Air Seychelles: Canary in a Coalmine for the European Majors (Guest Post)

Our old friend he Cardinal is back with an unlikely guest post. Why is he writing about Air Seychelles? It has global implications. Read on.


When Americans think of island paradises, thoughts generally drift to the Pacific and the Caribbean because those are the islands on which we tend to vacation — either Hawaii (or occasionally further south, to Tahiti or Fiji, or west, to Micronesia) or places like Aruba, Jamaica, St Barts (if you’re stinking rich), Dominican Republic and so forth.

But if you’re European or Asian, the natural geographic choices are different. In particular, they include the Indian Ocean, in between Africa and Australia, and places like Mauritius, the Maldives, the French Indian Ocean territories like Reunion and Mayotte (these islands are actually part of France, similar to how Hawaii is part of the United States), or the Seychelles.

Seychelles Route to Europe

Map via the Great Circle Mapper

The Seychelles are a beautiful group of islands about 900 miles east of Africa and north of Madagascar (that’s the big-*ss island off the east coast of Africa). The people are a melange of African, Indian, Chinese and Caucasian, reflecting the history of the islands, which were originally grabbed by France, and then transferred to British control after Napoleon was defeated. The country’s economy was once plantation-based, but now it’s all about tourism — not unlike many island paradises closer to the US.

OK, beautiful islands but, for most Americans, terribly remote. Why’s Cranky spending pixels on Air Seychelles, the national carrier?

Air Seychelles has done something quite extraordinary. Despite a national economy dependent on tourism, Air Seychelles is getting out of the long-haul business — the business of carrying tourists from Europe to the Seychelles.

On the face of it, it sounds suicidal for the Seychelles economy. But the Seychelles are in no danger of losing tourists. Instead, Air Seychelles has essentially been driven out of this business by the fast expanding Persian Gulf carriers — Emirates, Etihad and Qatar. Older carriers in Europe (and to a lesser extent, Asia) have been screaming for years about the pressure they’ve been put under by these fast-growing behemoths. In that respect, Air Seychelles amounts to a canary in a coalmine — this little carrier has been driven off its former main routes. Going forward, it will maintain only some smaller aircraft to serve the local neighborhood — other Indian Ocean islands and Africa.

What’s happened is that the amount of service to the Seychelles has exploded. From Dec 03 to Dec 11, the number of seats on flights over 2000 miles (which includes Europe, the Persian Gulf and South Africa — i.e. where most tourists come from) to the Seychelles has almost doubled, from a little more than 16,000 in Dec 03 to a little less than 30,000 in Dec 11 (source: mi.diio.net).

In 2003, none of Emirates, Etihad or Qatar flew to the Seychelles. In Dec 2011, between the three, they accounted for over 18,000 seats. Yes, these three carriers flew more long-haul seats in Dec 2011 than there were total in the market in Dec 2003 — when none of them were present.

For the Seychelles as a whole, this is good news. It depends on tourists, the Gulf carriers are delivering a ton of them. For Air Seychelles, not such great news. At some level, one has to applaud the Seychelles for recognizing their national carrier is a service, not a reflection of national virility, and simply getting out of the way. If this was France or Italy, the national government would be throwing bales of money at the carrier to keep the phallic symbol, I mean the flag, flying.

Is there a danger to the Seychelles here? Not really. Air Seychelles won’t cease to exist, and if, one day, the Gulf carriers get into trouble, it’s only a matter of Air Seychelles acquiring long-haul aircraft again. That’s the great thing about aircraft — you can move them around to where they’re needed.

But the wider significance is that Air Seychelles is somewhat of a canary in a coalmine. For many years, European carriers have been screaming about the danger posed to them by Emirates, Etihad and Qatar. Each of these carriers is big and getting bigger fast. In the past 25 years, Emirates has grown from zero to one of the largest international carriers in the world, with a penchant for spectacularly large orders (including a record order just recently for Boeing 777-300ERs and by far the largest outstanding order for A380s — it accounts for a stunning 90 out of 243 total orders and deliveries). Etihad and Qatar have been built in straightforward imitation of Emirates.

The size and growth of these carriers is greatly at odds with the size of their home countries. Emirates and Etihad both hail from the United Arab Emirates, population 8 million, while Qatar Airways is from Qatar, population 1.7 million. Tiny countries, massive airlines.

What they do have going for them is location — smack between Asia and Europe. Essentially, each of these airlines is operating a wayport — a hub with a heavy predominance of connecting traffic.

Each of them has costs that are far below those of European carriers. European carriers routinely complain that Emirates, Etihad and Qatar are subsidized.

Ever since Emirates started ordering A380s by the score (roughly a decade ago), it’s been clear the Gulf carriers would have a substantial impact on European, Asian and African airlines (US carriers are half a world away, so are, for once, spared this particular scourge). The major airlines of Europe are not about to be driven from key markets like Asia, even given the massive capacity increase in the Gulf. But without a doubt, the nature of this business is changing for Lufthansa, Air France and British Airways.

Lufty, AF and BA have costs that are much higher than Emirates, et al. There is simply no way to compete with these guys on price. One thing the Europeans have done is appeal to their national governments to restrict access of the Gulf carriers to Europe — and not only to Europe. Air Canada’s stout opposition to allowing expansion of Gulf carrier landing rights in Canada was almost certainly a favor to its Star Alliance partner Lufthansa (although the Gulf carriers pose almost zero threat to Air Canada, the Canadian government is unfortunately doing what AC wants).

But there’s an issue — the Gulf carriers are some of the best Airbus customers in the world. So, for instance, should the German govt protect Lufthansa, it could end up doing so at the expense of future Airbus business. Tricky, since while the German govt loves it some Lufthansa, it probably loves it some Airbus even more.

The other way for European carriers to compete is by offering the one thing the Gulf carriers can’t — a nonstop flight. Provide a nonstop flight from Frankfurt, Paris or London to a secondary Asian city — travelers prefer nonstop flights, and are generally willing to pay more for them. Of course that means buying smaller long-range aircraft. So, ironically, the sale of mass quantities of A380s to the Gulf carriers may mean sales of fewer of them to European carriers.

***********

Air Seychelles’ exit from long-haul flying is therefore a signal event. The Gulf carriers have collected a pelt. If they continue to execute their massive growth plans, it won’t be the last pelt they collect. Is that fair?

It’s fair to the extent Emirates, Etihad and Qatar are not subsidized. Emirates has routinely denied it’s subsidized (and it routinely reports profits), though a lot of that comes down to what you count as subsidy. If the crews don’t have to pay income tax because no one pays income tax in the United Arab Emirates, is that a subsidy? It presumably reduces the wages Emirates needs to pay its employees, but so what? Countries have the right to decide how to run their national finances. Europe, for instance, has a large Value-Added Tax (a type of sales tax) system that is not present in the US, but that’s not viewed as a trade issue.

Qatar Airways posted a profit in its most recent fiscal year, but again, you’d likely find severe skepticism in the executive suites of most European airlines as to how real that is. Etihad has yet to report a profit.

But significant sanctions against Emirates, Etihad and Qatar don’t seem likely anytime soon. They’re simply too important to the health of Airbus. In which case, watch to see which is the next domino to fall.


The Cardinal is an occasional anonymous contributor to The Cranky Flier. A long-time airline geek, The Cardinal is currently a [redacted] at [redacted].


33 Responses to Air Seychelles: Canary in a Coalmine for the European Majors (Guest Post)

  1. Kilroy says:

    Interesting analysis. Would love to see a more in-depth look at where the Arab lines are competing most fiercely with the Euro majors.

    I ran a few routes through the GC Mapper to compare distances, one a nonstop from LHR to (destination), the other with a stop in Dubai.

    LHR to HKG comes to an additional 900 nm for the stop in Dubai vs the nonstop, so you’re looking at a minimum of, say, an additional 3-4 hours travel time best case scenario including the layover.

    That additional distance due to the stop increases the further north one goes on the Asian side (Shanghai, Beijing, etc).

    LHR to SYD with the stop adds less than 300 nm, which on a flight of that distance (9200 nm nonstop) is very little. Are the Arab lines competing very fiercely yet for the UK-Aus traffic?

    Also interesting looking at the possibility of a JFK-SIN routing via Dubai, adds an extra 800 nm vs going northbound for the direct to SIN. Could be interesting at the right price point there.

    Would love to hear more about this, as I know very little of the Arab lines, but agree that at the right price point and service levels (which they appear to already be beating the US/Euro majors in, from what little I’ve seen) they will be very competitive to US/Euro direct longhauls, even with a stop in the Middle East.

  2. Sanjeev M says:

    Valid points, although you kinda veered off into the Gulf-Europe war for a while before coming back to Air Seychelles.

    How does this compare with respect to Air Austral, the flag carrier of the Reunion, who operate long haul 777’s and soon A380’s with 800 seats in them?

    Also, if you want to talk about restriction of air rights, you should talk about India, where it’s not clear who they’re trying to protect and Ethiopia, where they’ve basically allowed ET to make a killing on most of their routes.

    • LAFlyer says:

      Sanjeev, I believe that Air Seychelles was merely an anecdote to lead into the Gulf-Europe war, which was in fact the main point of the article, although your point about Air Austral is a very good one.

    • LAFlyer says:

      I think the point was to use Air Seychelles as an anecdote to set up a discussion of the Gulf-Europe war, which was in fact the point of the article.

    • CF says:

      The whole point of the article, the way I read it, was that this has a direct impact on the Gulf/Europe war. If it just applied to Air Seychelles, it wouldn’t be very interesting on a global scale. The potential implication elsewhere makes it really interesting to me.

      As for Air Austral, that seems to me like an airline that’s going to waste a lot of resources and capital on an airplane it doesn’t need and probably won’t be able to run profitably. Air Seychelles saw the writing on the wall whereas Air Austral thinks it can compete.

      • The Cardinal says:

        Air Austral is different. First, there is no service from the Gulf carriers to Reunion, so at least today, they’re not a factor. Secondly, Reunion has nonstop service with large aircraft not only from both Paris airports (up to four and even five flights/day), but also from Marseille and Lyon. These are all internal French flights, odd as it seems (and for that reason, it may not even be legal for the Gulf carriers to carry pax France-Reunion, which might explain why they’re not there).

        In contrast, there’s no service to Reunion from other European countries. There’s also a history of airlines like Corsair flying giant aircraft from metropolitan France to DOM-TOMs (French overseas territories) like Guadeloupe and Martinique. Air Austral is in that tradition.

        So, the A380 and 777s might still be too large for Air Austral, but the Gulf carriers don’t seem likely to factor into that outcome.

      • Sanjeev M says:

        Interesting to note that Air Austral is now planning to fly routes from Seychelles to Europe and has opened reservation for Reunion-SEZ-CDG today.

        http://airlineroute.net/2011/12/12/uu-sezcdg-s12update2/

  3. Andrew says:

    eh, I’m not so bullish on the Gulf carriers – they stink of the STL and PIT model of some years ago. Ask each of those cities/airports how relying almost entirely on connecting traffic turned out.

    • Sanjeev M says:

      Well STL and PIT had a different model. Remember that the US domestic market had too many hubs (STL, PIT, CLE, CVG, IND, MEM, MCI don’t all need to be hub). The US market was saturated (and some argue still is).

      Emirates came out of a market need, and has established itself over 25 years. Qatar has the money under it (gas) to fund it. Etihad I believe will merge into Emirates at the new Jebel Ali airport in about 10-15 years.

      Now also take a look at TK. Totally awesome strategy of narrowbodies to underserved tertiary European and African destinations. Once again filling a need. With growth in Turkey, this is not going to stop soon.

      Additionally unlike the US, you don’t have to do immigration in DXB/IST/DOH/AUH when making a connection.

      Most of our hubs were domestic, so they drew on a population of max 300 million. EK and the like draws on the whole world population of 7 billion. So while in 50 years it has the potential to be a STL/PIT if managed improperly, there’s nothing to solidly predict that right now.

    • CF says:

      I agree that this is very different. The US domestic carriers had connecting traffic that could have been served through many other, stronger hubs and very little local traffic. In this case, Emirates and the rest are connecting places that simply don’t get connected easily otherwise. You can fly with a single stop between cities you never really could before. And since it’s all on a single airline, there’s a big advantage. Think of all the smaller Indian cities that can connect with a single stop to places like Manchester, Glasgow, Prague, Dusseldorf, etc. Or look at how you can go from the US to the Middle East, India, Africa, and the Indian Ocean. Connections are being opened that really weren’t easily served before, and Emirates is just starting to turn the faucet on.

      Now, are there possibly too many carriers trying this strategy? Maybe. But it makes a ton of sense for Dubai to be able to connect the world in ways that can’t really be done otherwise. In the US, everything was already connected. It was just that the weaker hubs couldn’t compete.

  4. LAFlyer says:

    Great article! I think that it would have been interesting had you explicitly stated your implied point that the key to saving BA, AF and LH from the Gulf carriers is Boeing’s 787 (assuming the A350 is still a ways away). Oh the ironies of globalization!

  5. The gulf area is in a spot that can be used as a ‘hub’ to criss-cross traffic between Europe/Africa/Asia/SW Pacific so you can not fault them for being in a prime location any more they you can fault U.S. carriers with midwest hubs doing domestic criss-crossing of traffic.

    • Jason H says:

      I don’t think it was meant as a ‘fault’ article. I think you are right, as is the author, that the Gulf area airlines are leveraging their location as a crossroads. I also read this as praise for Seychelles Air to recognize the changing market and react proactively until of waiting until they were hemorrhaging red ink.

      Several US carriers could use the Seychelles Air strategy of removing bits and bobs that no longer make sense. Do we really need DL, AA, UA, US and all the LCCs serving the domestic market? Perhaps the answer is to pull out of some domestic and focus on international. Who knows, but I do like the article.

      • The Cardinal says:

        Emirates is no more at “fault” at leveraging the location of Dubai than is Singapore Airlines of leveraging the location of Singapore. They’d be silly not to.

        And US legacy majors have emphasized international expansion over domestic for many years now. It’s an explicit part of the United (previously Continental) strategy.

  6. CZBB says:

    I’m glad to see the AC vs UAE mentioned. This has cost Canada a huge amount of money as in retaliation the UAE canceled our lease at the air force base in the UAE (cause Canada to have to move their Air Force commitments to Qatar); and the cost of a visa to enter the UAE is now nearly $1000 for a Canadian (however, they’re much cheaper if you buy on board an Emirates flight)

  7. Bang on target about Air Seychelles. When I saw that they were withdrawing, I knew it was because of what the gulf carriers were doing. Hell, if United hadn’t ended its agreement with Emirates I would be using United miles to fly EK to get to the Seychelles next year.

    I agree that there’s a threat to some European carriers but I think the article underestimates the potential threat to US carriers. There is no threat now but Emirates has made clear that one of its next big targets in the coming decade is the ring of fire and penetrating further into the US. This could eventually pose trouble for both United and Delta who have the biggest presence in the Pacific of the US carriers. It’s also a potential threat to Singapore and Cathay Pacific.

    The immediate threat is Europe but the US isn’t going to be immune.

  8. Seems to me that these modern Middle East airlines fill a niche — Europe to Asia/SoPac, especially for budget/ethnic travellers. But I can’t honestly see them imperiling and of the larger global carriers who operate in that region. It’s not quite the same, but if Iceland Express bought a lot of new planes, how scared for the transatlantic players be?

    I think the Seychelles situation is someone unique to that type of market and, obviously, the particular geography.

  9. davywavy says:

    It all sounds like capitalism and the free market to me – the strong survive, the weaker go to the wall.

    For decades, the Euro carriers took financial advantage of many Middle Eastern and Asian countries, and now they’re fighting back.

  10. coldtusker says:

    An alternate way to get to Seychelles is via Nairobi on Kenya Airways which has been flying there for ages. I believe most pax flying to Seychelles vai NBO originate from LHR, AMS, or CDG. There might be some traffic from JHB as well.

    Therefore it is not just the Gulf Carriers but others who supply (additional) seats to Seychelles.

    Most Italians tourists using KQ end up in Kenya (MLD via NBO).

  11. It’s amazing the numerous amount of vacation spots that exist on Eastern half of the globe. I’d love to visit some of those areas.

  12. jessica says:

    I’m not sure you can compare Air Seychelles to Lufthansa or Air Canada. There are many reasons as an airline they cannot compete with other airlines.

    As an example, they just implemented electronic tickets a year ago. I felt like I was stepping back 15 years flying on them.

    The Seychelles is an expensive country to go to on vacation. The travelers going there have a much higher expectation for an in-flight experience than Air Seychelles offers. I would not recommend flying them unless it is the only option.

  13. EdFLondon says:

    This is another combination article wafting somewhere between NIMBY and the demise of local shops complained about by WalMat shoppers. We want capitalism and bulk buying except when we want to get sentimental about it. Asking governments to restrict competition, short of monopolies, is hypocrtical at least.

    Nevertheless, a good analysis of trends and effects.

  14. A says:

    I agree with the analysis between the middle east carriers and the legacy euro carriers to date. That said, I’m not sure I agree that we will see continued expansion of travel from Europe to Asia. All the OECD countries around the globe are broke and on the verge of financial collapse. Of course there will always be travel between major European centers and Asia, but I think we’ll see the peak sooner than later. A business model based on exponential growth (i.e. 90 A380’s) will always crash, it’s just a matter of when.

  15. Tony says:

    Letting go of a branded subsidized flag carrier is nothing new.

    I recall how each Latin American country would have their own flag carrier. Areoperu, Ecuatoriana, Varig, Llyods Aero Bolivia, LACSA Costa Rica, La Nica Nicaragua etc….

    Given the shock therapy economics of the 1980-90’s, many of these nations allowed for cabotage and lifted foreign ownership restrictions. The stronger carriers such as COPA, LAN, TACA and Avianca were able to expand in Peru, Ecuador, and Colombia. With LAN and TAM merging it will be a powerful airline. Overall, service to Latin America has never been better, and more people are traveling.

    • CF says:

      Good point on Latin America, but some of these aren’t quite giving up on their flag carriers. I believe LACSA technically still exists for that reason, even though it’s branded as TAM. Same in South America where each country has its own LAN brand because of ownership rules. I remember rumblings about Peru suggesting it needed to start its own new flag carrier in the last couple of years as well.

  16. Oliver says:

    Would have liked to hear a bit more about the huge amount of wide body capacity that Emirates has ordered. How are they going to fill them consistently and profitably? Are there enough markets that warrant a daily A380 to Dubai to use their 90+ aircraft?

  17. Carl says:

    Cranky, I think Emirates pose more of competitive threat to UA, DL, AC & AA than you allow. Emirates already flies from SFO, LAX & JFK. They have announced they are adding SEA and IAH to their route network. Thinking about any SEA, SFO & LAX, Emirates via Dubai is an entirely reasonable connecting point to virtually any city in India and also other places in Southeast Asia, like Jakarta or KL or Bali and possibly even Singapore. This does bleed traffic that otherwise could have originated on one of the alliances and remained on the alliance.

    • Arcanum says:

      I guess that depends on what you call a “reasonable” connecting point.

      From the left coast, most places in India could be reached non-stop with existing aircraft and will certainly be reachable with a 787 or A350. If you have to connect, DXB is not really any shorter vs. established alliance hubs in HKG, NRT, etc. For anywhere east of India, a DXB connection is significantly longer (e.g. 8340 miles for LAX-NRT-BKK vs. 11389 for LAX-DXB-BKK). Again, most Asian destinations could easily be reached nonstop if there were the demand.

      From the East coast, DXB connections are at best a wash. JFK-BKK is 9899 miles via DXB, but 9455 via FRA and only 9183 via ICN. Again, with alliance hubs allowing one-stop connections via either Europe or Asia, there’s no geographic advantage to taking a Middle Eastern carrier from North America.

      The other factor that differentiates North America from Europe is density. You have a sufficiently concentrated population in Europe to make 777 flights from places like MAN viable, because these secondary airports have enough of a population catchment to sustain a regular widebody flight to DXB or DOH. The population in NA is much more spread out. Yes, there are a few large centres like NYC, LAX, ORD, YYZ that can fill an A380 to DXB, but you’re never going to have enough people in IND or YEG to make a flight viable. How many people will drive an extra 3 hours from IND to ORD just to take Emirates, when they can fly from their home airport through any of a dozen hubs with AA, AC, DL, UA, or US?

      That’s where the “local” airlines have the advantage. They can connect the substantial chunk of North America’s population that isn’t in a top-ten urban centre to the world via their hubs. Unless the Gulf carriers come up with some sort of arrangement with a domestic carrier like JetBlue or Westjet, the majority of North America’s population will remain inaccessible to them.

      • Carl says:

        My point wasn’t whether it’s an efficient routing, but whether it’s viable. If Emirates has a cost advantage, whether due to cheap financing or cheap labor, they can undercut rivals in pricing. Brett (Cranky) said Emirates is not a threat to the U.S. international carriers, and I disagree – for certain markets Emirates will in fact compete with the U.S. legacy airlines and can undercut their prices and take some of their business. Canada has a legitimate interest potentially in restricting access. I think it’s remarkable that Emirates can make it economically to serve Seattle. I don’t think it’s traffic headed to the Middle East. The business case has to be based on connecting traffic, and probably a lot of it is headed to India, so they are competing with the legacies as well as their European alliance partners.

        • CF says:

          Are you talking about something that was in the post? I did not write this – it’s a guest post.

          • Carl says:

            Oops, I had forgotten it was a guest post.

            I was reacting to the statment: “Air Canada’s stout opposition to allowing expansion of Gulf carrier landing rights in Canada was almost certainly a favor to its Star Alliance partner Lufthansa (although the Gulf carriers pose almost zero threat to Air Canada, the Canadian government is unfortunately doing what AC wants).”

            I think Emirates does siphon off traffic from AC as well as UA, AA, DL, and certainly the European carriers, so the opposition was not solely to protect the alliance partners but also their own interests.

            As I said, I was kind of shocked to see them adding service to SEA which shows they don’t need such a large catchment area to make the service work at their cost structure.

  18. Next bird down….

    Early this week, Air Austral management informed me they were suspending the St. Denis de la Reunion – Sydney – Noumea service as of 20 March 2012. Since then the news has been made public:

    http://www.clicanoo.re/11-actualites…austral-suspend-sydney-noumea.html

  19. Pingback: [BLOCKED BY STBV] Etihad is Now the Worst Airline Ever, Thanks to the Transitive Property | The Cranky Flier

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