gulf

 

MIAMI — The Middle East is home to three of the world’s fastest growing and successful airlines: Emirates (EK), Etihad (EY) and Qatar (QR). From their hubs in the small, oil-rich countries of Qatar and the United Arab Emirates, they have expanded globally, linking every inhabited continent.

Their fast expansion—the oldest, Emirates, is only 30 years old—has not been without controversy. Because the United Arab Emirates (UAE) and Qatar are quite small in terms of population, most of the passengers for their airlines derive from larger markets. Emirates, Etihad, and Qatar Airways are government-owned and, their competitors suspect, highly subsidized. American Airlines (AA), Delta Air Lines (DL), and United Airlines (UA), concerned over the increasing presence of these Gulf Carriers’ in the United States, have called for a level playing field, free of the subsidies that Lee Moak, former president of the Air Line Pilots Association (ALPA), says total more than $40 billion, and has asked the US government to investigate. Whether the government will decide to continue its policy of ‘open skies’ or switch to one of protected ‘fair skies’ will be a turning point for international aviation in the decades to come.

But where have these airlines come from? How have they become so successful? And just how subsidized are they?

History


Aviation in the Persian Gulf was largely pioneered by Gulf Aviation, a small regional carrier formed in 1950 and acquired by Britain’s overseas flag carrier, BOAC, in 1951. Bahrain, Oman, Qatar, and Abu Dhabi purchased Gulf Aviation from BOAC in 1974 and renamed it Gulf Air. This purchase solidified Gulf Air’s primacy over the Arabian Gulf as a shared national carrier. Gulf Air retained that dominance by government protection, with one notable exception— the city of Dubai in the United Arab Emirates. Since 1950, Dubai had adopted an open skies policy, allowing unlimited flights by any airline at any time. Gulf Air, not receiving the protections it enjoyed in other markets, began to withdraw service from Dubai and left room for new competition in the 1980s.

The royal family of Dubai, the Al- Maktoums, saw a market opportunity. They contributed two governmentowned Boeing 727s and US$10 million of startup capital, and planned an airline for Dubai named Emirates. Emirates Airline began operations on October 25, 1985, with a flight from Dubai to Karachi, Pakistan. Several destinations in India were added soon after.

Emirates’ entry broke Gulf Air’s domination of air travel in the Persian Gulf. It stimulated traffic by cutting fares below those of its competitors and  advertising its service, which it called ‘the finest in the sky’. With destinations added over the following years and a government policy supporting aviation, Emirates grew briskly to a fleet of 234 aircraft by June 2015.

In 1994, the royal family of Qatar, eyeing the economic benefits Dubai had gained from Emirates, launched its own airline. Qatar Airways, operating from the Qatari capital of Doha, began with short-haul regional routes on a nofrills business model. This state of affairs lasted until 1997, when the Qatari Emir directed the airline to restructure into a premium international carrier. Qatar Airways then expanded quickly, reaching 142 aircraft by June 2015.

In 2003, the government of Abu Dhabi established its own airline, Etihad Airways, which means ‘union’ in Arabic.

Its stated goal was to promote Abu Dhabi as an international destination and transform the customers’ view of air travel. Etihad, too, was a success, growing rapidly, from its Abu Dhabi base, to 115 aircraft by June 2015.

Business Model


The Gulf Carriers achieved their successful growth by taking advantage of their central geographical location in the Persian Gulf. The International Air Transport Association (IATA) says that 80% of the world’s population lies within an eight-hour flight of the Gulf hubs. With labor costs being modest in the Middle East, the Gulf Carriers can tap a huge target customer base by offering a high quality product at a low price.

Because the passenger routes that the Gulf Carriers serve are international in nature and few people are destined for the hubs of the UAE and Qatar, the business model relies on an internationally recognized right called the Sixth Freedom of the Air. This is the right of an airline to fly a passenger from one foreign country to another via a domestic stop—Lufthansa, for example, carries passengers from Boston to Tel Aviv via a stop at its Frankfurt hub, while Emirates carries passengers from London to Sydney via Dubai.

The Gulf Carriers have so greatly cornered Sixth Freedom market demand that they operate much larger aircraft than the industry average. Emirates Airline, for example, has alone ordered 140 superjumbo Airbus A380s, while having no narrow-body aircraft. Etihad and Qatar, although they do have some narrow-body A320s for shorter routes, are also mainly wide-body operators. By operating larger aircraft, the Gulf Carriers have lower operating costs and larger capacity, which they use to improve their passenger product and offer lower fares.

Product


The Gulf Carriers also have a more premium positioning than their competitors in Europe and North America. Etihad has launched its ultrapremium “Residence” three-room suites on its A380s, while Emirates’ growing A380 fleet features onboard showers for First Class occupants. Qatar Airways, while phasing out First Class on most of its aircraft, claims that its Business Class is equivalent to First Class in terms of luxury.

European and North American airlines, many of which have phased out First Class on long haul fights, cannot match this service product.

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Controversy


In reaction to the Gulf Carriers’ rapid growth, some competitors have complained that the UAE and Qatari governments are subsidizing their airlines of airlines and the difference between private investment and government subsidy are hazy. The political and social structures of the UAE and Qatar are quite different from that of the United States, leading to different definitions and opinions on the matters of free trade, government support, and protectionism.

Delta Air Lines CEO Richard Anderson recently said of the Gulf Carriers, “They have the ability to gain advantages in markets because profitability doesn’t matter.” This is not strictly true; Emirates Airline pulled its Hamburg to New York service and Etihad delayed expansion in Dallas due to low performance. The Carriers, however, do have the freedom to expand with less concern for shortterm profit. Government ownership gives them this advantage because, unlike

March, Delta claimed that this financing capability gives foreign carriers, such as Emirates, an unfair advantage in aircraft procurement costs over US airlines.

European airlines, including Air France, Lufthansa, and Alitalia, have protested for several years about the Gulf Carriers’ entry into their markets. Emirates, Etihad, and Qatar have tapped into passenger demand from Europe to Asia, offering many one-stop connections between the two continents that European carriers cannot match. In a recent policy statement, Lufthansa effectively said that the European carriers’ survival on routes to Asia is under threat. The problem, they say, is that subsidies enable the Gulf Carriers to steal market share on these routes. Delta’s Anderson recently went so far as to say that the Gulf Carriers should not be allowed to carry passengers on Sixth Freedom routes through their hubs. Ironically, this right is used greatly by Delta’s SkyTeam partners such as Air France and Korean Air, which transport large numbers between countries other than France or Korea.

Competitors to the Gulf Carriers are concerned that the latter might expand in ‘Fifth Freedom Routes’ (flights between foreign countries that originate or end in their home countries) and use their lower costs to huge advantage. While this is a possibility, few of these routes are currently operated, for example, Emirates Airline opened a New York – Milan route in October 2013.

Antagonism from the US had been relatively muted until the end of 2014. In April 2013, United CEO Jeff Smisek even said that the Gulf Carriers were not being subsidized but were being supported by their governments’ recognition of the value of aviation.

However, in late 2014, the ‘US Big Three’ of American, Delta, and United announced plans to lobby the US government into reviewing its open-skies agreements with Qatar and the UAE and possibly limiting Gulf Carrier access to the US. On January 28 and 29, 2015, representatives of the US Big Three met with White House officials about this concern.

On February 16, news anchor Richard Quest, from CNN’s Quest Means Business, interviewed Richard Anderson to discuss the subsidy debate. Anderson said that US airlines had “documented evidence that cannot be refuted,” of the Gulf Carriers having benefited from “tens of billions of dollars in direct government subsidies.” Quest asked Anderson about loan guarantees to US airlines after 9/11. Anderson replied: “It’s a great irony to have the United Arab Emirates from the Arabian Peninsula talk about that, given the fact that our industry was really shocked by the terrorism of 9/11, which came from terrorists from the Arabian

Peninsula, that caused us to go through a massive restructuring.”

Delta apologized for this statement a few days later, after Emirate CEO Tim Clark and Qatar CEO Akbar Al-Baker took Anderson’s statement as a personal attack. “Anderson didn’t mean to suggest that the Gulf Carriers or their governments are linked to the 9/11 terrorists,” Delta said. “We apologize if anyone was offended.” The US Big Three later released a report on the Gulf Carriers, and arguments have continued to flow back and forth between both sides.

Amid the controversy, Emirates, Etihad, and Qatar do have allies. Boeing and Airbus, which receive billions of dollars from wide-body orders from the Gulf Carriers, have much to lose if there is repression of expansion. The Gulf Carriers are some of their largest customers and leading aircraft such as the Airbus A350 and Boeing 777X are built to the Carriers’ specifications. New York-based JetBlue (B6) has a codeshare partnership with all three Gulf Carriers and supports the current open-skies agreements. Australia’s Qantas Airways (QF), once opposed to the Gulf Carriers, entered into a revenue-sharing partnership with Emirates and moved its stopover on European routes to Emirate’s hub, Dubai.

Even the global airline alliances, which previously regarded the Carriers as disruptors to the status quo, have begun to accept them. Qatar Airways joined the oneworld alliance in 2013 and is planning a deep partnership with British Airways (BA)—although Qatar threatened in June 2015 to leave oneworld over claims that American Airlines is restricting codeshare sales and gate space at New York’s (JFK) airport. Etihad Airways receives support from its equity-partners, nearly failing airlines in which it has invested. Air France, while taking a publicly antagonistic stance toward the Gulf Carriers, holds a codeshare agreement with Etihad. Airports such as Orlando (MCO) and Dallas/Fort Worth (DFW) also support the Gulf Carriers. In a 2014 statement, Chicago Mayor Rahm Emanuel spoke positively of the economic benefit they bring to his city, but has since switched to a protectionist stance in a recent letter to the US Department of Transportation.

The Gulf Carrier debate is not over. Some governments in Europe, such as the Netherlands, have restricted Gulf Carrier access to their airports. Although US carriers are currently disgruntled, in the long-term, they may enter in partnerships with the Gulf Carriers, seeing benefits in markets of little overlap. Although protectionism may seem be on a roll at the moment, in the long-run, greater freedom of international aviation will benefit consumers’ interests.

Future


The Gulf Carriers’ future prospects and plans, although highly dependent on further liberalization of aviation, are bright. Dubai is building a new airport, Dubai World Central, to complement the current Dubai International (DXB), and projects 320 million annual passengers by 2050. Abu Dhabi plans to open a new 65-gate terminal that can accommodate 30 million passengers in 2017, and Doha recently opened its new Hamad International Airport (DOH) with eventual capacity for 50 million passengers. A vast number of passengers is needed to fill these airports, passengers that the Gulf Carriers are seeking in fast-growing markets such as Asia and Africa.

The Gulf Carriers are also investing billions of dollars in new airplanes.

At the 2013 Dubai Air Show alone, Emirates, Etihad and Qatar ordered 400 planes. Further orders are likely to come from the Gulf Carriers over the next few years, with Emirates planning to buy the Airbus A350-900 or Boeing 787 for secondary routes that don’t require the larger 777s or A380s in current use.

The Gulf Carriers—Emirates Airline, in particular—are pushing for a re-engined version of the A380. Emirate’s Tim Clark sees Airbus as launching an update to its ‘Superjumbo’ within the year, while promising to order at least 60 A380neos. Airbus, however, is still unsure about the size of the market and is holding off a launch decision.

Other airlines are attempting to replicate the Gulf Carriers’ business model. Turkish Airlines (TK), with a network of destinations heavily weighted toward Europe and 200 aircraft on order, plans to expand, and has already earned the nickname of ‘Fourth Gulf Carrier’. Just south of the United Arab Emirates, Oman Air plans to improve profitability by drawing on international long-haul traffic.

Although far smaller than its Gulf competitors now, it may eventually become a viable competitor between Africa, Europe, and Asia.

At present, the Gulf Carriers are highly successful, with growing fleets, supportive governments, and strong brands. But much depends on whether the US government decides to leave access to the United States market open for the Gulf Carriers. Will Washington support Emirates and friends, or United, Delta, and American? Customer choice hangs in the balance.