East vs. West: Could the US really ban Gulf carriers from their skies?

by  — 2 July 2015

An escalation of competition from Gulf carriers has made United States (US) legacy airlines vulnerable enough to initiate a strong lobbying for review of the open sky policies between the states. However, one needs to draw a distinction between business fairness and consumer interest in this whole debate. What is profitable for the airline companies might not necessarily be in the best interests of the customer, writes Syed Ameen Kader

What started as a verbal war between top executives of US and Gulf carriers, involving American Airlines chairman and CEO Douglas Parker (L) and Qatar Airways GCEO Akbar Al Baker (R) among others, is gradually turning into a massive aviation tussle amid fear of creating diplomatic animosity between the states.

The US legacy carriers have a strong argument to make about the ongoing aviation debate. Jill Zuckman, chief spokesperson of their coalition body, the Partnership for Open Skies, says, “Open skies policy is clear that the market should be free of subsidies and other government interference that distort and undermine competition.”

The ‘Big Three’ US carriers (American Airlines, Delta Air Lines and United Airlines) in a January report alleged that Qatar Airways, Etihad Airways and Emirates have received more than USD40 billion (QAR145.45 billion) in quantifiable subsidies and other unfair benefits from their respective governments in the last decade alone. “These unprecedented and unfair government subsidies have allowed Qatar Airways, Etihad Airways and Emirates to rapidly expand their fleets and international routes, distorting the commercial aviation marketplace,” says Zuckman.

Expressing their surprise about the report, an Emirates’ representative who did not want to be named says the three largest US carriers – each of which was a beneficiary of America’s unique Chapter 11 bankruptcy reorganisation law – has been presented as a case against open skies access for some airlines including Emirates, based on claims of government subsidies. The representative refutes the claim by saying that Emirates operates on a fully commercial basis and rational market assessments.

He argues that the airline currently flies to nine US cities, providing travellers with non-stop services to Dubai, as well as one-stop connectivity to 60 other cities in the Middle East, Africa and Asia Pacific – destinations currently not served by the US carriers, except perhaps via their alliance partners where routings are often relatively convoluted or inconvenient. “Head-to-head, there are virtually no competitive overlaps between Emirates’ network and those of the three complaining US carriers,” he claims.

It is beyond debate that all the benefits of open sky have made air travel more attractive for business and leisure travellers, providing huge impetus to the aviation industry to reach where it is today. Any hindrance to open sky activities – no matter whether it is due to unfair business practices or not – would make a huge blow to customers’ choices. 

The ‘Big Three’ US carriers (American Airlines, Delta Air Lines and United Airlines) in a January report alleged that Qatar Airways, Etihad Airways and Emirates have received more than USD40 billion (QAR145.45 billion) in quantifiable subsidies and other unfair benefits from their respective governments in the last decade alone.

But business ethics is important too. For companies to offer better service, they need to perform well – both financially and ethically. Martin Rivers, an aviation analyst, says that this debate is about whether or not the business models of the Gulf carriers are distorting the marketplace, and damaging rival airlines. “Passengers don’t care about that side of things, but it matters,” he explains. By subsidising international air travel, Rivers argues, the Gulf carriers can cause damage to foreign airlines – cause them to shrink, make them unprofitable, and ultimately kill them. “Aviation is an international marketplace. If one airline isn’t playing by the same rules as another, then of course governments will intervene,” he adds.


How big is the threat?

It would be interesting to analyse though if the US carriers are actually shrinking. The numbers suggest otherwise. According to the International Air Transport Association’s (IATA’s) latest mid-term data, North America has currently registered the strongest financial performance in the world, with net profits being the highest at USD15.7 billion (QAR57 billion) this year, against USD1.8 billion (QAR6.5 billion) in the Middle East. Industry observers attribute the growth in profits to a number of mergers and consolidations that the North American aviation market witnessed over the years. Today, the ‘Big Three’ control 65 percent of the US domestic flights, and more than 82 percent of the US-European Union traffic through their anti-trust immunised alliances across the Atlantic.

The often-criticised anti-trust exemptions allow member airlines to coordinate among themselves on pricing, scheduling and marketing of flights without fear of prosecution. Many critics say that although anti-trust immunised alliances are good for airlines, as they allow them to dictate price, they limit competition and customer choices.

With the growing opposition by the ‘Big Three’ to curtail the Gulf carriers’ rapid expansion, the voices have also become louder to review the privileges enjoyed by the US carriers through the immunised joint ventures. Robert Land, senior vice president for government affairs, JetBlue, said in his letter to the US regulators, “The US regulators should review the agreements known as immunised joint ventures to ensure they are truly benefiting the travelling public. The accords should be re-examined periodically.”

Emirates president Tim Clark had also echoed the same sentiment. So has Qatar Airways’ group chief executive officer Akbar Al Baker, who last month said that his airline would be forced to leave the Oneworld alliance if the opposition from the US carriers continues.

But finding a solution to this dispute would not be as easy as one would imagine – especially when the allegations of unethical business practices against the three Gulf carriers are still to be proved. The 55-page dossier released by the ‘Big Three’ could be a good reference guide for the US authorities to investigate further, but the interpretation of those ‘subsidy’ numbers are still to be justified in the court of law, if at all it reaches to that level.


Where do customers stand? 

Are customers now a pawn in the growing battle between the US legacy carriers and the fast-growing Gulf carriers? Both sides claim to champion the cause of customers and the general public. The Gulf carriers are vouching how their expansion due to the open sky has provided an indisputable benefit for consumers. The Emirates’ representative says, “This has also encouraged competition amongst airlines, and as a result multiple foreign carriers have enjoyed the ability to pick up and drop off passengers in Dubai for onward flights.”

If one talks about the customer choices, Emirates and the other three Gulf carriers rank among the top 10 airlines in the world. According to the Skytrax 2015 awards for top 100 airlines, Qatar Airways holds the top position, whereas Turkish Airlines is fourth, followed by Emirates and Etihad Airways at fifth and sixth positions, respectively.

The ‘Big Three’ though have managed to find a place at 45th (Delta Air Lines), 60th (United Airlines) and 79th (American Airlines) in the Skytrax 2015 list, which was selected based on a global passenger survey.

Temel Kotil, deputy chairman and CEO of Turkish Airlines, says, “Passengers across the world want lower fares, better service, easy connections, comfort, and convenience while travelling to international destinations, and the Middle Eastern airlines are strong enough to provide these without financial support from their governments.”

The Gulf carriers also stress how their expansion is contributing towards creating more jobs and opportunities in the US. On the other hand, the US carriers are highlighting the plights of American citizens and the workers who are involved in the aviation industry, and the customers, who, they say, might be affected in the long run, if the Gulf carriers are allowed to capture the whole market.

Those who take either side have their own interests to protect. The tourism bodies, hotels, aircraft manufacturers and feeder carriers and some airports, whose business model thrives on the benefits of the open sky, are understandably supporting the Gulf carriers. So is the case with the ‘Big Three’ and their sympathisers, who are supporting the idea of curtailing the Gulf carriers’ expansion because their businesses are in line to get hit.


Possible repercussions

The debate and public onslaught have been continuing for the past six months, and there are enough undercurrents within the industry to keep this alive for some time. But what could be the fallout of this battle? Could the US take drastic steps such as curtailing the open sky agreements with the UAE and Qatar?

Rivers says, “Maybe there will be a modest curtailing of open skies, which would keep America open for business but just limit the pace of growth by the Gulf carriers – growth which is fuelled by political design, not commercial achievement.” He points out most European countries have taken that approach so far.

Turkish Airlines’ Kotil adds that the Gulf carriers have a large network of destinations that are not generally well serviced by the US carriers, so any restriction would bring a huge shift in the travel dynamics. “We could expect to see flagging competition and service and many under-serviced routes,” he cautions.

The Middle East today is indispensible to the US – both politically and economically. The US needs them for a number of things, right from the geopolitical issues – whether it is relating to Iran’s nuclear programme or combating ISIS – to issues of economic interest that involve oil and gas, defence, trade and business deals. The Middle East is one of the biggest markets for the US and European manufacturers. Talking about Boeing alone, the US aircraft manufacturer forecasts that this region will require 2950 new aircraft, worth an estimated USD640 billion (QAR2328 billion), over a 20-year period from 2014 to 2033.

Bernie Dunn, vice president, Boeing International and president, Boeing Middle East, agrees, “To date, we have delivered over 600 aircraft to regional carriers. Thirty percent of the company’s wide-body backlog is accounted for by Emirates, Qatar Airways and Etihad Airways alone and we have been growing about five percent in the last four years.” Boeing currently has a robust order book for the Middle East with a backlog of more than 550 units.

And it is not just Emirates, Qatar Airways also announced at this year’s Paris Airshow that it is purchasing 10 Boeing 777-8Xs and four 777 Freighters, at a total order value of USD4.8 billion (QAR17 billion). Boeing also said that the Qatar Armed Forces has agreed to buy four additional C-17 Globemaster III airlifters to double its capacity.

“Qatar and the UAE are powerful actors in a very volatile geopolitical region. They’re really indispensable to America. These considerations make it very hard to predict what will happen.” – Martin Rivers, aviation analyst

Understandably, companies such as Boeing are worried about the possible implications of any hindrance to open sky activities. Dunn says, “Boeing’s stand on the current open skies debate is to continue to support open and fair policies that help grow the aviation industry, expand trade, and contribute to economic growth.”

But, if the US still does what its major airlines want it to do, the repercussions could be huge.

Rivers says, on the US side, the response could be a renegotiation of the open skies treaties to curtail the Gulf carriers’ access to US airports – which means limits on the number of destinations, the frequencies of their flights, the type of aircraft, the onward connectivity, etcetera.

“That’s how Washington can respond. But Doha and Abu Dhabi can also respond. They buy a lot of Boeing aircraft, which supports US jobs,” Rivers says.

The possible and immediate reaction could be Qatar Airways staging a walkout from the Oneworld alliance. Emirates and Etihad are still not part of any alliance. But the dispute can affect the composition of the 15-member Oneworld alliance, considering the fact that Qatar Airways owns 10 percent stake in the International Airlines Group (IAG), the parent company of two other members, Iberia and British Airways. Meanwhile, Etihad Airways owns a 29 percent stake in another Oneworld member, Air Berlin.

The second in line could be aviation purchases that the UAE and Qatar make from the US manufacturers. The biggest casualty could be Boeing. How quickly and specifically this would impact the aircraft orders is hard to predict but the Gulf states may take some symbolic steps to send across the message. 

The US and European companies may also find difficulties in doing businesses in the UAE and Qatar.  Akbar Al Baker was quoted as saying in May that if his airline is not allowed to “benefit in a small way by bringing additional flights to the Netherlands, then you should also not expect a lot of commercial contracts from our government. It’s as simple as that”.

That came after a Dutch government minister said Gulf carriers would not be allowed new landing rights at Amsterdam’s Schiphol Airport.

Remember, both the UAE and Qatar are readying to stage two major global events – Expo 2020 and the 2022 World Cup – within five and seven years, respectively. There are a lot of business opportunities for Western companies to grab.  Rivers says, “Qatar and the UAE are powerful actors in a very volatile geopolitical region. They’re really indispensable to America. These considerations make it very hard to predict what will happen.”


How can this be resolved?

One could speculate that after some sorts of retaliation from both sides, each party may decide to sit across the table to find an amicable solution. This might involve the Gulf carriers agreeing to open their books but asking for a time frame of two to three years – the period that they can utilise to put their accounts in order. The US may agree to revive the open sky treaties  with the Gulf states with the provision for partial expansion until the time the Gulf carriers come up with satisfactory explanations about their accounts. 

In the mean time, the Gulf carriers may try to up their ante in the trade war by making a back-door entry into the US and European markets through stake purchases in airlines and airports. The top executives of Gulf carriers have already expressed their willingness to infuse more equities into other airlines. How far they would succeed in doing so in the US market is still a question mark, but there can be some attempts made by them.

It may not go that far but it is very difficult to predict what form it will take. Some also speculate that the US carriers could sign partnerships with the Gulf carriers, and start sending more traffic over their hubs through revenue-sharing, metal-neutral joint ventures. 

All agree that we are a long way off that, but in the long run that is the outcome that makes most sense. “The Gulf carriers are here to stay, so you have to think about ways to work with them,” concludes Rivers.

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