Trump Gets Tough on the Middle East Airlines… Or Possibly Not

If you saw the news earlier this week that President Trump had addressed the gulf carrier subsidy issue, you could be forgiven for being extremely confused. What happened was reported in very different ways depending upon the interpretation, so you ended up seeing headlines like these:

Which is it? Is Trump taking action or not? The answer is… we don’t know. We do know that the administration is going to hold informal talks (just as President Obama did before), but that doesn’t mean anything. The feds have apparently said that if things aren’t resolved by a certain date, then they’ll take tougher action. You can decide if you want to believe that one. (I remain highly skeptical, at best.)

Though I do love a good backstory, I’m not going to reiterate this one here in great detail. In short, the 3 big US airlines (American, Delta, and United) have accused the 3 big Middle Eastern airlines (Emirates, Etihad, and Qatar) of receiving massive government subsidies. They don’t like it, and they want the US government to step in and amend the open skies agreements between the US and both the UAE and Qatar to punish them.

A ton of lobbying money is being spent on this effort, mostly by the US carriers, to prove that yes, there is massive subsidy. It’s hard to refute that (though the case is far stronger against Etihad and Qatar than Emirates, which is a viable airline on its own). But what would be considered a victory in this fight? Well, the formal process here would involve having the US and the UAE/Qatar enter into consultations. If that works well, then it would result in an amended agreement that addresses the concerns at hand. But informal talks are a long way from formal diplomatic discussions.

Still, what would that amended agreement look like? What would satisfy everyone here? Some might say that these airlines should be barred from flying to the US at all while others might be fine with just arresting growth. Personally, I think the broad attack on these airlines is hurting what should be the primary goal: preventing fifth freedom flying.

This attack on three large airlines is extremely noisy. It’s hard to make a case for what subsidies are ok and which ones aren’t. What about the big subsidies at Chinese carriers, the very ones that both Delta and American own a stake in? How much subsidy is too much? The answers tend to get squirrelly and it muddies the water. There is a more straightforward and fair way to approach this.

The US carriers should give up on fighting these airlines in their home hubs. Yes, there are certain advantages to being in those locations versus elsewhere, but such is life. And even with those advantages, you see these airlines starting to struggle.

Still, the market from the US to the Middle East/Africa/India/Southeast Asia (where the Middle East airlines can ideally connect passengers) is relatively small. Here’s a look at where Emirates can realistically take Americans via Dubai (thank you Great Circle Mapper):

That is a whole lot of lines, but the total market is fairly small. There are very few people from fly from the US to Africa. Sure, India is a bigger market, but most of those people were flying through Europe before. There was always limited service from US carriers to India. And for Southeast Asia, that’s really only a good option from the eastern US. Those are also markets where US carriers have had limited to no service. The overlap is small, and the impact is relatively minimal. The Middle East is perfectly positioned to serve those places, and the UAE and Qatar are much lower cost operating environments. It’s not a fight worth fighting. (I may be singing a different tune if I were a European airline.)

The fight that IS worth fighting is against those fifth freedom routes. A fifth freedom route is one that starts in your home market and goes to another country. Then the flight goes beyond to a third country, and the airline has the right to carry local passengers between those two other countries. Fifth freedom flights were originally designed because airlines didn’t have the ability to fly nonstop from their home countries to certain destinations. That’s why Air New Zealand flies LA to London and it’s why Singapore flies Frankfurt to New York. Those airlines need to stop somewhere to get to these far flung destinations from their homes.

Emirates is operating two fifth freedom routes to the US today, but neither are necessary. (Again, thank you Great Circle Mapper.)

Emirates can, and does, fly nonstop from New York to Dubai. Yet it’s still sending some airplanes via Europe. It’s hard to see here, but one goes from New York/JFK to Milan/Malpensa while the other goes from Newark to Athens.

This is really just opportunistic use of a low cost structure to compete on routes where there is no way for the local airlines to be competitive. Is it fair for Middle Eastern airlines to take a ton of subsidies and use low cost labor practices permitted in their home countries to fly routes that don’t touch their homes at all? That seems more like unfair competition, and it’s a bright line that avoids the issue of the Chinese subsidies (since they don’t do this at all).

If one of the Middle Eastern airlines were to start flying from North Asia or Europe to the US with high frequency, it would be very bad for the carriers that actually call those markets home. That is where the discussions should be focused, and it’s where the feds might have the easiest time making a deal.

Hopefully that would be enough to placate the US carriers. Any actions with a broader scope than that seem like a bad idea. So what exactly has Trump announced? Not much. This discussion is just getting started again.

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smallmj
Member

Actually, one of the Chinese airlines does do a fifth freedom flight from New York to Vancouver and then on to China. I’ve heard that it is a great way to fly JFK-YVR.

MK03
Guest
MK03

Cathay Pacific? But technically they’re from Hong Kong and not the Mainland (yes Hong Kong is part of China, but Hong Kong has a separate customs area).

Itami
Guest
Itami

Indeed. And if I’m not mistaken, the US even has different bilateral air services agreements between HK and the mainland.

Bick Rowen
Member
Bick Rowen

Tue, Jan 2
8:40 PM – 11:45 PM
New York City (JFK) – Vancouver (YVR)
Cathay Pacific 889 · Boeing 777
6h 05m

https://www.google.com/flights/#search;f=JFK;t=YVR;d=2018-01-02;r=2018-01-03;sel=JFKYVR0CX889;a=PR,CX;eo=e

Dave
Member
Dave

One challenge with sanctioning the Middle Eastern brothers is the fact that they have been huge buyers of Boeing airplanes. Coming down too hard on these carriers would affect Boeing’s fortunes far more than it would any of the Legacy 3.

A
Guest
A

Took the words right out of my mouth Davey. The ME3 buy a whole lot of Boeing aircraft. Emirates orders them by the 100’s and operates 1 of every 10 777 aircraft flying today. That’s huge to the overall US economy. Not that the ME3 are exclusive to Boeing but the point is AA/UA/DL combined cannot makeup for the Emirates order book alone – and none of the US airlines seem all that interested in staying loyal to Boeing for what they do order. Don’t get me wrong, an airline should buy the best aircraft for the routes they fly,… Read more »

Scott
Member
Scott

My own thoughts (which means you can disagree)…Ed Bastian has a totally different line of thinking of Richard Anderson. I think DL was one of the primary drivers of the “Fight the Gulf Carriers” thing back when Richard Anderson was there. UA dropped it eventually (I think) but fact is, the US carriers get a ton of subsidy too. Like it or not, the Essential Air Services Act a huge subsidy. While yes, I understand it’s a necessary evil for many communities it’s also government subsidy. Boeing gets a similar subsidy from the I/E Bank for financing their aircraft. Airbus… Read more »

Bick Rowen
Member
Bick Rowen

Delta is driving global expansion via overseas equity expansion within Skyteam. Therefore DL investments across Skyteam have most exposure to Me3 growth. ie. Jet Airways

Zack Rules
Guest

I would like to see some more fifth freedom flights on unserved routes. Chicago-Milan, Boston-Brussels, and Houston-Madrid come to mind and there are many others. Even the JFK/EWR-Athens route is not operated by Delta or United year round, but Emirates does.

Chase
Guest
Chase

QR and EY are not operating US fifth freedoms, only EK. Since EK can stand on it’s own without ‘subsidies’ there is no argument to made by the US3. Period.

Bick Rowen
Member
Bick Rowen

The Me3 carriers should be forced to adopt GAAP reporting methods and stop accepting non-commercial money from state. Basic transparency in Me3 business would solve this issue.

Bill Hough
Guest
Bill Hough

Boo friggin’ hoo. I can’t feel sorry for DL, UA and AA, who have degraded their product and added all those nuisance fees, and now cry because folks want to fly on the ME3 when they can. Why not man up and offer a better value product?

A
Guest
A

10 across seating on an EK 777 is not an upscale product by any stretch of the imagination. If flying in Y the only thing to like about the ME3 is flight schedules and destinations served. All the more reason why the US3 shouldn’t make a big deal of them.

Doug Swalen
Guest

I view the subsidy issue as a smokescreen and the problem has always been Emirates and neither Qatar or Etihad. It’s always been the 5th Freedom flying from the US to Europe that was the central issue. I think the US3 have needlessly screwed this up from the beginning by trying to drag Qatar and Etihad into a fight that’s really about Emirates and then raised the subsidy boogeyman to distract. The reason its a distraction and a smokescreen is because Emirates is the least subsidized of the ME3 but the only one flying 5th freedom routes to the US.… Read more »

semperfi82
Guest
semperfi82

It should be noted that the flight via Athens was at the request of the Greek government. It had been years since the Greece had year round flights to the USA. EK filled a much needed gap.

iahphx
Member
iahphx

Yeah, there are a few important issues going on here (and I thank you for raising them, unlike on some other blogs where the authors are a bit too enamored by their free luxury flights to discuss these matters intelligently). First, there is really no disagreement that the three Middle Eastern airlines are absurdly subsidized — in a way that no other airlines in history have been. That’s why the distortion to the marketplace that they’re causing is so extreme. I tend to agree with you that Emirates is the least subsidized — and MIGHT have a plausible business model… Read more »

billyshearer
Member
billyshearer

I would hate to see what the US3 would do with real competition! Jetblue and Southwest are nice but aren’t exactly shaking up things the way Ryanair, easyJet, Wizz and Norwegian are in Europe.

Funny how BA happily competes with Ryanair, easyJet and the ME3, and they don’t have a massive cartel style domestic market to plunder like the US3.

Axelsarkiss
Member
Axelsarkiss

If the U.S. carriers could prove that they were being materially affected by the Middle East airlines, they’d file an IATFCPA complaint and call it a day.

They haven’t, tells you how much they’re actually being harmed (or not) – especially considering the fact that this administration is more hawkish than any other in recent memory when it comes to trade disputes (the ridiculous Bombardier/Boeing case comes to mind).