WITH their geographical advantage for connecting flights between far-flung places, there is plenty to keep the airlines of the Gulf countries busy. Yet Bahrain’s skies are nearly empty compared with its neighbours. About 9m passengers used its airport last year, far fewer than the 88m for Dubai, 37m for Qatar and 26m for Abu Dhabi. The difference is striking given that Gulf Air, Bahrain’s flag carrier, was for decades the most prestigious airline in the Middle East. In its heyday in the 1970s and early 1980s, none of its three neighbours even had national airlines.
Geopolitics was the driving force behind Gulf Air’s rise and fall. During the 19th century, Bahrain was a protectorate of the British empire and the busiest trading centre in the Gulf. In the 1950s, its strategic importance motivated British Overseas Airways Corporation, at the time Britain’s flag carrier, to become a major shareholder in Gulf Aviation, the island’s fledgling local airline. By the 1970s Bahrain had the most developed airline infrastructure in the region. Qatar, Abu Dhabi and Oman rushed to buy stakes in the Bahraini company, forming a multinational carrier: Gulf Air.
This accident of history secured Bahrain’s dominance in the skies at a time when air travel was growing in popularity. But in the first decade of this century, Qatar, Abu Dhabi and Oman pulled out of Gulf Air and pumped vast sums of money into their own national airlines. Emirates, Dubai’s flag carrier, had already overtaken Gulf Air as the region’s best-known airline. It did so not by attracting passengers to Dubai itself, but by marketing the city as a stopover for intercontinental flights. Qatar Airways and Abu Dhabi’s Etihad Airways copied its model.
Against this competitive backdrop, Gulf Air floundered. In 2014, when Gulliver last wrote about the airline, Bahrain’s transport minister was publicly bemoaning how “no one wants” the top job at the company. But, last November, the kingdom found new hope in the form of Kresimir Kucko, the former boss of Croatia Airlines, another flag carrier struggling to find its path in a region dominated by larger competitors.
Mr Kucko’s strategy is now gradually taking shape. Gulf Air has committed to take delivery of 39 new aircraft by 2023. This year will see the launch of eight new destinations in the Middle East, north Africa, India and the Caucasus. Next year will bring a renewed push into Western Europe, where the airline used to have a deep footprint. Gulf Air also plans to tap into the connecting flows that proved so lucrative for its neighbours, specifically by connecting Africa with China. Eventually, North America will also be targeted. “The question is when”, Mr Kucko says. “We need to build a sufficient and sustainable feeder network in order to make this…biggest jump in our network.”
A return to growth will please Bahrain’s rulers, who have always considered Gulf Air an ambassador for the kingdom and a catalyst for economic growth. Its high-end reputation allows the airline to compete on quality rather than quantity—a fight it lost years ago. But the strategy is risky. Few companies make money while investing heavily in new markets, and Bahrain’s parliament has never been shy about holding the airline to account. Lawmakers will need to be patient if Mr Kucko is to have any chance of writing a new chapter in the history of Gulf aviation.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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