There was huge news from down under last week when the rumored link between Qantas and Emirates was officially unveiled. This certainly creates some confusion around Qantas’s role in oneworld as the airline backs away from British Airways but it is without question the right move to make.

The Australia to Europe market is one of the most difficult around. There is no aircraft that can fly it nonstop due to the extreme distance. That distance also means that to fly it, you need to dedicate a lot of aircraft time to make it work. The result is that most European airlines have abandoned the market because they can’t generate the revenue to bother. Virgin Atlantic runs a flight via Hong Kong to Sydney but other than that, British Airways is it. (And whether either of them should be in the market is questionable.)

Australia from a BA Point of View
BA has long connected the Empire but it has cut services back dramatically in recent times. Long gone are flights to Perth, Melbourne, and Brisbane. Sydney service was recently scaled back as well. Instead of connecting through several different points in Asia, BA now runs a single flight via Singapore.

Part of the reason for this cut was that, of course, the flights didn’t perform well enough. But BA also felt comfortable knowing that its long-standing revenue-sharing agreement with Qantas on the so-called “Kangaroo Route” provided a great deal of service for those who wanted it. That worked for BA because it freed up a lot of airplanes, but it wasn’t a great deal for Qantas.

The Middle East Puts Qantas in a Pickle
Think about it this way. If you’re Qantas, you can send people to London and connect into the British Airways network. That isn’t really that appealing. Sure, you have better heft and service to London than you can offer on your own, but the connections from there aren’t great since travelers have to backtrack to most places in Europe. Most importantly, your customers have to stop twice; once in Asia and again in London. That may have worked for years, but then the Middle East woke up.

Emirates and others started to tap into the Australian market and promptly kicked Qantas in the butt. See, it’s easy to go nonstop from Dubai to Australia. In fact, for the upcoming southern summer, Emirates flies 19 times a week to Perth, 4 times a week to Adelaide, 21 times a week to Melbourne, 14 times a week to Brisbane, and 21 times a week to Sydney. Some of those go via Southeast Asia, but most are nonstop. And we are talking big aircraft here with a mix 777s and A380s. Emirates then goes beyond those cities into New Zealand and has started to take traffic there as well.

What does it do with all of those Aussies (and Kiwis)? It brings them to Dubai and then gets them with just a single stop to anywhere in Europe and Africa. The idea that you can fly Emirates with one stop from Adelaide to Birmingham in the UK is mind-boggling but it works. Why would you ever fly Qantas and BA if you could go far faster via Dubai?

This isn’t much of a secret. Emirates has made a huge name for itself in Australia over the last few years, but it isn’t just Emirates. Etihad now owns 10 percent of Virgin Australia and wants to do the same thing via Abu Dhabi. But clearly, Emirates and its expansive network is the real prize.

The Details
So what exactly is happening with this deal? Qantas is walking away from its agreement with British Airways and will enter into a new one with Emirates. There won’t be any equity exchanged, but it will be a “benefit sharing” operation with tight integration including coordination of pricing and schedules, or so they say. The details seem a bit fuzzy at this point but it’s not just a run-of-the-mill codeshare. It’s going to be deeper than that.

Qantas will now send daily A380s to Dubai from Melbourne and Sydney. Both those flights will go on to London, but that’s it for Europe. Qantas will axe its Frankfurt flight, as it should have done long ago. Really, I imagine it’s a national pride thing to even keep the London flight. Were I Qantas, I would just turn around in Dubai and let Emirates take people on to London as it’s doing in the rest of Europe. As part of this, Qantas will also end its codeshare with oneworld partner Cathay Pacific and with Air France.

Qantas Focuses on Asia
All these moves make sense for Europe, but they make even better sense for Asia. As Qantas put it, Asia has served a waypoint for Europe services and that meant that the times between Australia and places like Singapore and Hong Kong weren’t optimized for local traffic. The two Qantas flights from Singapore to Sydney, for example, both leave around 8p at night. The northbound trips both leave around 5p in the afternoon. That isn’t great for local traffic to bunch your flights up like that. Now Qantas can (as it should have done long ago) reschedule the flights for local demand.

What does this mean for oneworld? It shouldn’t mean much, to be quite honest. Sure, BA loses a big partner to Australia, but it should be able to route passengers via Hong Kong on oneworld partner Cathay Pacific if it wants to ramp that up. And it still has its own Sydney flights… for now. There are also rumors of Qatar Airways joining oneworld, and that would prove more feed. Besides, it appears that Qantas will remain part of oneworld for now, just a more distant partner in what is now a more fractured alliance. But Qantas will keep strong ties with Japan Air Lines – they have a joint venture for a low cost carrier in Japan – and presumably will keep strong ties to American here in the US. The alliance itself, however, is a bit weakened.

In the end, there is no doubt in my mind that Qantas made the right move here. Others may not like it as much, but that isn’t Qantas’s problem.

Yesterday I addressed the issue of whether or not Emirates is subsidized, but I touched on something much bigger. Let’s assume the airline isn’t subsidized. Even if that’s true, does it have an unfair labor advantage? That’s a much more complex question.

One of the things you often hear is that labor costs at Emirates are very low. Is that true? Oh yeah. Take a look at the average cost per employee for the last fiscal year for Emirates as compared to a couple of our big guys here in the US. (This is in US Dollars.)

Just think how much airline labor costs have dropped in the US over the last decade and this is even more jaw-dropping. It’s not a perfect comparison, of course, because it doesn’t reflect the different structures at the airline, but one thing is clear. Emirates doesn’t have to pay nearly as much for its labor as other airlines do.

This isn’t anything surprising. There are very different standards and costs of living in many different places around the world. But often lower costs of living come with significantly worse living standards.

Living in Dubai
There has been plenty of criticism over the years of the working conditions in the United Arab Emirates. You can read a report from back in 2006 if you’d like more details. But these reports generally focus on lower level jobs, often in construction, and not those of people who work at Emirates.

Take a look at this page that Emirates puts out talking about flight attendant jobs. There are no unions. Flight attendants are hired on three year contracts from all over the place and that contract can be renewed by the company only if it so chooses. People can resign, but if they do, their visa to work in the country is terminated.

Since people are hired from all over, Emirates provides company housing in Dubai. Pilots seem to get high quality housing, and the flight attendant shared housing seems spartan but certainly passable, even by western standards.

Emirates does provide medical and dental care through its own medical clinics. It also provides transport to and from work. Wages aren’t up to what you’ll find at legacy carriers in the US or Europe, but there is no income tax to take a chunk out of the salary for each worker. In the end, this comes together to make for a pretty nice package.

This sounds like a very structured lifestyle that is designed to get the most out of each employee while he or she works at the airline. But is that a bad thing? Apparently not for a lot of people since there is no shortage of applicants and the standard of living seems acceptable.

Sustaining the Advantage
More importantly to our discussion, is this an unfair advantage for Emirates? That’s a debate for the ages. It’s an advantage, to be sure, and it makes life difficult for those airlines that are based in higher cost places, but that doesn’t make it unfair. This is an issue that’s not unique to the airline industry by any means. It’s the whole free trade issue that’s been replayed over and over again. Some countries can make TVs for less than others, and that’s why we generally buy TVs in the US that aren’t made here. Whether or not it’s unfair depends upon who you ask. It doesn’t seem that way to me.

What I’m more interested in is whether or not it’s sustainable. Emirates has placed a huge bet that it can grow to be an enormous airline. It is looking to operate 100 A380s and many more 777s. The sheer volume that it is hoping to support is mind-boggling.

Can Dubai continue to grow and deliver big money traffic? If it does, then surely the cost of living will continue to increase and Emirates will see less of a cost advantage as compared to its peers. If it doesn’t, and it really can’t grow at a fast clip forever, then the state will likely be unable to keep its friendly no income tax policy. It will need money to support its infrastructure. If it starts to struggle with money issues, then Emirates could find itself operating in a different, less friendly environment as both the airline and state see growth slow.

When that happens, will another airline and country come in to take its place? While it was easy for TV manufacturers to switch to China or Indonesia when costs rose in Japan, geography is much more restrictive here in the airline industry. There’s not going to be a major hub in Zambia despite the low cost of living and eager workforce. The lack of local population and inconvenient geographic position certainly doom a place like that.

But there are other Middle Eastern hubs that would be happy to serve that population. Outside of the UAE, Turkish and Qatar are the most threatening, but others will follow. There will always be a new low cost provider if the opportunity is there.

I’m getting a little off track here. Is this an unfair advantage? If Emirates is providing an acceptable quality of life for its employees, then it’s pretty hard to argue that the advantage is unfair. Only if a company is succeeding by providing poor working conditions that violate human rights should it be considered an unfair advantage.

That doesn’t seem to be the case here, but I’m more than happy to hear from those with experience. Hit the comments down below.

Earlier this year, Emirates put out a scathing report to combat all of the accusations that the airline is subsidized by the Dubai government. The paper, of course, claims that Emirates is unsubsidized. Is that true? Yes, but that doesn’t mean that there aren’t great advantages to being based in Dubai.

Emirates is actually quite up front with its finances. You can see annual reports dating back a decade on the airline’s website. The result? The airline is profitable, but not insanely-so. In the most recent fiscal year, Emirates posted a 2.9 percent operating margin.

So why is it that nobody believes this modest result to be possible without subsidy? It’s probably because most airlines that are complaining can’t sustain any kind of consistent profitability. The assumption is that there’s something funny going on.

Geography is Key
But the reality is that there are a lot of things that Emirates has going for it based simply on geography. Dubai is a very wealthy place that’s filled with ex-pats. So there is a great deal of high yield travel starting and ending in Dubai. Is there enough to fill 100 A380s? No.

But then there is the geographic advantage of being able to carry people between Europe and Africa, the Middle East, India, and Southeast Asia quite effortlessly. This high level of connectivity means that the airline can support flights to secondary cities in Europe that would require at the very least a connection via a European hub to get to many of the destinations Emirates serves.

The Connection Game
Think about it this way. If you need to go from Manchester to Bengaluru Kochi in India, what are your options? You aren’t going to get there even via a European hub because there isn’t enough traffic to support a flight. But you can go via Dubai. Dubai can support Bengaluru Kochi flights based on local demand plus connections from the same places the European airlines fly as well as from the Middle East and Africa. And it goes even deeper than this.

Emirates can support flights into European cities like Birmingham, Nice, Dusseldorf, and Prague. These aren’t the largest cities by any stretch, but they can connect with a single stop to much of the world via Dubai. It’s a very compelling option.

What’s unfair about that? Well, the geography puts European carriers at a disadvantage, but there is more. It’s a lot easier to do business as an airline in Dubai than it is in Europe. And that makes it easier for Emirates to compete.

The Dubai Advantage
Dubai does not overtax airlines like European countries do. Dubai is also a generally less expensive airport to operate at than large European hubs. Add in the fact that labor costs are much lower in Dubai than Europe and it can be a lot less expensive for Emirates to carry someone from Glasgow to Bangkok than it would be for a European airline. With European airline costs, that slim 2.9 percent margin can go negative quickly.

Technically, this is an advantage for Emirates, but it’s hard to classify that as a government subsidy. Costs are higher in some places and lower in others. It’s just the way of the world. If someone else wanted to start an airline in Dubai, they could enjoy those same advantages.

Why is Emirates going on the attack? It’s because the airline is constantly being barraged with these claims and it wants to expand in places it can’t. Canada is a great example. The country greatly limits the number of flights that Emirates can operate. That’s pure protectionism. Whether it’s good or bad is up for debate, but personally I’d rather have more flight options if I lived in Canada.

Emirates Loves the US
In the US, it’s a different story, and that’s why you see very little criticism of the US in this report even though some is due. Emirates gives example after example of subsidies to European airlines from governments but conveniently leaves out all the subsidies that US airlines have received in the last decade. This isn’t a coincidence.

Dubai The United Arab Emirates (where Dubai is located) and the US have had open skies for some time. In other words, any US airline can fly to the UAE Dubai as it pleases and the same goes from UAEDubai-based airlines in the US. That’s why we see Emirates flying to places like Seattle and Dallas. There is going to be more to come, as long as the routes are profitable. This is great for people in those cities who now have new one stop service to a whole host of new cities around the world.

I don’t expect that this report will change a lot of minds where the most minds need to be changed – in governments. But it can at least help provide a counterpoint for the general public in Europe and Canada, where the party line is that Emirates and all gulf carriers are subsidized.

It’s great to see Emirates supporting a no-subsidy policy, but that’s easy to do when you’re a young, profitable, and fast growing airline. I’ll be curious to see if we hear a change in tune years from now when growth slows and costs rise. It might be a different story. But for now, Emirates is happy to crow about being subsidy-free.

Do you believe it? Read the report and chime in below.

I decided to hold the last Emirates post from Nate until I was on paternity leave. You can see his report on the flight out to Dubai, Dubai Airport, and the flight back if you haven’t seen them.
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Probably the best thing about my trip to Dubai was building an itinerary that put me on the Boeing 777-300ER one way and the Airbus A380 the other. Not many travelers have a keen sense of their surroundings when they fly, so this presented a great opportunity to discuss the differences in the two aircraft as Emirates expands and offers both types on routes. I flew the 777 out of San Francisco for 15 hours to Dubai in Business and First Class, and then returned to New York JFK from Dubai on the A380 in Business Class. I found some fairly interesting differences in the two planes the way Emirates configures them.

Seating layout/arrangements
The 777 was in a typical 2-3-2 layout while the A380 had a very interested staggered layout of 1-2-1. Some rows had window seats with a small walkway to the aisle and others had an aisle with no seat in the window. The middle section either had two seats next to each other or two sitting on the aisle separated. The seats then rotate their position, giving each customer access to the aisle. This was a very nice feature as the A380 gives customers much more overall “area” for their individual seat, whereas the 777 you still had a neighbor – and the privacy screen really didn’t block much.

I could still watch my neighbor’s TV for most of my flight. I did select the bulkhead on the 777 and I had more wiggle room to get in and out, but the A380 still wins hands down. The 777′s “traditional” layout is much better if you are traveling with a group of friends or family, as the A380 seems to be designed more for the solo traveler. The other downside to BOTH aircraft is the aisle seats – there is still traffic up and down the aisle, so there’s a risk of getting interrupted while trying to sleep.

Service
One problem Emirates faces with the A380 is that there are a LOT of flight attendants . . . 26 to be exact. The Business Class galley is located in the back of the cabin, so you get a lot of foot traffic. While that can be nice (always someone going by that can you something) it did take time to do a full service for the 55 passengers (out of 76) in my cabin. I also can’t tell you the name of the flight attendant assigned to my section. The 777 provided excellent service as only 2 or 3 flight attendants worked my side of the airplane and I can remember their names. Overall, the 777 service seemed much more efficient.

Boarding/Deplaning
One would think boarding 500 people on an A380 would take awhile, but Emirates seemed to have this one down pat. Most of us in Business Class were in the lounge up until about 30 minutes before departure and found a short line for the premium cabins versus economy. In the A380, I didn’t see a single economy class customer. On the 777, while we had separate lines, we boarded through the same jet bridge. There was a lot of foot traffic through the 777 cabin while boarding, but the flight attendants kept the economy customers moving through, and were able to serve a pre-departure champagne service without any issues. Deplaning was equally fast, as Emirates holds back each respective cabin until those passengers are clear, and in New York we deplaned by the 2nd level. Its hard to pick the 777 or the A380 has both were very efficient.

Sleep
The A380 has a fully flat bed while it’s an angled lie flat bed on the 777. Both seats appear to be the same design and configuration except for the footrest on the A380. On the 777, your seat drops then extends out, and at 6’1″ I slept like a baby. I also really enjoyed the storage space/cut outs in the seat that also meant I had shoulder room. The A380 had a cubby hole for feet which probably helped keep rusty-sock smell from the cabin. But on the 777, it was hard to tell you weren’t lying completely flat. I’d also like to point out that I departed San Francisco at 5p and arrived in Dubai at 7p (next day) and did not feel jetlagged. I only preferred the A380 seat over the 777 because I didn’t have someone directly beside me.

Economy Class
Here’s where it can get painful.

The 777 was originally designed for 9 seats across the cabin, but Emirates has 10. So your butt and shoulders may be making contact with your seatmate for the next 13 hours. At least your knees and feet will be comfortable, as Emirates provides a few more inches of legroom. The A380 has standard seat width, but the legroom isn’t nearly as good as on the 777. In the row I tried out on the A380, the window felt a little more cramped. Both Economy cabins offer in seat video and universal and USB power ports, so even if you are stuck in the 777 in coach, you will still have plenty to keep you busy.

Here are some more pieces for comparison.

The Winner
Interestingly enough, I really enjoyed the 777 flight over the A380 flight. The A380 bar really stands out, but the service was much more consistent on the 777. The foot traffic on the A380 can (and does) stand out, so if you want to avoid it, then try to sit in the forward section of business class. Anyone who pays for Business Class (or upgrades) will not be disappointed. This airline does an amazing job and if I had the budget, I’d gladly fork out $12,000 for this type of service.

Our old friend he Cardinal is back with an unlikely guest post. Why is he writing about Air Seychelles? It has global implications. Read on.

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When Americans think of island paradises, thoughts generally drift to the Pacific and the Caribbean because those are the islands on which we tend to vacation — either Hawaii (or occasionally further south, to Tahiti or Fiji, or west, to Micronesia) or places like Aruba, Jamaica, St Barts (if you’re stinking rich), Dominican Republic and so forth.

But if you’re European or Asian, the natural geographic choices are different. In particular, they include the Indian Ocean, in between Africa and Australia, and places like Mauritius, the Maldives, the French Indian Ocean territories like Reunion and Mayotte (these islands are actually part of France, similar to how Hawaii is part of the United States), or the Seychelles.

Map via the Great Circle Mapper

The Seychelles are a beautiful group of islands about 900 miles east of Africa and north of Madagascar (that’s the big-*ss island off the east coast of Africa). The people are a melange of African, Indian, Chinese and Caucasian, reflecting the history of the islands, which were originally grabbed by France, and then transferred to British control after Napoleon was defeated. The country’s economy was once plantation-based, but now it’s all about tourism — not unlike many island paradises closer to the US.

OK, beautiful islands but, for most Americans, terribly remote. Why’s Cranky spending pixels on Air Seychelles, the national carrier?

Air Seychelles has done something quite extraordinary. Despite a national economy dependent on tourism, Air Seychelles is getting out of the long-haul business — the business of carrying tourists from Europe to the Seychelles.

On the face of it, it sounds suicidal for the Seychelles economy. But the Seychelles are in no danger of losing tourists. Instead, Air Seychelles has essentially been driven out of this business by the fast expanding Persian Gulf carriers — Emirates, Etihad and Qatar. Older carriers in Europe (and to a lesser extent, Asia) have been screaming for years about the pressure they’ve been put under by these fast-growing behemoths. In that respect, Air Seychelles amounts to a canary in a coalmine — this little carrier has been driven off its former main routes. Going forward, it will maintain only some smaller aircraft to serve the local neighborhood — other Indian Ocean islands and Africa.

What’s happened is that the amount of service to the Seychelles has exploded. From Dec 03 to Dec 11, the number of seats on flights over 2000 miles (which includes Europe, the Persian Gulf and South Africa — i.e. where most tourists come from) to the Seychelles has almost doubled, from a little more than 16,000 in Dec 03 to a little less than 30,000 in Dec 11 (source: mi.diio.net).

In 2003, none of Emirates, Etihad or Qatar flew to the Seychelles. In Dec 2011, between the three, they accounted for over 18,000 seats. Yes, these three carriers flew more long-haul seats in Dec 2011 than there were total in the market in Dec 2003 — when none of them were present.

For the Seychelles as a whole, this is good news. It depends on tourists, the Gulf carriers are delivering a ton of them. For Air Seychelles, not such great news. At some level, one has to applaud the Seychelles for recognizing their national carrier is a service, not a reflection of national virility, and simply getting out of the way. If this was France or Italy, the national government would be throwing bales of money at the carrier to keep the phallic symbol, I mean the flag, flying.

Is there a danger to the Seychelles here? Not really. Air Seychelles won’t cease to exist, and if, one day, the Gulf carriers get into trouble, it’s only a matter of Air Seychelles acquiring long-haul aircraft again. That’s the great thing about aircraft — you can move them around to where they’re needed.

But the wider significance is that Air Seychelles is somewhat of a canary in a coalmine. For many years, European carriers have been screaming about the danger posed to them by Emirates, Etihad and Qatar. Each of these carriers is big and getting bigger fast. In the past 25 years, Emirates has grown from zero to one of the largest international carriers in the world, with a penchant for spectacularly large orders (including a record order just recently for Boeing 777-300ERs and by far the largest outstanding order for A380s — it accounts for a stunning 90 out of 243 total orders and deliveries). Etihad and Qatar have been built in straightforward imitation of Emirates.

The size and growth of these carriers is greatly at odds with the size of their home countries. Emirates and Etihad both hail from the United Arab Emirates, population 8 million, while Qatar Airways is from Qatar, population 1.7 million. Tiny countries, massive airlines.

What they do have going for them is location — smack between Asia and Europe. Essentially, each of these airlines is operating a wayport — a hub with a heavy predominance of connecting traffic.

Each of them has costs that are far below those of European carriers. European carriers routinely complain that Emirates, Etihad and Qatar are subsidized.

Ever since Emirates started ordering A380s by the score (roughly a decade ago), it’s been clear the Gulf carriers would have a substantial impact on European, Asian and African airlines (US carriers are half a world away, so are, for once, spared this particular scourge). The major airlines of Europe are not about to be driven from key markets like Asia, even given the massive capacity increase in the Gulf. But without a doubt, the nature of this business is changing for Lufthansa, Air France and British Airways.

Lufty, AF and BA have costs that are much higher than Emirates, et al. There is simply no way to compete with these guys on price. One thing the Europeans have done is appeal to their national governments to restrict access of the Gulf carriers to Europe — and not only to Europe. Air Canada’s stout opposition to allowing expansion of Gulf carrier landing rights in Canada was almost certainly a favor to its Star Alliance partner Lufthansa (although the Gulf carriers pose almost zero threat to Air Canada, the Canadian government is unfortunately doing what AC wants).

But there’s an issue — the Gulf carriers are some of the best Airbus customers in the world. So, for instance, should the German govt protect Lufthansa, it could end up doing so at the expense of future Airbus business. Tricky, since while the German govt loves it some Lufthansa, it probably loves it some Airbus even more.

The other way for European carriers to compete is by offering the one thing the Gulf carriers can’t — a nonstop flight. Provide a nonstop flight from Frankfurt, Paris or London to a secondary Asian city — travelers prefer nonstop flights, and are generally willing to pay more for them. Of course that means buying smaller long-range aircraft. So, ironically, the sale of mass quantities of A380s to the Gulf carriers may mean sales of fewer of them to European carriers.

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Air Seychelles’ exit from long-haul flying is therefore a signal event. The Gulf carriers have collected a pelt. If they continue to execute their massive growth plans, it won’t be the last pelt they collect. Is that fair?

It’s fair to the extent Emirates, Etihad and Qatar are not subsidized. Emirates has routinely denied it’s subsidized (and it routinely reports profits), though a lot of that comes down to what you count as subsidy. If the crews don’t have to pay income tax because no one pays income tax in the United Arab Emirates, is that a subsidy? It presumably reduces the wages Emirates needs to pay its employees, but so what? Countries have the right to decide how to run their national finances. Europe, for instance, has a large Value-Added Tax (a type of sales tax) system that is not present in the US, but that’s not viewed as a trade issue.

Qatar Airways posted a profit in its most recent fiscal year, but again, you’d likely find severe skepticism in the executive suites of most European airlines as to how real that is. Etihad has yet to report a profit.

But significant sanctions against Emirates, Etihad and Qatar don’t seem likely anytime soon. They’re simply too important to the health of Airbus. In which case, watch to see which is the next domino to fall.

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The Cardinal is an occasional anonymous contributor to The Cranky Flier. A long-time airline geek, The Cardinal is currently a [redacted] at [redacted].