Qatar Airways returns to profit

Airline Results

2 Jul

$1.55 billion profits? Where did that come from?

When Qatar Airways reported their results for the year ending March 2022 on June 16th, a lot of people were taken aback to see them announce a $1.55 billion profit before tax, representing a 10.8% pre-tax margin. That would be a good result for any airline in a good year, and of course most airlines reported big losses for the same period due to the pandemic.

There has long been scepticism from some quarters about how real the reported numbers are for the Middle Eastern airlines. But the Qatar figures were also much better than arch-rival Emirates, which reported pre-tax losses of over $1 billion for the same period.

I decided to take a quick look at how they managed to achieved such an impressive result and why it was so much better than their neighbour.

Qatar Airways, a not quite Emirates look-a-like

Qatar Airways is of course widely considered to have copied the successful Emirates model. And in many ways, they did just that. It is the same “super-connector” business model, exploiting the geographical position of the Gulf to connect all the continents of the world together, with a particular focus on connecting Europe and Africa to Asia.

There are however some important differences, and the first of these is the fleet strategy that each has adopted. Emirates is famous for having gone “all-in” on the A380. Their fleet of 118 aircraft represents about a half of the global fleet for the type and makes up about half their own fleet and about 55% of their total seat capacity. Qatar Airways by comparison has only 10 of the aircraft and has preferred smaller two-engined aircraft for their wide-body fleet. Emirates is a wide-body only operator, whilst Qatar Airways mixes in a few narrow-bodies and even has an Executive Jet fleet.

The other big difference is that Qatar has invested much more heavily in building up its fleet of freighter aircraft, and has become the largest cargo carrier in the world. Overall, the two airlines are not that far adrift in terms of total fleet numbers, despite Emirates being 70% bigger than Qatar in terms of the capacity of their passenger aircraft fleet.

*Source: Company reports, GridPoint analysis*

Cargo to the rescue

Whilst passenger traffic slumped during the pandemic, cargo volumes were largely unaffected, and were even boosted. With supply chains being disrupted by the pandemic, air cargo was in high demand due to its speed. In normal times, most air cargo is carried in the bellies of passenger aircraft, but with long-haul air travel at a standstill, there was a massive shortage of capacity. That led to Cargo yields roughly doubling compared to pre-pandemic levels. Qatar Airways’ decision to invest so heavily in dedicated freighters before the pandemic put it in a fantastic position to exploit this.

Qatar’s decision to eschew the A380 also helped it out in the Cargo market. The A380 has 45% more seats than a 777-300ER, but the 777 carries 40% more cargo. The double decker design of the A380 doesn’t leave much space for belly cargo once you’ve accounted for all those passenger bags.

You can see how significant Cargo was to the overall results just by looking at the revenue mix compared to Emirates for the 2021/22 year, which I’ve shown in the following chart.

In some ways, it is surprising that Qatar didn’t outperform Emirates even more when it comes to cargo revenue. Qatar did manage to carry 40% more tonnes of cargo than Emirates during the year, but with a freighter fleet which is three times the size and aircraft types which are better suited to the market conditions, I’m actually surprised it didn’t outperform by a wider margin.

It also underperformed on yields. Emirates managed to achieve cargo revenue per tonne which was 31% higher than at Qatar.

Flying more

Qatar Airways took a very aggressive approach to maintaining its flying programme during the pandemic, compared to other airlines. In the year ending March 2022, its capacity measured by ASKs was 67% of the figure for the 2019/20 financial year. Emirates was more cautious and only operated 44% of its pre-pandemic capacity.

Qatar Airways has never reported load factor figures, which is pretty amazing for such a basic measure in the industry. I’ve worked out a basic seat factor figure using passenger numbers (which they do report), divided by seats flown, which you can get from OAG data.

For the 2019/20 financial year, I worked out a figure of 65%, which is remarkably low by industry standards and significantly below the 78.5% figure recorded at Emirates. Could this be why they don’t consider it a metric worthy of being reported?

Their approach to capacity during the pandemic saw load factors fall further, to a low of 31% in 2020/21 and 55% in 2021/22. That sounds bad, but in reality they narrowed the gap to Emirates which only managed 58.6% last year, despite the more conservative approach to capacity.

*Source: Company reports, OAG seat data, GridPoint estimates and analysis*

What about yields? Qatar was lower there too. Its average passenger revenue per passenger was 20% below that of Emirates. There is virtually no difference in the average stage length of the two airlines’ networks, so this seems to be a genuine performance difference.

Unit costs

With Qatar underperforming Emirates quite significantly in terms of unit passenger revenues, it is quite a surprise that they managed to beat them for overall profitability, despite the helping hand they had on cargo.

It’s quite difficult to do much of a comparison of unit costs, as the two airlines categorise their costs differently. I also need to add a health warning that both these airline groups incorporate quite significant “non-airline” activities (third party handling, catering businesses, hotel operations and even airport operations). But for what it is worth, here are the figures for the costs broken into the largest cost categories.

It certainly looks like Qatar Airways has quite an advantage in terms of unit costs. A lot of that will be due to operating a bigger proportion of its pre-pandemic programme. That will have helped out quite a bit on depreciation costs for example, and will also have helped spread their other fixed costs over a larger volume of ASKs. It won’t have been a factor for fuel costs. Qatar Airway’s advantage here will undoubtedly be driven by its more fuel efficient aircraft mix. Despite its size, the A380 has never had the best fuel efficiency per seat.

The bottom line

When you bring this all together, Qatar’s approach of running a bigger programme seems to have worked well for the company. Undoubtedly the results were substantially helped by being the largest cargo operator in the world, in what has been a “super profit” period for that industry.

Investment losses

One thing that you can’t see from these headline profit numbers is the money that Qatar Airways has lost from its investments in other airlines. Its strategy of building up a portfolio of minority stakes in leading airlines across the world stands in sharp contrast to Emirates, which has always avoided investing in other airlines.

In the last three years, Qatar Airways has lost $2.7 billion on its investments in IAG, Cathay Pacific and LATAM. Those losses didn’t go through the face of the profit and loss account, due to the way they are accounted for. The losses appear only in the statement of “other comprehensive income”.

In the last financial year, those losses added up to $830m. Although that is still quite a tidy sum, it wouldn’t have been enough to completely wipe out Qatar Airways reported profits for the year.

Future outlook

Some of the things that helped Qatar Airways performance during 2021/22 might not apply in future. Other airlines are getting back in the air, so their position as “last carrier standing” will be less of a unique offering going forward. As wide-body capacity from other airlines gets back to pre-pandemic levels, inflated cargo yields will begin to drop back closer to pre-pandemic levels.

However, Qatar Airways has a couple of things going for it. The closure of Russian airspace to most Europe-Asia flights is causing passengers and cargo to divert via the Gulf, which will benefit the company considerably. The war in Ukraine has also triggered a huge spike in energy prices. Like any airline, Qatar Airways will be hit by the increase in fuel costs. However, Qatar is the world’s largest supplier of liquified natural gas and the world’s leaders have all been beating a path to the country’s door. The country must be drowning in money at the moment.

I suspect we may be seeing some more impressive results from the company in the next year or two.

QatarEmirates

Robert Boyle