The State of Qatar Promises Reforms to Its Airline Because It Needs a Friend

Qatar (the country) has been in a sticky situation for some time now. With many of its Arab neighbors accusing the country of meddling in their internal affairs as well as being a state sponsor of terrorism, those countries have cut off diplomatic relations. Qatar has been isolated, and the economic impact is large. For that reason, Qatar is desperate for friends, and the US just happens to be one of that remains. Recent negotiations have resulted in stronger ties between the two countries, and part of that includes an effort to reform how Qatar Airways operates. This is a step forward, though it’s hard to know if there will be any actual impact.

You’ll recall that the big US airlines have targeted Qatar (with Qatar Airways) and the United Arab Emirates (with Emirates and Etihad) in an effort to shut down what they consider unfair competition. The US carriers argue that the US government needs to take action, because these Middle Eastern airlines are emboldened by massive subsidies to expand beyond what’s commercially reasonable. Under the Obama Administration, the pleas were heard, but there wasn’t any resolution. Now under Trump, things have started moving. Some of this may be due to the Trump Administration’s interest in putting restrictions on trade, but it may also just be that opportunity knocked.

When Qatar ran into trouble with its neighbors last year, the US remained a friend and gained leverage in the process. This week, a lot more than just this aviation agreement was announced. There was an “Inaugural U.S.-Qatar Strategic Dialogue” this week that is to become an annual event. The US will also effectively turn the Al Udeid US military base into a larger, more permanent operation. This kind of love-fest is hugely valuable to Qatar, and the country’s Defense Minister Al-Atiyah is playing that up:

The state of Qatar has never waived its commitment to stand with friends and allies, especially when the – when they needed us the most. When other in the region were no longer able to accommodate U.S. present of their soil, Qatar eased restriction and expedited its offer to host its ally.

With this background, the time must have felt right to try to get some concessions on the aviation front, especially since it fits in well with the Trump Administration’s stance on trade. The discussions produced “a set of Understandings to address concerns that U.S. carriers have raised with respect to government support of Qatar’s flagship carrier, Qatar Airways.”

The end result is something squishy in the sense that it’s not a revised open skies agreement nor is it otherwise legally-enforceable. There are three main pieces here.

Qatar Airways “should” issue public annual reports with financial statements audited externally in accordance with internationally-recognized accounting standards.
This will certainly be nice to have, but it won’t alone stop any sort of subsidies. Emirates, an airline which puts out audited financial statements regularly, is still a main target of the US airlines in this campaign. So this alone improves transparency, which is good, but it doesn’t do more than that.

Within two years, Qatar Airways “should” make public any significant new money the airline takes from the State. It also should take steps to make sure those transactions are based on commercial terms.
In theory, if Qatar Airways can only take state money on commercial terms, then that should prevent any true subsidy, but I imagine there are a lot of holes here. What about, for example, the fact that Qatar Airways has the sole right to distribute alcohol for the whole country? Are those recurring revenues a problem?

More importantly, this isn’t enforceable anyway. I can’t imagine a world where Qatar Airways is able to operate subsidy-free within two years. So, what happens then? It’ll be up to the US to determine whether there should be additional enforcement action, but there are no teeth to this agreement if it’s not honored.

Qatar Airways has given assurances that it isn’t currently looking to fly any fifth freedom routes from Qatar to the US via an intermediate point (like Europe or Asia).
There’s no strict prohibition on fifth freedom flying in this deal from what I can tell. It’s just that Qatar Airways has said it isn’t planning on doing it. Well, yeah. Instead, Qatar is following the Etihad model and making large investments in foreign carriers. Qatar doesn’t need to fly from Europe to the US. It can just have Meridiana lease some airplanes and do the flying itself. While it may not have true voting control over the airline, it very clearly has strategic control from all early indications. If I were Qatar, I wouldn’t want to bother with fifth freedom flying either when I could just have a European airline do it for me with my airplanes.

So, does any of this matter? If you listen to the lobbying groups fighting on behalf of the US airlines, then this sounds like an amazing victory. In reality, it’s a step forward, but I don’t know that it has any real impact.

I know I sound somewhat negative on this, but that’s not entirely the case. It’s an improvement in transparency which is a move in the right direction. I just don’t have much faith that this is going to change anything about how Qatar Airways does business, mostly because I can’t see how the airline can function without subsidy in the near future.

What will be more interesting now is to see what happens with the UAE. That country has much more at stake — after all, Emirates is the airline that really likes the idea of fifth freedom flying — but the UAE is in a stronger negotiating position than Qatar. Not only does the UAE not have the same diplomatic issues as Qatar, but FedEx relies on fifth freedoms for its Dubai hub operation. This will be a much trickier negotiation.

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25 Responses to The State of Qatar Promises Reforms to Its Airline Because It Needs a Friend

  1. Peter Morris says:

    One question- would you like to fly on Qatar Airways to the Middle East, or on a US carrier over Europe? Take your time…. Now I’ll mention business class.

    • Bick Rowen says:

      I would suggest you consider issues such as women’s rights, gay rights and western values such as due process and freedom of association before flying an ME3 airline.

      • Darin says:

        You must travel to relatively few places in the world. Plus the US track record on some of the issues you mentioned are mixed at best.

        • thetrain says:

          Darin- the US is among the best in all of these issues and pioneered many.

          • Darin says:

            You’re not a white cisgendered middle aged middle class (or higher) man named John by chance? How close am I? Anyway, you are absolutely right, what was I thinking…

    • Peter says:

      I don’t think that’s the point. If I am flying from US east coast to India, I can choose any of the ME3 or any other US or European based airlines. They mostly have 1 stops anyway.
      Flying coach, I would rather have 9 abreast on a US 777 vs 10 abreast on a ME3 777 given the price being about the same. Even with flying Business class, I am not sure the service are that far off between them. I guess it really depends on what people is looking for in terms of services.

    • JAXBA says:

      I’d wouldn’t mind the more direct, although I don’t care about journey time so much (I like creative routings – see my GRU-X/DOH-JNB routing I mention below…).

      If time was precious: QR. If chasing miles/status points/EQM/etc., probably AA/BA.Price and novelty would come into the equation too.

      Same answer for business class.

    • Jason H says:

      I and probably 90% of the flying public will probably go with whatever airline with the better prices and schedule…

  2. Wild Bill says:

    According to SkyTrax only 1 US carrier made any of the lists for top airlines to Europe. That was Delta and it ranked 10th for their amenity kit.
    http://www.worldairlineawards.com/Awards/best_business_class_airlines.html

  3. Itami says:

    The really doesn’t seem like it changes things much for anyone, does it?

  4. “This will be a much trickier negotiation.”

    This presumes it even happens at all…which I find unlikely.

  5. Tim Dunn says:

    The US3 have not done a great job of convincing the public or even some government officials of the cost to US airlines because of the very different set of rules that the ME3 play by. Of course airlines that are state supported can offer better products at lower prices- that is the nature of global trade complaints. Unlike other state owned airlines, including the Chinese, the ME3 do benefit from Open Skies agreements which allow those airlines access to every potential market a US carrier could also potentially serve. European governments have largely been willing to trade weaker airlines for more aerospace jobs but the US3 have built their complaints on the notion that one industry should not benefit at the expense of another – and that is an absolutely valid position.

    The issues behind the ME3/US3 debate have changed as political instability continues in the Middle East – now between the home countries of the ME3. Qatar surely does need the US as a friend but all of the ME3 are reaching an inflection point in their countries’ willingness to subsidize air transportation. The ME3 have largely stimulated all of the local demand that they can stimulate which means further subsidies would just make air transportation for people connecting in their countries cheaper, not a cost that Qatar and the UAE really want. There likely aren’t a whole lot more markets in the US they can develop and they also have to compete against Turkish. Further, the US3 are much more profitable, have stronger relationships with their joint venture partners and in some cases with Indian carriers. New airplanes also cut the cost of operating even in subsidized countries and going back makes it clear that US carriers will compete in the world’s most important markets and have the massive networks to support cities that might not be as profitable as others.

    Thus, the Qatar agreement is less about any real transformation but about the eventual convergence of a bunch of factors that would have limited the amount of subsidies the ME3 would have received before long – just at the time as the US3 are better positioned to return to some of the markets that they gave up. Even if the return isn’t on the scale it once was, the public message to the ME3 is that the US3 are ready to defend themselves even in the ME3’s home markets.

    I hope for the sake of competition that we see US carriers back in the Arab Middle East.

    • CF says:

      Tim – I think that’s another dynamic that differentiates Qatar and the UAE. In Qatar, you either have a big global airline or you don’t. But in the UAE, you have options. The long rumored Etihad/Emirates merger would instantly pare down capacity. Move them to DWC and you have an airport right in between the two. It’s a simple and smart solution that still allows for a global airline in a way that’s possible without major subsidy. (Sure, it requires pulling back on capacity, and there are a lot of A380s coming, but it’s still possible.) Qatar is just backed into a corner. There isn’t really a viable solution other than “shrink like crazy down to the small network that can actually be supported.”

      • Tim Dunn says:

        You are absolutely right. The UAE has two airlines that are trying to be megacarriers and the government is subsidizing both. There is room for efficiency and the government ultimately has to decide if it is worth their while to subsidize passengers that are simply changing planes in the UAE. At some point, there is no longer any advantage in continuing to subsidize airlines if the routes that bring the world to the UAE are already in place. DWC could take over a lot of connecting traffic that already flows over AUH and DXB while those two airports could retain service to the top destinations. But the 7 Emirates are highly competitive so there is a lot of agreement necessary to make anything “joint” work.
        QR and the country of Qatar is in a different position – but they also have been more measured in what they have done. They aren’t going to back away from their goals but there is less opportunity to squeeze out efficiency. Ultimately, their government also can’t support a bunch of air service that just makes international flights for half of the globe much cheaper than they otherwise would be – with little boost to the local economy.

        The US carriers were concerned first and foremost with the possibility of the ME3 flying from Europe to the US using 5th freedom rights since having a government- subsidized competitor in some of their top routes opens a very big can of worms. Concern 2 is the below average fares to key markets like India; see above but eventually the US3 will figure out how to serve those markets even with subsidies – which are likely to diminish over time. Part 3 which is much less of a concern is subsidies that increase the size of the local Middle East markets. If the governments want to do that which makes US carrier service less profitable, there is little basis for arguing against it.

        I suspect the UAE will come up with an equally nebulous commitment because the Trump administration will tie US air service subsidy complaints to other issues which matter more to both parties. Other factors will continue to move the ME3 away from subsidies while the US3 will find good reasons to move back into those markets. Add in that the EU3 are competing more aggressively against low cost carriers and the ME3 and the ME3 will have had their ten years in the spotlight but will before long just be big global airlines not much different from other global legacy carriers.

  6. DMK says:

    I am in agreement with Cranky. This is mostly a symbolic victory. As Cranky explained, other than fifth-freedom flights, other aspects are hard to enforce 100%. The US airlines and pilot unions came out and paid lip service to the US government. On paper, it’s definitely a win-win-win for all parties involved. ;-)

    The reality is fifth-freedom flights between Europe and US by the ME3 would cause minimal pains to the US3. The ME3 generate far, far more revenue between the US and Subcontinent, ie, India, and resulting in the US3 not being able to capture the growth in the emerging Subcontinent market. This agreement will not change the competition landscape in the US-India market.

    • CF says:

      DMK – I think you underestimate the kind of damage that fifth freedoms can do. If Emirates (as the most likely participant) were to really rev this engine and put airplanes from several dots in Europe and Asia to the US, then you have a real problem. The stuff to the subcontinent is larger now, but the potential is already maxed out. On the Atlantic/Pacific, the possibilities are endless if you have low enough costs to be able to undercut everyone.

      • Nicc says:

        I argued about 2 to 3 years ago on this august column that the ME3s next wave of expansion is exactly the 5th freedom route. At some point their hub strategy gets saturated and all those A380/77X/787s have to fly somewhere.

        At the moment I believe Emirates offers 3 flights daily into Manchester. Flying onwards, say, to Toronto/Chicago/Boston could look attractive. Then there are all the other non-hub cities in Europe.

        Personally I have visited Doha once (Do-hell as an ex-QR CX crew once called it). Place looks like it was designed by architects on serious LSD, but more to the point I have never been to a place where the expats (the ones in the service positions, i.e. hotels/restaurants/transport) are so utterly miserable.

        As Chinese New Year ‘Kung Hei Fat Choy!’

        Nicc

      • DMK says:

        The current two trans-Atlantic services Emirates have are very strategic. ATH is not served by any Greek carriers, and the US3 offer seasonal services only. MXP is a bigger market and it’s well served by the US3 and Alitalia, but Emirates offers the only year-round daily service. These two services account for a tiny fraction of Emirates’ total revenue, as well as total N Atlantic revenue of the US3.

        Few years ago, Emirates said India had overtaken the UK as their largest source of revenue by country. India is far from maxed out. It’s an emerging market. Demand for US-India will have a lot of room to grow, and the US3 are not well positioned to compete effectively in this market.

        • CF says:

          DMK – I wouldn’t call these strategic. I’d just call them a way to use aircraft time. Athens to NYC is only seasonal on other airlines because there is a tiny amount of demand in the winter. Emirates is getting money to run the route, so it may make some sense, but it’s certainly not viable based on demand. As for Milan, Delta flies JFK to Milan daily and Alitalia flies it 6 days a week in the winter. United flies 6 days a week from Newark and American flies 4 times a week, so I think it’s safe to say there’s plenty of competition and many options in the market. But the main point is that this is just the tip of the iceberg. If Emirates wants to roll out service on these routes, it can tank fares and use its structural cost advantage to compete in markets where it shouldn’t have that advantage available.

          As for India, I worded that poorly. Emirates has maximized what it can take between the US and India in terms of share. If the market grows, then Emirates can grow as well. But it’s not like there are network-related moves out there to serve markets that aren’t well-served today. The Transatlantic market is enormous and if Emirates wanted to make moves, it could grow dramatically without there needing to be growth in demand. It would simply take market share.

          • DMK says:

            Fifth freedom carriers generally have to compete on lower fares, especially when compete against home airlines with multiple daily frequencies. On the MXP route, EK doesn’t have the convenience disadvantage against the competition in terms of frequencies. Then they don’t have to cut fares excessively to compete.

            Go compare both economy and business class fares between LAX and ICN. Singapore, a reputable brand, has to price themselves 20-30% cheaper to compete with the likes of Korean, Asiana, Delta. But that is not the case between JFK/EWR and MXP; Emirates’ fares at worst are 5% lower than competition, both the lowest coach and business fares.

            That’s why it’s unlikely Emirates will jump into markets like LHR, AMS, CDG, FRA, etc. During peak seasons, there are more than 500 daily flights across the North Atlantic. Two flights by Emirates won’t make a huge dent to the market leaders, namely the three JVs. They account for ~0.5% of the seats between Europe and the US.

            There are roughly 10 million passengers traveling between the US and India annually. About half are carried by the ME3. That’s a huge chunk of revenue potential that the US3 wish they could have a larger share. Because the ME3 have huge advantage in network coverage, even if the US3 deploy services to India, the US3 have to undercut their fares to compete against the ME3, not a financially sound proposition for them. That’s why only United has maintained nonstop services to India, This is because NYC has sufficient OD demand that they can get a price premium against the one-stop services by the ME3.

            • CF says:

              DMK – Singapore and Emirates are very different animals. Singapore needs to have that stop in Incheon (or Tokyo) to be able to get people to Singapore, at least until it gets its longer range A350s. So that flight exists to get people between LA and Singapore. The LA-Incheon traffic is gravy, so Singapore is willing to take a lower fare to make up for the fact that it has flights at off times and it has no strong local base at either end. Emirates, on the other hand, has nonstops from JFK to Dubai, so I can’t imagine anyone is flying via Milan. Emirates has to rely on the local traffic in that market, so there needs to be greater fare integrity.

              All that being said, Emirates can take lower fares than the other guys because of structurally lower costs based on laws in its home country. For options going to and through Dubai, that seems fair. It’s just home-field advantage. But when those costs get exported to routes that have nothing to do with Dubai, then it seems like an unfair advantage. So on Milan, Emirates has brought down fare levels in the market and that’s part of the reason the fare differential isn’t as great. The other carriers in the market have to compete because Emirates is filling its airplane (or trying) with those locals. (Unfortunately I don’t have access to the ticket data internationally, so I don’t have the hard numbers. But I’ve seen references to how fares have had to come down.)

    • Nick says:

      The issue with ME3 5th freedom routes vs say most other 5th freedom routes is the idea of local vs connecting traffic.

      DL flies NRT/SIN. DL is mostly interested in taking people from the US through NRT to SIN because there hasn’t been a plane that will do it very efficiently from the US Mainland. DL is not really trying to capture local traffic between SIN and TYO. I’m sure some people do that, but it’s not really what DL is setting out to do. DL is just trying to have SIN connected to their market.

      EK flies MXP/JFK. That is nearly 100% about local traffic from NYC and MXP. No one is flying DXB/MXP/JFK. There already are DXB/JFK flights. So that is entirely about cherry picking routes outside of a carriers natural market.

  7. JAXBA says:

    I’ve flown QR twice in longhaul Y (GRU-X/DOH-JNB[!]) and the service was good but the crew were obviously afraid and robotic (yet genuinely friendly).

    If I were involved in the negotiations I’d bring up the human rights issues at the same time as the trade/openskies negotiations; as in “yes, the US will remain friendly to Qatar, but ease up on the modern day slavery or else.” I’d alos persuade AA to resume codeshares with QR once conditions improved.

    • CF says:

      JAXBA – Well, one of the other things that was discussed this week is that the US and Qatar are going to work together on human trafficking. So that’s… something.

  8. After spending a few days in Dubai last year, it’s pretty obvious that the government is subsidizing anything in the hope that there will be a strong economy once the oil runs out within the next couple decades. The government is involved in building most of the major buildings in Dubai, EK, and just about everything that is going on in Dubai. It’s not too much of a stretch for the rest of the world to state the ME3 is heavily subsidized. The goal is for everything to become profitable, but who knows if this approach will work.

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