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Persian Gulf airlines occupying ever more of the sky

DUBAI -- Emirates Airlines, Qatar Airways and Etihad Airways are pulling the global aviation industry's center of gravity toward the Persian Gulf. Sure, their convenient base -- at the crossroads of Asia, Europe and Africa -- has helped a great deal. But so too has their enthusiasm to radically expand their fleets and form strategic alliances with rivals from outside the Middle East.

     On June 1, a news release from Etihad Airways -- the national airline headquartered in Abu Dhabi, United Arab Emirates -- created some buzz at a cocktail party in Doha, Qatar's capital. "We are in the final stages of talks for a possible investment in Alitalia," the release said.

     The party's guests were senior representatives from member airlines of the International Air Transport Association, which held its annual general meeting earlier in the day.

     If the deal goes through, the Italian flag carrier will be rescued from looming bankruptcy. Etihad is expected to buy up to 49% of Alitalia. Italian Transport Minister Maurizio Lupi has told state television that the Abu Dhabi-based carrier is ready to invest around 600 million euros ($812 million) in the struggling airline.

     Qatar Airways, meanwhile, is throwing some covetous glances at a carrier that continues to steadily grow. CEO Akbar Al Baker, who hosted the IATA general meeting, the first held in the Gulf region, identified the airline during a news conference. "We are keen to invest in IndiGo," he said, "if (a stake) is available." IndiGo is a budget operator in India.

     Etihad has already forayed into India's aviation market, having recently purchased a 24% stake in Jet Airways.

     Two of the Middle East's big airlines are fledglings. Qatar Airways was established in 1994, and Etihad in 2003. These latecomers have made up ground by investing in rivals with well-established routes and customer bases.

     Not even Emirates Airline, the front-runner among the Gulf carriers, can be called an old duck. Not exactly; it was established in 1985. The Dubai, UAE-based airline has grown by creating new routes on its own. Last year, though, it entered into a strategic alliance with Qantas and began code-sharing with the Australian flag carrier.

     The tie-up has also made it possible for the Gulf carrier to wink and ask Qantas to quit stopping over in Singapore and start using Dubai instead. Thanks to that nudge, Emirates is now getting more code-share passengers. In 2013, it moved into third place in the world in terms of revenue passenger kilometers, a key metric in the airline industry.

     Profitability in the airline business is coming down to having fuel-efficient, technologically advanced aircraft. In November, Emirates placed the largest-ever aircraft order in civil aviation history, worth $990 million. It now has $162 billion worth of jetliners on order. Qatar Airways has $50 billion worth of passenger planes on order.

     All three of the Gulf carriers hope to lure passengers to their long-haul flights with new planes decked out in luxury and amenities like shower rooms, all delivered with top-notch service.

     The Gulf airlines can also expect to grow thanks to a big new airport or added passenger capacity at their hubs. Qatar Airways now calls Hamad International Airport, in Doha, home. The gateway became fully operational in late May. Akbar Al Baker, Qatar Airways' CEO, expects the airport to handle up to 50 million passengers a year by 2019.

     Meanwhile, Etihad Airways' abode, Abu Dhabi International Airport, plans to open a new terminal complex that will cater to 30 million passengers a year upon its completion in 2017.

     Dubai International Airport, Emirates' nest, handled 66.43 million international passengers last year, becoming the world's second busiest airport. Since 2013, when a project was completed to accommodate Airbus A380 superjumbo jets, the airport has been edging closer to overtaking London Heathrow Airport as the world's busiest aviation hub. Emirates has the world's largest fleet of A380s.

     The three Gulf carriers have another advantage over their global peers: swift decision-making when it comes to making large-scale investments. Of course, pulling the trigger is easier when a company has some financial muscle, as all three airlines do. It is also easier when an airline knows it can count on government support for airport improvements or even construction.

     That support can also look like subsidization. Not only are all three airlines 100% state-owned, their governments are cash-rich. Qatar and Abu Dhabi have rivers of revenue flowing from oil and natural gas exports. An Australian newspaper in May reported that Etihad had access to an interest-free $3 billion loan from Abu Dhabi's government.

     European airlines have been particularly vocal in criticizing the big Gulf flyers, saying "state subsidies" make for unfair competition. Executives at Germany's Lufthansa, Europe's biggest airline, are sounding alarm bells about the state-backed Gulf carriers continuing to accelerate their expansion into Europe.

     At the IATA meeting, Willie Walsh, CEO of the International Airlines Group, a London-based airline holding company, expressed skepticism that Etihad's pending Alitalia purchase makes business sense. Etihad, he said, "seems to believe that it will be able to reap profits commensurate with (its) investments, but I can't share that perspective."

     Demographics play a key role in the three Gulf carriers' strategies here: Their own corner of the world is sparsely populated. To grow, they must tap into foreign demand and even pull market share out from under their competitors.

     The UAE has a population of 9.3 million, and Qatar comes in at around 2.2 million. That puts the Gulf carriers in the business of routing other people through their hubs.

     Luckily, geography is on their side.

     Singapore Airlines has always occupied a similar corner of the global aviation market. Singapore has about 5.4 million people, and the airline has depended on ferrying long-distance travelers through Changi International Airport. Now, because of the Gulf carriers' success, Singapore Airlines is feeling as though it has been painted into that corner.

     Consider that there are no direct flights between Japan and Africa. When travelers from Tokyo book tickets to the continent, most choose an airline based on price, departure and arrival times, service quality and perhaps the length of their layover ... but not where they will be during that layover.

     This means airlines that rely on transiting passengers have to fight to keep their fickle passengers. And in that regard, the three Gulf carriers might want to look at Singapore Airlines' plight as a warning about the longevity of their business model.

     They could fall prey to the upstarts of tomorrow.

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