Other Carriers Can’t Compete With Gulf Airlines Under The Current System — Here’s Why

I’ve written extensively about the battle going on between the “big three” US carriers (American, Delta, and United) and the “big three” Middle Eastern carriers (Emirates, Etihad, and Qatar) regarding the Open Skies agreement.

This debate might seem insignificant to some, but the liberalization of international air service is in consumers’ best interests, and this has the potential to change that trend.

More from OMAAT FTC Investigating Airlines Over Personalized Pricing: Don’t Get Too Excited Read more

I’ve been doing some research on the issue, and I finally understand the position of the US airlines, and even side with them. Previously I saw where the Gulf carriers were coming from, but the US airlines haven’t done a great job of communicating their position other than “crying foul.” Now that I have a bit more insight as to the stance of the US airlines, their grievances make perfect sense to me.

I think we’ll see a lot more information made public in the near future which puts this into perspective.

Here are my thoughts:

What are Open Skies agreements?

To figure out whether something needs to be changed, it first makes sense to understand what’s at stake.

For decades airlines have been working towards removing the “red tape” required to start new routes, by eliminating government intervention as much as possible. Here’s how the US Department of State describes Open Skies agreements (bolding mine):

Open Skies agreements have vastly expanded international passenger and cargo flights to and from the United States, promoting increased travel and trade, enhancing productivity, and spurring high-quality job opportunities and economic growth.  Open Skies agreements do this by eliminating government interference in the commercial decisions of air carriers about routes, capacity, and pricing, freeing carriers to provide more affordable, convenient, and efficient air service for consumers.

America’s Open Skies policy has gone hand-in-hand with airline globalization.  By allowing air carriers unlimited market access to our partners’ markets and the right to fly to all intermediate and beyond points, Open Skies agreements provide maximum operational flexibility for airline alliances.

It’s clear that a cornerstone of these Open Skies agreements is the “elimination of government interference in the commercial decisions” of airlines.

But lots of airlines are government owned — why single out three airlines?

The next logical question here is “why single out Emirates, Etihad, and Qatar?” If the problem comes as a result of airlines being government owned, then why not go after the smaller government owned airlines, like Oman Air, etc.?

This is the area that’s challenging, because I do think it’s tough to figure out where to draw the line. And in general I’m opposed to making regulations centered around arbitrary metrics.

But there are many things that make Gulf carriers especially unique, including:

• Of government owned airlines, Emirates, Etihad, and Qatar are growing disproportionately compared to their respective populations and GDP growth. In a few years these carriers will have more widebody aircraft than all US airlines combined, despite the fact that the UAE and Qatar have a population that’s less than 4% that of the US.
• Emirates, Etihad, and Qatar airlines aren’t playing fair. It’s one thing to have a government owned airline that’s losing money, but the behavior of the Middle Eastern airlines is destructive. Their long term business model is basically to run competing airlines out of markets as much as possible, and at any cost, even if they lose billions of dollars doing it.

Qatar Airways A380 at London Heathrow

What dirty tricks do Middle Eastern airlines use?

Let’s be clear about what makes the advantage of the Middle Eastern carriers “unfair.” It’s not that they have lower staffing costs because of where they’re located. Or that they have lower oil costs because of where they’re located.

Rather it’s that they have access to virtually unlimited interest-free capital, and that every aspect of the Gulf carriers operations and supply chain is interconnected. Collusion between the Middle Eastern carriers and their governments allows for zero transparency, which has the result, if not the intention, of giving Etihad, Emirates, and Qatar an unfair advantage.

For example, Emirates Airline’s President, Sheikh Ahmed bin Saeed Al Maktoum, is also President of Dubai Civil Aviation Authority, Chairman of Dubai Airports, and President of dnata. That would be like Doug Parker being CEO of American Airlines, head of the FAA, and President of DFW, ORD, LAX, JFK, and MIA Airports.

If that doesn’t present a conflict of interest — especially for a company that isn’t financially motivated — then I don’t know what does. It’s my understanding that Dubai Airport’s landing fees are less than the cost of providing them. How can an airport justify losing money with every plane that lands?

Because Dubai Airports knows subsidizing landing fees benefits Emirates most. And when you’re in charge of the airline, the airport, and even the civil aviation authority, it’s all just an accounting exercise anyway, right?

Here’s another one. Whenever you fly through an airport there’s a passenger facility surcharge. Basically some component of the ticket cost goes to the airport for having used the terminal.

Virtually all airports charge this to both passengers originating and connecting at an airport (they can differ based on whether you’re originating or connecting, but every passenger is charged at least something).

Dubai International Airport

However, at the airports in Abu Dhabi, Doha, and Dubai, that’s not the case. Only passengers originating or terminating in those cities are charged a facility fee.

Why? Because a vast majority of passengers traveling on Emirates, Etihad, and Qatar are connecting, while a vast majority of passengers on other airlines flying to those airports are originating or terminating there (in other words, you’re not flying Lufthansa in order to connect in Dubai, much like you’re not flying Emirates to connect in Frankfurt).

For example, between Singapore and New York (via Dubai) you don’t pay any sort of Dubai passenger service charges:

While if originating/terminating in Dubai, you pay ~$20 in passenger service charges:

Even though they don’t care about making a profit, Emirates, Etihad, and Qatar are literally having foreign carriers subsidize operations at their own hubs.

Line-up of Emirates’ massive A380 fleet at Dubai Airport

And then there’s the $4 billion fuel hedge loss that Emirates faced, which suddenly “disappeared” and was taken care of by the government. But we’ll save that for another time.

The two sides need to pick representatives to argue this

It’s actually sort of refreshing to see the “big three” US carriers and “big three” Middle Eastern carriers collaborating with one another for once. It’s a nice change of pace from the usual bickering that usually happens amongst the respective sides.

This is such a serious issue, yet unfortunately it seems we’ve heard the most from the two least eloquent people on both sides:

• Delta’s CEO, Richard Anderson, somehow managed to make this a debate on Islamaphobia by bringing up 9/11, which is just preposterous and counter-productive
• Qatar’s CEO, Akbar Al Baker, has zero credibility, and unless he’s chiming in on Bravo’s new “Real Housewives of Doha” show, really shouldn’t be given a mic

If the two sides knew what was best for them, they’d let Doug Parker make the argument for the US carriers (he’s well spoken and relatable), and Tim Clark make the argument for the Middle Eastern carriers (he’s one of the brightest guys in the industry).

Etihad A340 at Seoul Incheon Airport

“The US airlines should just compete”

The Middle Eastern carriers love telling the US carriers that they should just compete and shut up. But what does that even mean? “Hey, you guys should get with the program and lose as much money as we do?”

The truth is that other airlines simply can’t compete with Gulf carriers under this system.

This isn’t about service. This isn’t about airplanes. This isn’t about routes. This isn’t specifically about the fact that the airlines are government owned.

This is about the fact that Emirates, Etihad, and Qatar are not at all motivated by profits.

So to those agreeing the US airlines should “just compete,” how?! It’s one thing if the Middle Eastern carriers were making money and saying “try competing.” But when these airlines are losing billions of dollars and saying “compete with us,” what does that even really mean? Compete with the service at the expense of your shareholders?

Bedrooms on planes are nice, but are they profitable?

What’s the solution?

This is the tricky part. I don’t know what the solution is. Where do you draw the line and what should be done? Should the “big three” Middle Eastern carriers just be excluded from Open Skies? Should they be forced to “unbundle” their cost structure so that they’re actually paying “fair” amounts for the services they’re receiving?

I don’t know the answer, but I do know that what they’re doing is quite the opposite of the “elimination of government interference,” which is the very purpose of Open Skies.

Bottom line

Open Skies is intended to eliminate government intervention and “free” markets. And there’s no arguing that the Middle Eastern airlines aren’t operating within the spirit of the agreement.

To be clear, life isn’t fair.

We’ll never be able to reconcile the differences in staffing costs, passenger facility costs, etc. And that’s something I think the US airlines are fine with.

But when every aspect of an operation is being run in order to generate a loss and increase market share for the purposes of developing a country rather than an airline, then Emirates, Etihad, and Qatar really aren’t playing within the spirit of Open Skies.

Where do you stand in the Open Skies debate?