Welcome back to the third, final, and probably most controversial installment in my Across the Aisle interview with Delta CEO Ed Bastian. If you missed part one about Los Angeles and the Pacific, find it here. And if you missed part two about getting cocky, arriving on time, and viral videos, that one is right here.
I hadn’t even planned on asking about the Middle East carriers, because that wouldn’t have been near the top of my list with so much else to discuss. But when our time was up and Ed wanted to keep the party rolling so we could talk about the Middle East situation, I wasn’t going to turn it down. The airline has really ramped up the Middle East carrier rhetoric lately, so I think we can all get ready to hear a lot more about this.
I’ve long believed that there’s a lot of noise in this battle, and that this really wasn’t about the Gulf hubs at all. It always seemed to me to be about future growth in fifth freedom flights that, without government intervention, will eventually allow Middle East airlines to connect the US with East Asia and Europe. (There are already a couple of questionable European routes flying.) I made sure to bring that up in the discussion, and Ed’s comments cemented by belief.
Many people have brought up the hyprocrisy in calling out subsidies when other airlines receive them as well. I don’t buy some of those arguments, like, as mentioned in the interview, the Chapter 11 comparison, but there are others that seem more cloudy. That’s why I brought up China. My understanding is that some Chinese airlines are running an increasing number of loss-making flights with cheap seats over the Pacific thanks to local subsidies. As you see below, Ed has an alternative view.
Brett Snyder, Cranky Flier: We’ve seen Emirates making some big cutbacks lately in the US, but as an overall strategy you still see these guys growing. Qatar just announced San Francisco. There’s more coming. Obviously Delta and others have been very vocal about the subsidization issue of Middle Eastern carriers. Where is that today, this fight, because it’s been going on for some time?
Ed Bastion, CEO, Delta Air Lines: Well, we are working with a new administration. We spent a lot of time with the previous administration. We thought we had made our case to them, and I think they weren’t quite sure how to deal with the remedy.
Cranky: They believed in the case. They just didn’t know what to do with it?
Ed: I think that’s indeed the case. And I think they were trying to work the issue, and they ran out of time. This president ran on a platform of enforcing US trade agreements, fair trade as compared to free trade, and protecting American jobs and American interests. Given the size of the subsidies which we’ve had audited, we’ve had lawyers involved, forensic accounting involved, no-one has been able to give any evidence that they’re not subsidized. Fifty billion dollars is our expectation and we think it’s grown since then, because that was a couple years ago. So our government needs to decide what they’re going to do about it.
The issue for me, Brett, is a very important issue because the US airlines are profitable, some of the most profitable airlines around the globe. It’s not going to cause us to go spiraling out of business any time soon, but it will over time. And over time it’ll be too late if we don’t do something about it now. And when you think about those three airlines combined have about 450 planes, widebodies. They have destroyed a large part of the European economics that the traditional carriers; Air France, KLM, Lufthansa… certainly other things that fit back to their businesses too. But that’s really hurt their traffic pulls Europe to Asia, Europe to Africa, Europe to the Middle East. Those profits are way off, and they’ve lost those and now they’re barely making money. They’re not growing anymore in those markets. Big social unrest as a result of that. They can’t pay their people. You go to Asia and you look at the issues that Singapore’s having. Look at the issues Cathay Pacific is having. A number of factors going on there, but the Middle Eastern carriers have had a significant impact in those markets.
Cranky: It’s funny, because Singapore, the same charges were levied at them back when they started.
Ed: Exactly. Well, the Middle Eastern carriers stole the business model from the Singaporeans. And then Australia where Qantas has now turned into largely a feeder airline for Emirates on an international scope. Of course they fly Australia to China and they do some local Asian flying, but the flights to Europe, the Kangaroo flights, that’s all been ceded to the Middle Eastern guys. Emirates is far larger, substantially larger than Qantas is. We don’t have to look too far. You know what’s gonna happen when you add another 500 aircraft, 540 to be specific, widebodies on order, firm orders, that are being built as we speak to be delivered over the next 5 to 8 years? Where are they gonna go? Are they gonna go to China? I don’t think the Chinese are going to let them in. Are they gonna go to Japan? I don’t think so. The Japanese aren’t going to let them in. The only other market that can sustain that level of volume is the US and they’re waving ’em in.
They want to bring them over the Transatlantic undoubtedly. They want bring them through, establish Transatlantic markets they continue to poke at. They eventually want to bring them in over the Pacific, there’s no question in my mind of that. And it’s for to us to decide, ’cause if that is indeed is going to be what happens, then the US industry is going to be substantially smaller in 10 years from today than it is. And I think that’s a terrible thing for our international airlines, a terrible thing for our employees, a terrible thing for our customers, our communities and you know, they’re cheaters. They’re trade violators and they’re cheaters. And we need to hold them accountable.
It’s easy when somebody pays billions of dollars to make issues go away… we’re here in Los Angeles, Emirates is the airline of the Dodgers. They’re all over Dodger Stadium. How can that be? They’ve got one flight a day, LA to Dubai. Can that sustain a sponsorship which I know is very expensive? That sponsorship costs many millions of dollars a year. Based on one flight, which they just cut back from two. How could that be? Or how could they be the sponsors of the US Open in New York, the tennis tournament, on two flights a day they got. These things have created outsize impacts not just in international aviation but the cost of sponsorships, the cost of service, and we need to do something about it. If it’s proven that they are not subsidized, fine. We’ll compete with anybody. But we can’t compete with a government that’s nation-building. That’s what they’re doing. In terms of wanting to turn their economy as they’re doing and have done into a center of global trade and commerce. That’s not right, it’s not fair, and we’re not going to stand for it.
Cranky: So, the fifth freedom is the big concern, right? The ability to flow something through Europe or through Asia here? Because what they have now, I guess in theory they could add more cities to their Middle Eastern homes, but that’s probably more of a drop in the bucket, right?
Ed: We already know they’re subsidized and losing an enormous amount of money, so at this point they can add as many as they want and it doesn’t really matter. But I’m much more sensitive to what they do on routes that people actually want to fly on. To Europe versus Doha.
Cranky: Routes people want to fly on? So [Newark to] Athens doesn’t bother you then? *laughing*
Ed: No, exactly, to Europe. Rather than route over Doha, you’d rather go direct to Athens and that’s a cause for concern.
Cranky: No I know; I was kidding because that’s a pretty thin route for that airplane anyway.
Ed: I understand they have like 60 people on that flight.
Cranky: Oh that’s pretty good.
Ed: I’m not sure how many people paid.
Cranky: In the winter it’s going to be rough.
Ed: I heard there were maybe 2 people in business class and I’m sure they were both comped. So anyway, when you see that stuff,and you know it’s wrong, and you know it’s subsidized. And by the way, we’re together with American, we’re together with United, we’re together with our unions. Everyone who competes against these people have the same reaction. You hear the noise from the people that don’t compete and get paid off by these guys. You know, they’re biased. They get paid by them, so I don’t think their arguments carry much credibility. Our government needs to respond to that, and I think they will.
[Corp comm chimes in to say we’re just about out of time, this time for real]
Ed: He wants to cut you off because I could go on for another 30 minutes.
Cranky: I’m sure. Let’s get some drinks in here. But I will ask one more question. You hear people that compare it to bankruptcy as a subsidy in the US which I don’t buy into anyway.
Ed: That’s BS.
Cranky: And I agree on that, but what about the people who say “looks what’s happening in China”? They’re throwing money in China at routes that are in no way sustainable to the US.
Ed: There are subsidies in China. By the way, they call them out. They put them on their financial statements to do it. Have you seen the Chinese financial statements?
Ed: You need to get a look at the Chinese financial statements. There’s a line item called subsidies.
Cranky: Well at least they’re clear, but that’s still a subsidy.
Ed: Well ok, but first of all, they’re transparent about it so you can draw your conclusion about it. I’ve asked because we have partners over there, and the majority of those subsidies are geared toward domestic service. The Chinese would not be flying between a lot of these secondary markets within China. We’re not competing against that market, and that’s China policy within its own nation. We have no issue with that. There’s minimal subsidies of international service by the Chinese carriers. The bulk of that is domestic which by the way we have in our country too; it’s called [Essential Air Service]. It’s small and it’s going away. It’s not relevant. For people to compare that, which are in the Chinese, I think it’s in the tens of millions of dollars, not the billions to the $50 billion number I talked about, it’s laughable.
And that was a wrap. I appreciate the way Ed answered the questions put to him, even if I might not agree with everything he said. I have no doubt this particular post is going to generate a lot of heat in the comments, so have at it.
If you missed part one about Los Angeles and the Pacific, find it here. And if you missed part two about getting cocky, arriving on time, and viral videos, that one is right here.