Are you up for some competition?

By Richard Klophaus

How the big US and EU carriers should deal with the global network expansion of the Gulf airlines.

The aim of airline deregulation is to improve general welfare through market entry of new airlines, thus increasing competition. In the same way, open skies agreements liberalize the rules and regulations of international aviation. Thanks to airline deregulation and open skies, the Gulf airlines Emirates, Etihad, and Qatar Airways have entered new international markets after initially using their Middle East hubs to build a passenger base, flying people from Europe to the Far East, India, Africa, and Australasia. More recently, the Gulf airlines expanded to fly people from China and India west beyond Europe to the Americas. The presence of Gulf airlines in Western Europe and North America is growing rapidly: From only New York-John F. Kennedy in the United States (US) and 17 airports within the European Union (EU) in the summer season 2005, the number of airports served by the big three Gulf carriers jumped to 6 in the US and 29 in the EU five years later to reach 12 US airports and 38 EU airports in the summer season 2015. In October 2013, Emirates also entered the transatlantic market with fifth freedom flights between the EU and the US by launching a service from Dubai via Milan-Malpensa to New York-John F. Kennedy. These figures illustrate the Gulf carriers’ route expansion besides additional frequencies and larger aircraft employed on existing routes. During the last decade, the big three Gulf carriers’ route expansion to North America was more pronounced than to Western Europe. The total number of seats offered by the big three Gulf carriers to and from the US amounts to 7.8 million in 2015 (Source: OAG Schedules Analyser as of May 2015). This is roughly three times the seat capacity offered in 2010, and 35 times more than in 2005. In comparison, the total seat capacity offered in 2015 between the US and Western Europe is 72.7 million. The fact that the Gulf carriers also fly into second-tier US cities like Boston, Philadelphia, Orlando or Seattle might explain why American Airlines, Delta and United Airlines advocate the case for “fair skies” to freeze further expansion of the Gulf carriers in US.

Have the major US and EU airlines cried wolf?

“The Boy Who Cried Wolf” is an ancient Greek fable about a boy giving false alarms. Is this also applicable to the major US and EU airlines with their lobbying efforts? They assert that Gulf airlines benefit disproportionally from misconceived open skies agreements as the United Arab Emirates and Qatar cannot offer reciprocal traffic rights for a large number of airports. Furthermore, the state-owned Gulf carriers are thought to be receiving undue government subsidies and benefits. Hence, their access to US and EU markets should be limited. One intuitively tends to support the notion of fair skies as a prerequisite for open skies. But what constitutes fair skies? An unfair playing field is an inherent trait in the global aviation market. The Gulf airlines’ success despite small home markets builds primarily on their preferential hub locations and competitive labor costs. Should they be sanctioned for this? Clearly, the Gulf airlines’ network expansion might jeopardize intercontinental routes offered by the major US and EU airlines. It could also have a ripple effect on their domestic and international short-haul operations. However, demanding that the government should step in to impose fair skies is protectionism in disguise, blocking foreign competitors’ market access. Some industry leaders share the belief that global liberalization is fundamental for the future growth of the aviation industry. In March 2015, International Airlines Group (IAG), the parent company of British Airways and Iberia, left the Association of European Airlines (AEA). The cause of this conflict reportedly lies on demands put forth by Air France/KLM and Lufthansa Group to limit access to Europe for Gulf carriers. As courageous as this decision by IAG’s CEO Willie Walsh appears initially, one should keep in mind that Qatar Airways is IAG’s largest shareholder with a stake of almost 10%.

In summary and returning to this column’s initial question “Are you up for some competition?”: Preserving the original goals of airline deregulation and open skies, the big US and EU carriers might better adopt new business strategies, improve cost efficiency and their product offerings to compete with new market entrants instead of complaining about unfair competitive advantages of Gulf airlines.

Category: columns