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.

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-First-Class-113
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).

Emirates-First-Class-Lounge-Dubai-05
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:

Dubai-Airport-Fees

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

Dubai-Airport-Fees-1

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.

Emirates-Dubai
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).

Korean-Air-Lounge-Incheon-47
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?

Etihad-A380-First-Apartment-25
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?

About lucky

Ben Schlappig (aka Lucky) is a travel consultant, blogger, and avid points collector. He travels about 400,000 miles a year, primarily using miles and points to fund his first class experiences. He chronicles his adventures, along with industry news, here at One Mile At A Time.

More articles by lucky »

Comments

  1. From the consumer perspective, the more competition there is (government subsidized or not) the better. Consumers get more options for travel. In the past if you were going from Boston to India or Australia, connecting through DXB wasn’t really an option. Now it is. The product being offered by many of the non-U.S. carriers is superior, too.

    The U.S. airlines are complaining, yet they’ve made huge profits recently and we’ve seen the stock prices skyrocket in the last year.

  2. Interesting story however instead of complaining, maybe the US carriers should stop downgrading their services. Instead of blaming terrorists, maybe DL CEO Anderson should take a good, long look in the mirror. DL has saved over $2 billion in reduced fuel costs and still continue to cut and cut and cut.

  3. Jeez Ben – Where did this about face come from?

    Glad to see you made it here thought. While you’re right, there is no clear line, clearly you have to be in the same ballpark.

  4. Don’t know about the others, but Emirates is a very profitable airline. This totally rebuts your argument that the ME3 aren’t motivated by profits. How do you reconcile the two?

  5. Competition is good. What a business decides to do for itself should not be dictated by the market. If apple decides to sell the iphone to you tomorrow at below cost, would you cry foul about it (even though it is taking a loss) – I don’t think so.

    Why single out the ME3? From one of your own past accounts/calculations, you said that La Compagnie is probably not going to cover it’s costs at the price points it is selling tickets for. Somebody is taking the loss there – may be an investor or a government (how does that matter to you or me)? Why not cry foul about that? Just because it is a small airline with one/two aircraft, does that change the rules?

    At the end of the day, if the loss becomes too much for the ME governments to handle, they will reign in the carriers themselves. Let the market forces play.

  6. Great post, just one comment re 9/11: while mentioning the terrorists came from the Middle East is irrelevant and over the line, the Gulf carriers point to the payments US airlines got in the wake of 9/11 as unfair subsidies, so I understand why he mentions 9/11.

  7. I am still confused. I hear me3 saying they make profit. Where is the proof that they are losing money? My understading is that we can only guess…if you have a proof, please do share, i really waan know because all of these argumetns are based on losing money assumption

  8. I think you have a good take on this Ben. I think another thing to look at though is what the big tech players have been doing for years with little critique. Google and Amazon subsidize their hardware, knowing they will make money back on ad sales or purchased content once consumers are using their respective ecosystems. Likewise, new tech start-ups backed by millions of dollars of venture capital don’t have to compete with more established firms on profit – they can singularly use low prices to grow their user bases, and focus on profit later.

    Are these examples fair? Is it fair to sell a product below cost as a strategy to gain new customers? Is it unfair to do so to drive competitors out of the market? It’s a tough call.

  9. @ Steve Case — There’s truth to the quote that “the fastest way to become a millionaire in the airline industry is to start as a billionaire.” Are the airlines making money right now? Yes. Have they been profitable historically? Absolutely not. I actually think they’re smart for fighting a long term battle here. This isn’t about profits this month or this year. This is about long term profits. Much better they start the process now, as opposed to when they’re losing money and just seem like sore losers, in my opinion.

    I really don’t think this argument has anything to do with service. After all, the US airlines are making money, while the Middle Eastern carriers are for the most part losing money.

  10. @ Veejay — Emirates is “very profitable” by what metric? Perhaps after they receive billions of dollars in interest-free capital, pass off multi-billion dollar fuel hedging loses, and lose money with every airplane that lands. But not sure how that statement can otherwise be made.

  11. A bigger problem for Europe than for the US, but the real danger is that countries will stop being well-connected to the rest of the world if the ME3 take away more and more routes from European carriers. Right now, for example from Frankfurt you can fly non-stop to Shenyang or to Chennai. I doubt these routes are feasible without connecting passengers, exactly the passengers that the ME3 will take from Lufthansa. Having these non-stop flights connecting Germany with the rest of the world is a huge positive externality for the German economy. And exactly for that reason the market will not give you an optimal outcome. Basic econ 101, once you have a market failure the market ceases to deliver the most efficient outcome.

  12. @Matt – “From the consumer perspective, the more competition there is (government subsidized or not) the better.”

    Except, according to Lucky, the ME3’s strategy is to run their competition out of a given market. If they do that, you’ll have no competition.

  13. @ KP — Because in this case it’s not what a business decides to do to itself, but rather a government trying to manipulate a market under an agreement which is intended to encourage free trade and the elimination of government intervention.

    If La Compagnie doesn’t succeed then they go out of business. Meanwhile the ME3 keep burning through millions of dollars by design, with a greater goal in mind. That’s totally different than an airline with real shareholders losing money.

  14. @ J — You’ll see very soon, I’m sure. Emirates might be making money with some very creative accounting, but Etihad and Qatar are nowhere close to turning a profit.

  15. @ Matt K — Agree it’s a tough call, though I do think it’s a little bit different when they’re publicly traded companies intended to maximize shareholder value as opposed to governments with no transparency.

  16. Maybe it’s time to lay off the champagne while you still have a few brain cells left :-).
    A bit of an education in finance would also help….

    Some if the more stupid ones:
    – more widebodies that the US…. Of course that’s there business model, a global long haul provider.
    – lower finance costs… Really, they finance their aircraft just like any other airline:http://www.flightglobal.com/news/articles/analysis-how-emirates-has-financed-its-first-50-a380s-402945/
    – not motivated by profits…. Sure, that’s why they run such lean operations. They don’t care about money.

    Maybe it’s time to really do some reading…. You should have plenty of time for that.
    This is a good start: http://dspace.mit.edu/bitstream/handle/1721.1/89852/890140089.pdf?sequence=1

  17. Just to add – this externality big time explains why the gulf states are so eager to develop their airlines. The airlines are not supposed to make a profit. They are supposed to benefit their respective economies by providing connectivity to the rest of the world. Connectivity they could not achieve without connecting passengers.

  18. lucky,

    as someone who takes to the skies as much as you do, you should be one of the first to realize that no matter what the purposes or rationalization behind the gulf airlines motives, what it really does is subsidize the flying public. every dollar that they “lose” in profitability is a dollar relatively that some flyer somewhere picks up in value. and if it pushes undercapitalized and badly run airlines out of the picture or forces them to alter their routes then so be it because when those subsidies run dry, everyone will compete on a level playing field again.

    we live in a world where hundreds of billions of dollars can be mobilized and capitlized on a moments notice on the markets of at least three continents, so im not worried if the current incarnation of delta, american or whatever goes out of business – someone will acquire the good assets and create a new airline when the time or idea is competitive to that market.

  19. @ perry — I don’t disagree at all that short term consumers win, but that’s definitely not the case in the long run.

    But again, I think this gets at the fact that Open Skies is a privilege and not a right. The stated purpose involves eliminating government intervention as much as possible. Can you really argue that the Middle Eastern airlines are contributing towards that goal?

  20. What an about face over the course of a week or two posted about this. Who did you talk to that enlightened you to the economics? This is really a WTO issue and the US and Europe should get together and file formal complaints against the ME3 for violating trade agreements.

  21. You make some good points, but “growing disproportionately compared to their respective populations and GDP growth” isn’t necessarily a bad thing. How’s that different from Singapore Airlines and their strategy of building a primarily longhaul fleet? They’re government owned to some extent and haven’t made any money lately either, yet no-one is complaining about them.

  22. Taking another analogy, would you argue that US based Financial Companies should be banned from doing business outside of the United States since they received a near trillion dollar bailout package?

  23. Just over a year ago I was at a party with a very high level Qantas executive. He said that they were pretty forced into a partnership with Emirates as Emirates has unique advantages besides geography including:

    -low fees at DXB which you allude to in your blog.

    -their employees pay no income tax

    -their fuel is so cheap [remember prices were higher then] that they overfill the tanks on the London flights and burn the fuel on the way back

    And then there is the issue of direct government subsidies/investments. The research Delta did over two years shows 40 Billion Dollars of subsidies. I hope they release the documentation.

    If you fly from east of the Mississippi to south Asia the times are very competitive with going west. Who wouldn’t want to be taking a shower in an A380 on the way? USA based carriers are going to lose market share. They may lose even more if Fifth Freedom rights are exercised and the ME3 start flying Europe-USA. Can anyone justify Emirates announcing an A380 on the Milan-New York route? That is almost crazy.

    RIchard Anderson came off as inelegant and some further clarification was issued by him. Sadly, that is added an emotional charge to a difficult situation.

    We as flyers will enjoy lower fares and nice planes from the ME3 but it will clearly come at the expense of USA based aviation jobs unless something is done.

  24. @ Ven — If it were happening consistently and in a non-transparent way, and if that weren’t the intention of the agreement under which they were able to do business that way… then sure.

  25. @ Papa Smurf — I agree, that in and of itself isn’t a bad thing. At least not, like most things in life, in moderation. And I agree it’s a slippery slope. But Singapore Airlines makes an effort to turn a profit, is transparent in how they operate, pays the “fair price” for what they receive, etc.

    The biggest battle the US airlines will have to fight in this case is proving where the line drawn should be drawn, since it absolutely is a slippery slope. It’s a case where I feel like it’s obvious which airlines *aren’t* acting within the spirit of such an agreement, but then there are somewhere in a grey area.

  26. “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.”

    While this does in fact look questionable….how much debt did the US carriers make disappear by going into Chapter 11?

    “If La Compagnie doesn’t succeed then they go out of business” Right and if Delta, NWA, UA, Continental, USAirways don’t succeed they go out of business….OH WAIT…no they don’t…they go into Chapter 11…shed a bunch of debt and continue on….

    I can’t find the quote but the head of the Indian carrier Indigo once pointed out that as an Indian carrier they don’t have the luxury of Chapter 11 if they have problems so they have to be very careful in their planning and growth… Isn’t chapter 11 a form of government involvement/interference in the free market?

    It really comes down to this….there are definitely criticisms to be made about the ME3…but for ANY U.S. carrier to complain about foreign government interference/assistance is the pot calling the kettle terrorist….er black.

  27. @ Atif — Again, it’s a slippery slope, but Chapter 11 is at least a transparent process. And it’s not a process under which airlines operate year after year 24/7/365. And that’s why I think some government intervention is fine. It’s fine for an airline to even be owned by the company. But when their actions are clearly predatory, it’s a different story…

  28. Ben,
    You are giving little credit to the basics. ME airlines are doing great because they have a vision. Why haven’t US airlines purchased other airlines outside the US. Imagine if AA had bought LAN 15 years ago. They can say it is not fair competition, but really no US airline had the vision of being a global airline.

  29. There is a bit of conflating several things here.

    Why would the fact that a government owns an airline disqualify or make it unsuitable to participate in the Open Skies Agreement? Suppose the US government owned a commercial airline called “USA” that coexists and competes with the US Big 3 (like Air China, state-owned, competes with privately owned airlines in China). Would the fact that USA airline is owned by the US government automatically disqualify it from the Open Skies Agreement, regardless of what are the government’s objectives for its national airline? The US is a rich country, which could decide to develop an airline that does the country proud, even if it means losing money. Why would this affect the Open Skies Agreement when the US is not directly interfering with agreement but just making decisions that affect its airline?!

    If state-owned airlines are a problem for the Open Skies Agreement then go after ALL such airlines and not just after the ME Big 3…

  30. “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.”

    Hmm…doesn’t the UK government charge taxes/fees on tickets originating from the UK which are higher than fees charged to those CONNECTING through the U.K.? I supposed this practice is only bad when Middle Easterners do it…but as long as the Brits do it, it is o.k……

    It is a good thing that here in the U.S. airport fees/taxes are fairly and equally used to benefit all airlines equally….OH WAIT….didn’t you report that Alaska Airlines objects to airport fees that affect their domestic flights that will help Delta’s INTERNATIONAL flights? So is the local Seattle government interfering in the free market by using taxes/fee to benefit one airline at the expense of another?

  31. @ Atif — You’re talking about two different things there. There’s the UK Air Passenger Duty if you originate in the UK, but there’s also the UK Passenger Service Charge, which you pay if you connect.

  32. Lucky, I think you might have misinterpreted what I said. As a consumer, I don’t care as much as how the airlines are funded because I care about my experience. So if we take an apples to apples approach – business class, the ME3 deliver a better experience that the US3. If it weren’t for the ME3, the US3 would have us riding in those newly patented Airbus bicycle seats. That’s where the rubber meets the road. The DL BE lay-flat seat is crap. I am 6′ 2″ and it is too narrow for a seat and too short for a bed. To have DL CEO Anderson complain about the ME3 as he is continues to downgrade MY business class experience is pure crap.

  33. @ Steve — I don’t think anyone denies that on the whole the ME3 deliver a better experience than the US3. But where do you draw the line? Would you support the ME3 starting domestic US service with foreign crews (based in the Middle East), etc.? Short term I think anyone would say “yes,” but how do you think that would end long term?

  34. @GH
    They finance their planes the same way as everyone else? Right, because US carriers have access to exim backed loans have rates hundreds of basis points below non-exim loans. /s
    And the billions in interest free loans from royals? I’m sure if US airlines wanted them, they could just go ask President Obama and he would personally loan the airlines billions of dollars interest free. /s

  35. However the U.K. government wants to categorize/name/explain/excuse it….the net affect for the consumer is the same:

    Connecting through LHR is cheaper than originating in the U.K. Which is very similar to your criticism of the landing fee structure of ME3 airport. Not saying it is right or wrong….just that the ME3 airports are not unique in that connecting passengers pay less than those who are not connecting.

  36. I rarely comment on blogs, but PLEASE READ.

    Ben, you are completely off on this. Every entity exists to make a profit, even the government. If subsidies are enough to drive foreign competitors away, then so be it. This is GOOD for consumers both in the short and long-run. If Emirates/Qatar cannot continue to offer below marginal cost pricing in the long-run, this provides tremendous opportunities for new market participants, also GOOD for the consumers.

    Open Skies agreement is also not about fair competition. It is about standardizing the airways. It is about collusion if anything. It’s basically artificially creating an oligopoly, not a free market.

    Also, there is no “line” to be drawn. The consumers will ultimately decide with their checkbook, and US carriers should just compete – or try. If they cannot compete, that IS FINE. Not every company can successfully compete in every niche, regardless of the reason.

    Finally, I’d like to touch on your blasphemous “no-interest” loan comment. This is not true. By deploying capital into an airline, an investor (even if it is the government) is expecting a return on their investment. Also, you can look on Bloomberg at their corporate bond rates, so you can see that they do pay interest on investment.

  37. The issues is analogous to that of buying free range organic eggs.

    Yes the market is flooded with cheaper and, what some might consider better alternatives but if consumers choose ethically then you will keep things on an even footing.

    The key is education of your customer base. Crying foul makes you look bad. Talking about your differences and how you are more ethical in your business practices will help sell the message. The key is to associate the ethical message with your corporate consumer market. Big business don’t want to be seen to be associating with companies with questionable and unethical practices.

  38. Thoughtful, reasoned analysis Ben. Your view is more persuasive given you originally had a different, gut-instinct opinion but your thinking evolved upon conducting research into the facts. Good job articulating the reasons! I agree with your conclusion. It will be interesting to see where this goes.

  39. “@ Atif — Again, it’s a slippery slope, but Chapter 11 is at least….”

    Bottom line is this: ALL governments interfere with the free market, this is especially true for aviation which is inherently an infrastructure intensive industry.

    The system setup by the ME3 is VERY different from that in the United States and there are legitimate and real discussions to be had regarding the merits of each.

    HOWEVER what people are fed up with is the hypocrisy of the U.S. carriers and U.S. Gov’t pointing to the other system and saying it is “bad” and while ignoring their own issues with “slippery slope” and “at least…” excuses….

  40. You forgot to mention in addition that the Gulf airlines operate under their medieval labor laws. Read the blogs about the way Abu Bakr treats employees.

  41. Ben – Chapter 11 is a transparent process for the US, but it is not normal in other places of the world. In other places you mess up, you are done. This subsidy talk is pure politics. US airlines didn’t take advantage when they were kings, know they are the losers. Is this not a subsidy

    http://www.ajc.com/news/news/state-regional-govt-politics/lawmaker-rips-delta-lobbyists/nj3sJ/

    “Ehrhart is the sponsor of House Bill 175, which would end Delta’s lucrative state tax credit on fuel. Ehrhart said he filed the bill after hearing Delta CEO Richard Anderson urge lawmakers not to be “chickens” about raising gasoline taxes to fund transportation improvements.”

  42. I think your analysis is mostly sound, but I do question your point that the ME3 want to drive other carriers out of business. I don’t think that’s necessarily true — after all Etihad could drive a bunch of airlines out of business quickly if it just stopped shoveling cash into them.

    After all, these carriers #1 goal is to promote and build their hometowns. Even if the ME3 could get rights to fly all sorts of US-Europe flights, those flights would not help bring people to DXB, AUH and DOH, so I wouldn’t be surprised if the airlines got into too much of that type of flying if they got rebuked from behind the scenes to pull back — especially if all of this interest-free capital and other government perks prove to be subsidizing loss-making flying that doesn’t touch the home hub.

    Similarly, even if the US decided to allow foreign carriers to fly domestic routes, how would it help build Abu Dhabi if Etihad decided to start flying NY-Chicago and NY-LA? The ME3’s governments are wealthy, but they don’t have infinite resources, so I doubt they would be thrilled about funneling a bunch of money into what would likely be a loss-making service for a long time before it might–maybe–drive all of the US carriers out of business and then could be an expensive monopoly. And once it did that, then someone would just launch a new startup…

    (Granted, you could argue that Etihad’s behavior doesn’t make a ton of sense under this framework, and I would agree, so maybe the ME3 are getting uppity about their supposed mission, or their largely-foreign management teams are getting distracted by markets elsewhere. Etihad’s behavior does also make at least a little bit of sense in that they have used acquisitions to gain access to other markets for Abu Dhabi — Airberlin allows them to serve more German markets from AUH than they otherwise could, and Jet allowed them lots more access to India.)

  43. The US is the greatest capitalist economy in the world, with world leaders in most industries. Unfortunately, airlines is not one of them, and anyone who has flown internationally can see that US airlines are barely first world. With this terrible service, domestic flights in America have a really high cost per mile, compared to Europe, Asia, Australia, etc. Even though airlines in those countries tend to be better quality service, hard product, etc.

    The reason for this, is government meddling. Foreigners can’t start airlines in the US, Airlines can go into chapter 11, and come out, with the same inefficient union contracts keeping them expensive and poorly run. We let Lehman Brothers and Bear Sterns fail, but keep United and American in business. The only difference between US airlines and Middle Eastern airlines is that the government meddling in the middle east improves the product.

    Cheap airfares are great for the economy, it opens up business between countries, regions, etc. If middle eastern governments want to subsidize routes between the US and south Asia, this will only benefit the cities being connected, increasing international trade, tourism, etc. The only losers would be the US airline, who can focus their efforts on other more profitable routes. Do you really want more expensive flights to India, so some 60yo angry flight attendant on United, American, or Delta can keep their plum route for another couple of years?

  44. Emirates by the Numbers:

    http://en.wikipedia.org/wiki/World%27s_largest_airlines

    7 Emirates Airlines United Arab Emirates 22.0 0.9 27.6 State owned

    Translation:
    7th biggest airline in the world in terms of revenue ($22B). It is not losing money (+$0.9B profit) and it has $27.6B in assets.

    So much for the thesis that “they are losing money” or “do not care about profit”. As that crumbles, so does the apologia for the US Big 3.

    They just need to compete and are afraid competition would take away their huge profits of late…

  45. Interesting article. I lived in Kuwait from 2006 until 2013. We all travelled regularly to Dubai on weekends…..until…..Emirates had a dispute with the Canadians as they wanted increased access to flight routes and landings. When the Canadians said no, the resultant action from Dubai was to then charge Canadians for a landing visa, where before there had been no charge. It wasn’t just a cursory fee either, it ended up being about $400 I believe, I simply stopped going to Dubai. Once the Canadians accommodated Emirates, the visa was wiped. It was pure and simple extortion.

  46. I agree with everything you’ve said here except for one thing: Jeff Smisek should do the talking. He’s very good at reciting a script in front of a camera. “We’re making some changes, and I think you’ll like them!”

  47. The UAE analogue of the FAA would be the GCAA, not the DCAA. You made a non-analogy there with Ahmed bin Saeed Al Maktoum.

    Second, you didn’t substantiate your comments about Emirates making billions in losses. The Dubai government doesn’t have much money or oil (which is why they borrowed from Abu Dhabi during the crisis) and making profit from their investment into Emirates is certainly a chief concern.

    Finally, I am very interested in reading more about the supposed disappearing fuel hedge losses.

  48. Lucky, you are reading into the open skies agreement something which is not there. Open skies agreements talk about governmental interference in the context of not allowing governments to erect trade barriers, so that competition will be enhanced. It has nothing to do with governments being involved in owning airlines.
    What it comes down to is that you are taking a uniquely American/capitalist viewpoint. Just because the only consideration for American companies is profit to shareholders does not make that the only right way of operating. Just about everywhere else, companies are expected to balance the interests of all stakeholders. In Europe, customers and the environment are inportant, in Japan, employees and customers are much more important than stakeholders, in China, it is government, economic development and employment. Even in Canada, Air Canada still has a mandate to serve routes that are not profitable because it is good for the cohesiveness of the country. So for the ME3, they have to satisfy economic development goals, not profit goals. That doesn’t make their system wrong or even easier, it is just different. Just because an exclusive focus on profit is an American system does not make it the best system, or make it the right system and everyone else’s the wrong system.
    When I went on an international study tour and met with executives from many major Japanese companies, there was virtually no mention of profitability by them. Their goals were to operate honorably, employ as many people as possible and build companies that would last forever. Doesn’t sound much like American companies, yet they have companies that have lasted for hundreds upon hundreds of years and they have managed to have a functioning economy despite having virtually no natural resources. Not being a profitable company is the ultimate sin in the US but is not a consideration much of the rest of the world.

  49. You have been to Dubai. And Abu Dhabi. And Doha. Before the ME3 expanded, how many people, including yourself, fancied a trip there? Most of the world knew these cities as places where only oil and gas existed. The reason these airlines “lose” money is that they serve as purposes other than transporting people on ridiculously cheap airfares and mileage redemptions from point A to B. Since they are government owned, how much of those losses are offset by the tourism that comes to a place like Dubai, etc etc. The balance sheet has a much wider scope.
    It doesn’t matter. US airlines make record profits and complain about ME3. If they were not profitable, your views might have more credibility. When the race is to the bottom, there is no need to complain about ME3. I don’t care if money comes from UAE or Richard Branson or the cutting of peanuts in economy – more competition is always a good thing for the consumer.

  50. To listen to some of the US carriers you’d think that they were competing head-to-head with ME3 right across their operations. But that’s clearly not the case. 60% of Delta’s ASKs for example are on domestic routes. No Gulf carriers operating there. Then if we look at just international, more than 35% of its ASKs are on European routes. Nobody’s flying from LA to London via Dubai (except maybe Lucky!), so there’s no threat from ME3 on the transatlantic (except for the exceptional 5th freedom route). Likewise on intra-Americas which account for another 30%+, no competition from the Gulf there. Northeast Asia, which is about 25% might be impacted to some extent but it’s quite a bit further to travel via the Gulf on many routings from the US. The greatest competition is on routes between the US and India/South Asia and also to Africa, but US carriers have had minimal operations to these markets, so what’s the issue? ME3 are providing choice and connectivity to passengers that US carriers were simply not serving. This whole fair skies issue is a red herring, as quite clearly ME3 overlap with US carriers on just a very small proportion of their networks.

  51. Everyone whining about how American carriers don’t compete with the Gulf carriers in terms of amenities and service are COMPLETELY MISSING THE POINTS above being addressed so well. The Gulf carriers can offer the better service and amenities entirely because they have no concern about profit…unlike every publicly owned airline (including every US and Euro carrier) in the world. That creates a very unfair competitive advantage for the government owned airline–which is not supposed to be the point of Open Skies.

    Open Skies IS a tremendous benefit for the consumer, as it permits international travel to be far more competitive than it otherwise would be for all American consumers, allowing consumers to have far more choice beyond the US carriers. That doesn’t mean Open Skies should HARM US carriers–which account for an enormous number of US jobs, by the way, and which are a critical part of our own economy for both their domestic and international route networks.

    The Gulf carriers are a new innovation in the airline industry–airlines being used as loss-leaders in order to generate more visitors and tourist traffic to their home cities/nations in the Gulf, much like grocery stores sell most foodstuffs at a bit of a loss in order to draw in consumers to pay for the more profitable items that make the entire model work! Open Skies was initiated at a time when such a loss-leader use of airline service was unthinkable, and the Gulf airlines loss-leader model subsidizing the growing tourism and economies of the Gulf states and cities is NOT what Open Skies intended to augment nor is such a model in the best interests of the US consumer or US carriers (or Euro consumers or Euro carriers).

    I would offer that penalties on loss-leader airlines should be imposed. If the Gulf carriers are subsidized by their government such that they can afford to lose billions, then the US (and perhaps Europe) should get in on the action! The Gulf carriers should be removed from the Open Skies agreement or added only wit the proviso that they must pay separate fees for each US city they serve until they open their books and clearly demonstrate that they operate in the traditional profit-making model as envisioned by the Open Skies agreement. Charge the 3 specific loss-leader Gulf carriers MUCH higher airport landing fees and Gulf carrier specific surcharges on every ticket issue for US travel. If the Gulf carriers want to lose money to build their local governments and cities/states, then let them pay more to the US and Europe to do so. If they want to lose billions, let them lose more billions to the US and European nations they serve as much as they lose for their own Gulf states’ governments. Fair is far, after all–and it affords a nice chance for the US and Euro municipal and federal government entities to increase revenues which benefit all Americans and Europeans, as well. Let some of the oil money that the US and Europeans spend that ends up in the Gulf states come back to the US and Europe. 🙂

  52. Ben,

    In summary, you believe US airlines (and perhaps Europeans too?) to exist in a largely free market and that they are not subsidized by their governments much, whereas the ME3 are heavily subsidized in all sorts of ways.

    As someone who has spent half his life in ME/Asia and the other half in the US, I feel your belief reflects an overly trusting attitude to the ‘free markets’ that the US trumpets regularly. US airlines, and many other industries, regularly receive massive direct and indirect governmental support. Post 9/11 bailouts are an obvious example, allowing consolidation to create oligopolies is another, Ch 11 structures is an indirect subsidy, low-ish ME energy costs through defense expenditures is another. Many other previous examples.

    My point is that the US provides subsidies in ways that don’t strike Americans as subsidies because of course that’s just ‘normal’ behavior, while the ME3 approach through subsidized airport fees, fuel, etc is considered egregious.

    On a related note that others mentioned, ALL the largest US and European banks would be bankrupt if not for direct government takeovers of their worst debts and central bank intervention to increase their assets’ value in nominal terms to match up with their own debts at zero interest rates. While denying the benefit of good commercial decisions to those who had the good sense not to lever up. As a fellow US citizen, I find the claims of free markets laughable in the face of these kinds of interventions. Airlines and autos and drug companies and oil companies are smaller versions of the same corporate subsidy mindset.

  53. Lucky – your claim: “… they receive billions of dollars in interest-free capital, pass off multi-billion dollar fuel hedging loses, and lose money with every airplane that lands.”

    What’s your source? Let’s see some actual authority to back your claim. Not speculation or suspicion. Got any?

  54. Following the consolidation, I don’t think the U.S. legacy carriers are in danger of going out of business anytime soon. They can withstand the ME3 taking some marketshare on international routes. If the ME3 corner too much of the international market, the U.S. legacy carriers can ramp up and re-enter the markets. In the interim, the U.S. legacy carriers need to improve their international product, or otherwise concede that market.

  55. “(…) about routes, capacity, and pricing, freeing carriers to provide more affordable, convenient, and efficient air service for consumers”. I got your point, but if is not “fair” to US airlines, they complain. Since 2011, US and Brazil have an Open Skies agreement (100% this year), and honestly, this will be bad for our carriers since TAM/LAN, Gol and Azul have more costs than american ones (QAV represents 40% to BR airlines, and only 29% to US ones) due to local taxes, etc. My point is that, in Brazil and Latin America in general, the “ME3” is Delta-American-United. And TAM/LAN, Azul and Gol complain about unfair competition. Endless.

  56. @Bill
    I think you are the one missing the point. Here in the US we have the mentality that government is inefficient and companies should take the place of government. if you follow that logic, taxpayers in UAE should be pretty mad that they “waste” so much money on Airlines and sponsor deals for soccer stadiums and soccer teams. but if you check all the sovereign wealth funds from UAE, they are not doing bad all. So that argument about government loss leaders may not be do accurate.

  57. Ben, I don’t get your change of heart. You prefer any of the ME 3 before flying US Arline’s, that should tell you a lot of what are the dynamics. I live in ATL, I see the coziness between the city government and Delta, I see how the #1 airport in the world is basically a monopoly, very little competition, we don’t even get any of the ME3. Basically, anything that Mr Anderson says is bad, it means is good for the consumer, any “enhancement” that made in the last year is…….

  58. Thanks Lucky for the post.

    I’d love to see all the ME3 apologists work under the conditions the ME3 cabin crew do. I wouldn’t wish that on anyone working at the US3. Just as you said Lucky, short-term consumers win if the ME3 have cheap rates and (this is subjective) better service. Long-term, it is not good for the industry or anyone who wants people all over the world to work with dignity.

  59. This whole post reads as if you know something the rest of us don’t, do you have access to their financials/annual report? I skimmed the comments and someone noted some documentation from a Delta study.

    Are you privy to their financial performance or is this just ‘educated’ guesses? I feel like that would be something important to note.

  60. Looking at the issue purely from a Passenger Experience viewpoint .. I have flown with both US & ME carriers long haul. I have flown in Economy & Business. In my humble opinion & I know it may not be popular here, but the ME carriers win hands down on service & style each & every time. When I spend my own money on travel, I will not consider spending it just to keep a company in profit, I spend on the basis of how that company treats me when I fly, and I must say the ME carriers are always excellent

    As we are discussing how the US carriers are playing by the rules and losing, any comments on the actions of some US carriers in trying to get Norwegian banned from flying long haul to the US

  61. All governments manipulate costs for their own benefit. In the US we manipulate the cost of money ( it’s called quantitative easing) that affects everything. We manipulate the costs of farm products and via the tax code just about everything.

    Every country is good at something. Fr example per capita wine production in France exceeds that in Kenya. Does that mean France is doing something illegal? How about the shipping focus in Greece and Singapore? Manufacturing in China? Drug IP policy in India?

    The fact is that few would voluntarily go to the Mid East and the government there has had to invest in infrastructure at low cost to get people to come. That drives the local economy. The Japanese did it with low cost capital and the keiretsu system to become big in cars ( that would be before your time Lucky but ask someone much older what happened to semiconductors, textiles, consumer electronics and autos between 1970 and 1999 with respect to the Japanese). Right now China is subsidizing solar.

    So it’s upto us on how we want to respond. Accusing China of rigging exchange rates when we are doing the same ( we do it by fixing interest rates they do it by fixing exchange rates) or Greece of rigging shipping or China of rigging manufacturing or the Mid East for rigging the airline business is nuts. Either find a different way of competing the way Singapore, Cathay, Air Asia etc are doing ( or the low cost Norwegians) or shut up. After all consumers do benefit if there is an entity determined to sell goods and services at a loss.

    I have commented several times I find Emirates service artificial, forced and general go out of my way to fly Asian carriers. I also go out of my way to not fly US carriers except AA international F. Not sold on the Mid East carrier strategy but if they want to sell at a loss I welcome that.

  62. Bebn,
    Just glad to have 2 of these airlines on the One World team! Better options and services for using all my AA miles!
    AA and BA are dinosaurs! They need a good shot of competition!

  63. It’s about time the truth came out. So called Open Skies pretty much destroyed QF and threatens the same fate for other major carriers. The specious argument that US carriers are making huge profits holds little water since they’ve lost money for the past 20+ years, and only after industry consolidation have they been able to restore their balance sheets, albeit at the expense of previous shareholders, bondholders and employees. It’s total BS to say that the consumer always wins by getting the lowest price when that pricing is part of a foreign country’s industrial policy to dominate certain industries. Thanks for finally setting down some facts.

  64. Lucky, Lucky, Lucky….Are you kidding me…After all your great trip reports DL thinks they can fly a B763 from SEA-NRT……

  65. Lucky, can you cite one example where in a globally competitive industry a government enterprise drove out competition and become a monopoly to the detriment of consumers?

    You can only do that if entry is constrained in some way and that is not the case in the airline business

  66. I would like everyone to understand the economic inpact of US airlines. Sure their service suck but they create a lot of jobs in the US. They help employ a lot of people. We need to support our US airlines.

  67. Lucky, let me ta keone final stab at this. OK, Richard Anderson is upset about the ME3. This is a legitimate concern as this is something he can’t change. BUT, he has decimated the skyruble program and has taken away the perks because he can. This is totally in his control. SO, Mr. Anderson is talking out of both sides of this mouth. Let’s see him work with the things that are in his control and maybe save an exodus of dissatisfied customers.

  68. The U.S. ‘big 3’ haven’t got a leg to stand on. While they may be at a disadvantage when it comes to the ME ‘big 3’ they have all used the advantages of Ch 11 that, in turn, aren’t available to a lot of their other competitors. The U.S. legacies can claim that the ME airlines wouldn’t be able to exist without government subsidies but the fact is that, without ch11, neither would they.

  69. @Tom, actually, this is not a WTO issue. Air transportation is a service, not a good. WTO subsidy rules only apply to goods. They specifically do not apply to services, though negotiators intended to expand the General Agreement on Trade in Services (GATS) to cover subsidies for services. However, it has not happened, in part because developing countries are opposed to GATS subsidy rules.

  70. Lets air out the dirty laundry for the U.S. airlines. I’m not even going to count Chapter 11 or the post-9/11 payments:

    – EAS Program – Rural Service to bumblef*ck airports – $250 Million / Year
    – Civil Reserve Air Fleet Program $500 Million /year – Particularly egregious – this is free money – in theory airlines are paid every year for the Pentagon to have the option to use commercial aircraft at a time of war. But regulations would require the govt to pay the airlines on commercial terms if that ever did happen.
    – Risk insurance subsidies – $300 Million (program terminated)
    – Fly America Act – Compelling tax payer funded travel to be on U.S. flagged carriers instead of cheapest carrier. It is estimated to increase fed travel budget by $100-$150M/Year range
    – Cabotage Restrictions: No non-US flagged service between US airports.
    – Anti-Trust Immunity: All 3 carriers have trans-atlantic JVs where they collude to set prices – behavior that in any other industry would land people in jail. This is the really big one. I don’t have a precise number for this but would not be surprised if this number is in the billions.
    – Restrictions / Cap on Foreigners starting a U.S. airline.
    – Interest Rate Subsidies on Muni Financing: Airline in infrastructure in hub and regional airports qualifies as a special class of municipal securities enabling certain airline issue debt to be eligible for federal tax exemption.

  71. Also for every airline job that would be lost to ME3 competition – there is a very grateful worker at Boeing and its vast array of U.S. Aerospace suppliers where the ME3 now account for the majority of their widebody order book.

  72. As I said in the other post on this topic, the U.S. aerospace industry benefits far more from the financial stength of the ME3 than the U.S. carriers suffer from competition from the ME3. Every Airbus or Boeing is loaded with U.S. content. Companies such as UTC, Parker Hanifin, GE, Spirit Aerosystems, etc. benefit with each aircraft the ME3 buys. Those are real U.S. jobs — better paying than most U.S. airline jobs.

    Bottom line, the ME3 are good for U.S. industry.

  73. Lucky,

    What proof do you have that the big three are losing money? You keep saying that Etihad and Qatar in particular are making big losses – on what are you basing those comments?

  74. @Lucky between your post on Qatar’s CEO lying and this piece you have lost almost all credibility to be objectively discussing this issue of the US3 vs ME3. Obviously your personal connections to Qatar staff have impacted your overall analysis of Qatar’s response to Delta’s comments and the U.S. Airlines stance on the ME3. While nobody endorses horrendous and oppressive labor conditions let us not act as though your friend and those other FAs were kidnapped and forced to sign those employment agreements, they did so in hope, expectation and understanding of a better opportunity than their circumstances prior to then. I don’t hear you stumping up for the FAs at AA or UA that don’t want to pay union dues or be subject to seniority lists that protect those in power including airline management, the contract is a powerful stick for management as well as the union. As well you don’t seem to have qualms with buying or using most modern electronics made in Asia under similar restrictive and oppressive labor conditions which essentially destroyed any domestic US production.

    The bigger issue with your post on Al Bakhar was that you focused on the one personal issue you have with his interview and then painted the rest of his points with that brush. That’s a disservice to your readers who didn’t see the whole thing. You might not like the guy but he raised valid points not to be dismissed when the US3 complain about homerism.

    This post is even worse, it sounds as if you got talking points from the US3 lobbyist or the “aviation expert” they have retained because there is no attempt to compare or contrast the benefits the ME3 receive vs the US3. You would do well to consider reading some of the analysis done by some of the independent industry analysts that have researched actual data on this and broken down the advantages and disadvantages of most airlines in costs and marketing segments to mandates. I recall one study showing the marginal cost of EK and VS as similar per KM and BA being much higher and why, it dispelled much of what you spout in terms of impact on operations without touching the other innuendo.

    A poster above does a better job of trying to highlight that Govt support for transportation that is considered strategic is not limited to the ME3. Lest we forget Pan Am got its start and dominance flying US Mail on govt contract. The current 3 get fat on Fly America type provisions, infrastructure subsidies, local and state tax concessions, indirect subsidies of labor and capital costs like healthcare through the tax code, and trade promotion. You also fail to consider how the sheer size of the US market can overwhelm smaller aviation markets and airlines when the US3 want to serve a destination, can Cathay easily resist the sheer amount of air service the US3 could push into HKG considering the relative customer base?

    I don’t think this spat is as clear cut as some are making it out to be, governments everywhere protect and promote national champions in all manner of ways, financial and non-financial. The US3 have no leg to stand claiming to be the bastions of free enterprise, they receive tremendous support at all levels of govt for their businesses just like the ME3. What they may want to discuss is a mutual de-escalation of that support, which I don’t see either side wanting. And for you Luck, this is your space to express your views with biases and all but I think you do a better service with more considered approach for these types of issues and pieces, unless you want to look like a hack.

  75. In reading the comments, I think that there are a few more things to consider:

    – The ME3 have fundamentally altered the economics of long-haul flying. This appears to have decreased prices/increased quality(?) on long-haul routes. In other words, prices down & cost of service up (hard product/soft product). Taken on its own, this would appear to be a net benefit for consumers.

    – In making the changes identified above, I suspect that the ME3 have squeezed margins on the long-haul routes that provided a relatively reliable source of profits for the USA3 and the European carriers. Taken on its own, this would likewise appear to be a net benefit for consumers.

    – This reduction of profit, in turn, changes the economics of short-haul routes. Short-haul routes need to be more profitable to work. I suspect that the refusal to increase domestic USA seats ties, in part, to the reduction in profit to the long-haul routes. There’s more at stake. This is going to be bad for consumers.

    – We cannot underestimate the other structural advantages that the ME3 have with respect to employment:
    + Fewer employment restrictions (e.g., hiring and firing is easier, no age discrimination claims to worry about, etc. – It’s amazing how young and good looking the ME3 flight crews are. Could be coincidence…)
    + Lack of anti-discrimination laws mean, effectively, that the ME3 have fewer senior staff to pay at higher wages.
    + Low tax/no tax jurisdiction, meaning that wages go further (50K without taxes is 50K, not 35K…)
    + Health insurance is cheaper
    + No unions
    + Extremely low wages for non-customer-facing personnel and construction personnel.
    + Etc.

    This is a major difference, given how significant labor costs are to the USA3 and European carriers.

    Is this core to the discussion? Yes and no. It’s definitely not an even playing field. It might be seen as a subsidy of a sort.

    – Is it relevant that the USA3 and European carriers cover multiple markets, with a range of short- and long-haul aircraft, while the ME3 operate only long haul?

    I also enjoy flying the ME3 more than the USA3. In fact, flying from Australia, I don’t fly the USA3 if I can possibly help it. Qantas does me fine.

  76. I think it is well established that nearly all major airlines are the beneficiary of some sort of government largesse. The question is how much to allow the ME carriers to enter our markets if they are offering a product at well below market prices and whether the U.S. should be promoting the position of its airlines as the UAE and Qatar do their own. I’d be interested to see what the Big Three’s profitability looks like without the profits on their international routes.

    If Emirates wanted to set up a bunch of transatlantic, fifth freedom routes and offer them at $200 RT, do we grant them those rights knowing it’s unsustainable and would only put the U.S. airlines out of business on those routes, leaving Emirates free to charge whatever price it wants later. Arguably it’s better for consumers in the short run, similar to MS offering Internet Explorer for free, but you end up putting the Netscape’s of the world out of business.

    However, singling out only these three airlines ignores the fact that most airlines are subsidized to a certain extent. It seems like a better option would be to open up our markets and allow the ME airlines to compete, but have a WTO-type review process covering international routes where formal complaints backed by evidence can be brought in the event foreign airlines are granted access and start systematically offering flights at significantly below market prices.

  77. Ben,

    You allude several times about the long term effects if the ME carriers are successful. Can you elaborate more about what you think that would look like?

  78. Based on the numerous comments above, it seems that Luck spoke a bit to early. He pretty much jumped the gun on this one! (a number of questions and comments posted by him – ones for which there are no references or detailed analysis provided) Why? Cause a number of insightful analysis/questions presented to Luck have generated no responses by him. Lucky is perhaps the best at analyzing products and charts (devaluation and beyond), but he’s been weighed and wanted under this segment it seems!!

  79. Hi Ben

    1. Your whole argument is based on loss-making ME3, yet you cannot provide any evidence, just responded: you will see. I am a bit disappointed by that. This means you have just a guess not proof and built your argument around that. For example, Dubai doesn’t have a huge oil revenue, they make money because of the tourism and transportation. I am guessing the government is trying to achieve the benefit of externality and organize each unit in a way that is best for the whole economy, so I wouldn’t be surprised if the government is making money overall after subsidies etc. Again, you need some proof for any argument to be valid.

    2. Following my point in 1, I believe UAE is trying to compete globally in a different way because they are so small. To be able to compete with large economies, they need to create an industry size comparable to large economies. They cannot create many industries of that size, so they are concentrating on transportation because they have a geographical COMPARATIVE advantage. While WTO doesn’t apply to Open Skies (against your argument), the core of WTO is free trade, so each country should specialize in their comparative advantage. In the spirit of WTO, I think we should let ME3 serve more cities for cheaper. In theory, the total welfare should increase (but I don’t think economists agree on the benefit of free trades, so if you argue one way or another, you should be clear on which theory you taking sides on…) Now, do we see any more threats from the Gulf nations in financial industry? car making? High tech? No because they don’t have comparative advantages in many industries but US has…

    3. Following 2, now you see your point of conflict of interest for Al Maktoom is wrong. First, he is not the head of FAA. Second, Dubai is not the US, he is in charge of only two airports but to me, they are just old and new airport because of its expanding air traffic. He is just the head of JFK and LaGuardia if you want to compare, or even less because I’d consider Dubai’s two airports as one just switching…

    4. You also argue that ME3’s intent is to drive out all airlines but that would never happen. Each airline has advantages on certain routes and ME3 cannot really change that. Even if ME3 takes all routes in the world and if UAE/Qatar is willing to subsidize it, let them give us some money. By law, ME3 staff will follow the US rules when flying domestic, so I don’t think they will bring their ME rules to US. I don’t think there will be more job loss domestically as ME3 will replace US3, but that will never happen due to rules and economic forces.

    5. By law, ME3 cannot serve domestic routes, so your argument there is incorrect. My understanding is that US3 worry about future transatlantic 5th freedom flights, the routes that bring an enormous amount of profit for US3 due to the anti-trust immunity for JV. To me, it is anti-competitive and I am not happy with the price I pay for those routes. Too expensive compared to the routes with same distance etc That is also why US3 complained about Norwegian…However, if ME3 connect more US hubs to ME hubs, that is better for the US economy because customers benefit. ME cannot serve all US domestic airports, so US3 should cooperate with them and take their flow into domestic markets. US3 are not serving most of Africa, South Asia and ME, so I don’t think ME3 is taking away customers from US3. Letting ME3 enter more US hubs should benefit both sides and CUSTOMERS. That is the spirit of Open Skies.

    6. ME3 are growing but that is because they are new. Your argument based on per-capita term/GDP growth is just off-base because ME3’s intent is not serving the local economy. Just a different business model. I don’t think there is any economic rule that says your industry growth has to be the same with the number of airlines you purchase. In fact, if their investment pays off in the long term and their airlines are supporting the local economy, the airline industry growth has to be bigger than the GDP growth. In a near future, they will achieve their steady state and we won’t see this fast growth anymore. Just wait a bit 🙂

    Finally, I am sorry about your friends at QR but I have many QR flight attendants, too. They are all aware of what contracts they are signing on and their life in Doha is much better than the home country, that is why they come to Doha. For what it matters, their personal life is probably much better than what most people outside would think…We should worry about the construction workers more because they are not always aware of the contracts they are signing, and they cannot leave the country (whereas QR CAs can terminate their contract and leave anytime but they often do not because of its huge benefits) even after working under an extremely harsh environment.

  80. Overall, I don’t think you can say what ME3 are doing dirty. To me, it makes a perfect economic sense and it is not aggressive and as dirty as you explained/think. However, I do believe that there should be a change to be made in laws in the Gulf nations. As a matter of fact, they are working hard to change the laws and make the society better. Whenever you talk to locals, you learn there are changes everywhere, for good. But it is always slow because of politics within, just like any other nation. They just started, so we have to be patient. Did US develop its society over 20 years? How long did it take to abolish slavery, “no blacks no dog” sign, anti-trust laws etc?

  81. There are so many factually incorrect statements (eg. regarding allegedly “low” landing fees in DXB) and illogical conclusions in your analysis that I really don’t know where to begin debunking it.

    Open Skies is a uniquely US creation that was forced down the throats of most of the world as a condition for other trade/aid considerations by a US DOT that wasted the entire decade being obsessed by this policy. They ignored the warnings of many people (including myself) that US airlines could never compete in a truly open global market in the long term because they simply do not have the operational flexibility (for a variety of reasons including geography, politics, regulatory requirements, unionised workforces and higher labour costs) to respond to and take advantage of changing global dynamics. This has now come back to bite them in the butt.

    If you want to see what is really damaging the industry today and stifling innovation, take a look at the ATI granted to members of the big alliances. Those simply serve to establish the oligopoly of the 3 major alliances and their members, and to raise the barriers for new entrants.

    Competition is not about incumbents fighting over market share (which is effectively what this argument is about), but rather about disruptive forces and new entrants being given easier access to the marketplace. For someone who is so supportive of market forces in other areas of the travel industry (eg. Uber, etc..), your position makes no sense. You’ve either not thought this position through completely or you’ve sold out editorial influence to one of the US majors. Neither reflects particularly well on your blog or on you personally.

    Just my $0.02 on the issue. Happy to sit down with you in the UAE when you’re next here and debate this in more detail (with facts rather than emotion). 🙂

  82. This is what I think… I’m not sure the phrase “can’t compete” is appropriate, because in some ways they’re playing very different games.

    Think of each of the ME3 less as an independent business and more as a subsidiary. So, in effect, Emirates is a subsidiary of Dubai Inc., etcetera. If you look at it that way, the actions of the ME3 makes more sense: the “owners” are looking out for the entire business as a whole, not just the airline specifically. So it’s fine if they lose money (Qatar Airways) or make a little less than they can (Emirates, probably Etihad)

    In addition, the ME3 have real owners. They don’t have “stockholders” who’ll flip and sell at the say-so of a talking head. The upside is: the ME3 can do long-term strategy in a way that no carrier in the US or Europe can hope to do.

    Now, consider the US3. Their independent businesses subject to the whims, largely, of the stock market. That’s a market which cares not about anything beyond the next earnings call. In short, they are at a severe disadvantage for making anything long-term.

    Richard Anderson is playing the cards he’s dealt, and probably the only game he knows. Wall Street had crucified David Barger for the crime of not giving them their pound of flesh. So he tried to do what he could… get government on his side. (Crony capitalism indeed.)

    Delta is fortunate that geography dictates that the ME3 and the US3 will only compete so much. The problem is FAR bigger than open skies or whatnot. Too much of what passes for “good performance” in US corporations is meant to pump up stock shares – a measurement which is divorced from reality. Many US corporations are good at pleasing the “market”, but not their customers. See the ISPs. See the phone companies. See the airlines. They’ve been able to get away with it because government regulators have let de facto cartels form.

    It’ll take some US corporations getting their clocks cleaned internationally by companies who can actually plan ahead before this changes. Until then, expect more of this.

  83. It is surprising that this post does not have the usual balanced views you usually have, where you look at the points from both sides.

    Lucky, many of your claims in this post are simply not accurate and the post seems very sloppy for that reason. For example your claim Emirates gets interest free capital, is simply not correct. Emirates balance sheet shows they are paying about 3.5% in interest on their current debt. This is publicly available information. Singapore Airlines just issued bonds that have an interest of 3.15%. Ryanair just issued bonds with a 1.87% yield, much lower than what Emirates and Singapore pay. I really don’t know where you get your information from.

    You also claim Emirates is only profitable due to creative accounting! How? When you make such strong accusations you need to back it up with more details or at least some objective evidence or how you arrived at that view, otherwise some readers might start to wonder if some lobbyist/PR person has hacked into your blog and posted under your name.

  84. I posted a comment about emirates on your first thread about this and I was right because emirates literately losses more money from their routes rather then making money. However the reason why emirates loves the A380 is if you highlight what he said “The A380 is very popular among travellers” Which means it makes the A380 a first choice among any 777 traveling on the same route which eliminates competition for example a flight on Singapore airlines 777 VS Emirates A380 from Dubai to Singapore and many people would chose the A380 (Unless prefer service)

    In other words Emirates is the main cheater because their government is the most supportive.

  85. To play fair, why doesn’t the U.S. Government mandate tariffs for Gulf operators to land in U.S. airports. Why not have the U.S. airports charge an excess fee to passengers originating from UAE or Arab hubs, or better yet, charge the Gulf airline flying into U.S. Airports excess fees per passenger. That’s playing it fair.

  86. @Roger Wilco: lets wait to see Lucy’s upcoming wonderfully positive review on a recent trip on one of the US3, you will then find out who is sponsoring this peace.

  87. Lucky, boy was I surprised by this post. Your arguments are weak:
    ->GDP and population growth? Are you suggesting you must have a big country to own a big airline based on transfer traffic? 70% of KLM’s traffic connects at Schipol, and they rightfully celebrate that. Coming from an American and a German, I must say this is somewhat offensive.
    ->You argue that the cornerstone of the Open Skies policy is the ‘how’, i.e. government interference. Why not the ‘why’ i.e. freeing carriers to provide more affordable, convenient, and efficient air service for consumers?
    ->Running other airlines out of business? I think the comment on EY’s acquisition of airlines that even deserve to go out of business answers that.
    The most fundamental flaw most people make is to lose the nuance (which you previously captured) that the ME3 are different, or at least that EK is vastly different to QR and EY. Dubai doesn’t have uber-deep pockets (or they would have bought Jet Airways and solved their India access issue), and they cannot afford to be a loss-leader in the sustained manner required to build an airline of the calibre of EK (the construction costs of the Burj Al Arab would be like pocket change in comparison). Similarly as other comments have pointed out, EK does not get interest-free capital.
    Why aren’t we doing a fuller analysis of the job-creation at Boeing (and also Airbus while we’re at it) by Gulf carriers vs the actual/potential jobs losses at the majors (let’s face it, DL might need to shut their non-stop Dubai and Mumbai routes, but they’re sure as hell not going out of business!). By the way, I think most government folks would prefer highly-skilled aerospace jobs to front-line airline jobs, given the choice, but I digress.
    ‘Dirty tricks’, Lucky, really? I’m wondering if this post is intentionally provocative, an early April Fool’s Day joke or as other insightful readers observed, some PR folks have hacked the blog. I’ve been reading the blog daily, Lucky, for years. This is the first time I’m not smiling. The writing in this post lacks its usual thoroughness and innocence.

  88. You say the purpose of Open Skies is to eliminate government intervention. Actually the purpose of Open Skies is to let carriers like delta make more money. Period. When Open Skies does not fulfill that purpose, the US carriers cry foul. US carriers are not opposed to government intervention when it grants them oligopoly profits through industry consolidation. The US carriers would make more money and save all of us a huge amount of time by improving the ATC system!

  89. finally North America feels the burn of those idiots. I am originally from Lebanon and currently live in Canada and I have watched these Gulf airlines destroy the profits of Lebaon’s national airlines (middle east airlines). These scum bags seem to think they can buy their way through anything. I would say sanction them.

  90. A few people ask why these three Middle Eastern airlines should be singled out. I think the issue is one of scale. Yes, governments have bankrolled airlines before, but the wealth here in the Middle East is phenomenal. Qatar is sitting on a tonne of money with its natural gas. They can subsidise more and longer than other countries. So other airlines really do face a risk of eventually being priced out of the market. I think the problem is actually smaller now than it will be – it’s probably more a matter of “watch this space”.

  91. I literally rolled my eyes at this yet-another ME3 vs Everyone Else post. Can we leave the serious analytical writing to the experts and you stick to posting pretty pictures of aircraft products?

  92. I’ll leave the discussion about government subsidies and interest free capital aside, and just discuss the aspect of having a passenger fee at an airport. Changi did not charge transit passengers any fees till a couple of years ago, and offers significant landing fee rebates to attract new airlines to operate there.

    The case of Dubai not charging passengers fees during transit can be explained very simply: airports do not simply rely of passenger charges to derive their revenue. Dubai Duty Free makes close to USD 2 billion a year – so all that money passengers do not spend on a passenger charge somehow gets spent in the shops.

    So the argument that Dubai somehow loses money with every flight can seriously be argued on the basis that the ‘loss’ is more than made up by the duty free sales within the terminal alone, not even considering other potential non-operational sources of revenue (advertising etc.).

  93. From a purely free market perspective, any company should be free to it pleases within the bounds of the law. Open Skies seems to allow ME3’s current business practices.

    However, a crucial caveat is that predatory business practices with the intent to drive out competition in the short term in order to maximize profits in the long term is bad for everyone in the long term except the predatory company. If Apple killed every other smartphone hardware and software product by giving away the latest iPhone for free for 3 years, all consumers would be thrilled for those three years. Starting in year 4 when iPhone prices go up $1500 because there are no more alternatives in the market, only Apple is better off going forward. This type of behavior is prevented by antitrust laws in the US, but perhaps there isn’t anything similar governing the international aviation industry.

    I don’t know if ME3’s intent is to kill competition through short-term predatory business practices, but if US and EU airlines are forced to liquidate or severely curtail service due to large short-term losses, we the consumer will face higher costs in the future due to lack of competition.

    In short, we as a society should not mortgage future competition for short-term deals. Obviously, each individual consumer will pick the best deal at that moment, so its up to a greater initiative (e.g. government intervention) to make the correct policies to promote long-term benefits.

  94. This post is absolute nonsense. Trumped up “facts” about economics, lending rates, subsidies, alleged conflicts of interest. No substantive evidence backing up any statement. No substantive critical analysis.

    Go back to swooning about lounges, beverages, and having the first class cabin to yourself. And stay away from serious posts about business and economics.

  95. Really interesting post, and interesting points of view in the comments.

    My conclusion: OK, maybe the business practices of the ME3 are unfair, as are their subsidies. But that attitude comes from the perspective that only pure marketplace competition is fair. Americans are almost unique in the world in believing that. In almost any other functioning first world nation, people look to the government to both regulate and support businesses, for the good of the people. If that means subsidizing businesses seen as necessary for the economy, so be it. Think of Lufthansa, which, if I understand correctly, for a long time was subsidized by the German government (as their passenger rail system still is). The ME3 are just the same thing, in extremis.

    So I find it really hard to be sympathetic with the US3 on this. They have plenty of other routes. Why should our carriers be entitled to compete everywhere? If we, as a people, really care about it, we should ask our government to provide subsidies to the US3. But we don’t care, do we? I’d rather that the government subsidize other things, and I’d perfectly happy, a few years from now, flying an ME3 carrier because they’ve demolished their pathetic US3 rivals.

  96. OK so the USA subsidizes drug research, pushing to open financial markets with its subsidized banks, and gives US airlines protected access to a gullible flying domestic captive audience; even captive hubs. But then the MEA3 are not playing fare?
    Where did you get these FACTS? a airline PR statement?

  97. Lucky, I think you missed an important point in your entire analysis. The impact that ME3 carriers make on Boeing’s bottomline due to massive orders, from narrowbodies to widebodies. In my opinion, the impact of this should also be included in a holistic discussion on this issue.

  98. Forget all the above. If the US airlines really want to start to compete they have to bring back something they forgot a long time ago: Customer Service!!! US Airlines could not care less about its customers. Starts on the phone with reservations, goes to airport personnel to FA’s, etc… They are all grumpy and clearly not happy to do what they are doing. Ok, let’s not generalize but the majority of people that work for US airlines feel they are entitled to something. And let’s not talk about what US airlines did to the loyalty programs. They destroyed them. Thus, if they want to compete they better start to care about passengers who are the ones that buy the tickets.

  99. @Mazen

    Actually, our lack of innovation and route expansion is what killed MEA’s profits. We fallen behind even Royal Jordanian and Egypt Air, and that is our fault, not the fault of the Gulf carriers.

    “But that attitude comes from the perspective that only pure marketplace competition is fair. Americans are almost unique in the world in believing that.”

    Americans only believe that when they are leading the industry.

  100. Ben
    Lovely analysis. I’m still torn on the issue, without a definitive decision on which side I support.

    What is particularly interesting about this is that unlike other airline issues (e.g., security), where airlines and the passengers have (generally) been on the same side of the coin, here the forces are not operating in the same direction. Whereas the ME3 may be bad for the the US carriers, they are simultaneously good from the passenger perspective: lower fares and better service.

    One point I don’t necessarily agree with is the ‘unfair’ advantage Emirates has at Dubai. Yes, of course it does, but DXB is its home turf. Of course they are going to do everything to minimize competition there. So it’s hardly odd that they only charge the airport fee to disembarking/embarking passengers rather than connecting passengers. Plus, one could make the case that disembarking passengers use more resources (immigration, customs) whereas transferring passengers spend more time in duty free.

    The biggest problem I think is the lack of transparency- and THAT should be the anchor upon which arguments against the ME 3 are based.

  101. This post is evocative of a high school student skimming basic info and then taking a side prematurely to then write a thesis paper on it to turn in with the expectation of an average grade.

    This post is poorly reasearched, unsubstantiated in fact, sloppily constructed, and showing a complete lack of understanding of global markets and the workings of domestically based corporations within the US.

    As previous posters have already mentioned, the US government has thrown uncounted billions of dollars to the US3 in direct and indirect subsidies. We have had near zero interest rates for 6-7 years while other countries and trade zones have had much higher interest rates. We have bailed out our airlines, allowed them to merge and run an oligopoly that guarantees them windfall profits across a huge part of its network, allowed them to offshore profits for tax evasion, given them exclusive corporate contracts, provided them preferential treatment at the local level and the list goes on and on. None of that stuff is transparent either. To argue that our US3 are at a disadvantage is something only someone can conclude who doesn’t understand the full picture. Time to read some books on plane rides rather than watch another episode of housewives….

  102. Regardless of how the US government has assisted US airlines in the past, this one important fact remains: if the US airlines are not profitable, they will go out of business. And if they go out of business, all US citizens will be harmed. According to the stats I just located, the US airlines employ nearly 600,000 people and are the top employers in many US cities. (For example, Delta is Atlanta’s largest employer.) We don’t want to see a repeat of the disaster which occurred when the US lost manufacturing jobs. Nicer fabric on the plane seats, better IFE, or blingier decor should not be the priority of US citizens, the US economy should be.

  103. The US has plenty of similar protected industries, I mean does paying farmers not to grow crops have a profit motive? The US airport funding model still isn’t user fee based, there are still lots of government hand outs. Over in Canada, airports are almost exclusively funded by user fees which creates an incentive for people to drive over the border and catch a flight.

  104. What a blinkered, inaccurate and shallow view.

    Some points for consideration:
    1) EY and QR are (probably) bankrolled as they seek to compete with EK. Be in no doubt there is no love lost between the three.
    2) The ME3 carriers provide a far superior product which customers want.
    3) Certainly the availability of cheap finance supports the rapid growth – especially of EK – but EK has earned the right to easy access to the capital markets because of its “speed to market and scale quickly” policy. International banks know that EK is a good bet. All other airlines have been left behind and are now starting to whinge.
    4) It makes perfect sense for the ME3 to attract transit passengers and, ideally, across their own networks because, if you look at the map of the world, the Gulf is bang in the middle. The Americas are on the left wing and Asia on the right. Europe provides the defence to the north, and Africa the strikers to the south. You can’t change geography.
    5) In addition to speed and scale to market, and offering a great product, EK has invested in its brand which has also driven the growth of Dubai as the new centre of the world. It’s no coincidence that the new Maktoum International – which will have SIX runways – is billed as Dubai World Central.
    6) Open Skies – your analysis is completely flawed.
    I could go on but, just like the ME3 vs US3 argument, it will rumble on for ever and a day – or until the US IMPOSES protectionist policies to support inferior products while the Gulf States and, especially, Dubai welcome all flights and carriers with open arms …. they need the traffic to fill the hotels and expand the business hub.

  105. Etihad Regional launched last year in Switzerland intending to give SWISS a run for its money. It worked, SWISS dropped its prices somewhat. Not to Etihads level but in the same ballpark. Fast forward to this Febriary, Etihad is cancelling almost all of its routes from Zurich. Thus proving that……

    1) competition is a good thing as it made SWISS focus more on price and service

    2) the MIddle east airlines will not continue to lose money forever

  106. Making big profits from air tickets isn’t the #1 priority for any major airline so why bother focusing efforts in this area.

    – US airlines are focused on selling miles. That’s what makes the big bucks for them.
    – Gulf carriers are a means of bringing people with money into the gulf states where they will spend more money. But you need a great product to lure someone with cash to a new country.
    – European LCC’s make their cash through ancillary revenues and tourism ‘sponsorship’.
    – Indonesian gov pays local airlines a flat fee for each “1st world” tourist that enters the country. As such, local airlines can undercut competition and always win on price.

    The airline isn’t and won’t ever be the real strategy. It’s always about something else.
    US Airlines can’t/don’t want to compete with gulf carriers because they see more opportunity in other areas… not because it’s “unfair”.

  107. Great article and great comments. Remove Chapter 11 and you start to get to a level playing field. Such protection is not afforded in many places in the world, so why should the U.S. carriers have this advantage? Second, do the US3 really think the ME3 give a damn about US traffic? The volume of non-US passengers the ME3 carry is immense. Thirdly, if the U.S. carriers offered decent service (with a smile – JetBlue excepted) and stopped hiding behind FAA ‘rules’ and treating passengers with contempt, they may start to gain back some overseas loyalty they had many years ago in the days of Pan Am etc. Best they realise what it really takes to persuade international passengers to CHOOSE to fly with a US carrier instead of a European, Asian or ME one, and maybe then they can start to cry foul.

  108. In your example it is not clear why you booked SIN-DXB in Economy and then DXB-JFK in First. Did that impact or inflate the surcharges in any way? It is not clear.

    Overall, its good to learn from other markets. For example, this debate has been played out in Canada for years, and in each instance Air Canada (with its government support) has gotten its way over consumer choice and customer service. In one instance, while Air Canada was fighting to limit Emirates access at Toronto Pearson Airport it was simultaneously fighting to gain access to Toronto Billy Bishop Airport, where Porter Airlines had exclusive access. Needless to say Air Canada got its way in both cases.

    Porter (a small Canadian airline renowned for its customer service) had to suffer at the hands of Air Canada. Will the likes of JetBlue have to suffer at the hands of the US3? Will the meek always suffer in the hands of the strong?

  109. The one big difference between the ME3 and the US3, is simply this, the respective governments in the Middle East, value their Airlines, and create a competive environment for them to do business in!
    However the USA and most western governments view their Airlines and their passengers as cash cows, and tax the day lights out of them!

  110. This discussion always gets overtaken by emotion.

    European airlines went through the same process (some are still in the latter stages) – anger, denial, anger, frustration, aspersions . . . . acceptance.

    The airline market is highly regulated and government supported across the world. It’s not perfect but what global market is? US – Chapter 11, restrictions on foreign ownership. Not a criticism, just highlighting this support is alive and kicking in the US as it is elsewhere.

    Emirates and Etihad are unquestionably profitable. Combined the ME3 are profitable (Qatar will likely be profitable in the next few years).

    The fundamental difference between ME3 and US3 is that the ME3 shareholders have a long term plan for their airlines (which allowed them to make losses in the early years). This is driven by the perceived economic contribution of the airline to the overall development of the country. Unfortunately for publicly listed airlines they cannot afford the long-term vision nor do they receive the support from the government in achieiving that vision. But is that reason to criticise the ME3?

    Also, the governments provided equity only in the early years. There is not a constant supply of funding provided by the government. The financing for growth has come from banks and lessors (many US banks and lessors), as well as from their own cash flow.

    There’s no mention of the support that Chinese airlines receive – why not? Because they are not the same competitive threat as the ME3.

    The US airlines should divert this energy into producing a more competitive long-haul product and maybe, just maybe, forming closer relationships with the ME3 (such as IAG and Qatar). Sure, get some restrictions on Open Skies, but the ME3 will continue to expand ino other regions. Ultimately the US3 need to face the competition head-on rather than seek further regulation to delay the inevitable.

  111. The Middle East has large hydrocarbon reserves as well as ample refining capacity which helps reduce the fuel costs there. The biggest cost advantage is however personnel. Middle Eastern carriers are able to rely on a steady supply of cheap labor from the Indian subcontinent. Interestingly the authors point out that the cost to the Middle Eastern carriers of their senior management is significantly higher than that of European carriers. This is due to the fact that they look to attract senior executives away from other airlines, and as such have to provide them with incentives. The only cost category that the Middle Eastern carriers face a disadvantage in is sales, the reason being their reliance on travel agents. Travelers in Europe rely more on the internet and credit cards to make their travel arrangements. Internet and credit card penetration is not as high in the Middle East, and as such the Middle Eastern carriers face higher costs due to commissions paid to travel agents. Fuel and labor costs are typically the biggest costs to an airline constituting approximately 50% of total costs. As such the Middle Eastern carriers enjoy significant cost advantages over their European counterparts. This in turn allows them to offer lower fares to attract market share away from existing competitors.

    # so EU And USA high tax on their employees make big deferent.

  112. Open Skies Competition is more than who flies where and when
    If you transit DXB it is a dream mid way through a long flight with every amenity at hand and a way to stretch your legs over a long flight . As Singapore Airlines and others have proved 18 hours in the air is no fun whatever the comfort standard. A 2 x 9 hours with a 2 hour break in a glamorous shopping mall might just be the way to go.
    Have you ever tried to transit MIA international to international its a total immigration security nightmare if you were stupid enough to try it once you would never do it again? JFK don t even think about it in any direction!.So how the heck do you expect American Carriers to compete outside there domestic controlled environment? As for cabin service the last time I flew long haul First Class on an American Carrier I felt so sorry for the “Granny serving in First Class ” I did nt order an extra drink but though I might have to get up and help her!.

    So Service and Convenience, Location aside what about the other angle of USA refuting OPEN SKIES?

    The 3 Gulf carriers operate 259 wide body Boeing Aircraft……………………………!
    Of the Next Generation Boeing 777X series of 286 total orders 225 or 79% of orders come from just 3 Gulf carriers yes you guessed Emirates Eithiad and Qatar,while the 3 major USA Airlines have ordered 0 yes 0% of the new Boeing Long Haul Aircraft
    Tim Clark cancelled 75 A350 1000 aircraft because Airbus did nt consult him on a change in spec
    How long would it take Airbus the launch a A350 1100 exactly to his spec to replace 225 777X orders if the US Government reneged on OPEN SKIES?
    Seattle sales teams have to be in for a few sleepless nights!
    AJK

  113. Lets drop the Economic analysis because it only fits in a perfect world. With the current problems in the middle east that are political and very important. It is not in the United States best National interest to allow Arab owned middle east carriers to wipe out United States owned and needed carriers. These same countries have supported in many ways causes that in danger every person in the United States and much of the civilized world. Open skies to these nations should be dropped in out LONG RUN Natonal interest.

  114. What US domestic traffic will the 3 Middle East Carriers take from the US BIG 3 ?

    What trans Pacific traffic will the 3 Middle East Carriers take from the US BIG 3 ?

    What South American traffic will the 3 Middle East Carriers take from the US BIG 3 ?

    What European traffic will the 3 Middle East Carriers take from the US BIG 3 ? Well 9.99% of IAG
    49% of AirBerlin 49 % of Alitalia I guess

    Africa Middle East and the Indian Ocean bordered countries a fair percentage based on how competitive the 3 BIG US carriers are in the market I guess

    How large a protective market do he 3 BIG US Carriers need to survive or are they totally unable to compete without protection?

    Who will replace the jobs in Seattle when the the 3 Middle east carriers cancel the 256 aircraft or
    79% of Boeing,s 777X order book?

    When will Qatar buy 9.99% of their One World Alliance partner American Airlines?

    AJK

  115. It seems lucky has gotten brainwashed fairly easily by the US3 press releases.

    US3 has gotten plenty by way of federal and state subsidies since the early days of commercial aviation (over 150$ billion). Cheap loans, cheap land, cheap construction and cheap equipment. Also, the trend to supporting hub system of airports has constricted the amount of airline competition in favor of a US3 oligopoly. Ignoring these major pieces of US aviation economics on your post is alarming to say the least. You need to look at both sides of an issue.

    Painting ME3 as a monstrosity willing to sacrifice itself in a fiery debt profile just to sink the US legacy carriers is a bit propaganda”ish”. Just think clearly about your conclusion. If ME3 continue to operate under such heavy losses, don’t you think they will eventually have to close up shop? Even the richest people in the world stop playing games after allegedly losing billions each year. At worst, what they are doing is operating at a loss in order to gain market share. Over time, as demand stays high, they can gently raise prices to restore the balance sheet. This is not unlike a “grand opening” sale at any mom-and-pop market.

    As noted above in multiple posts, the ME3 isn’t going to sink our country’s airline industry since they will only beat us on a fraction of the existing routes, including a small number of 5th freedom routes like EK JFK-MXP. Where they are really going to hurt companies is by diverting European connecting traffic. India/SE Asia/Africa – US traffic is a huge market and ME3 is slowly gobbling them up from connecting in LHR, FRA and CDG – the three major European hubs for US3 respective alliances. LH, BA, and AF are going to lose a large portion of these passengers over the next few years and have managed to make the americans join the war on their behalf.

    Ultimately, more choices for consumers is a good thing. As long as the product is good, safe and competitively priced, why should we exclude more suppliers from the market? Let the big boys and market forces figure out which ones will stand at the end. Till then, unless you would rather eat pretzels and drink wine out of plastic cups, enjoy the ME3 and their superior product whenever you can!!!

  116. Didn’t manufacturing move out of the U.S. To China and IT moved to India ?

    If jobs are being lost in the U.S. Then they are being created in the Middle East.

    Whoever can do it the best, let them do it.
    Maybe the U.S. Can do something else like design and manufacture airplanes, which it seems to be good at.

  117. What we have here really is US Carriers (US3) complaining that carriers in the Middle east (ME3) get “better” subsidies than they do and that ME3 doesn’t have to hide them. US carriers are subsidized by laws like C-11, and the Railway Labor Act which enable the Airlines to extract concessions and lower wages that not only other carriers across the globe don’t have available to them but even other companies in the US dont. Under C-11 Airlines get the unique ability to void out contracts , impose what they want for as long as they want and the Courts prohibit the Unions from Striking. No other private work force anywhere is subjected to that, and the airlines get to use that if the years of delays and frozen wages that the RLA allows them to impose doesn’t get them what they want. We are taking about a subsidy in the tens of billions of dollars a year that Airlines enjoy at the expense of their workers with the help of the United States government. As an Airline worker myself I’m not too thrilled about ‘open skies” but after the way that our government has helped the carriers cut my compensation in half I find it hypocritical for US Carriers to complain about government subsidies when they operate in the most profitable Air travel market in the world, are making billions in profits and have the heavy hand of the US Government making sure that the workers don’t get any of it.

  118. It would be interesting to see salary comparisons between say pilots on the USA3 vv the ME3 on similar equipment then how are Cabin Crew Ground Staff etc compensated ?
    Who pays more ?Who pays less? for What?

    AJK

  119. I’m working for Emirates for over a decade, and I have been witnessing their growth. I can’t speak for Etihad or Qatar, since I have no accurate and first hand information about these airlines, but Emirates does not get subsidised at all. The government does however support aviation as much as possible, since they want to make Dubai a tourist and business hotspot, and this part of the world is only reachable by aircraft, so that makes sense.
    Before you repost propaganda from the US3, please check your facts and think about it first:
    1. Emirates does not get interest free loans, it writes out it’s own bonds to raise capital, just like any big company does.
    2. The airport fee of 20 USD is to pay for immigration services, which you will need when you exit or enter the UAE. As a transfer passenger, there is no immigration required, you aren’t actually entering the country, so you don’t have to pay for the service. This does make sense, no? The airport operations are funded through landing fees, which are the same for every airline landing here, and a big part of PROFIT of the airport is made by Dubai Duty Free. Yes, if you would have been to Dubai before, you would have noticed that the airport is one big shopping mall which is busy 24/7.
    3. $4 billion fuel hedge loss? Seriously? Didn’t happen. I will stand corrected if you explain.

    On the other hand: Emirates makes decent profits, of which every year a huge percentage goes to Dubai Inc. (out way of saying the government) in form of dividends. Yes, you do read this correctly: Emirates Airlines is paying money to the Dubai government every year because Dubai itself needs to pay back loans it got from Abu Dhabi in 2008. These loans have nothing to do with aviation, yet Emirates is one of the ways how Dubai makes money to pay them back.

    So how does Emirates make money?
    First of all, it’s geographic location is second to none. India, China and Africa are booming, and Emirates has a base on the crossroads between these areas. 25% of the worlds population is within 4 hours flight from Dubai. The whole of Asia, Europe and Africa are within 8 hours – that’s more then 70% of the world’s population.
    Second: the government does promote aviation. If you look at peak times in Dubai airport, you will notice that the main arrival park is around midnight. One of the big departure peaks is between 3 and 4 am. In most countries, airports would be closed or would have serious curfews in place. In Dubai, no such thing exists. The airport is extremely busy 24/7.
    Third: cheap labour. Most of the foot soldiers are originating from third world countries. The salaries they make in Dubai are generous compared to what they could make at home, and a lot of them are supporting whole families back in their home countries. Having said that, these salaries are only a fraction of what an equivalent worker would get in Europe or the US.
    Four: Advertising. Which was the last international big sporting event you saw without sponsoring from Emirates? Their name is everywhere.
    Five: All emirates airplanes are modern with state of the art inflight entertainment. Even a frequent traveller won’t be bored on an Emirates aircraft.

  120. Well said Stephen, read up on Tim Clarks rebuttle and you’ll see how many lies are told by US3, by the way the gent (Terry Kozna) who suggested these countries are supporting terrorism against the USA is the most laughable comment of all. The UAE is very ant-terroirst/ISA?Al Q etc and is a staunch Ally of the USA in the Middle East. Many US citizens work here and send their tax dollars home.

  121. Disappointing read to be honest. I was expecting a more balanced view. Some points that at be of interest.

    while all three big ME carriers present a threat to other major, particularly, Western carriers, they are not all the same. Emirates in particular has been profitable for more than 90% of the years it has existed. To say they are not profit-oriented is unfair. They are also the largest of the three.

    not all three receive the same amount of government support. Qatar’s losses are carried by their government and Etihad’s government pump in billions in capital. But Emirates growth over the years has not been as frenetic and they’ve largely grown “organically” (they’re not playing catch-up) and, funnily enough, EY and QR are trying to take market share from EK.

    EK actually can’t afford to purchase their own aircraft (they only own 6) and they lease them (those big orders announcements are marketing ploys) using cashflows rather than burning through capital the Dubai government doesn’t have (Dubai does not have oil, and almost went bankrupt in 2008. They cannot afford to prop up airlines forever).

    the nature of Open Skies does not prevent any carrier from creating a hub in DXB, to take advantage of those exact same conditions EK operated under: lower labour costs, no legacy labour costs, lower landing fees and helpful geography. Other airlines have created DXB hubs and benefited from it (QR most prominent, but there are other smaller regional airlines).

  122. I clearly have lesser knowledge then you, but I can only tell by my experience. Firstly, lets face it..the three American carriers are the biggest airlines in the world making billions of dollars in revenue. I fly to India quite often for work in Economy. My last four trips have been on Lufthansa, United & Jet Airways, American & British Airways and Etihad. Can I be frank? United and American gave me the worst time of my life.. both I flew from Chicago to London. American had NO personal ife screens (which I heavily rely on to pass the time) just a few common ife systems which had a movie going on and on in repeat. United did have a personal screen..but just 4 channels each with one pre-selected movie again playing on a repeat. The service on both of them very purely disgusting, and I am being nice here. Food-bad, flight attendands seemed to be hating everyone and it was like they wanted us to apologize if we even asked for a glass of water. Lufthansa and British Airways trips were really good, peaceful and comfortable. Jet Airways was unexpectedly better than all of the above. Brilliant seats, food, attendants, everything! And Etihad, obviously, was right up there with Jet..and I had the best time.

    Now as a common passenger, the US “Big 3” carriers should really not expect me to travel with them just bcoz of them crying like a baby about some other airlines and yet, they are the ones who are making the passengers’ life miserable.

    Btw, for my next trip, the cheapest ticket was United-Air India again, but I did pay $100 more to fly with Etihad again.

  123. ive enjoyed all your reviews and posts up until this point. Your about face on this matter, the comments you make all reak of paid propoga from the big 3 US. I have zero doubt you have sold out. How could anyone interested in travel hacking have a negative thing to say about the added competition from the Gulf. Here in Australia Qantas is crying the same tune against Virgin because they are backed by Etihad “which is backed by the UAE” well I enjoy better service, better planes and the better products from both sides due to the competition. It’s like Uber vs Taxis! I note that you support Uber, I guess the Taxi council or whatever has not cut you a big enough cheque.

  124. Lucky,

    If you don’t like ME carriers, you can stick to the heinous products and services of the U.S carriers. 😉

    X

  125. For the longest time now (at least in the last 10 years) the cheapest flights out of India to Europe or the United States are the Middle Eastern carriers hands down. Saudi Arabian is also a major one which I think might be worth a look. I always wondered how they could offer such low fares. For Ex: BOM-FRA would be $ 470 roundtrip!

    How could it not have anything to do with ATF prices? All these flights make stop-overs in the ME and I’m pretty sure they gas up there for the long haul to the US/EU.

  126. Jet A1 fuel needs to be specially refined. I’m the Middle East it is all refined by major Western oil companies and sold at global market prices. There is no cheap fuel in Dubai. Even if there is, nothing is stopping US carriers from setting up hubs in Dubai or Abu Dhabi or Doha (Dubai in particular – a number of airlines have secondary hubs there). But then why would anyone want to fly on a US carrier out of the ME…..

  127. To: Ben Schlappig (aka Lucky). It says that you travel 400,000 miles each year, which is approximately a 1000 hours in the skies, or 42 days in the air each year. Maybe you suffer from oxygen deprivation.
    All your facts and figures, as presented by you on the ME 3 Airlines are totally distorted and wrong. If Delta, United and American are paying you to write such inaccurate articles, or are giving you free flights, then that is a different issue.
    Suggest that you visit the UAE and request Emirates Airlines to allow you to inspect their Books of Accounts, since the inception of the Airline to date. After your inspection, comment on the “Subsidies”.
    Further, the “Open Skies Policy” has not been adopted only by the USA, it is Universal. Every major Country, has an Open Skies Policy. Suggest that you do a deep and intensive study, by reading the posts on this subject, on LinkedIn and studying the reply of Sir Tim Clark’s reply of 200 plus pages, to the US Govt. on the 55 page protest letter by United, Delta and American.

    Also study the “Rules & Regulations” as contained in the “Open Skies Policy”. It would benefit you, to find out from the US Dept. of Commerce and of Labor, as to how many jobs have been created for the American citizens by the ME 3 Airlines, and the contribution to the US Economy and GDP. Also re-read the views as posted by my fellow members on this topic, as above. Visit a lawyer or an Accountant and find out the real meaning of Chapter II and the meaning of “Subsidies”.

    Lastly, bear in mind that each Airline, wherever they may be, are in for the long term and for making profits.

  128. The government of Dubai doesn’t own Emirates!
    Sheikh Ahmed does who is Sheikh Mohammed uncle.
    Yes closely related

  129. Well I see that some people here don´t agree with this article, and I have to back them up. I was reading quite a few articles you have wrote about your travels and I would say that (except Lufthansa which is the best airline ever 🙂 ) middle eastern carriers offer much better travel experience than US ones. But this was something I knew even before. While i.e. Qatar airways, even in economy class which us mortals use, make their best to make you feel comfortable in any way possible, at Delta they will tell you that your extra meal order was too late, despite the fact that you selected it at time of the booking one month ago. And then you can enjoy your transatlantic flight on an empty stomach.

    One thing that needs to be understood is that Gulf carriers are driving the economy of their countries, and once they ran out of oil and gas, they will have to have some kind of income. And with that kind of climate they will not plant tomatoes 🙂 So their approach to aviation business is very smart in long therms.

    On the other hand American and Delta still stubbornly operate a huge number of MD-80 series.
    In terms of fuel MD-80 is circa 45 percent more expensive (fuel per seat per NM). Most other serious airlines have phased out this type long ago.

    All in all I would say that the energy US carriers use in accusing others of being unfair would be better used in thinking how to make their product more competitive. I understand that it is hard for them, since they were world leading airlines, and often setting standards in the industry, but this is not the way to go.

Leave a Reply

Your email address will not be published. Required fields are marked *

Pingbacks