Reshuffling the Decks: Can code-shares bring détente to Gulf and Europe?

Back in 2015, Lufthansa CEO Carsten Spohr was hard-pressed to find something pleasant to say about Gulf carriers. At that time, airlines in the Persian Gulf region, like Emirates, Qatar Airways and Etihad, were fighting the storied German airline and other legacy European carriers tooth-and-nail for passengers in a skirmish for market share that ultimately saw Lufthansa abandon Abu Dhabi. Accusations of illegal subsidies and unfair business practices were lobbed in all directions. There was talk of rescinding well-established open-skies agreements over the feud. Lufthansa, like other legacy carriers IAG and Air France-KLM, had underestimated the sheer will to grow and the deep capital backing of the Gulf carriers – and now the Gulf upstarts were demanding to be taken seriously.

But it’s now 2017, and the current mercurial sociopolitical climate, often creates strange bedfellows. Low oil prices have state-owners of Gulf carriers (including Etihad, which is owned by the Abu Dhabi government) scrutinizing budgets with increasing attention. With Etihad CEO James Hogan stepping down later this year, it appears that fiscal discipline is the new watchword in Abu Dhabi. Hogan’s equity-sharing strategy was successful in directing passenger flows through Abu Dhabi in Etihad aircraft, but investments in Alitalia and Airberlin have yet to turn a profit.

On the cargo side, Etihad Cargo carried 592,700 tonnes in 2016 – flat, year-over-year, despite adding a slew of new markets. In addition, the Centre for Aviation (CAPA) predicted that the weekly capacity of Etihad’s partners into Abu Dhabi will fall to 2013 levels this June, well below June 2015’s high of about 37,500 seats-per-week.

Meanwhile in Germany, Lufthansa has been in cost-cutting mode, rolling out new products on both the passenger and cargo sides in an effort to bring its costs under control – with only middling success. Adjusted EBIT for the first three quarters of 2016 was down 0.9 percent, and down 6.3 percent in the third quarter. Somehow, the two adversaries decided they might work better as partners than as rivals.

And so it was that Spohr found himself surrounded by Etihad’s leadership in Abu Dhabi last December, announcing a code-share deal with Etihad. At the event, he praised the United Arab Emirates as “one of the world’s leading aviation centers.” By the start of 2017, Spohr and Etihad announced yet another deal, this time a $100 million partnership covering catering and the potential for MRO cooperation in the future. Both carriers quickly scuttled rumors of an equity investment by Etihad, but the tone had been set.

Spohr’s embrace of this sea change in aviation immediately raised speculation about what the code-share meant for the bottom lines of both carriers, but it also raised questions about what had changed to bring these once bitter rivals together. Analysts and the media rushed to answer these important questions, and their answers generally had dollar signs in them. Instead of viewing the competition in regional terms – i.e., Mideast vs. Western Europe – the carriers were now focusing on the use of each other’s networks to better compete with their more traditional rivals for the best global routes – i.e., the code-shared Lufthansa-Etihad network vs. the combined IAG-Qatar Airways network.

But one dynamic lost in the noise was the implications of the deal for the cargo side of the business. After all, most of the long-haul routes offered by Gulf and European carriers involve cargo-friendly widebody passenger aircraft. How could this partnership make use of this pairing up of extra belly space and create new airfreight business for forwarders?