It was just a couple weeks ago that I wrote about how American, Delta, and United have banded together to request that the US reconsider open skies agreements with Qatar and the United Arab Emirates. At the time, what was known publicly didn’t seem like a very strong case to me. When I was at the American Leadership Conference (Disclosure: American provided flights and hotel for the ALC), the airline presented many of us with the details but we were told they weren’t public. Now they finally are, and it’s time to talk about this.
We’ll get into details below, but in short… I do think there is compelling proof of subsidies totaling over $40 billion. The weakest case is, of course, against Emirates which is the only one of the three (Qatar and Etihad being the other two) to have shown any sustainable business case for itself. But so what? Should we care as long as it means cheap flights and easy connections? We should indeed care, but we shouldn’t do anything near what the US carriers are suggesting. That doesn’t mean that doing things “as is” is the right way forward either.
First, head on over and read both the presentation and the white paper that the airlines put together. That white paper is the much-discussed 55-page document that lays out the case.
The airlines, primarily under Delta’s lead, hired forensic accountants to go back and dig up dirt over the last 10 years. Apparently, to fly to some countries you have to file financial information, so these guys went around the world and found these little scraps of info. What they found was a ton of money being flooded into the three carriers.
For Emirates, the biggest chunk that was found was $2.4 billion in fuel hedges that went south. The government just assumed those losses. The rest of the substantiated claims are pretty weak, though there is a lot of unknown here. Emirates is owned by the government and has a lot of sister companies. While the airline does put out audited financials, it doesn’t say whether the transactions between Emirates and its sister companies are at arm’s length. In other words, we don’t know if they’re getting below market price, but the assumption is they are. Still, I think Emirates is really just a sideshow here. It’s Qatar and Etihad that are the most clear cases.
Both Qatar and Etihad have received massive amounts of capital infusion from their governments. They’ve also been loaded up with a ton of interest-free loans with either a very-distant or no timeline for repayment. That may be the way business is done over there, but on a global stage it counts as a subsidy per World Trade Organization guidelines. The UAE and Qatar are signatories, so the WTO rules apply.
In fact, it has been noted (as you’ll see in the docs) that neither Qatar nor Etihad would have been going concerns without massive further investments of capital. They would have and should have gone under until the government poured more money in each time.
There are many more examples of subsidies for those carriers, but you can read the details yourself in the documents. Now, here’s the question… who cares?
Today, the “harm” being inflicted on US carriers is primarily on traffic going beyond these Middle East hubs to India and Southeast Asia. The US carriers don’t have a lot of service in these markets anyway. It’s only through their joint venture partners that this becomes a threat. Even then, we’re not talking about the kind of numbers that will hurt that much.
More importantly, travelers gain incredible new single stop connections that wouldn’t otherwise exist. Think about someone wanting to go from Seattle to Trivandrum. You can connect a lot of dots that don’t get connected as easily otherwise when these gulf carriers are involved. And yes, fares tend to be cheap. At the same time, the damage to US carriers seems to be relatively slight. I don’t see how you can justify curtailing this.
Where I see the real issue, however, is in fifth freedom flights. Of the freedoms of the air, the fifth is becoming one of the more controversial. Fifth freedom rights allows an airline in one country to carry passengers from a second country to a third country as long as the flight starts in the airline’s home country. It was originally created because airplanes didn’t have the distance to connect all the dots around the world. They needed to go somewhere in between, and they needed a way to make those flights viable. Today, that’s rarely the case, but Air New Zealand uses it every day.
Air New Zealand flies from Auckland to LA and on to London because it can’t fly it nonstop. It would be tough to make that viable without being able to carry local passengers between LA and London, so there is an agreement between the two countries to allow that service.
As part of the open skies agreements between the UAE/Qatar and the US, the carriers are allowed fifth freedom rights. But the reality is that these airlines don’t need fifth freedoms. Emirates isn’t flying Dubai-Milan-New York because it can’t fly it nonstop. It flies it because it thinks it can undercut everyone else in the market and use its low costs to its advantage.
If you think about it, the gulf carriers could fly from Dubai to pretty much anywhere in Asia or Europe and then on to the US, causing serious damage to the US carriers. I know some of you still don’t care. If it means cheaper flights with better service across the pond, then so what?
The reality is that it could get really ugly, really fast. If the Middle East carriers skim the international markets with the most traffic, then the US carriers will have to cut back service. When international flights get cut, the whole network becomes vulnerable. The end result is probably less service for smaller and mid-tier cities. It’s just the way the network effect works.
That’s quite a catastrophic prediction, but it could happen if unlimited fifth freedom rights were allowed for carriers with true structural advantages. These airlines have a massive number of airplanes on order and have to put them somewhere.
Of course, it’s never that simple. Etihad owns a huge chunk of Alitalia, which is a joint venture partner of Delta’s. Qatar just bought 10 percent of British Airways parent IAG. How do these things all come together? And what should be allowed?
We won’t know for a long time. The next step would be for the US government to decide that it agrees with this. It can then enter into consultations with the UAE and Qatar to try to resolve the issue. If it can’t be resolved, then the US can pull out with a year’s notice if it wants.
But first, the US would have to decide it wanted to enter into consultations. That’s not a given. We have some pretty powerful military interests in those areas plus a lot of consumer benefit on the table. The offset is potential harm to US airlines if this is allowed to continue.
This web is a tangled one indeed, and there’s no clear answer. One thing that is clear to me is that the US carriers have done nothing to help their case in the public eye so far. This whole thing has been botched from the beginning, first by talking about this report but not releasing it, then by Delta CEO Richard Anderson linking the issue to 9/11. They have dug themselves a huge hole that they have to climb out of.
And what they want isn’t going to ring true with consumers because they can’t see the negative impacts yet. I do think that fences on fifth freedoms may very well make sense. But other than that, it’s hard to see how this should be restricted.
[Original shark photo and original buoy photo via Shutterstock]
Wake me up when the airlines provide their own security and the TSA goes away, when the FAA stops providing air traffic control and subsidies to airports to build runways, when the military stops providing free training for so many future pilots, when the bankruptcy laws change, when foreign ownership restriction caps are lifted, where airlines don’t get subsidies post 9/11, when the Ex-I’m Bank dies …
“Airlines provide their own security”
In a way they do as they have to add security and segment taxes into the ticket (making their fares more expensive)
“military stops providing free training”
You are welcome to tell our men and women in uniform that the value of their contributions is zero, but I disagree. That free training comes at significant personal cost.
“The ex-Im dies”
The Export Import bank benefits foreign carriers more. Why do you think delta is lobbying so hard to remove its charter?
“FAA stops providing air traffic control”
Perhaps we should tax the highway to the airport as well? Or does the corporate and other tax that the carriers pay not cover this?
This provides an orderly legal process of dealing with shareholders and liabilities. It’s not a subsidy (unlike the Detroit bailouts).
At best you’ve illustrated what is considered a subsidy can get murky depending on where you draw the line.
I don’t agree with the airlines in many of their arguments either. Low airport costs are not really a subsidy. However, assuming billions of dollars in fuel losses by the government is.
Absent a principled basis such as the Mises-Rothbard non-agression and voluntary exchange ideals, these craven opportunists (see Delta on Ex-Im) will engender no sympathy from me. And I rest my case on the EAS.
In the meantime, I will be glad to enjoy the subsidies offered by tax payers in places where I don’t regularly pay them, such as SC, WA, and IL for Boeing; AL and EU for Airbus; and the ME for these three airlines.
I know you think by dropping some libertarian theory you think your stance sounds far more consistent and well-thought out than it actually is, but in reality all you’ve done is given yourself a convenient escape hatch to tackling the actual comments that Jim has made. Screaming “This does not match my ideological purity so I don’t have to argue anything!” is not really a legitimate retort.
“You are welcome to tell our men and women in uniform that the value of their contributions is zero, but I disagree. That free training comes at significant personal cost.”
That’s not the “value” he was talking about. The military trains pilots, and then those pilots fly for the commercial airlines. Effectively, the government is paying for employees of a private business to get trained. That is a subsidy. The personal cost borne by members of the military does not affect the cost to the airline.
“This provides an orderly legal process of dealing with shareholders and liabilities. It’s not a subsidy (unlike the Detroit bailouts).”
When the government says “OK, we are giving you permission to not repay your debts”, that is basically a subsidy. It is no different from the UAE telling Emirates Airlines “OK, you don’t have to pay for this fuel hedge that went wrong”.
The airlines still pay for pilot training. It’s required by the FAA that the pilots go to training on the specific airliner they’re assigned to fly. On a massive economies of scale it still costs probably $10K sim+pilot pay+productivity loss to take a pilot through training. And then the airlines pay for them to go through recurrent training. That’s not subsidized because the pilot was prior military. Where in the hell did you people come up with that???
And a majority of airline pilots (and growing) are from a civilian background and paid for their own training. So there is no government subsidy there. And fwiw this is the same with the ME3 airlines, they only hire qualified pilots.
As to counting the training done in the military as a subsidy, you morons do realize the military trains people to fly for the military, right? The military gets their money out of the pilots before their commitments are up. If they decide to leave the military and go get their civil licenses and go to the airlines guess what happens…. the airlines still pay for their initial, recurrent, upgrade and every other initial training on each new type of airplane they fly. A pilot flying the P-8 in the Navy who goes to Delta may be assigned the MD-88, all that 737 time means nothing. Even if they do go to the 737 initially, guess what, Delta flies the 737 with different procedures and profiles than the Navy. Hell even SWA and Delta don’t fly the 737 the same. So no matter how much previous time you have on a specific model you still as a new hire go through a full blown Delta 737 training course. No money saved.
In fact how much did the military get out of a pilot? Basically about a tour or so after their commitment the military pilot will transition to non flying jobs. Thus, the military got their money’s worth out of them and wants them for something else. You’re lucky as hell to be a Lt Col/Col still flying.
Drop that moronic subsidized military training line.
“If you think about it, the gulf carriers could fly from Dubai to pretty much anywhere in Asia or Europe and then on to the US, causing serious damage to the US carriers.”
Surely that requires more than the open skies agreement between the U.S. and UAE/Qatar? E.g., in the case of Milan, Italy/EU would have to approve that flight of a non-US/EU carrier from EU territory to the US, I would think.
Oliver – Yes indeed. It also requires open skies agreements between both countries and the third country. Considering the US wants open skies agreements as a matter of policy, that means there are a lot out there.
It’s Emirates flying Milan – New York, and that flight was controversial on the Italy side of the equation. And you say yourself Emirates isn’t really so relevant to this discussion. The issue isn’t ripe for examination.
The concern here is transatlantic flights between Europe and US which would compete against US carriers. And that really isn’t happening now. This would be an issue at the point where those flights begin in a material amount. Until then the issue just isn’t ripe, and shouldn’t be a US government priority – precisely for the security and consumer interests mentioned in the post.
And then we really do have to look seriously at issues like consumer benefit, which matter a whole lot more except that consumers don’t really have lobbyists. And if we start to care enough to sort through whether there’s actual unfairness, I think we have to ask about the fuel tax subsidies Delta receives from Georgia, and the subsidies Delta received for its oil refinery in Pennsylvania. And when we criticize state subsidies for aircraft, we ask about where American Airlines got the funding for its very first large aircraft order (the sleeper version of the DC-3)… the Reconstruction Finance Corporation. Indeed, commercial aviation’s launch in the US was wholly directed by the Postal Service.
The subsidies received in the early days of the US industry (remember we’re talking about the relatively early days of the Gulf aviation industry here) seem relevant and missing from the analysis of this post. And of course US aviation is heavily intertwined with the state, it’s one of the most heavily taxed and regulated industries in the US.
Any international case may take place within the context of WTO rules and definitions, but the case proceeds in a political and not merely definitional context.
Plenty of state-owned, subsidized airlines in the world flying to the US which US carriers partner with and which even have fifth freedom rights. The US airlines aren’t scared of Kuwait Airways. THIS IS PURELY ABOUT USING GOVERNMENT TO SHUT DOWN COMPETITION whether that competition is ‘fair’ or not. AND THE RHETORIC USED IS DEPLORABLE, racist even (how many times can US airlines make the case using the word ‘sheikh’?). Aside from the 9/11 comments from Delta.. which partners with Saudia, where there’s a case to be made that the Saudi government provided at least tacit support. It truly boggles the mind.
Cynical cynical cynical. And any attempt to be ‘reasonable’ shouldn’t allow one to be taken in by it.
Don’t forget the CRAF money US airlines get every year from the military.
I don’t think CRAF really counts here. US carriers participante in CRAF and are required to make aircraft available for military missions. In exchange the governement pays for some of the expenses associated with making the aircraft available for the military.
Gary – I’m not suggesting this should be a high priority, that’s for sure. But it’s really the one area where I can see this being a valid argument. I think that might be the case for a lot of fifth freedom traffic, but it’s something I’d want to spend a lot more time thinking about. Of course the only reason the airlines are going after these 3 is because they’re growing quickly and pose a real threat. Nobody cares about Kuwait Airways because they aren’t trying to grow.
I think the chapter 11 argument that the Gulf carriers make is probably also a valid one. I think the issue is that all airlines, US, EU or Gulf based, operate under business rules that are deemed “normal and acceptable” in their country of origin. The WTO might have an opinion if asked, but getting to that point will take a long time, provided the US government even wants to create that conflict with their military & anti-terrorism partners in the Middle East.
Why do airlines in Europe really go bankrupt, whereas in the US they are deemed too important to fail and have been protected under Chapter 11? Lufthansa and Air France at the moment seem to suffer greatly from the Gulf Carriers while BA and KLM seem to be able to make business work for them, despite that all four are impacted by Gulf Carriers in their respective markets and operations. France and Germany have huge (and union protected) work forces and policies, which work against slimming, trimming and realigning their business.
I think the US airlines will fare best if they focus on being competitive and attractive.
You can’t fault the airlines for Chapter 11. They can enter Chapter 11 and emerge from it only if there is someone there to provide capital for the business plan. It’s not a question of importance (unlike the banks and automakers during the great recession where the US government invested capital). If no one was there, they would have to enter Chapter 7 (?) and liquidate. The fact that Europe does not have a similar policy is their loss. Nothing is stopping EU governments from enacting similar policies if they feel that is a problem. I don’t see how Gulf carriers can make Chapter 11 a seem like a subsidy in any stretch of the imagination. That said, there doesn’t seem to be much meat on the bones of the US airlines arguments (except for the fuel hedge assumption by the Dubai government. I agree that they should focus on raising their service levels while providing competitive schedules.
“You can’t fault the airlines for Chapter 11. They can enter Chapter 11 and emerge from it only if there is someone there to provide capital for the business plan.”
1) American went into Chapter 11 without debtor-in-possession financing, so this is false.
2) Why is being able to obtain new capital when the government lets you break contracts (and in some cases foist pension obligations onto the Pension Benefit Guarantee Corporation) a meaningful distinction of subsidy vs not?
The airlines have consolidated themselves to a point where we the flying public are being held hostage to one fee after another. They have become so arrogant that while fuel prices fell off the edge of the cliff, the airlines, while quick to tack on surcharges, refused to credit their customers.
The quality of domestic US mega-carriers compared to their European counterparts is, at best, shameful. They’ll be the first to whine when the Government re-imposes regulations but will do nothing to stave off that possibility.
There must be a middle ground between cheap fares and basic minimal creature comfort.
I agree the airlines that imposed seperate furl surchargers (mainly it was international, US airlines haven’t had then recently) should have reduces/eliminated those fees. But to say that airfare should go down becuase fuel did in the US makes zero sense. Airlines have the right to charge whatever they can get and they still run at a pitiful 10-15% profit margin right now. You have Congressman wanting to investigate airfares at that margin but Apple is ok selling the iPhone with margins in the multiple-100s%. The airlines are bringing in a lot of profit right now in total dollars but they are still a pathetic business in terms of margin.
Gulf carriers have a geographic advantage:
With current long rangers, they can reach almost any populated spot on the globe non-stop (Airbus has some nice mapping feature for their fleet on the web page and I guess, Boeing has something similar).
So they have a very nice advantage without any government subsidizing them, and (that’s the sad part), there’s nothing competition in the US or Europe can do about it (continental drift will be too slow to change that).
Compared to the US carrier, the European ones suffer more as the Asia/Africa market is way more important for the European carriers for years, and this is slipping away (esp. for *Alliance not having a robust partner in the Middle East).
If the US-Carriers would have spent some fraction of the money, lawyers, analysts have spent to dig out this data to improve their product, the could at least narrow the gap between the Gulf Carriers and themselves.
If I have to choose a carrier to cover a destination I go for
– other considerations (loyalty programs etc.)
and esp. in the Central-Europe -> India distance (which is one I frequently fly), Emirates has a superior product (as well inflight as well as timing as well as price).
When going to the US (still reasonably frequently), I try to avoid US Carriers on the Transatlantic segment and prefer the european carriers (as they have the superior product).
– improve your product (that’s where spending some money might help)
– get your prices competetive (that’s where you might have to accept lower margins)
– stop blaming change for your (maybe bad) situation
*slow clap* Contentential drift….Bravo
“and esp. in the Central-Europe -> India distance (which is one I frequently fly), Emirates has a superior product (as well inflight as well as timing as well as price)”
Have you ever flown EK’s 777 in coach? I’d hardly call it a superior product. Sure, you have a dazzling IFE system, but you get the same surly FAs and horrendous seat comfort in their 10-abreast configuration that you do on US and European carriers. Emirates has done a great job of bamboozling the avgeek crowd about how great they are thanks to their (admittedly superior) premium class experience, but the reality for the majority of passengers who are stuck in coach is very different. You fly EK because it’s cheap and it’s a convenient one-stop option to India, not because the product is any better.
I think the Delta and the other US carriers should be required to finance a White Paper of how consumers were damaged by the airline mergers.
Frankly, I would consider letting some of the foreign carriers operate in the US as long as they use US crews.
The only competition left in the US airline business is between the carriers to see which one can pay its CEO more.
One comment above, which I strongly disagree with, is the one against the Ex-I’m Bank. The Bank strongly helps American industry and especially the the American aircraft industry.
Letting foreign carriers operate domestically would be fascinating. However other governments would not likely allow the same in their skies.
As for the EX-IM Bank: it definitely helps American industry more. howver, my comment was limited to carriers.
I think not allowing Richard Branson to own 51% of Virgin America is a great example of how legacy airlines benefit from thier campaign contributions.
Please avail yourself of Timothy P. Carney regarding the Ex-Im Bank and hopefully you will see the error of your ways.
US airlines – that continue their fuel surcharges with cheap oil, gut their award programs, cut snacks and reduce seat pitch so much in Y that their customers are attacking each other when one reclines – calling out Gulf Carriers for their conduct is a pretty good joke. If I were a politician, there’s no way in hell I’d come to the rescue of DL’s profits.
As others have pointed out, our own airline industry was heavily subsidised by the USPS on behalf of the Federal government, and that sort of support continued for decades.
Also, what does AA think about this? Aren’t they OW partners with Qatar and Royal Jordinian? Don’t they allow earning miles on their partners Etihad and Gulf Air? AA seems pretty comfortable with a variety of Gulf Carriers…
Jon – It’s very interesting because American is tied to all of those middle eastern carriers. And of course, American’s closest partner BA is now owned 10% by Qatar. So it’s one ugly tangled web. But American is standing toe to toe with Delta (which is a joint venture partner of Alitalia’s, partially owned by Etihad) on this so far. Still, it seems clear to me that this is really Delta’s handiwork and the other two are along for the ride.
Considering the attempts by the Big 3 to put the squeeze on their workers, I don’t have a ton of sympathy for them, but that said, there is no doubt that intercontinental travel to an extent covers losses on flying from Poughkeepsie. If the margins there get slashed then you will see a ripple effect down the line that will, ironically, have a negative impact on consumers in small to mid tier airports. While people complain about not having enough non-stops at their airport, the reality is non-stops in many situations are unsustainable, and hub flights are only sustainable as long as the margins on connections from there are healthy. These factors are sustained by these artificial constraints.
A lot of the viability of these companies relies long-term on the ability of their governments and their economies to function. Some of the infrastructure projects that sustain the Gulf countries are of questionable utility and even longer-term sustainability, both financially and environmentally. The fact that, per the report the UAE is unable to financially sustain DXB and other airports with the current fee regime suggests that they will run head long into the same scenario they did when credit froze up; needing a bailout from a neighbor or another Gulf state to be able to sustain itself. Its like St. Louis’ Mid America writ large.
Is the current fee regime for ATC and AIP sustainable? Was the TSA security fee adequate to cover the costs prior to last year’s budgetary kabuki? This Anarcho-capitalist assumed Jim knew those answers so didn’t feel necessary to correct him. (I admit I will gratisously mention/slur Ex-Im any chance I get.) I’m pretty sure military aviation training is for the “common defence” and not to help Doug Parker make more.
From a consumer standpoint, I would LOVE to be able to fly foreign carriers domestically. Heck, even 3rd-world airlines (LLoyd Aereo Boliviano comes to mind, on a flight from LPB to EZE via Santa Cruz) have better in-flight service than most US airlines.
Even if you lose some marginal US destinations through the network effect, how much of an economic impact would that really have? I would wager that most of the smaller US airports are within 90 or 120 minutes of another (more sustainable) airport, with the exception of a few extreme examples that are currently financed by EAS subsidies. So your business execs going to/from unpopulated parts of the country have to ride an extra hour or two each way in a cab, or spring for the corporate jet, not the worst thing on earth.
In addition to the direct subsidies, the labor treatment of the Middle Eastern airlines is deeply and explicitly against US labor standards and gives them an unfair advantage over US airlines. ( and , for example, for Qatar Airways.) In particular, the requirements for exit visas for flight attendants to leave Qatar, restrictions on marriage, and short contracts which allow the employer to exclude any flight attendants who aren’t young and beautiful are beyond the pail. There are bad things to say about airline labor unions in the US, but they’re presence has made all of these things as well as weigh-ins relics of the distant past here.
Certainly, wage standards and labor standards are different around the world and aviation is a global industry, but these airlines are hiring westerners to serve westerners on flights between the US and Europe, between Europe and Australia, and on many other routes where the “home” airlines have significant structural disadvantages because they can’t legally or economically (due to effective press and labor standards) operate with the labor practices are even remotely fair. There have to be ways to negotiate decent labor standards into any bilateral aviation treaties, and I see no reason why the treat-women-as-equal-human beings world should give the Middle Eastern airlines an exemption from those rules when they’re competing with airlines that do treat employees vaguely decently. This is especially true if they’re allowed the fifth freedom routes you mention between (eg) Europe and North America without a stop in parts of the world where these labor practices are legal or acceptable.
And the Qatar’s CEO’s defense that the employees “as a mature individual accept[ed] those conditions” () rings awfully hollow. The reality is that labor markets are in no way equal agreements between power employers and weak individual employees (especially in the absence of a union). This is why labor standards matter.
My understanding is that Emirates and Etihad aren’t as bad as Qatar in this respect, but I certainly don’t believe that their labor practices would meet western standards.
Oops; I guess the comment software won’t let me post links to the news articles I was citing. But others can Google them as well as me. :)
Sounds like the Gulf airlines are all fans of Ayn Rand.
How do you spell cry babies, AADLUA.
Almost since the beginning of passenger air service, countries had a ‘national’ carriers where the government pretty much paid the bills for so it’s not like it’s anything new.
US carriers didn’t care much about India until the world changed and everyone started having call centers in India and traffic picked up. On a globe, the USA and India are a long ways from each other, so it’s not like having a lot of nonstop service from different U.S. cities to say Canada/Mexico/the Caribbean.
Carriers in Europe/Aisa/MIddle East can do a better job at serving India then U.S. carriers, but the Middle East uses thousands of workers from India so natually have more service to India to transport people back and forth.
Notice how you don’t see AA/DL/US pushing their European and Asian partners to increase service to India as an example to compete with the Middle East carriers on service. Or to lower fares or increase inflight service to compete with the M.E. carriers. No they just want to whine about it to try and get the millions of voters in the U.S. to get their elected officials to ban M.E. carriers or something.
Maybe, maybe we should outsource all of Silicon Valley computer workers with low paid Chinese techs. That way, we can have cheaper computers and cheaper real estate in the Bay Area of San Fran….
Competition=lower fares=good for consumers. When was the last time Delta or United gave a crap about the flying public. Compete or perish!
BTW CF, you shouldn’t be commenting on things you don’t understand nor have any business trying to explain international business competition to your readers. You went to school where and have a degree in what? You have participated in international business experience for how many years?
Pretty sure CF has years of experience working for multiple airlines, an MBA from one of the top business schools in the country, and is regularly sought out to provide commentary on the airline industry by television and print news. How’s that compare to your “international business experience”?
What about the subsidies, marketing money, reduced or eliminated landing fees, grants, etc that the US carriers receive from airports and local and state governments to make service work? They look like subsidies to me.
What about the carriers this is helping? JetBlue has been very successful with partners like Emirates.
You are right, I do not care about the effect on US carriers. If American stops gouging at DFW maybe it would have traction but looking at it holistically there is plenty of “subbsidy’ of American now, although in another sense. It is a big world, deal with it.
This is simple. We should show exactly the same sympathy for the US carriers that they have shown us…which is none. I have flown Emirates, and in every class of service, they are simply better. Why in the world would we support paying higher fares for crappy service, no loyalty to their passengers, and ignoring the subsidies the US government gives to its carriers.
Maybe I should care. However, when I think about all the issues cited by Eric Morris in the first comment and then reflect on how DL, UA and AA have adopted a customer-unfriendly business model that quotes a rock-bottom fare and then nickel-and-dimes you for ever thing that was part of the fare a decade ago, I end up on the side of the so-called ME3. Plus the domestic airlines benefit from a sheltered domestic marketplace since foreign airlines can’t fly domestic routes. Why the heck should I care about DL’s whining?
Does anyone know if there’s been a good write-up on the collapse of the quadpartite ownership structure of Gulf Air? I can certainly understand Qatar’s and Abu Dhabi’s preference to control their own airlines versus subsidizing one that’s headquartered in Bahrain, although at least some of Gulf Air’s losses could be attributed to the inefficiencies of having headquarters and operations functions parceled out among the other owner-states as consolation prizes. But it seems to me that the amounts of money thrown at QR and EK easily dwarf the contributions Qatar and Abu Dhabi made to GF.
EY, not EK.
Middle East Carriers do not allow passengers with Israeli passports on their airlines. They are also heavily subsidized by their middle eastern countries. Do we want them to be rewarded for anti-Semitism and handouts from their countries? I don’t!
I can understand how the issue of subsidies is painful in a country like the USA with multiple carriers all theoretically having the right to equal or no state subsidies. But I cannot understand why the UAE/Qatar governments can’t subsidise their state-owned carriers, since a) they are the only carriers of each entity, b) they are state-owned anyway.
Andrey – Well, if they’re members of the World Trade Organization, then they’ve committed to this. And both the UAE and Qatar are signatories.
Sorry for my dumbness, but doesn’t the definition of “state-owned” mean “state-funded”?
Andrey – Well, state-owned carriers likely had an initial capitalization from the state (or they were nationalized at some point), but that doesn’t mean they aren’t self-sustaining businesses. Air New Zealand is a good example of both. It was a disastrous state-owned business that required bailing out in the early 2000s. Today, it’s a self-sustaining business that doesn’t require capital funding from the state. It just happens that the state is an owner. It’s the same thing for private businesses. You might own stock in a company but that company isn’t going to come to you and ask you to add more money unless things become dire.
I certainly don’t know the details of the WTO rules, but my could-be-wrong understanding is that the state’s ownership has to be something at least vaguely like a real investment in which they have an expectation to profit. The state can’t just use general revenues to subsidize an unprofitable-on-its-own airline.
Who needs WTO if it dictates me what I can and what I cannot do with my own property?! :-) Sorry for the off-topic. It just seems to me a little unfair that some countries state that other countries cannot do whatever with their revenues (as long as they are not spent on war, drugs and slavery).
But then again it looks a little bit strange that American is happy with Qatar in oneworld and yet unhappy with Qatar in the US.
Cranky, when you say “today, the “harm” being inflicted on US carriers is primarily on traffic going beyond these Middle East hubs to India and Southeast Asia. The US carriers don’t have a lot of service in these markets anyway,” that is circular logic. The reason US carriers don’t have a lot of service in those markets is partially due to the subsidized competition. If these airlines weren’t subsidized, the US carriers would likely have more service in those markets.
I have to say that this report is a lot more impressive than I expected. There is actual evidence of direct subsidies, not just abuse of cheap labor and such.
Jim – I don’t think we’d see much more service to India or Southeast Asia even if these airlines didn’t exist. Might American’s Chicago to Delhi (or was it Mumbai?) flight have survived? No. American was clear that it didn’t work for other reasons. And you’d never see American carriers serving small cities in these areas like the middle east carriers do. So sure, maybe there could be a couple more flights but we’re not talking about much.
I read through the 55 page document and found it quite interesting. There are a lot of assumptions made to get to the $42 Billion number, but they seem mostly reasonable. I did not like the “Equityworthiness” argument about Etihad and Qatar. I think people/entities sometimes invest money in projects they think will create returns over the long term even if the short-term losses are bad – especially in airlines. If it weren’t this way, certainly Virgin America would be dead by now.
Cranky, the one thing left out of your post that will be critical in the government’s response is the impact to Boeing of pushing for change in the Open Skies agreements. If the ME carriers are mad enough they will take their billions in aircraft orders to Airbus at enormous detriment to US employees all over the country.
As a side note, I was surprised to see a few typos in the document. Emirates was implicated instead of Etihad in the Etihad sports sponsorship section. The DXB airport code was misspelled in the Emirates section as well. I would have expected a more thorough review before publishing.
Think the European airlines are bigger fans of the ME3? They are probably working on a similar complaint to be submitted to the EU.
Is there anything besides labor laws that keep the big 3 from having bases in the Middle East and operating flights from These regions?.
Olamide – I would assume it’s simply a labor issue. But then again, why would anyone want to have a base in these places? There’s so much overcapacity as it is.
As an American, I am embarrassed for these US Airlines crying about the ME competition, so sad.
Rather than improve their product (hard & soft) to compete, they just raise the white flag…
Trying to secure government intervention, ban competition…reeks of desperation.
I am a small business owner, if I don’t constantly innovate, provide superior customer service, bust my tail to ALWAYS put the customer first; then I don’t deserve the business, period. Why don’t the US based airlines have this same philosophy? because they don’t have to. They know that US consumers don’t have a choice (domestically)…so they just don’t care. They know that the barriers to entry are so high…that new competition will not materialize.
I avoid flying US based airlines at all costs, it is literally a depressing experience (including Business class). Lucky for me I only fly long-haul international to Europe & ME, so I have many non-US airline choices (as I live in major US city). I feel sorry for the ‘worker bee’ who has to fly US domestic routes weekly or monthly etc…
Good article and some excellent points. Honestly, I do not know what to think. I’m not opposed to Fifth Freedom practices and agree that U.S. airlines should be allowed full access rights. That said, thy don’t really want to – or will not – based on soft product. (The triad of Gulf airlines nearly always offer better service-for-dollar.) I’ve flown all three Gulf carrier at least once. I’ve dumped Qatar based on business and personnel practices and I think their CEO is a jackass. The other two remain in the running, based on service and net cost. Those flights tend to be very long and even in coach class, the quality of service becomes important. (In business class, the Gulf carrier are an easy win.) The U.S. carriers want access to the routes, but so far, the refuse to deliver either competitive service or price. Save the odd specialty route, the U.S. carrier are probably better off limiting their offerings to long legs between major ports and have no business in the secondary, non-U.S. market where they simply cannot compete – or will not compete. IMO, their services to/from those markets are simply horrible. We know that they CAN compete if they wish to, but in my experience, they do not have the desire. They seem content with a captive audience, 60%-70% load factors, horrible service and still manage to generate a modest profit. When the haul is extremely long, service does matter and our own folks just don’t seem to give a damn. Yes, YOU, Delta, American and United! Shame!
” While the airline does put out audited financials, it doesn’t say whether the transactions between Emirates and its sister companies are at arm’s length. In other words, we don’t know if they’re getting below market price, but the assumption is they are.”
If this is true, then it’s a very big deal, although in a different context. Complex intercompany transactions, run through a series of related shell entities, at prices and/or fees that do not equate to market value is basically the scam Enron ran. You can debate whether buying goods from related parties at below-market rates constitutes a “subsidy” or not, but at the very least, it’s quite possibly accounting chicanery that artificially inflates Emirates’ published earnings (I can’t say for sure because I don’t know how these sister companies are structured, but as a CPA, this raises a lot of red flags to me). If it is, then shame on their auditors if they let this go on, as I can’t think of any basis under either GAAP or IFRS that permits such games to be played. And it also raises the question – if they’re willing to play accounting games and aren’t willing to be transparent about their related party transactions, what else, subsidies or otherwise, might they be hiding?
Anyway, I’m over with my accounting geek rant. Back to your regularly scheduled programming…
I can tell the CEO’s of the US-based carriers the difference. I am surprised they don’t know, although, having experienced American airline standards recently, it doesn’t surprise me in the least they have no idea.
Having just done over 20 flights in 28 days last month in Premium, I can honestly say they are appalling. I find this with all US based carriers. In Australian slang, we call it “a bloody rip-off mate”. Price paid for quality delivered is an absolute shocker.
The simple answer is this: Lift your game.
Check this out. I am about to do LAX-DXB-CMB in F in April and I would not even think about using a US carrier for this flight. And this is why.
It starts on-ground. If I was to pay full-freight for F on an American carrier, I will make my way to the airport by my own means, I will check-in with every other Tom, Dick and Harry. I will have to put up with the “holier-than-thou” attitude of the on-ground staff as I check-in, treating me with suspicion.
I will pay for drinks in the lounge ( WTF! ) and I will have a choice of what Americans call cheese, LOL, in a plastic wrapper, and some sort of weird nut mix. Oh, I almost forgot the carrot sticks. In plastic of course. I can have very bad coffee from a machine if I choose.
I will go to the gate, I will line up in Group 1 so I can board first ( WTF!!!! ). No choice.
On board, I will not be greeted at the door because the older cabin attendants will be too busy to bother with the passengers and if I actually say hi or g’day to them they will look at me as if I am some sort of weirdo. It’s like the whole service thing is beneath them.
I will have to find my own seat while the rest of the passengers are traipsing through the cabin being loud with the biggest carry-on bags in history. ( How do the airlines allow this? ) I will take my coat to the cabin attendants and ask if it can be hung and probably get told I will have to wait. I will be offered Californian sparkling wine in a plastic cup. No choice.
My seat will not be much better than what Economy was 10 years ago and I can only hope and prey the passenger in front of me chooses not to recline. OK, the International seats are slightly better, recline is not an issue, but they are so narrow.
After take-off, my meal will be brought to me all at once and 10 – 15 minutes later they will be asking me if I am finished. I will be offered a choice of probably 2 wines, both American unfortunately. No choice. God forbid, we as passengers should interrupt their time.
I will recline my seat and probably discover I don’t have a pillow or blanket so i will have to go to the galley and interrupt their dinner and ask. It will eventually be brought to my seat.
The aircraft will be old and cruddy and in urgent need of a flight to Nevada.
Contrast EK with your American carriers.
I will be met at my hotel and driven, by limo provided by EK, from my hotel to the airport.
I will be met at the airport by their concierge, I will be taken through priority customs. I will be taken to a lounge for a full a-la-carte dining experience before I board, if I choose. In the First Class Lounge I will drink some of the finest champagne and wines in the world. I will have the option of a pre-flight massage or a shower, if I choose.
I will board when I am ready. I will be escorted to my suite on-board. I will eat gourmet food should I choose, when I choose. I will drink the best in French champagne, if I choose, I will drink wine from a world selection of NZ, AU, SA. FR wines. And I will be treated with dignity and respect. My bed will be made for me at a time of my choosing.
On arrival I will also be met by a concierge. I will be escorted through priority customs and immigration, and as I have a layover longer than 6 hours ( it’s 7.5 hours ) my limo will be waiting to take me to my hotel provided by EK. I will rest and relax at a 5 star hotel in DXB near the airport, before my 4 hour outbound flight on to CMB.
I will be taken back to DXB in their limo, to a separate A380 Terminal, to the First Class lounge and board directly into the cabin without all the passengers traipsing through the cabin, gawking and being loud.
On arrival in CMB, I will be taken through customs again, I will have my baggage collected, I will have a limo provided to take me to my hotel and my journey is over. I will tell all of my friends, colleagues, business associates of my contrasting experience and recommend they avoid American carriers like they would avoid the plague.
I can pay $10K + on a US based carrier. I can pay $10K + on EK or EY or QR. So for those about to defend the US based carriers, if it was your choice and your money, what would you do? It’s a no-brainer. Apparently not though for the CEO’s of UA, AA, DL.
And until they make the flying experience in Premium all about the passenger and not about them or their appalling staff, the Middle Eastern carriers will continue to grow and surge.
So CEO’s, you can sit back and whine and moan about unfair practices by the Middle-Eastern carriers or you can lift your game and offer a better product.
The first thing I would do, is resign yourselves. Time to go boys. Off you go with your massive pay-outs and live happily ever after.
Then I would clean out the cabin crews. Goodbye, you’re fired. They are a burden and a blight and you will never change anything as long as they continue to fly with their bad attitudes and their bad service. They’re tired and have been doing it far too long. Most of them hate their jobs and most of them hate the company they work for. I know that because as passengers we can hear them talking in the galleys while they are stuffing their faces during flight.
Get new people, younger, people who care and actually enjoy flying and the service business. People who are well-trained in modern 21st Century travel. Offer incentives, training, bonuses, rewards.
Then eventually, one day, the US based carriers might overtake the Middle Eastern guys in premium service delivery. Until then, the choice is only EK, EY or QR.
This is the best assessment of longhaul premium travel on the US3 I think I’ve ever read. From start to finish, the entire experience is about the employees and making their jobs easier. You’ll eat when they tell you, get up when they let you, and receive a smile if they feel like it. Only very rarely is it about the passenger and his/her needs. When you fly with an international carrier – and particularly with the ME3 – the difference is astonishing. There’s nothing “ageist” about calling the problem what it is: old, tired crews who’ve lost their service mentality in the face of endless amenity cutbacks from penny-pinching management.
At the end of the day, the ME3 consistently deliver a superior product, with or without any structural advantages. The US3 are too afraid of the labor confrontations required to deliver better service, so they’ve gone whining to the government for protection instead.
This is a major reason why unions can prevent improvements from happening. Instead of higher performing employees getting the premium assignments, it is based on seniority. In the real world, I would lose my job if I got complaints about my service or failed to do my job in a safe and customer friendly manner (I am in a customer service based industry). The senior employees (not all) have no reason to improve their performance because their pay is based on the seniority. Also, any union employee the company wants to terminate must go through a process that the union fights to keep that employee employed, even if the reason for termination may be egregious.
Until the US airlines change the way they promote employees and assign routes to a performance based model versus seniority, you will have these issues continuing and you will find better flight experiences on most foreign airlines.
I know there is little sympathy for the US carriers because people feel the service should be better (it should be better, and basic ticket prices should also be higher). That said, it is beyond foolish to think the US carriers should/could compete with the Middle East airlines on “service.” The only reason that this level of service exists is because it is heavily subsidized. I don’t think most folks would want the US gov’t to be throwing billions at AA, DL and UA so they could provide a better in-flight product.
While the full extent of the Middle East subsidies are still unknown, the proof is in the pudding. Look at the “crazy” routes they’re already flying to the USA, and compare them to int’l routes flown by USA airlines and non-Middle East airlines. Folks, it’s nearly impossible to fly a long-thin route to a city of 2 million inhabitants — much less with fancy, low density seating. And the idea that you can make this work with “connections” is a joke: find me another airline in the world that makes money by primarily offering long haul connecting service. I think the number is zero.
There is no question this is limiting service by US airlines to Asia. I think DAL threw in the towel on one India route, and the odds of another India route starting seems very low — even though this, logically, should be an area of growth for US airlines. As more and more below-cost seats are added from the USA to the Middle East, I’m sure the US airlines will feel the pinch of lower yields on various Asian/Pacific routes. I don’t think this is right. Do you?
IAHPHX, Subsidies, are you kidding? What do you think Chapter 11 is? It’s a giant subsidy from American taxpayers. Basically the airline went broke, they declared bankruptcy, they stole money from their suppliers who never get paid and the taxpayer funded them. Isn’t that a subsidy? AA, UA both did it. Without those subsidies there would be no UA or AA. We can only dream.
But this issue has absolutely nothing to do with subsidies. It’s about Customer Service and Quality of product. The US airlines need to stop worrying about what the others are doing, focus on themselves and their customers and get the hell on with it.
There is nothing they can do about EK, EY or QR. There is a lot they can do for themselves. One day they might grow-up and then they can start playing with the big-boys of the Middle East.
You Americans are strange I have to say. You adopt bully-boy tactics where ever you go in business with whatever you do and then as soon as someone else adopts your tactics, you cry wolf. Strange. If you can’t stand the heat, get out of the kitchen.
I agree that the U.S. Airlines need improvement, but airlines like Qatar treat their cabin staff like almost slaves. If you want to quit, you have to pay a bond and you can’t even leave the country. Try researching how the middle eastern airlines treat their employees and then not feel guilty about flying on them. Maybe you should wake up!!
Thanks For Sharing!!
AA should not expect any support from IAG… Willie Walsh today:
“We are a long way from the fully deregulated global industry I would like to see. It is also worrying to see protectionism rearing its head again, notably in the US where some carriers complain the open skies arrangements are benefitting non-US airlines, most particularly the Gulf carriers,” Walsh said.”
As Cranky noted, that’s 10%-owned-by-Qatar Airlines IAG.
A couple of thoughts:
How is what the ME3 doing any different from the good old days of Pan Am et al, when the American airlines ruled the skies and flew to every corner of the world? Times change.
Consider the considerable hub and spoke operations American airlines have to serve SE Asia from Japan / HK. Is it not unfair to the local airlines flying those routes?
It should be trivial for American airlines to serve India with a similar arrangement based out of HK or even DOH. I think DL does some routes in partnership with KLM to India.
It’s curious that none of the above comments include complaints about the service provided by the “aging” pilots who fly international routes for Delta, United and American.
Now that sir is funny :-)
What about the aging pilots of the ME3. What’s the difference? There’s not many Middle Eastern pilots and everyone one else is an expat. ??
Zup, just for clarification, my comment was made tongue-in-cheek…….it appears that “age” in the flight deck is perceived more favorably than “age” in the cabin, no matter the carrier.
Instead of blaming other airlines, they should travel once from emirates or Qatar which they called lower carries. Service is so far superior and professional. Be prepare for fare competition then common habit to put all competitors at bay with US lobby.
I could care less how the Big Three of the Gulf region maintain their businesses… gov’t support, few taxes, ready reserves of fuel, low labour costs… they provide incredible service and value at any level of class and, what the Big Three of the US don’t get, they hub for the world! I can leave from my home airport of Milan MXP, fly to Dubai and then go practically anywhere in the world… Cape Town, Sydney, Lima and even to secondary cities too. I also can hop a Emirates flight to JFK! Delta in the lead, American & United following smacks of kids on the playground who, fed up with better players, take their balls and go home. Fine. They can stay with their quest for market dominance in the US, I know who to fly… an airline which can at least make a good cup of coffee.
Everyone should read this from the FT:
“The truth is that most of the Gulf success stems not from illicit subsidies but from innovation, exploiting their advantages fairly and making a bet that paid off. Good luck to them.”
kt74 – This sounds like it was written by Emirates.
I do think the US carriers are barking up the wrong tree if they pursue Emirates here. Etihad and Qatar are the real issues. If you want to call burning through billions of dollars a success, then go for it. But those airlines are not successful by any business metric that anyone would use.
What if the reign of Emirates is soon to be over? With new planes that can fly unbelievable distances with great fuel efficiency like the A350 and 787, and the 777X and A330neo down the line, European and American airlines are better equiped now than ever to serve Asia non-stop. What if the Dubai stop is no longer needed? Its not like this hasn’t happened before. Here in Ireland this exact scenario unfolded in the 1960’s at Shannon. During the 50’s Shannon was booming with stopover traffic but when jets arrived in the 60’s there was no need for the stopover and Shannon was left to be rescued by the Government with their “Shannon Stopover Scheme”. If this happens again all the American airlines have to do is introduce non-stop flights to popular Asian destinations and wait for the ME3 to die. I’m pretty sure they’ve already hit overcapacity if not soon
The US airlines, at least, aren’t falling behind because of technology. The Dubai stop already wasn’t needed at all. The ME3 are just a recent addition to global networks, if anything. Dubai/Qatar/Abu Dhabi all inserted themselves into the global conversation by rapidly expanding their route networks to become indispensable to airlines that were cutting routes left and right.
US and EU airlines already fly to the popular Asian destinations. They fly as far as India, Australia, and Hong Kong – direct. There’s no “need” to route through the ME for those places. It’s the smaller (but growing!) destinations that US airlines don’t want to risk investing in, that the ME3 are gobbling up. And for the few new routes that US airlines are adding, their pricing and product pales in comparison to even the non-ME3 airlines. If you want to go TATL, would you fly UA/AA/DL, or LH/BA/AF? Hell, even Iberia outshines the US carriers these days. How about TPAC? Would you take a US airline, or QF/ANA/JAL/CX/SN/Thai?
Exactly. The problem the US carriers have is only magnified by the ME3, but the US carriers have only put themselves at the bottom of the pile through their own cost-cutting and poor training.
Without a doubt this is the most informed and sensible comment I have read on this piece. Put succinctly and to the point. But most of all, it’s right. Thanks for the informed contribution to this discussion.
Well then it appears that better service truly is the only way for US airlines to combat the ME3. Maybe they’ve already realised this, but it would take a lot of finance the likes of ME3’s service and quality. Even European carriers that are miles ahead of the American ones need to improve. The only difference is that now American carriers have the profit and finance, EU airlines on the other hand.
During the past decade, government approval of airline mergers has resulted in the creation of a customer-unfriendly oligopoly which colludes to offer horrible customer service while nickel-and-diming their customers with endless nuisance fees. Travel writer Joe Brancatelli sums it up the best: “Americans dislike the oligarchy that the U.S. carriers have created and they hate the service and policies that they offer. Moreover, Americans like competition and they love the kind of cut-throat, price-slashing competition the Gulf carriers have brought to air travel.”
Delta got the government to look into “ME3” subsides per http://www.reuters.com/article/2015/03/19/us-airlines-competition-regulator-idUSKBN0MF07D20150319
Before making an issue of potential subsidies to foreign airlines, the U.S. government needs to consider all of the assistance given to domestic airlines. Post 9/11 bailouts and abuse of bankruptcy laws by major airlines immediately come to mind. The United States should open domestic routes to foreign airlines; this might restore some actual competition where none currently exists. The government should NOT respond to self-serving complaints by airlines that cannot compete in the global market place.
I just flew the AA DFW-HKG route and have flow QR to DOH a number of times. The hard product of the 1-2-1 on the AA 777 is better than the 2-2-2 on the QR 777 flying out of the US. In fact, the AA 1-2-1 config, while being the same ‘reverse herringbone’ as the QR 787 config, was better customized to provide more personal space for the passenger.
The soft product was not as good. While the FA were ok, it seemed a little rude of one of them to walk away as I was talking to them and the meal service was no where near as good or as accommodating as on QR (e.g. you were on their schedule on when to eat).
As for QR’s labor, the FAs I’ve seen have been a mix of Asian or Eastern European. Qatar’s labor laws in general could use some updating but the ‘exit visa’ requirement applies to every expatriate working in Qatar, not just the lower paid jobs.