Qantas and the Middle Eastern Success Model

Background

Air Australia (AA) - previously known as Strategic Airline - is 100% Australian owned company. It offers scheduled passengers services to international leisure destinations; Bali, Phuket and Honolulu as well as to domestic destinations initially including Melbourne, Brisbane, Perth, Port Hedland and Derby. On Friday 17th of February 2012, just a day after Qantas announced 500 job cuts, news broke that the Brisbane-based budget airline, had entered into voluntary administration after just four months of operation. The appointed Administrator has suspended Air Australia's ticket sales and called for immediate expressions of interest in the sale of the business.

Australian airlines are hardly the only ones facing challenges around the world. The recent collapses of long-established carriers such as the 66-year old Hungarian carrier Malev, the 24-year old Spain's Spanair, and venerable, 78-year old American Airlines underscore the grim financial reality the industry faces. In India, Kingfisher Airlines (India's third-largest airline) has not been profitable for a single quarter since it started operations in 2005, reporting a $90 million loss in the December 2011 quarter.

The Aviation Industry

The aviation industry is notoriously difficult with large capital and operating costs, high fuel costs and faces increasing competition at a global scale. In Australia, it is also particularly exposed to the rising dollar, despite having the world's fourth busiest air route (Sydney-Melbourne - http://www.ausbt.com.au/sydney-melbourne-is-world-s-fourth-busiest-air-route).

According the International Air Transport Association (IATA), the global aviation industry has finished in the red for six of the past nine years. Following the GFC and record-high oil prices in 2008, it showed a return of -4.6% (IATA 2011). Given the weak global economy, IATA is forecasting a return of -1.4% for 2012. To sum it up, in the past nine years, airlines as a whole suffered an aggregate loss of US$47.9 billion.

The Middle Eastern success model

Despite the worrying numbers worldwide, Middle Eastern airlines seem to have found the winning formula. They have experienced unprecedented growth at an annual rate of nearly 20% over the past few years. Dubai airport is rapidly closing the gap on London's Heathrow in its number of passengers and its new airport, planned to open in the early 2020s, will make Dubai the biggest airport in the world.

The success of the airlines in the UAE is simply staggering. Since its second year of operation, Emirates (wholly owned by Dubai's sovereign-wealth fund) has made a profit every year while doubling in size every three to four years. It recently placed a huge order for 50 Boeing 777 jets. Etihad (the Abu Dhabi airline set up by royal decree in