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Qatar’s new equity investment model: National carriers and semi-private airlines

Faced with intense pressures on its core airline business, Qatar Airways is expanding outwards through large, risky investments. Crimped in the Middle East by the Saudi blockade and faced with lowered demand in the West, Qatar is embracing an aggressive investment plan that includes the development of a new national carrier in Italy and a cash injection in U.S. private jet operator JetSuite, which owns the semi-private scheduled service carrier JetSuiteX. Qatar’s new strategy is a marked change from its previous equity investments — minority stakes in established airlines such as IAG, LATAM, and Cathay Pacific — and much riskier. As Etihad’s ghastly $1.87 billion loss in Fiscal Year 2016 demonstrates, equity investments in the airline industry can quickly turn sour.

The current market environment is very challenging for Qatar Airways. A confluence of geopolitical events has left Qatar scrambling for a new strategy. Last year, Saudi Arabia — along with the United Arab Emirates, Bahrain, Kuwait, and Egypt — broke off all diplomatic relations with Qatar. The blockade hit Qatar Airways hard. Qatar Airways cannot fly in the airspace over the Persian Gulf to the north, the UAE to the East, and Saudi Arabia to the South. While Qatar was able to negotiate a sliver of airspace access from the United Arab Emirates, many of its flights are not optimized for stage length leading to higher trip costs. “It is painful because there are many routes that slide as much as 2 1/2 hours longer, and there are routes that are narrow-body routes where we had to convert to wide-body in order to carry enough fuel to go the longer distance,”  explained Akbar Al Baker in 2017. According to Baker, 11% of the airline’s route network and 20% of its revenue was wiped out by the blockade.

While Qatar has tried to offset the blockade through capacity increases in Eastern Europe and Southeast Asia, it is not nearly enough. The travel and laptop bans in 2017 also softened demand between the Middle East and the United States, leading to capacity cuts further exacerbating the problem. Qatar has a whopping 332 planes on order (including options) and is running out of places to fly from Doha. While the airline is considering leasing some of its aircraft to IAG, which it holds a 20% equity investment, Qatar would prefer to place them in a more long-term productive capacity.

Enter Air Italy: In 2017, Qatar acquired a 49% stake in Air Meridiana, a small 11-aircraft Italian operator. With failing Alitalia on its last fumes, Qatar saw an opening to launch a new flag carrier. Air Italy made a big splash in February unveiling a chic livery and interior featuring burgundy Qatari accents. Qatar Airways executives, including CEO Akbar Al Baker, were present at the heavily covered press event.

Qatar plans to focus Air Italy on long-haul flying, mainly in the lucrative transatlantic market. To achieve this, Qatar is leasing its entire order of 30 Boeing 787-8 aircraft to Air Italy. Even though the Open Skies agreement between the Gulf states and the United States has had no material change on the fifth freedom flying of the Gulf carriers between Europe and the United States, the optics are much better for Qatar to deploy its 787s in Air Italy’s livery rather than its own.

Additionally, Air Italy is wading into the much more competitive Italian domestic and intra-European market. LCCs such as EasyJet and Ryanair are preying on the remains of Alitalia and are close to reaching over 50% penetration in the Italian market. But to funnel traffic into its long haul routes, Air Italy has no choice but to enter the slimmer margin world of European travel.

Across the pond, Qatar’s equity strategy is significantly different. With softening demand in the U.S, an ongoing rivalry with major U.S. airlines, stockpiles of cash, and coming off a rejection from the American Airlines board to acquire 10% of the company, Qatar has pumped a significant amount of cash into JetSuite — a private jet charter and the owner of JetSuiteX, a “semi-private” airline that operates scheduled regional service on the west coast. The scale of the investment by Qatar could have a significant impact on the future of regional travel in the U.S. Since JetSuiteX operates out of private airports, passengers only have to show up to the airport 15 minutes before departure and don’t have to wait in long security lines.  With a massive influx of cash from Qatar, JetSuiteX is planning to expand its fleet with more ERJ135s and eventually Zunum electric aircraft. Electric aircraft will cut the cost of short point to point regional travel.

Movement in the space has been considerable: new by the seat private jet startup apps seemingly pop up daily, Ultimate Air Shuttle and OneJet recently merged, and ZED Aerospace just announced AURA — a luxury private airline. Qatar is placing itself at the forefront of innovation in an airline industry ripe for disruption, especially at the regional level. While many in the space have failed, the value proposition is strong with huge time-savings compared to traditional commercial air travel. And with major backing from Qatar and JetBlue, JetSuiteX will have the financial firepower to grow for the long term.

However, Qatar’s new direction has raised some eyebrows in the industry. Many point to Etihad’s failed investments in Alitalia and Air Berlin which contributed to its massive $1.87 billion loss. With Etihad having failed to turn around Alitalia using a similar model as what Qatar is pushing for Air Italy–focus on premium long haul flights and a limited short haul network for mostly feeder purposes–Air Italy seems destined for the same fate as Alitalia.

But Qatar is taking a much different strategy than Etihad. Instead of investing in large, failing airlines, Qatar is investing in small airlines and scaling them up. Will the strategy work? Although Air Italy is very susceptible to competitive threats and requires a significant amount of capital, it has no bloated workforce or balance sheet and is Independent from the Italian government.

One of the reasons Etihad’s investment in Alitalia failed was due to the bloated workforce and government involvement which impeded the implementation of necessary structural reforms. With Air Italy, Qatar has a clean slate.

On the other side of the world, JetSuiteX has major potential for success with the massive influx of cash from Qatar. There is enthusiasm for the model from consumers and JetSuiteX also has strong ties in the industry with JetBlue.

While fraught with risk, Qatar’s new equity investment model has the potential for big returns. And with few alternatives in the face of major geopolitical headwinds, Al Baker may again prove to be a shrewd tactician.

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