Delta’s CEO on the Middle East “Cheaters” (Across the Aisle)

Welcome back to the third, final, and probably most controversial installment in my Across the Aisle interview with Delta CEO Ed Bastian. If you missed part one about Los Angeles and the Pacific, find it here. And if you missed part two about getting cocky, arriving on time, and viral videos, that one is right here.

I hadn’t even planned on asking about the Middle East carriers, because that wouldn’t have been near the top of my list with so much else to discuss. But when our time was up and Ed wanted to keep the party rolling so we could talk about the Middle East situation, I wasn’t going to turn it down. The airline has really ramped up the Middle East carrier rhetoric lately, so I think we can all get ready to hear a lot more about this.

I’ve long believed that there’s a lot of noise in this battle, and that this really wasn’t about the Gulf hubs at all. It always seemed to me to be about future growth in fifth freedom flights that, without government intervention, will eventually allow Middle East airlines to connect the US with East Asia and Europe. (There are already a couple of questionable European routes flying.) I made sure to bring that up in the discussion, and Ed’s comments cemented by belief.

Many people have brought up the hyprocrisy in calling out subsidies when other airlines receive them as well. I don’t buy some of those arguments, like, as mentioned in the interview, the Chapter 11 comparison, but there are others that seem more cloudy. That’s why I brought up China. My understanding is that some Chinese airlines are running an increasing number of loss-making flights with cheap seats over the Pacific thanks to local subsidies. As you see below, Ed has an alternative view.

Brett Snyder, Cranky Flier: We’ve seen Emirates making some big cutbacks lately in the US, but as an overall strategy you still see these guys growing. Qatar just announced San Francisco. There’s more coming. Obviously Delta and others have been very vocal about the subsidization issue of Middle Eastern carriers. Where is that today, this fight, because it’s been going on for some time?

Ed Bastion, CEO, Delta Air Lines: Well, we are working with a new administration. We spent a lot of time with the previous administration. We thought we had made our case to them, and I think they weren’t quite sure how to deal with the remedy.

Cranky: They believed in the case. They just didn’t know what to do with it?

Ed: I think that’s indeed the case. And I think they were trying to work the issue, and they ran out of time. This president ran on a platform of enforcing US trade agreements, fair trade as compared to free trade, and protecting American jobs and American interests. Given the size of the subsidies which we’ve had audited, we’ve had lawyers involved, forensic accounting involved, no-one has been able to give any evidence that they’re not subsidized. Fifty billion dollars is our expectation and we think it’s grown since then, because that was a couple years ago. So our government needs to decide what they’re going to do about it.

The issue for me, Brett, is a very important issue because the US airlines are profitable, some of the most profitable airlines around the globe. It’s not going to cause us to go spiraling out of business any time soon, but it will over time. And over time it’ll be too late if we don’t do something about it now. And when you think about those three airlines combined have about 450 planes, widebodies. They have destroyed a large part of the European economics that the traditional carriers; Air France, KLM, Lufthansa… certainly other things that fit back to their businesses too. But that’s really hurt their traffic pulls Europe to Asia, Europe to Africa, Europe to the Middle East. Those profits are way off, and they’ve lost those and now they’re barely making money. They’re not growing anymore in those markets. Big social unrest as a result of that. They can’t pay their people. You go to Asia and you look at the issues that Singapore’s having. Look at the issues Cathay Pacific is having. A number of factors going on there, but the Middle Eastern carriers have had a significant impact in those markets.

Cranky: It’s funny, because Singapore, the same charges were levied at them back when they started.

Ed: Exactly. Well, the Middle Eastern carriers stole the business model from the Singaporeans. And then Australia where Qantas has now turned into largely a feeder airline for Emirates on an international scope. Of course they fly Australia to China and they do some local Asian flying, but the flights to Europe, the Kangaroo flights, that’s all been ceded to the Middle Eastern guys. Emirates is far larger, substantially larger than Qantas is. We don’t have to look too far. You know what’s gonna happen when you add another 500 aircraft, 540 to be specific, widebodies on order, firm orders, that are being built as we speak to be delivered over the next 5 to 8 years? Where are they gonna go? Are they gonna go to China? I don’t think the Chinese are going to let them in. Are they gonna go to Japan? I don’t think so. The Japanese aren’t going to let them in. The only other market that can sustain that level of volume is the US and they’re waving ’em in.

They want to bring them over the Transatlantic undoubtedly. They want bring them through, establish Transatlantic markets they continue to poke at. They eventually want to bring them in over the Pacific, there’s no question in my mind of that. And it’s for to us to decide, ’cause if that is indeed is going to be what happens, then the US industry is going to be substantially smaller in 10 years from today than it is. And I think that’s a terrible thing for our international airlines, a terrible thing for our employees, a terrible thing for our customers, our communities and you know, they’re cheaters. They’re trade violators and they’re cheaters. And we need to hold them accountable.

It’s easy when somebody pays billions of dollars to make issues go away… we’re here in Los Angeles, Emirates is the airline of the Dodgers. They’re all over Dodger Stadium. How can that be? They’ve got one flight a day, LA to Dubai. Can that sustain a sponsorship which I know is very expensive? That sponsorship costs many millions of dollars a year. Based on one flight, which they just cut back from two. How could that be? Or how could they be the sponsors of the US Open in New York, the tennis tournament, on two flights a day they got. These things have created outsize impacts not just in international aviation but the cost of sponsorships, the cost of service, and we need to do something about it. If it’s proven that they are not subsidized, fine. We’ll compete with anybody. But we can’t compete with a government that’s nation-building. That’s what they’re doing. In terms of wanting to turn their economy as they’re doing and have done into a center of global trade and commerce. That’s not right, it’s not fair, and we’re not going to stand for it.

Cranky: So, the fifth freedom is the big concern, right? The ability to flow something through Europe or through Asia here? Because what they have now, I guess in theory they could add more cities to their Middle Eastern homes, but that’s probably more of a drop in the bucket, right?

Ed: We already know they’re subsidized and losing an enormous amount of money, so at this point they can add as many as they want and it doesn’t really matter. But I’m much more sensitive to what they do on routes that people actually want to fly on. To Europe versus Doha.

Cranky: Routes people want to fly on? So [Newark to] Athens doesn’t bother you then? *laughing*

Ed: No, exactly, to Europe. Rather than route over Doha, you’d rather go direct to Athens and that’s a cause for concern.

Cranky: No I know; I was kidding because that’s a pretty thin route for that airplane anyway.

Ed: I understand they have like 60 people on that flight.

Cranky: Oh that’s pretty good.

Ed: I’m not sure how many people paid.

Cranky: In the winter it’s going to be rough.

Ed: I heard there were maybe 2 people in business class and I’m sure they were both comped. So anyway, when you see that stuff,and you know it’s wrong, and you know it’s subsidized. And by the way, we’re together with American, we’re together with United, we’re together with our unions. Everyone who competes against these people have the same reaction. You hear the noise from the people that don’t compete and get paid off by these guys. You know, they’re biased. They get paid by them, so I don’t think their arguments carry much credibility. Our government needs to respond to that, and I think they will.

[Corp comm chimes in to say we’re just about out of time, this time for real]

Ed: He wants to cut you off because I could go on for another 30 minutes.

Cranky: I’m sure. Let’s get some drinks in here. But I will ask one more question. You hear people that compare it to bankruptcy as a subsidy in the US which I don’t buy into anyway.

Ed: That’s BS.

Cranky: And I agree on that, but what about the people who say “looks what’s happening in China”? They’re throwing money in China at routes that are in no way sustainable to the US.

Ed: There are subsidies in China. By the way, they call them out. They put them on their financial statements to do it. Have you seen the Chinese financial statements?

Cranky: No

Ed: You need to get a look at the Chinese financial statements. There’s a line item called subsidies.

Cranky: Well at least they’re clear, but that’s still a subsidy.

Ed: Well ok, but first of all, they’re transparent about it so you can draw your conclusion about it. I’ve asked because we have partners over there, and the majority of those subsidies are geared toward domestic service. The Chinese would not be flying between a lot of these secondary markets within China. We’re not competing against that market, and that’s China policy within its own nation. We have no issue with that. There’s minimal subsidies of international service by the Chinese carriers. The bulk of that is domestic which by the way we have in our country too; it’s called [Essential Air Service]. It’s small and it’s going away. It’s not relevant. For people to compare that, which are in the Chinese, I think it’s in the tens of millions of dollars, not the billions to the $50 billion number I talked about, it’s laughable.

And that was a wrap. I appreciate the way Ed answered the questions put to him, even if I might not agree with everything he said. I have no doubt this particular post is going to generate a lot of heat in the comments, so have at it.

If you missed part one about Los Angeles and the Pacific, find it here. And if you missed part two about getting cocky, arriving on time, and viral videos, that one is right here.

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56 Comments on "Delta’s CEO on the Middle East “Cheaters” (Across the Aisle)"

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scotshea
Member

Great interview, Brett!  Thoroughly enjoyed reading all three parts.  From a DL retiree.

Tim Dunn
Member
This is by far the best write-ups on the ME3 issue and it is so good because it captures the emotion of the conversation that a government filing cannot do. “that’s BS” is precisely right and it is the hypocrisy that the ME3 throw out and too many people repeat because they don’t understand that reorganization under BK laws involves exchanging debt for equity in the new company and it involves private creditors, not the government. The emotion is reinforced in the reality which Ed notes that the ME3 have decimated European longhaul aviation. The only part that is missing… Read more »
Southeastern
Guest
“they don’t understand that reorganization under BK laws involves exchanging debt for equity in the new company and it involves private creditors, not the government” The airlines, specifically American, dumped billions of dollars of pension liabilities on the government/tax payers through the Pension Benefit Guarantee Corporation (a U.S. Government agency). To claim they didn’t makes the ME carriers look honest. It would be great if all sides would open their books and be honest about current funding (aircraft, pensions, airports, fuel, labor, etc) so we can have an honest debate about fifth freedom rights and asking airlines to contribute more/less… Read more »
billyshearer
Member

Except, the European market has not been decimated by the ME3.

Tim Dunn
Member
This is the best article on the ME3 issue because it captures the emotion of the issue as only an interview can do. “BS” is accurate about bankruptcy because it highlights the hypocrisy of the ME3 in trying to accuse somebody else of wrong-doing to justify their actions and ignorance of those who don’t understand that the process of chapter 11 organization involves swapping debt for equity among private shareholders, not the government. The only thing missing in the response about the decimation of the Europeans is their mistake allowing the ME3 to decimate European airlines in exchange for buying… Read more »
Tim Dunn
Member

forgive the duplicate post… I’m betting I am not the first one that, at times but not always, waits for the post to appear or get an error message non the captcha code only to think nothing posted.

billyshearer
Member

The capcha code is so annoying!

Mike
Guest

“No-one can give any evidence that they’re not subsidized” is an incredibly silly argument to use. The onus isn’t on the ME3 to prove themselves innocent, it’d be on Delta or US carriers to prove that they’re guilty. Using that logic one could easily say that nobody has given any evidence that Delta’s management doesn’t ritualistically sacrifice a live puppy every quarter to improve their A0 numbers and it’d be just a true. Either way it was a softball interview.

Wes
Guest
Agreed that asking for proof of a negative is not a way to win an argument. However, it’s not as though there isn’t a fair amount of evidence (perhaps a preponderance?) already out there in support of the proposition of the ME3 being heavily subsidized. Given the extreme difficulties that any entity outside of the ME3 would have in obtaining reliable documentary evidence on the issue, I don’t think it’s unreasonable to require an airline to prove it isn’t subsidized as a condition precedent to permitting the airline to fly 5th freedom routes to/from a country whose industries stand to… Read more »
Bill Hough
Guest

My sentiments exactly. Thanks for the puppy sacrifice analogy, it summarizes how many people feel about the US3. If they would stop whining about the ME3 and work on having a decent product, this wouldn’t be an issue.

Mike
Guest

And as another follow up, if the Chinese airlines only get subsidies for their domestic operations, then maybe if the ME3 are subsidized, they only get the subsides for all of their routes not involving the US.

It’s just incredibly hypocritical to say that you’re ok with an airline you’ve invested a ton of money in being subsidized because it’s “only for domestic operations” (I’m sure none of that money helps their balance sheet elsewhere). And then go on to argue that subsides are bad and distort competition.

Jim@CVG
Member
The “subsidies” for US carriers, as Mr. Bastian pointed out, are “Essential Air Service” subsidies in which small towns raise money to bring air carrier service to their municipalities. In many cases the air carriers still lose money with the “subsidies” and discontinue their service after an agreed-upon time. Do you think any of the ME3 want to fly Paducah, KY to ORD, or Alpena, MI to DTW, or Garden City, KS to DFW? No. They want to scrape all the cream off the top. The labor costs for these carriers must also be minimal, to say the least, where… Read more »
Mike
Guest

I was referring to Delta being completely ok with the fact that China Eastern (who DL bought a $450 million stake in a few years ago) having $865 million of documented state given subsides “for domestic operations” in 2015 alone (this is more than their yearly profit by the way). But somehow they’re massively against other carriers receiving a subsidy….possibly.

Suzie Alcatrez
Guest

Don’t forget the Civilian Reserve Air Fleet payments.

Biggles
Guest

Join the discussion

Nicc Harris
Member

I argued here once before the next stage in the growth of the ME3 will be secondary european city to North America, i.e. Dubai-Manchester-Chicago, or Doha-Stuttgart-Miami. Connecting growth rates via the Middle Eastern gateways is not sustainable, so the alternative must be the afore-mentioned type of routing. Admittedly this was based on talking to London based airline analysts.

This will inevitably draw away connecting traffic away from the UK/European carriers main hubs as well as their US partners.

Going East will be far harder, China, Japan and Korea are far more protectionist than their western counterparts.
Nicc

Bill from DC
Guest

I appreciate Ed’s candor as well as these in depth interviews. Much better than most of the aviation fluff pieces in MSM that do little more than echo the airline’s PR bullet points.

southbay flier
Guest

I agree. Ed seemed very honest and I didn’t feel like he really was spinning his answers that much.

Hal
Member

It may shock Ed, but most of his customers would stampede over him to enjoy the quality of service offered by any non-American airline at near-equivalent prices. Think: young flight attendants that smile, food with more than a single shard of lettuce, space for knees, it goes on. Let the subsidies continue!!

Nathan P
Guest

Would you like to lose your job because your employer cannot compete against a state sponsored entity? I would love to pay below market prices too, but not at the expense of fair competition.

Giles
Guest

Thanks, Brett!

Ghostrider5408
Guest
Well you should take Larry king’s old TV show because this was a bag full of “softballs” you threw. While I will not argue that there are a lot of “state” owned parts and pieces which benefit the ME3 the assessment or argument that Bankruptcy and special tax deals are not subsidies is pure CRAP. Remember they don’t have the tax code we have. Delta buys more AirBuses than US metal as does United and AA. The US carriers are profitable, and I am sure you just love to fly in those cramped smelly coach seats eating those wonderful food… Read more »
Tim Dunn
Member

you do know what happened on Sept 11, 2001?

All of the US airlines have invested enormous amount of money in their products and terminals and increased pay for their people and they have done with their hard-earned profits, not government subsidies.

Tell us what flight attendants for the ME3 make compared to US flight attendants at the same time you tell us how many other airlines in the world chose to fit even their coach toilets with wood toilet seats. Show us the rent payments for terminals at DXB, DOH, and AUH.

Seth
Guest

When you consider the absence of taxes, housing and other benefits the ME3 staff receive, they get paid pretty well. They also get longer rest periods and nicer hotels.

Bill from DC
Guest

Absence of taxes = another subsidy

Simon
Guest

Absence of personal income tax only equals another subsidy if the Government of the relevant ME country is running a budget deficit (and thus using borrowing from tomorrow to subsidise its citizens of today). So your argument only holds if the US doesn’t run a budget deficit…

Bill from DC
Guest

Uh, income that should be taxed that isn’t taxed is another form of subsidy from the government that isn’t taxing it.

Has the effect of making the wages seem higher to the employee which is clearly a subsidy to the employer as it allows them to pay lower wages.

Itami
Guest

It’s easy to miss amid all the other topics, but it’s interesting to see that how confident he is that the EAS program is going away. Republicans have talked about cutting it for years but so many of their districts rely on it for air service.

Eric Morris
Guest

And I thought my three daughters six and under could be whiny at times …

A
Guest
I love the passion Ed has about the ME3 carriers. Great point on what they have done to European carriers. My hunch is they [Europe] wanted to play nice for the benefit of their “once upon a time” state sponsored Airbus. I don’t disagree with the argument the US airlines are making and I definitely don’t think there is that much difference between the back of the bus on an Emirates A380 vs. a DL 777. I do think many people’s general state of discontent towards US based airlines clouds their opinion of the situation. In a true free market… Read more »
Tim Dunn
Member
I have done both in coach since the first of the year on longhaul segments and I did LH in coach a couple of times. To be honest, the biggest difference was the sophistication of the EK AVOD system – better than either DL or LH – and the smaller amount of meat in the main course on either LH or EK. The DL seats on multiple aircraft other than the 744 are as comfortable as EK’s (the A380 is a nice ride) while the LH 744 like any 17″ inch seat is tight. FAs on all of them were… Read more »
southbay flier
Guest

I was wondering if Delta was going to soften their stance against the ME3 with Richard Anderson’s departure. Now, we know that answer.

However, I do agree with Ed in many ways. I think you are seeing way too much capacity to Doha, Dubai, and Abu Dabi. Plus with route additions like EWR- ATH, you have to wonder about how good are they are finding profitable routes with all their huge planes.

Bill Hough
Guest

Boo fricken hoo. The US majors have degraded their product by nickle and diming us to death, and now they want sympathy? I would love to see cabotage put in place so I could fly SFO to ATL on EK so I could flip Bastian the bird.

kop84
Guest

Many carriers are subsidized in some way. But a $500K subsidy to fly to a small market, or even the $400+ Million that MU got to fly some inter China flights is a drop in the bucket compared to the billions the ME3 got.

If my folks give me $5K for a down payment on a new car, but they buy my sister a new $500K house, do I not have a right to complain about the fairness? We both got money, but the scale is no where near the same.

Bill from DC
Guest

Exactly. It’s not a “gotcha, they have subsidies too” game. Typical either/or, black/white nonsense that infects our political process.

It’s a question of degree and your example illustrated that perfectly.

DesertGhost
Guest

Based on my understanding of what I’ve read on the subject, China’s domestic air subsidies make a certain amount of sense. China’s transportation infrastructure (roads, railroads, etc. is limited at best. In some ways, China isn’t unlike Alaska. It’s often less expensive to build airports and fly to many areas of China that it would be to build roads or rail lines into those areas.

Chase
Guest
Great write-up Brett. Ed can cry all the way to the bank (how about the export-import bank to be exact). Just like the EAS program, the Ex-Im Bank is a major reason why these arguments of the US3 won’t go anywhere; politicians won’t go near this stuff. Boeing is a job-creator and a huge beneficiary of the bank, which in turn allows it to score these big deals with the ME3 worth billions. Ed needs to count his blessings that geographically, the US3 are somewhat insulated for the effects of the ME3 other than the 5th freedom flights. Speaking of… Read more »
Tim Dunn
Member
first, Delta’s 5th freedom rights in Japan are becoming worth less and less because of the opening of Haneda to longhaul international flights so I’m not sure that argument works that well. and Japanese carriers do have 5th freedom rights beyond the US – JAL used to fly NRT-JFK-GRU but they dropped it even though the rights still remain. And the ME3 doesn’t need Exim in order to buy aircraft. If the topic was airlines in most African countries, then few people would be criticizing Exim but the ME3 don’t need Exim. Just like access to Europe, the ME3 took… Read more »
USBT
Guest
The US carriers (initially Northwest and Pan Am) were given 5th freedom rights at Tokyo in a time where aircraft had nowhere near the range they have now. And UA and DL are winding down their 5th freedoms. UA will have zero 5th freedoms at NRT by the end of October and DL will end theirs once the JV with Korean is done. UA has only one remaining 5th freedom, HKG-SIN and they’ll drop that if/when they can get a code share partner to connect the two. Neither of the EK 5th freedoms are needed for range issues, EK flies… Read more »
A Boring Guy
Guest
If American airlines could make money ex-Tokyo, I’d bet those routes will still be flying. The fact is, no one in Asia truly wants to fly on an American airline. The service standards are abysmally poor compared to the competition. American airlines are shutting down 5th freedom routes ex-Tokyo simply because they can not compete, even with all the advantages they had in the past. Back in the good old days, aircraft range did determine route negotiations. It certainly played a role in discussing the freedoms of the sky. But the freedoms of the sky were born out of a… Read more »
Bill from DC
Guest

NW and then DL competed just fine at NRT until the liberalization of HND occurred to allow long haul international routes to fly from there (almost exclusively on ANA and JAL).

After all, NW/DL was there for over 50 years. I doubt they would have stayed so long if they truly “couldn’t compete.”

kop84
Guest

But most of DL and UA’s 5th freedom rights were not really about local traffic. Some of the beach flights sure, but they were still served out of the much less desirable NRT.

DL has the NRT-MNL/SIN flights mostly to serve US travelers to those destinations that until very recently, weren’t really practical/possible to serve non-stop from the US mainland.

The ME3 isn’t looking at serving passengers to/from UAE/Qatar, they’re connecting everyone, and their 5th Freedom routes out of Europe to the US are looking at O/D customers.

Tim Dunn
Member
According to DOT data, Delta’s flights from NRT to business cities of Asia (not the beach market flights) carried 25% or more local Japan to Asia traffic ON TOP OF the connecting passengers that originated in the US (or vice versa). No hub works solely if all passengers are connecting thru the hub and that is not the way the NRT hub worked. Opening HND to local traffic siphons off the best revenue to another airport; DL had no choice but to compete for HND flights or its US-Japan franchise would weaken even if shifting flights to HND weakens the… Read more »
sundevils
Member

Emirates has been sponsoring tennis tournaments around the world for years. Its sponsorship of the US Open has nothing to do with flights in NYC. Emirates sponsors tennis tournaments in many places where it would never fly.

USBT
Guest

Ed Bastian articulates this issue far more eloquently than all the other CEOs combined (Parker, Munoz, and earlier Smisek and Anderson). Indeed Richard Anderson did the cause no good with his jibes, especially getting into that spat with Mr Al Baker.

Had Ed been at the helm two years ago when the US3 released their documents and started their campaign it would have got a more positive reception.

Aussieflyer
Guest
I totally agree that blatant subsidies are a bad thing in the long run and distort the market. A non trade barrier that benefits the US carriers is the Federal Aviation Act that prohibits foreigners from owning more than 25 percent of an airline! No wonder the domestic carriers are so poor on their service offering. Perhaps some competition would be a good idea. In Australia you can have a 100% foreign owned domestic carrier. Hence you saw the likes of Virgin, Tiger etc bring the fight to Qantas. The USA, the land of competition should open up this sector… Read more »
cpagan2
Member

So, is Ed saying that Delta does not get any tax breaks from the federal and/or state governments? Because that is a form of subsidies.

Bill from DC
Guest

No. No he’s not. He’s saying that if the ME3 airlines get $1 million in subsidies for every $100 in subsidies that go to US airlines get, trade fairness is probably a discussion worth having.

Numbers are just to show scale, I don’t know the claimed ratios but I’m sure Ed does (and maybe cranky does too).

billyshearer
Member

I’m getting so tired of DL, AA and UA who basically carved up the US markets between them complaining because the goal posts changed. I can’t see how muzzling these ME3 will help improve customer service from the US3.

European carriers are competing with this just like American ones without bleating. And they have fiercer competition from Ryanair, easyJet, Norwegian and Wizz than that provided by JetBlue and SouthWest.

Be a good airline. Treat customers well. Create an airline people want to fly with. Stop being negative about competition.

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