Qatar Airways: The Challenges of Sustainability
Dr. Rashid Al Saadi
Abstract
Qatar Airways is setting the standard for airline carriers and shifting the aviation service paradigm. However, this endeavor may be unsustainable in the future owing to the challenges Qatar Airways may face. This paper will discuss a range of challenges for the carrier’s sustainability that fall into the categories of direction of business and financial strategy, social challenges, operational issues, environmental concerns, or miscellaneous threats. At the same time, the paper will propose directions for Qatar Airways to pursue in the future.
Introduction
Qatar Airways (QA) is setting the standard for airline carriers and shifting the aviation service paradigm. It has accumulated many top accolades, including the prestigious “Business Traveler 2011” award and recognition as Skytrax’s “Airline of the Year 2011.” Since 1997, it has expanded from having four airlines to possessing over a hundred aircraft covering 110 destinations with plans to buy an additional 250 aircraft (with a budget of USD 50 billion) including B787s, wide-body B777s, A380s, and A350s. QA plans to establish a worldwide cargo hub and is pushing towards high-value products and services targeting corporate and affluent travelers. A new airport is to open by the end of 2012. Its net profit in 2011 was USD 230 million, representing 12 % growth over the previous year. Almost daily, its relentless promotions and packages, branded with the Oryx emblem, appear in different media in a wide range of countries. These achievements are amazing!
Table 1. The World’s Best Airlines 2011The World’s Best Airlines 2011 | |
1 | Qatar Airways |
2 | Singapore Airlines |
3 | Asiana Airlines |
4 | Cathy Pacific Airways |
5 | Thai Airways International |
6 | Etihad Airways |
7 | Air New Zealand |
8 | Qantas Airways |
9 | Turkish Airlines |
10 | Emirates |
Source: World Airline Award. http://www.worldairlineawards.com
As stated by its Chairman, QA’s goal is simply to establish itself in perpetuity as the best airline in the world. However, this endeavor could be unsustainable owing to some of the challenges Qatar Airways might face. An airline is sustainable when it can serve its present stakeholders and shareholders without compromising its ability to serve future stakeholders and shareholders.[1] These sustainability issues fall into categories such as direction of business and financial strategy, social challenges, operational issues, environmental concerns, or miscellaneous threats. This paper will research and discuss these challenges in turn and propose directions for Qatar Airways to pursue in the future in order to meet them.Business Strategy and Direction
QA is growing very fast and will continue to do so. It has plans to expand its fleet by 17% in 2013. Besides the new airport, it has established Qatar Executives, a corporate branch of Qatar Airways dedicated to high-end travelers and businessmen. Additionally, it has Qatar Aviation Services, Internal Media Services, the Qatar Distribution Company, and the Qatar Aircraft Catering Company. The airline business is very risky. With QA expansionist strategy, it places its carrier at the higher ends of this risk. . What makes Qatar Airways so successful, so competitive, so profitable, and yet so confident? According to its Chairman, QA has a reasonable cost base yet offers luxury products and services. This is a difficult logic to understand! If an airline provides better price offers with top quality products and services, others cannot easily compete with it, but its profit margin will suffer. One can only speculate on the health of QA, as there are no analyzable data available in the public domain. However, European airline executives can verify the fact that the Government of Qatar supports QA financially.[2] This leads to the conclusion that QA has not built its internal sustainable competencies appropriately for gearing to worldwide competition. It is intriguing to note the different strategies among the Gulf Cooperation Council (GCC) airlines. Gulf Air, Oman Air, Etihad and Emirates are regional rivals to Qatar Airways but have different growth strategies. Gulf Air plans to reduce its fleet and redefine its strategy to survive in its third major restructuring. Oman Air has a strategy to expand, but will do so cautiously. In 2008, it reported a loss attributed to the rise in fuel costs, the acquisition of more aircraft, the opening of new routes, staff salary increases and more costly aircraft support services. Etihad’s management had plans to follow Oman Air’s strategy, but under Abu-Dhabi government pressure, it has committed to expanding the fleet. Finally, Emirates, the most feared competitor in Europe, declared a profit of USD 925 million only for a 6-month period in 2010, an increase of 352% from the same previous period.[3] It had an average load factor of 81.2% for the same period. Emirates, like Qatar Airways, has a dramatic expansion strategy and focuses on super-jumbo A380s. Operating large body aircraft and ensuring high-load factors seem to be the trend today, as this generates fewer departures and is therefore more profitable.[4] A common factor among the airlines above is that they are state-governed with no public shareholders. In addition, Emirates tops all GCC airlines in performance.
Financial Challenges
The airline industry is a pillar of the economy as it plays a crucial role in globalization. It allows for economic cooperation between countries and the transportation of means and the outcome of production. It also reduces unemployment and provides an opportunity for the development of tourism. Moreover, it enables the expansion of the manufacturing sector and affects many aspects of the economy. QA has played a leading role in achieving all of the above. It deserves substantial credit for bright-highlighting Qatar on the world map. However, to sustain this venture, QA needs to do more in streamlining its internal processes to enable and empower its corporation vis-a-vis the challenges of globalization. Three of the most vital factors in this respect are governance, transparency and pricing. This paper will discuss governance and transparency in terms of the operational aspects. However, one immediate subject of vital importance to QA is pricing optimization.Figure 1. Fare Comparison: Doha-London-Doha (economy class)
Source: Skyscanner, 13 January 2012
Optimized pricing benefits include higher annual revenues, lower liquidation risks and increased competition.[5] Furthermore, optimized pricing will pacify Qatari citizens once they perceive that they are getting an equitable deal. In an ideal world, an airline establishes its pricing policy based on demand modeling and forecasting in close interaction with revenue management. This happens once the airline has optimized its revenue management methods, whereby reservations and distribution provide important data for both pricing and revenue management. However, QA has limited customer knowledge since it relies on travel agents to handle reservations and cancellations. Therefore, the study recommends closing this gap through revenue management optimization and the integration of this function with pricing. This alone will not be sufficient to earn market respect, but if QA scrutinizes the results of better revenue management against pricing discrimination, it will enhance its image. A final piece of advice in this area is that QA needs to establish and develop a customer relation management system (CRM).
During the years 2008-2009, QA’s prices were competitive. Today, the situation is different. Figure 1 compares several airlines operating on the Doha-London-Doha route. As noted, Qatar Airways is the most expensive. The "best airline in the world" reward and the "five-star airline” status may be the reasons behind the price difference, or maybe this is due to other factors and the price mix QA is trying to achieve. Nonetheless, scrutiny of public social networks soon reveals that QA is perceived as having become very expensive. For example, travelers in London are reconsidering Qatar Airways as a choice for flying to the Far East. To explore the possibilities for improvement of QA’s position, it is imperative to focus on pricing-related issues. Figure 2 brings together the most important determinant factors in pricing.
Figure 2. Price Determinant Factors
Source: Author
Like other carriers, QA provides good discounts for early booking, and charges higher fares for late booking. From the Qatar Airways site, a sample comparison between early and late fares is illustrated in Table 2.
Table 2. Qatar Airways Pricing for Early and Late Booking (Example)
Trip | Doha – London – Doha (economy class flexi) | |
Booking Type | Early Booking " travelling after 75 days" | Late Booking "travelling within 5 days' time" |
Price USD | 1013 | 1580 |
The difference is substantial. Is this an optimized pricing for passengers commencing their trip from Doha? What is the demand against this price? What is the relationship between the price elasticity and total revenues? To answer these questions, this paper needs to discuss pricing factors further to formulate a global picture or forecast a trend on QA pricing strategy.
Figure 3. Prevailing Aspects of Airline Rules
Source: Author design, information adapted from Vinod, B. (2010) The complexities and challenges of the airline fare management process and alignment with revenue management. Journal of Revenue & Pricing Management, 9 (1/2) pp. 137-151. [Online]. Available from: Business Source Complete, Ipswich, MA. Accessed January 16, 2012.
Looking at the different market and social rules in Figure 3, it becomes clear that QA selects the market rules and ignores the social ones. This paper defines social rules as those that cover human and empathetic aspects such as discounted fare for students, senior citizens, visiting relatives, emergencies or medical treatment, children, and other similar ones. Greed in any business is an aspect of selfishness seeking to maximize profits at the cost of customers’ limited income. The pricing section strives to find out how much a passenger is willing to pay for a particular segment. That is an unfair fare. Logically, such airlines could go out of business when they lose their customers’ trust and loyalty. Customers review airlines constantly. News of such practice spreads fast owing to the development of social networks.
QA market segmentation includes business and leisure travel. Business travelers tend to be more sensitive to schedules than leisure travelers are. Conversely, leisure travelers tend to be more sensitive to fares and less to schedules. That is why many rules emerged to protect weekend prices from travelers' manipulation (from the business point of view). To overcome such rules, many travelers opt for cross ticketing, where an inbound or outbound leg of a ticket is left unused. QA's awareness of cross ticketing prevents customers presenting an unused outbound leg and forces them to pay the difference. Some passengers go further to circumvent this, such as in the following example. Normally, the Qatar Airways first-class return trip from Doha to Frankfurt costs USD 6,748, but it costs USD 3,490 from the same carrier and the same class and type of Karachi-Frankfurt-Karachi trip. The hub for QA is Doha. Therefore, a Qatari citizen or resident, wishing to vacation in Frankfurt or its vicinity will buy an economy one-way or a return ticket to Karachi and commence his first-class flight to Frankfurt from Karachi. Through a travel agent, he or she can make a transit in Doha for as many days as desired. Imagine now if a family of five members, a typical Qatari family, wants to visit Frankfurt. How much is their saving in doing so? A simple calculation reveals that the family will save USD [5*(6,748 – 3,490 + 400)] or USD 14,290. The number (400) is the return-economy ticket price to Karachi. This is a substantial saving if the trip started in Karachi or a crippling price if it originated in Doha. This iniquity encourages consumer protection agencies to intervene.Another example is that of the different types of classes. From the QA site, QA charges USD 7,153 for a Doha-London-Doha first-class standard ticket and USD 8,518 for a flexi one. For the same flight, it charges USD 6,058 for a business-class standard ticket and USD 6,633 for a flexi alternative. Assuming it is a late booking, the business class is 320% more than the price of the economy class. In the same conditions, first class is 440% more than the price of the economy fare. According to QA, some passenger segments are willing to pay three or four times as much for the prestige and comfort. Table 3 compares QA class fare pricing with other airlines. The result in Table 3 is indicative of the absence of any common rule for determining the differential between class segments. Increases range from 167% to 745%. It is clearly airline exploitation of buyers' threshold of "if it is within my capability, I will pay for it."
Table 3. Airline Class Fare Comparison in USD (return flight from origin to London)
Airline | Originating From | Economy | Business | First | ||
Air China | Peking | 1276 | 7291 | 471% | NA | NA |
Egypt Air | Cairo | 470 | 1742 | 271% | NA | NA |
Emirates | Dubai | 1010 | 4374 | 333% | 8022 | 694% |
Etihad | Abu Dhabi | 946 | 4938 | 422% | 7995 | 745% |
Gulf Air | Manama | 1195 | 3837 | 221% | NA | NA |
Lufthansa | Berlin | 446 | 1189 | 167% | NA | NA |
Qatar Airways | Doha | 997 | 4434 | 345% | 5777 | 479% |
Singapore | Singapore | 1795 | NA | NA | 14469 | 706% |
Turkish | Ankara | 452 | 1772 | 292% | NA | NA |
Source: KAYAK Accessed 17 January 2012. % is calculated with an economy class base
From another perspective, Table 4 compares European airlines and shows that the first-class segment is fading away. This is applicable to United States airlines as well, although the table only shows Delta Airlines. QA has started following this trend for the Asian Continent. However, the price differences between classes are still exorbitant.
Table 4. Price Comparison: American and European Airlines Serving the GCC Region (USD)Airline | Trip | Economy | Business | First | ||
Alitalia | Rome-Dubai-Rome | 897 | 3,257 | 263% | NA | NA |
British Airways | London-Dubai-London | 632 | 2,834 | 348% | 7,245 | 1050% |
Delta | NY-Dubai-NY | 971 | 8,215 | 746% | NA | NA |
Iberia | Madrid-Dubai-Madrid | 791 | 2,617 | 231% | NA | NA |
Lufthansa | Berlin-Dubai-Berlin | 889 | 4,206 | 373% | NA | NA |
Source: KAYAK. Accessed 17 January 2012
It defies engineering and operational costing logic that a direct flight is more expensive than an indirect flight from the same origin to the same destination. However, if QA does not attract travelers from other markets, the load factor of its fleet will reduce. With a fleet of over a hundred aircraft, the fixed capacity will be lost and the airline will lose out. QA is also fighting the internet price competition for transfer flights. It can be concluded from the above that fares are competitively based. It is worth mentioning that British Airways, Lufthansa and some of the other airlines have lowered their one-way tickets to destinations where low-cost carriers are operating.
The other issue that requires QA’s attention is cancellation or rescheduling. This paper has not found a single case where QA compensated passengers for flight delays. On the contrary, QA charges between USD 96 and 137 for cancellation before departure. QA’s rescheduling charges fluctuate, depending on the seat type. They range from USD 96 to USD 247.[6] It is recommended that the cancellation and rescheduling charges should be lowered and fixed at USD 96, with further reductions for a family or group.
For final thoughts about pricing, customers' perception of value determines their loyalty to an airline. The five dimensional constructs of perceived value include quality, price, behavior, reputation and emotional response.[7] Out of the five, Qatar Airways needs to enhance three of the measures: price, emotional response and behavior.Operational Challenges
When QA publishes its schedule, it is committed to meet the incurred cost. This cost is comprised mostly of the overall operational cost, including reliable maintenance and safety, staff and pilot salaries, and aviation fuel, to name a few. Other variable costs are relatively marginal. Risking low seat occupancy in certain seasons and periods of the year, QA circulates promotional packages to the public. Additionally, unfilled capacity leads QA to be discriminating about prices. QA charges passengers in poor markets much less than those in richer ones. Qatar Airways has many positive aspects, such as extensive resources, a strong financial standing, standard operating procedures, cooperative agreements, and an excellent market. However, the public cannot access information on shareholders or on QA’s organizational structure. Only the CEO or Chairman is visible. Although the Government of Qatar stipulates that a certain percentage of Qatari citizens be employed in every private organization, it is difficult to find evidence of compliance with this in Qatar Airways. Some Qatari citizens grew impatient and raised the issue on Twitter with the objective of boycotting Qatar Airways services. QA has not commented on this. Furthermore, QA has a protectionist commercial policy.
Other examples of good governance that are yet to be seen at Qatar Airways include the reduction of state intervention in economic decision-making, allowing for more transparency, eliminating public subsidies, and the adoption of policies to develop human resources.[8] [9] [10] All of the good governance examples mentioned here are important success factors for future sustainability. They are the factors that QA must address in its continuous improvement and strategy plans.Qatari citizens believe that Qatar Airways is their national carrier, and that therefore its reputation reflects them, and that they should be able to participate in its decision-making. A group of activists aiming to boycott QA wrote a letter to the Qatar Civil Aviation Authority demanding an end to price discrimination, a ban on alcohol onboard and the employment of Qatari citizens. A great deal of evidence such as that from QA’s globalization ideology and the fiercely competitive environment suggests that Qatar Airways has not gone beyond this rhetoric. Instead, according to its globalization philosophy there isn’t time to waste on nurturing local human resource pools (which may be uncompetitive) or on allowing local participation in expert decision-making. Although this cannot be publicly exposed, these things are evident from the airline’s behavior. Such thinking is detrimental to QA in the long run.
Historically, sustaining huge airline expansion involves dealing with capital and infrastructure constraints, politics with other airlines, safety boards and aviation authorities, shortages of pilots and experienced staff, high operational costs and many other issues. Many airlines have gone out of business. This is why airlines draw up conservative growth strategies. However, unlike the rest, QA is among the few airlines that target massive expansion. The risks are high. To mitigate them, QA must have multiple resources and competencies, and it needs to sustain and retain them. It is a difficult task but an interesting exercise to speculate about the future and either confirm the historical trend or develop a new theory in successful mammoth growth. Social Challenges
The online business dictionary defines price discrimination as “selling the same product to different buyers at different prices depending on order-size lot or their geographical location.” This paper has proved that QA sells the same product at different prices in different market segments. It is illogical to have one-way tickets that are more expensive that return tickets. Also, it is absurd to know that a direct flight is more expensive than a multi-path flight from the same origin to the same destination. Because the aviation travel market is an open one, passengers evade such pricing regimes through rule abuse.[11] Qatar’s Consumer Protection Law (8) of 2008 neither defines price discrimination nor states that consumers are bound to contracts that have unfair terms and conditions. The law must protect the weaker link in the contract; here it is the consumer.The Federation of German Consumer Protection warned British Airways and Lufthansa about the small print of their terms’ rules.11 It accused them of lack of transparency. Qatar Airways is no different in the example in Figure 4. Note the design of the site, and how the rules are in small-capitalized letters embedded in another box, which is even harder to read. Although IATA stipulates that a ticket is a binding contract, and despite the fact that the passengers are aware of their violations, the German lower courts have ruled in many cases in the favor of passengers for various reasons, including illness, unforeseen events and other genuine justifications. These courts found that the airlines confused the passengers through complicated wording, misunderstood deals and lack of transparency.
Figure 4. Qatar Airways Rules
Source: Qatar Airways Site. Accessed 19 January 2012. http://www1.qatarairways.com/global/en/homepage.html
Environmentally, QA is undertaking a pledge to research new types of fuel that are less harmful and more efficient. The present plans focus on utilizing abundant algae to make aviation fuel, but this is associated with high production costs. The other available option is liquefied natural gas. This is of course a cheaper option and likely to be the aviation fuel of the future because of its low weight and lower cost. Currently, the Government funds Qatar Airways’ research, and this is assisted by research labs in Qatar University and Texas A&M University in Qatar.
Another environmental concern is noise. Qatar Airways looks at noise only from the perspective of aircraft design and ignores other types of noise caused for example by operation throughout the night. There are no laws regulating the time of operation in Qatar or even in the GCC. Citizens are disturbed by noise in the middle of the night and early morning, particularly in winter, when the noise of air conditioning units does not mask aircraft noise. Adding to this, both airports, the old and the new international airports, are in the capital, Doha.
This research has also considered other social challenges discussed earlier that are common influential factors with pricing, such as loyalty, customer relation management systems, quality, and ordinary citizens as shareholders. QA has no alternative but to improve these factors in order to maintain and sustain its mammoth expansion.
Other Threats
A successful entity, as an unknown adage says, is like a nail popping up in a wooden surface, everyone wants to hammer it down. Qatar Airways faces threats from competitors, shareholder expectations, the unavailability of capital, and dissatisfied customers, which might even extend as far as customer revenge. Regional rivals include Emirates, Etihad, Gulf Air, Oman Air and Saudi Airways. However, currently Emirates is more effective in taking a substantial market share in the region. Etihad is following suit, but it will be another four to five years before it can match Emirates’ competencies.The GCC airlines are making inroads into the market share in Europe. Their capacity to move passengers is almost doubling every year. European airlines are lobbying to terminate export support to GCC airlines and seem to be successful in terminating such finances for Boeing and Airbus aircrafts. European airlines also criticize many over-regulated laws such as political opposition to improvements, insufficient infrastructure, eco taxes, emission trading, night curfews, noise regulation, passengers’ rights, trade unions and the right to hire and fire at will. They claim that their rivals in the Gulf Cooperation Countries are not confronted with the same levels of constraint.[12]
Conclusion
Qatar Airways has excelled in many areas on the ground and in the air. It has expanded beyond the imagination and continues to grow. This paper discussed the sustainability challenges relating to the direction of business and financial strategy, social challenges, operational aspects, environmental aspects, and miscellaneous threats. Sustainable development requires certain indicators for tracking and control. Definition of these is beyond the scope of this paper, and it would be appropriate for Qatar Airways to establish its indicators based on the issues raised here. Instead, we seek to identify some general implications for QA in meeting these challenges. This research finds that QA needs to understand the processes involved in and carry out the following actions:1. Build internal sustainable competencies appropriately geared for competing with rivals worldwide.
2. Consider issuing QA stocks to the public.
3. Streamline internal financial processes in the three vital areas of governance, transparency, and pricing.
4. Optimize revenue management and the integration of its functions with pricing.
5. Establish and develop a customer relation manager system (CRM).
6. Anticipate the ways in which consumer protection agencies might seek to challenge QA rules.
7. Lower its fares in the local market.
8. Enhance customers’ value perceptions of price, emotional response and behavior.
9. Establish good governance like reducing state intervention in economic decision-making, allowing for more transparency, eliminating public subsidies, and the adoption of policies to develop human resources.
10. Develop and empower local human resources.
11. Expand with caution, as the capital may not be available tomorrow.
12. Be mindful of the fact that Qatar’s Consumer Protection Law (8) 2008 neither defines price discrimination nor states that consumers are not bound to contracts that have unfair terms and conditions..
13. Pay heed to the fact that the law courts are always considerate to the weaker party, the passenger.
14. Be mindful of the fact that the European airlines will create many obstacles to Qatar Airways’ competitiveness.
Reference:
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