Why Delta Thinks Its New Investment, a Subsidized China Eastern, is Not the Same as a Subsidized Middle East Airline

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 China Eastern Investment

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?

[Original doctor photo via Shutterstock]

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17 Responses to Why Delta Thinks Its New Investment, a Subsidized China Eastern, is Not the Same as a Subsidized Middle East Airline

  1. CP says:

    Since corporations are people too, I guess they are within their rights to be hypocritical

  2. Mike says:

    You are 100% correct: a subsidy is a subsidy. There’s no gray area or level where it’s legal or illegal. Delta doesn’t set the rules, though it seems to want to. And amount of domestic or international traffic? That’s meaningless. If the state of Colorado decided to subsidize Frontier and have it build a hub in ATL, you can bet DL would use its same arguments.

  3. A says:

    I can understand why Delta and other US/European airlines complain about the ME airlines from the argument Delta outlines here. They aren’t airlines serving their domestic O/D markets whereas I’m quite sure most passengers Delta serves are in fact Americans, or people flying to American destinations.

    Totally agree that this China Eastern buy is slightly hypocritical but love their genius of trying to change the conversation.

    • Mike says:

      You took the words right out of my mouth. Totally agree that DL can make an internal argument that subsidizes to re-route “existing” traffic and/or to “create artificial flows” does sound more sinister than subsidies to serve your domestic market and connect your growing economy to the largest economy in the world.

      • Mike says:

        OOPS. Should have grammar-checked.

        Also, meant to add that the average US consumer won’t care about that nuance.

  4. Doug Swalen says:

    “Widget see, Widget do”

    Delta doesn’t have a leg to stand on anymore regarding the E3 and subsidies. Not that it ever had much of a leg to stand on in the first place. The “just a little bit pregnant” defense doesn’t work.

    • Doug Swalen says:

      ^^^Should be “ME3”. Getting my airline terminology conflated with my gaming world terminology…

  5. enplaned says:

    Weakens Delta’s case against the ME3, which wasn’t very strong to begin with, especially with respect to Emirates.

    There have always been carriers that have carried a large amount of connecting traffic between countries rather than to/from their home country. KLM, which is a Delta partner carrier, is one of them. Singapore is another. Throughout history, certain countries have functioned as entrepots — transit points for people and goods. It’s unclear why this should be regarded as something that makes a meaningful difference in the situations. Is the success of Singapore Airlines somehow more dubious because it’s not connecting people to domestic points? In that case, is the success of Delta’s Atlanta hub somehow less valid because of all the connecting traffic?

    • DE says:

      KLM is the perfect historical comparison to the ME3 – tiny country with an airline that thrived disproportionately on connecting traffic. And we’re all OK with that, right? Let’s have a long term JV with them! (and let’s ignore the fact that JVs in total are very illegal, until approved to be legal)

      So, really it’s just down to the subsidy question, and apparently now we’re OK with splitting hairs and debating subsidy:revenue ratios.

      Sheesh.

  6. Jonathan says:

    Who does Richard Anderson think he is, Obi-wan Kenobi?

    http://i.imgur.com/f3NrEqR.jpg

  7. dan says:

    hypocritical about boeing and the export bank subsidies which were also received by GOL. historically US airlines have gotten burned by large investments in foreign airlines…as I see it aeromexico, gol, virgin atlantic, china eastern, or skymark will eventually bite delta where it hurts. makes more sense to me to fly those 40x 737-900’s on order out of narita…that 5th freedom flying inherited by nwa was paid for at a very high price on the USS MISSOURI sept 2 1945( allow pan am and northwest orient fly domestically and intra-asia out of tokio)

  8. David SF eastbay says:

    Remember it’s only bad when someone else does it.

  9. jrod says:

    I think Delta gave the wrong response. Their answer should be – “We are 100% in favor of open skies agreements. Of the 72(?) in place, all but 2 are working fine. We contend that the terms of the agreements with the UAE and Qatar are being violated by disallowed subsidies to EK, EY and QR. As there is no open skies agreement in place between the U.S. and China, we are governed by bi-laterals and route rights approved by each government. The comparisons of the two are apples and oranges – or dates and lichee nuts”.

    • Gary Leff says:

      1) Where does it even say that in the agreement?
      2) If it actually said that why wouldn’t the subsidies Delta receives violate it?
      3) And further, why wouldn’t Delta’s benefiting from the subsidies to China Eastern (as a partial owner) violate it?
      4) How about those subsidies to the flag carrier of our Open Skies partner Saudi Arabia? Ooops, they’re a Delta partner so that’s ok.
      5) What about Delta’s joint venture with Alitalia, which is running on Etihad’s investment? Delta is concerned about Emirates flying JFK-MXP, but not about Etihad flying transatlantic under the Alitalia banner since Delta shares in that…

  10. Hua says:

    I think the biggest difference is that there is significantly more domestic traffic within the US and China (and passengers originating from and terminating to) the US and China than in the ME3 markets. If Delta would rather the ME markets look like the US and China (to/from and within the country rather than relying on international connecting traffic) there just wouldn’t be much of a market. Sounds like DL is just envious of the ability of the ME3 and their ability to leverage their geography to make up for a lack of domestic traffic.

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