When Delta announced that it would take a 3.55 percent stake in China Eastern, I received a bunch of emails saying effectively the same thing. To paraphrase, how can Delta justify investing in the most subsidized Chinese airline while still fighting Emirates/Etihad/Qatar and their subsidies? It sounds hypocritical, for sure, but Delta is walking a tightrope here and thinks these are two very different situations.
Delta has not been shy in talking about its ambitions for China. Earlier this year, CEO Richard Anderson suggested Delta would like to have a hub in Shanghai that looks a lot like the Delta/KLM hub in Amsterdam. There are two big hurdles there. First, Delta and KLM have a long-standing joint venture (dating to the Northwest days) in a market with open skies. While Delta and China Eastern are both SkyTeam partners, they don’t have a joint venture and can’t until there is an open skies agreement. That’s not likely to come any time soon.
But Delta sees tremendous value in China, and, especially since it lacks a tight North Asian partner, wants to make Shanghai a key point in the network. The best way to do that in a highly regulated market like China is to buy-in to the existing carriers. The 3.55 percent stake isn’t much, though it did cost $450 million. It is, however, an important move in that it somewhat symbolically gives Delta “first dibs,” so to speak, when the market liberalizes in the future.
This kind of investment sounds similar to what we’ve seen Delta do in other markets with Gol, Virgin Atlantic, and Aeromexico, but this one is getting a fair bit more criticism. China Eastern is the most subsidized Chinese carrier with nearly $600 million in subsidy last year alone.
So how is it that Delta can get aggressive in chastising Emirates, Etihad, and Qatar for taking subsidies while it goes and invests in another subsidized airline? Instead of speculating, I asked Delta for an answer. And here it is.
The Middle Eastern carriers are unique in global aviation, both because of the unprecedented scope of their government subsidies ($42 billion and growing) and the fact that their business models are designed as part of their governments’ economic development arms primarily to connect passengers between other nations through their hubs rather than serving their local markets. The Chinese airlines, in contrast, are structured like U.S. carriers – they primarily serve their domestic markets and passengers traveling to and from China. Delta’s alliance with China Eastern is focused on consumers traveling between the U.S. and China in routes where demand is growing, which makes them an appropriate partner.
Ok, so Delta is saying that there are really two differences. The first is sheer size. China Eastern had about $600 million in subsidy on $14.5 billion in revenue in 2014. Meanwhile Etihad was half the size yet had more than five times the subsidy at $3.5 billion committed for 2014. And of course, the claim is that Etihad has taken more than $17 billion in subsidy since it started 10 years ago.
Yes that’s a lot more subsidy, but where is the line drawn? Would $1 billion subsidy a year be too much for China Eastern? $2 billion? I get that there are differences, but there’s no clear “right vs wrong” line that can be drawn here, and that has to hurt Delta’s case.
The second claim is about how the airlines are operating. Since China Eastern is being operated to serve its home country of China, that’s ok. But since the Middle East carriers are operating on the idea of serving people through their home countries instead of the people in those countries, it’s not ok. Again, I do see a distinction, but how much focus on connecting traffic is too much?
I think the US carriers have an uphill battle in this fight anyway, but muddying the waters by investing in subsidized carriers (not that there’s an airline out there that doesn’t receive some sort of subsidy) isn’t going to help Delta’s cause. I suppose it might not hurt it either, but it certainly provides fodder for its opponents on this issue.
What say you? Do you buy the distinction here?