The big three US airlines (American, Delta, and United) have been hammering on the big three Middle East carriers (Emirates, Etihad, and Qatar) for illegal subsidies for many years now. I’ve written about this several times, and I’ve been semi-sympathetic to at least a part of the argument. But recently, the fight has shifted. It now seems to have centered on Qatar’s investment in Air Italy, and that hardly seems worth a fight at this point. The hard part is knowing when that changes.
The overall fight calmed down after some weak and substance-free agreements were signed between the US and the both the UAE and Qatar. The deals made it look like the US was doing something when, in reality, weak economic conditions did more to impact the ability of Emirates and Etihad to grow than anything else. Even heavily-subsidized airlines eventually have to face reality, or a version of it.
Now, the fight has pivoted and the spotlight is shining brightly on Qatar Airways and its investment in Air Italy. Air Italy was Meridiana, a niche carrier based in Sardinia with an aging fleet and not much of a plan. Last year, Qatar bought a 49 percent stake in the company and decided to transform it into Air Italy.
At the time, this felt a lot like Etihad’s investment in Alitalia. It was an attempt to push the brand more upscale, give it some kind of strategy and then magically succeed. As we know, Etihad failed miserably with that plan and lost pretty much everything in Alitalia. I just assume Qatar is on the same path with Air Italy. The airline has already pivoted multiple times. It has gone in and out of routes like they’re going out of style, and it has now decided it won’t take Qatar’s cast-off 787s and will instead stick with Qatar’s cast-off A330s.
That, however, isn’t stopping the big three under the guise of their lobbying organization Partnership for Open & Fair Skies from going guns-blazing on this arrangement. The Partnership has put out a cringe-worthy ad that is being broadcast in DC stroking the President’s ego and trying to get further action to be taken. Watch for yourself if you have a strong enough stomach:
The message is summed up succinctly in this press release:
… Qatar Airways used its government subsidy-backed investment in Air Italy, previously a struggling regional carrier, as a proxy to continue its expansion into the U.S. market. Without Qatar’s subsidized backing, Air Italy’s new U.S. routes wouldn’t be feasible.
Or there’s this statement in response to Air Italy’s announcement that it would add a couple of new routes to the US next summer.
Simply put, the only reason a failing airline like Air Italy can continue to launch new routes without consumer demand is because of Qatari government dollars designed to fuel unchecked growth.
In the past, the only part of the US carrier argument that has really resonated with me is the argument that these Middle East carriers would use subsidies to fund fifth freedom flights that don’t even touch their home countries. You see Emirates doing this in a limited way today with Newark to Athens and JFK to Milan, but that’s really about it so far. Still, that is where I think real peril lies. But if that’s the case, why am I against going after Qatar’s investment in Air Italy? I’ll try to explain.
As the argument goes, Qatar is funneling money through Air Italy to fly between Italy and the US as a proxy. It can use its airplanes to expand its reach around the globe. That sounds pretty sinister, but it just doesn’t look that way right now.
Air Italy is an Italian airline (49 percent owned by Qatar) with Italian costs (mostly, we think) that is failing just like any good Italian airline would. The reality is that Qatar usually invests in successful airlines like British Airways parent IAG. This isn’t the same as the Etihad strategy of throwing money at garbage.
Air Italy previously was a failing regional airline, but that’s irrelevant. Qatar saw the ability to invest in a platform to create a Milan-based hub and have it grow quickly. Alitalia was struggling and had effectively abandoned Milan as a hub. While I don’t think this strategy is going to work, it is a real business plan. If Qatar wants to invest in that like it has invested in others, so be it.
Where it gets fuzzy is in what Qatar is doing beyond the initial investment that saw the airline take 49 percent of the new company. We haven’t seen 2018 financials for the airline, so it’s hard to know what actually happened, but as I understand it, there was a loan that has been at least partially forgiven. And there were loan guarantees for the airline to raise more money from third parties as well. Then there’s the question of how much Air Italy is actually paying Qatar for the airplanes it’s using. It’s all quite murky, but to me, the biggest issue is around how Air Italy is using this money and if it really is distorting the market. So far it looks like an airline that had an initial strategy that hasn’t worked, and it is rapidly hunting for anything that will before it runs out of money.
What is that strategy? Well, there was talk of massive expansion including 30 787s, but that has already fallen apart. Now it will take an unspecified number of A330s instead. Air Italy has gone in and out of many markets and continues to hunt for routes that might work just like any other airline would. So far, I just see an ill-advised investment on the part of Qatar and not much else. This looks like an airline that is actually trying to succeed even though its efforts will probably be in vain.
The obvious question then is… at what point does Qatar’s involvement create a distorted market that requires action? That is honestly something I can’t answer, and I realize that’s completely unsatisfying. It feels like a “I’ll know it when I see it” type of situation. If we see Qatar pump additional funds into the airline after it’s clear that it won’t succeed, or if we find out about below-market questionable lease deals, then there’s a problem. It’s just not as black and white as one might hope… or need if you’re a regulator trying to be consistent.
If Air Italy continues to lose money and ends up flying 30 widebodies, then that is pure insanity. But I highly doubt we’ll get there. Instead, I imagine we’ll see Qatar take a bath on this whole adventure. Those may have been illegal subsidies that they lose, or they may not have been. But at least at this point, it feels like the market is going to guide this one. The day it starts to feel different is when I change my mind.