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Qatar Airways suffers from blockade, but only just

QR A350 J class

Inside a Qatar Airways A350 business class section. Pic/Shukor Yusof

A month after Saudi Arabia and five other nations cut diplomatic ties with Qatar, the former British protectorate, located on a 11,586 sq km peninsula that protrudes into the Persian Gulf, is still alive and kicking.

Some denizens of Doha, Qatar’s modern capital city, tell us there is no panic, no rationing or shortage of food, no hoarding of petrol and politically, no surrender by the Al-Thani family that runs the gas-rich state.

Indeed, it’s business as usual, according to Malaysians and Singaporeans living in that Gulf state, adding they are now enjoying more tantalizing Turkish food than before. Fresh supplies from Turkey and Iran, close allies of Qatar, have been airflown since the embargo on Jun 5. Some dairy products, say the residents, are cheaper and taste better than those from Saudi Arabia!

What about Qatar Airways, the national carrier? Eighteen regional destinations were automatically severed and several long-haul flights now need to be rerouted via Oman and Iran, adding to operational costs.

As expected QR is experiencing less capacity, about 20% lower while duty free revenue at Hamad International Airport is reportedly down 25%. That’s to be expected given fewer flights and therefore, fewer visitors.

QR’s combative CEO Akbar al-Baker has vowed the schism between his country and the other Arab states won’t stop the airline from expanding during the unveiling of the carrier’s latest product –  the Qsuite – at the Paris Airshow last month.

And he’s got every reason to feel positive: QR was voted the world’s best airline for 2017, it has won reprieve from the dubious laptop ban imposed on Gulf carriers and has got unexpected business from British Airways (QR has a 20% stake in IAG) for the lease of nine A320/321 planes while BA cabin crew goes on a 16-day strike. That has helped to somewhat offset some of the losses within the Gulf region.

QR 772LR GRU Nov 2015 - a

A qatar Airways B777-200LR. Pic/shukor yusof

And to reassert its influence in the industry, QR has scrapped orders for four A350s due to delays at Airbus. QR was the launch customer for the A350 and took delivery of its first aircraft late December 2015. In our view QR’s A350 fleet has the best products in both business and economy classes.

More importantly, QR has the backing of Qatar Investment Authority, one of the world’s largest sovereign wealth fund with USD335 billion worth of assets, is still keen to take a 10% stake in American Airlines. Both are oneworld members but AA is among the three US carriers (together with Delta and United) that are up in arms against the Gulf airlines (QR, Emirates and Etihad), accusing them of operating on an unlevel playing field by being heavily subsidized.

QR is investing in AA not because of hubris but out of necessity. Al-Baker has already approached AA CEO Doug Parker but we aren’t privy to all other details other than AA reiterating its opposition to the Gulf carrier’s alleged unfair practices.

QR has deep pockets, in fact deeper than Emirates. It can easily mop up AA shares in the market and having a larger stake in a US airline would help show Congress it is investing in American jobs. While the laptop ban has been lifted there’s no saying when other limitations on Gulf flights to the US might be imposed, hence QR is buying insurance.

Additionally, Qatar probably expects the standoff with Saudi Arabia and the others to continue indefinitely. Thus, investing more outside of the Gulf makes more business sense especially given that US carriers have been among the most profitable in the world the past couple of years.

A few things to note about Qatar: despite having been downgraded by Standard & Poor’s to AA- (from AA) on June 8, its financial fundamentals are strong and sound. That said, we feel while Qatar may resist and continue to operate as normal now and the near future, the longer this drags on, the more difficult QR will find to operate as the block on air traffic ultimately will result in less business and therefore, less interest from potential investors.

All things being equal, Qatar is an exceptionally wealthy state. Here are some facts: it has enough gas to last 143 years, it has the highest per capita income in the world, Qatar’s bank assets amount to QAR1.1 trillion (USD302 billion), it has the highest quality of education among Arab states and, for what it’s worth, is ranked among the least corrupt countries in the Middle East.

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