First with Financial Comment from Arabia

Qatar economic miracle flies into turbulence

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Qatar Airways kept up a bullish front at the Hyderabad International Exhibition and Conference on Civil Aviation yesterday. But all is not well in the emirate which last month sacked 40 staff from its high profile Qatar Financial Centre, including its brilliant PR chief Steve Martin.

The euphemistic talk is of a reassessment of budget priorities. The talk in Doha is of over-expansion without due regard to commercial good sense. And the big whisper is that gas prices are down, and that the outlook for gas revenues may be far below expectations.

Gas dependent

Who knows how much gas the now depressed economies in the UK and USA will actually require from Qatar. Certainly the previous plans linked to far faster rates of global economic growth will have to be reassessed.

In the meantime, the huge investments in liquefied natural gas infrastructure still have to be paid for and their massive loans serviced. There has been no indication that debt is a problem just yet in Qatar. But the credit crunch has already been manifest in a slowdown in finance for local property projects, many of which are now on a go slow or have stopped.

The new airport is said to be around two years behind schedule and over budget, so planes queue up on the tarmac at the overwhelmed original Doha airport, and a new luxury hotel is bang in the flight path.

Is the order backlog from Qatar Airways therefore as secure as its executives proclaim? The airline has 220 aircraft on order worth some $40 billion. By 2013 its fleet will grow from 80 aircraft today to 120 and its network jump from 86 to 120 destinations.

Over the past five years Qatar Airways has doubled its fleet and invested in five-star service standards that are the envy of the industry. Passengers also enjoy discounted fares courtesy of gas-subsidies. The airline has never made a profit. Is this not over-expansion?

Thin commercial logic

Without a domestic tourism industry like nearby Dubai the logic for creating a massive airline based in Doha has always been thin on commercial grounds. Bringing tourists into a city creates local spending that boosts the overall value of an airline to a local economy. Transit passengers do not have the same value.

Advertising expenditure can only go so far in any business model. Ask the now sharply cutback Qatar Financial Centre that has spent many millions on some superb adverts.

No at the end of the day any business has to stand on its own two feet and make a profit. State subsidies can fund a start-up and maintain a loss-making business. Ask Gulf Air. But there is no substitute for sound business economics and that is a fact many Gulf States are now starting to appreciate.


Written by Peter Cooper

March 8, 2010 at 8:54 am

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