European and American airlines fear Middle East
European and American airlines fear Middle East
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Why European and American airlines try to operationalize their governments to protect their markets against Middle East carriers
Over the last fifteen years, the big three carriers from the Middle East comprising Qatar Airways, Etihad and Emirates have expanded to become 3 of the most highly regarded global carriers in the world. Over the recent past, carriers in Europe and the United States have raised complains that the Middle Eastern airlines get unfair subsidies from their respective governments (Noakes, 2015). This paper seeks to evaluate the reasons why airlines in the United States and Europe are trying to operationalize their governments to protect their markets against carriers from the Middle East.
Through various agreements between the American government and governments of Qatar and the United Arab Emirates, the Middle Eastern trio commonly referred to as ME3 have increased their presence considerably within the American market. Even so, Delta, United and American Air Lines which are the 3 largest carriers in America and commonly referred to as the US3 assert that the Middle Eastern trio’s lavish spending and explosive expansion are due to billions of dollars on unfair subsidies from their governments. At the moment, Delta, United and American Airlines want the federal government to cancel those agreements which allow the Middle Eastern trio to encroach on their territory (Unnikrishnan & Flottau, 2015). In the year 2014, Etihad Airways expanded to nearly 15 million travellers, with Emirates carrying 3 times more travellers and US3 carried 34 times more travellers (Ball, 2015).
While labour unions and carriers based in the United States initiate a campaign in opposition to alleged subsidies for the Middle Eastern trio, the debate is already in progress in the European Union. The major players in the transport policy are seeking a new agreement with Middle Eastern countries aimed at regulating government subsidies, but Qatar and the United Arab Emirates along with their airlines are strongly against this effort (Dunbar, 2015). For many years, airlines based in Europe have lobbied against the ME3. These Gulf carriers affect a considerable part of the European airlines networks. As Etihad’s investment into Italy’s flag carrier Alitalia demonstrate, European airlines face the Gulf carriers not just on long-range services, but also inside Europe. As such, the ME3 are facing more pressure and scrutiny.
The European Commission (EC) seeks an authorization from EU countries to negotiate with the Middle Eastern countries regarding the issue of unequal competition. This process was instigated by Lufthansa Group and Air France KLM in 2014 in a letter in which, along with their subsidiaries, they demanded that competition with the Middle Eastern trio has to be more equitable and fair. The transport ministers of Germany and France made a joint proposition that until fair competition is ensured, ME3 airlines must not be given more traffic rights into the EU (Flottau & Unnikrishnan, 2015). The two transport ministers also stated that European airlines, in spite of significant adaptations which they have made, have continued to lose their share of the market to the Middle Eastern carriers on numerous destinations including Eastern Africa, Oceania, Southeast Asia and the Indian subcontinent (Flottau & Unnikrishnan, 2015). They noted that there is an urgent need to act and pointed out that the current situation decreases the attractiveness of EU hubs, harms the European airlines very much, and significantly threatens EU’s connectivity with the rest of the world.
The German and French transport ministers suggested that a response may be a wide-ranging air transport agreement with the Qatar and the United Arab Emirates if some specific conditions are satisfied fully. The conditions to be met are as follows: a guarantee of fiscal transparency, competition that is fair, exhaustive and full provisions on subsidies, unfair competition and practices, over and above giving the European Commission and EU countries proper means of action besides the standard dispute-settlement methods in case of nonconformity to or disobedience of these stipulations (Walker, 2015). They added that the opening of EU Markets would be slow and restricted. In an exhaustive air service agreement, only 3rd and 4th freedom rights should be covered and additional traffic rights to the Middle Eastern trio would be associated with a positive progression or development of the competitive environment. The 3rd and 4th freedom of the air dictum cover the rights of to move traffic from and to the home nation of the carrier. However, the business model of the Middle Eastern trio is developed largely on connecting traffic and beyond – 6th freedom – and therefore the condition is very likely to be unacceptable to the Gulf countries and their carriers (Flottau, 2015). A proposition such as this one has been suggested by Richard Anderson, who is the Chief Executive at Delta Air Lines. He stated that new agreements between the Gulf countries and the United States have to prevent the Middle Eastern trio from offering flights which do not end in the United States or their home countries (Flottau & Unnikrishnan, 2015). This suggestion is equal to a prohibition on connections, which is in fact the exact business model under which airlines in Europe and the United States are operating.
Unbalanced and unfair competition with airlines from the Middle East
An important reason that makes US-based and EU airlines to operationalize their governments to protect their markets against carriers from the Middle East is the unfair competition from heavily-subsidised ME3 carriers. The United States, European and international carriers operate internationally under various Open Skies treaties which are aimed at lessening protectionism and freeing up competition. The intention is essentially to expand global cargo and passenger air travels through the elimination of government interference in commercial airline decisions with regard to pricing, capacity and routes (Aguinaldo, 2015). For nearly fifteen years, the Gulf airlines have been party to Open Skies treaties and the ME3 have aggressively expanded into the American market over the last 10 years, all set to compete with award-winning service and large fleets of new airplanes. With their international business threatened, airlines based in the United States argue that competition with the Gulf airlines has now turned out to be inherently unbalanced and unequal.
The US3 want their government to freeze the growth of the Middle Eastern trio into the American market and to negotiate once more the Open Skies treaties with United Arab Emirates (UAE) and Qatar. The Partnership for Fair and Open Skies, the lobby group which represents the US3, stated that the Middle Eastern trio have been given an estimated $42 billion over the last 10 years in subsidies from the Qatar and United Arab Emirates governments (Open Skies Partnership, 2015). The Middle Eastern trio are wholly dependent on taking traffic from other carriers through subsidizing for instance subsidized marketing, product levels or pricing (Open Skies Partnership, 2015). In essence, airlines in the United States are not concerned about Middle Eastern airlines flying domestic routes around America. Actually, the ME3 are only configured for long-haul international flying. What the US3 are looking to protect are their important international air travels out of and into the United States. Therefore, the US3 are seeking a new agreement. It is worth mentioning that any re-negotiation of Open Skies treaties may have sweeping business as well as diplomatic ramifications (Francis, 2015).
As said by the Partnership for Fair and Open Skies, ME3 airlines have been given $12 billion in shareholder advances and interest-free loans, in addition to $8.79 billion in loans from their governments in the past few years. Additionally, they have been given slightly over $11 billion grants and inequity infusions, plus an extra $9.5 billion in wage savings from labour costs that are below the market as well as other subsidies (Open Skies Partnership, 2015). Every time that a carrier based in the United States loses an international route to ME3, there would be a loss of 800 jobs in America (Dunbar, 2015). European and U.S-based carriers assert that subsidies for instance cheaper access to airports, interest-free loans from their governments, and cheaper access to services like ground handling and fuel make it not possible to compete for profitable international travellers. The Chief Executive Officer of American Airlines stated that there is adequate evidence which suggests that the governments of the United Arab Emirates and Qatar are going against the aviation trade treaties between the United States and these two Middle Eastern nations by giving huge subsidies to Emirates Airlines, Qatar Airways and Etihad: these subsidies are in amounts so high that are in fact record in the history of global trade (Dunn et al., 2015). Airlines in Europe are also disturbed. Transport ministers of Germany and France arranged for the European Union (EU) executive commission to espouse a strategy aimed at ending subsidies to the Middle Eastern trio. The initiative was backed by officials in Austria, Sweden, Belgium and the Netherlands.
There are quite a few things which make which the Middle Eastern airlines particularly unique. Firstly, of all the government-owned carriers in the world, Qatar, Etihad and Emirates are expanding in a disproportionate manner in comparison to their respective growth in Gross Domestic Product and populations. Not so many years from today, these three airlines would have more widebody jets than all carriers in the United States put together, in spite of the fact that Qatar and the United Arab Emirates have a population which is less than four percent of the United States (Baker, 2015). Secondly, these three carriers are not playing fair and their behaviour is actually destructive to other airlines. In essence, the long-term business model of the Middle Eastern trio is to run rival carriers out of markets as much as possible, and to do so at whichever cost, even if it means losing billions of money in the process (Flottau & Unnikrishnan, 2015).
U.S and European carriers seek to protect the profitable transatlantic routes
Another major reason as to why airlines in the United States and Europe are trying to operationalize their governments to protect their markets against carriers from the Middle East is that they are seeking to protect the highly lucrative transatlantic routes from new competitors. The US3 want restrictions on the destinations and routes which foreign airlines may fly into America. Over the past few years, carriers from the Gulf region have expanded into cities across America with direct air travels from their respective nations of origin. This growth has largely been met with slight resistance. In 2013, nonetheless, Emirates Airlines started to operate air travels between Milan, Italy and New York City: air travels that come from outside the domestic market of the airline. This a major source of the conflict (Bart, 2015).
Any air travels from the Gulf region with a stop in Europe allow the airline to sell flight tickets on the portion of the trip between America and Europe. In essence, this is a game-changing development given that transatlantic flights are highly lucrative and competitive and increased competition on the transatlantic routes would certainly be troublesome and worrying. The entrance of the Middle Eastern trio – which are very deep-pocketed and accomplished carriers – could actually be catastrophic and disastrous not just for U.S-based airlines, but also for their European alliance partners (Dunbar, 2015). Most of the transatlantic air travels are controlled by U.S-based airlines along with their Skyteam, Star Alliance, and Oneworld partner carriers based in Europe. Increased competition from the Gulf carriers on the transatlantic routes would surely lead to a decline in profits for US3 and the European airlines flying these routes such as Lufthansa, British Airways, and Air France.
Unlike U.S and European carriers, Middle Eastern trio not motivated by profits
The other reason is that airlines in the United States and Europe are trying to operationalize their governments to protect their markets against carriers from the Middle East because the big carriers from the Middle East are actually not financially motivated. They seek to increase their market share but not to make a profit. Etihad Airways, Emirates Airlines and Qatar Airways are not really motivated by profits and to increase shareholder value like other airlines. Every aspect of the operations of these three Persian Gulf carriers is run so as to create a loss and increase share of the market in order to develop the country and not the carrier (Francis, 2015). There is one particular thing which makes the ME3 unfair: it is not that these airlines have lower costs of staffing owing to where they are situated. It is also not because they have lower costs due to their location. Rather, these three airlines employ dirty tricks and have unfair advantage since they have almost unlimited access to interest-free capital and all aspects of their supply chain and operations are interlinked. The conspiracy between these airlines and their governments does not allow for transparency, which has the intention or result of giving these 3 carriers an unfair advantage in the marketplace (Baker, 2015). For instance, the President of Emirates Airlines, Sheikh Al Maktoum, is also the Chairman of Dubai Airports, he is Dubai Civil Aviation Authority’s President, over and above being dnata President. This is something that really presents a conflict of interest, particularly considering that the business organization is not motivated by money.
Furthermore, the landing fees at Dubai Airports are actually lower than the costs incurred in providing them. In other words, Dubai Airports lose money with each aircraft that lands there (Dunn et al., 2015). This is something a typical airport in Europe or America cannot justify. In Dubai however, Dubai Airports understands that Emirates Airlines benefits the most when landing fees are subsidized. Moreover, when a single person is in charge of the airport, the carrier, as well as the civil aviation authority, he can do virtually anything. Furthermore, when a passenger flies via an airport facility, there is usually a passenger facility surcharge. In essence, some constituent of the plane ticket cost will go to the airport facility for having utilized their terminal. Almost every airport in the world charges this passenger facility surcharge to both travellers who connect at or originate from an airport. Even though this fee could be different depending on whether the traveller is connecting or originating, each traveller is charged at least some amount. Nonetheless, at the Dubai, Doha and Abu Dhabi airport facilities, this does not happen. Facility fee is charged only to travellers who terminate at or originate from these cities (Noakes, 2015). The reason for this is that most travellers who travel on Qatar, Etihad and Emirates airline carriers are connecting, whereas most of the travellers on other carriers who fly to the airports in these cities are terminating at or originating from there. For instance, between Boston and Tokyo via Dubai, a passenger does not pay any kind of Dubai passenger service fees. However, if a passenger is terminating in or originating from Dubai, then he or she will be required to pay about $20.40 in passenger service fees.
Although ME3 do not care about profit making, they are essentially having foreign airlines subsidize operations at their hubs. There is also the fact that Emirates Airlines faced a $2.4 billion fuel hedge loss which the government of the UAE took care of. The fact is that under this system, other carriers just cannot compete with the Middle Eastern trio. This is not particularly about the fact that Qatar, Emirates and Etihad are fully owned by their governments. This is also not about routes, aircrafts, or service. It is about the fact that these 3 carriers are not financially motivated at all: making a profit does not motivate them (Ball, 2015). For this reason, European and US-based airlines cannot just compete with these ME3 carriers which are losing billions of dollars annually. European and US-based airlines cannot compete with the service without regard for their shareholders.
As per the Financial Times, the accusations against Emirates airlines comprise $1.9 billion of savings from the carrier’s non-unionized employees, $2.3 billion of savings from very low airport fees, and a $2.4 billion of fuel hedging loss. The boss of Emirates denies the accusations stating that cheap ground-handling and labour costs are not government subsidy but rather, they are a reflection of the Dubai government’s commercial savviness (Aguinaldo, 2015). Etihad is accused to have been given capital injections amounting to $6.3 billion, interest-free loans of $4.6 billion without obligation of repayment, in addition to extra committed subsidies of $4.2 billion from the government of Abu Dhabi. It is claimed that Qatar Airways was given interest-free loans by the government of Qatar amounting to $7.7 billion in addition to reduced debt-interest charges amounting to $6.8 billion because of sovereign guarantees (Bart, 2015). As a result, the Middle Eastern trio enjoy obvious fiscal advantages over their European and American rivals, which provides them with a safety net that allows them to operate unprofitable services for the purpose of gaining market share.
Long-range jets would bring much more capacity than needed by the demand
There is also the assertion by European Union and American carriers that very big jets for instance the long-range Airbus A380s would bring a lot more capacity into the United States and the European Union than is in fact warranted by destination and origin demand. The U.S.-based carriers claim that the Middle Eastern trio are adding capacity to the United States which outstrips the demand by far, since there is very little destination and origin traffic between the United States and United Arab Emirates and Qatar (Flottau, 2015). This denotes that the Middle Eastern trio are siphoning traffic from EU and US airlines to Asia and beyond at a scale with which the American and European carriers are not able to compete because of unfair subsidies from Qatar and UAE governments.
In the United States, James Hogan and Tim Clark, who are the CEO and President of Etihad and Emirates respectively, strongly defended their points of view in various meetings where US-based carriers and their unions pushed to reduce the access of ME3 to the United States. These 3 Gulf airlines are calling for the government of the United States to start consultations with the United Arab Emirates and Qatar governments. Until a resolution is reached, airlines based in the United States assert that no new ME3 airline capacity to America should be permitted. Even so, critics argue that this condition abrogates the open-skies agreement (Noakes, 2015). On the whole, airlines in Europe and America cannot effectively compete with carriers which benefit from significant subsidies from their governments. Nonetheless, the boss of Emirates Airlines stated that the airline only ever got $10 million from the UAE government as seed capital in the year 1985 and that its explosive growth on the international arena is as a result of a combination of the Gulf region’s geographical good luck at the midpoint of West and East as well as the pro-aviation policies of the government of Dubai (Dunn et al., 2015).
Conclusion
In conclusion, airlines in the United States and Europe are operationalizing their governments to protect their markets against Persian Gulf carriers due to unfair competition from these carriers which are very much subsidized by their respective governments. The Middle Eastern trio have been given over $41 billion in the last 10 years in subsidies which gives them unfair advantage over US and EU carriers. Moreover, the Middle Eastern carriers are actually not motivated by making profits. They are operated so as to create a loss and increase share of the market in order to develop the country and not the carrier.
References
Aguinaldo, J. (2015). Disputing the Open Skies. MEED: Middle East Economic Digest, 59(36/37), 32-33.
Baker, M. B. (2015). U.S., Persian Gulf Carriers In Open Skies Spat Over Funding Allegations. Business Travel News, 32(5), 12.
Ball, L. (2015). Outlook stormy as U.S. open skies debate rages. Air Cargo World, 105(3), 20-21.
Bart, J. (2015). Emirates CEO goes on offensive. USA Today.
Carey, S. (2015, February 24). U.S. Airlines Clash Over Rivals From Persian Gulf. Wall Street Journal – Eastern Edition. pp. B1-B5.
Dunbar, M. (2015). Big 3 carriers aim to rollback US Open Skies. (Cover story). Canadian Travel Press, 47(26), 1-14.
Dunn, G., Yeo, G., Russell, E., & Pilling, M. (2015). US big three accusations spark open-skies debate. Airline Business, 31(2), 14.
Flottau, J. (2014). Defining Fairness. Aviation Week & Space Technology, 176(41), 35.
Flottau, J., & Unnikrishnan, M. (2015). France, Germany Protest Gulf Carrier Encroachment. Aviation Week & Space Technology, 177(11), 1.
Francis, R. (2015). North Texas officials, airlines seeking new talks. Fort Worth Business Press, 27(22), 7.
Noakes, G. (2015). Sky strategies. Buying Business Travel, (75), 56-59.
Open Skies Partnership. (2015). U.S. airlines, unions reveal evidence of $42 billion in subsidies and benefits by Qatar and the UAE to their state-owned carriers. PR Newswire US.
Unnikrishnan, M., & Flottau, J. (2015). Lobbying Against Gulf Carriers May Be To No Effect. Aviation Week & Space Technology, 177(17), 1.
Walker, K. (2015). A Dangerous Debate. Air Transport World, 52(4), 5.
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