squeezed – Saudi airspace to the west is blocked with Bahrain controlling much of the airspace to the south. The Saudis can block its airspace as it isn’t a signatory in a 1945 transit accord allowing for open skies and airlines to fly freely through a country’s airspace. Bahrain and the UAE, however, are signatories. Question is, will they revoke it?

QR operates a 14x daily shuttle service between DOH and DBX that’s been stopped. Additionally there are many international flights that traverse Saudi and Egyptian airspace, including those to Europe and Africa and South America. These will have to be rerouted. Rerouting costs money and time. To make matters worse for Qatar, its citizens aren’t even allowed to transit in the UAE (home of Emirates and Etihad) on their way home.

Doha airport bear

there’ll be less transit passengers at hamad international airport. pic/shukor yusof

So, how deep will the losses be? It depends on how long this goes on. The sanctions will continue unless Qatar capitulates, something it isn’t likely to do. In April this year Al Baker said he was expecting record profits for 2017.

Our analysis suggests optimistically QR could see a decline in second half (2H17) revenue of around 20%-30%, and pessimistically up to 40% if ties aren’t restored soon. It goes to say the revenues at Emirates and Etihad will also be affected although not dramatically.

What will happen next? The six countries that imposed the blockade will wait to see how Qatar respond; there are reports Kuwait is trying to mediate but the Arab states are generally divided and if Qatar does submit, it stands to lose not just its credibility but its pride.

That said, Qatar could, alternatively show the middle finger to all six and leverage on whatever strengths it can use: there’s a major US base in Qatar, there’s the gas exports it controls and most crucially, there’s the relationship with Tehran which will be strengthened. Can the Saudis and the US swallow that?

Let’s wait and see…

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