The Arab Battle for U.S. Skies
America’s biggest airlines say the luxury carriers of the oil-rich Persian Gulf aren't playing fair. But are Emirates, Etihad, and Qatar Airways subsidized -- or just smarter?
DUBAI, United Arab Emirates — Amid the turmoil and tumult of today’s Middle East, the region achieved a quiet milestone in 2014: Dubai International Airport surpassed London Heathrow to become the world’s busiest airport, measured in terms of international passengers. With its faux palm trees, Porsche raffles, and glittering duty-free shops selling everything from Scottish single malts and Havana cigars to Swiss chocolates, gold bars, and local dates, the airport, at times, feels like a 21st-century shrine to consumerist globalization.
But look beyond the duty-free glitter and do some people-watching, and you’ll see one of the most cosmopolitan collections of peoples under a single roof anywhere. A group of salwar kameez-clad Pakistani tribesman with red henna beards and white turbans fawn over the latest iPhone. A Kenyan sports team in tracksuits orders sandwiches at a Subway. A tanned European couple with Louis Vuitton hand luggage flip through magazines. A group of young Iranian women shop for perfume, a gaggle of Chinese and Indians buy gold, and a Balkanish-looking fellow in a black leather jacket and neck tattoo yells into a phone.
In 2014, Forbes magazine noted that Dubai is the most air-connected city on the planet, contributing to its distinction as the seventh “most influential” city in the world. Jad Mouawad of the New York Times points out that this Persian Gulf city-state has emerged as an air superhub, a modern crossroads connecting East and West. The rise of Dubai and other Arabian Peninsula air hubs — Abu Dhabi and Doha — have reshaped global commercial aviation. And the Gulf “Big Three” airlines — Emirates in Dubai, Etihad Airways in Abu Dhabi, and Qatar Airways in Doha — have emerged as major global carriers, capable of going toe to toe with the industry’s giants.
Their rise has coincided with the emergence of a new global middle class and an attendant surge in global air travel. Unsurprisingly, the fastest-growing market in air travel comes from emerging economies — places that the Gulf carriers serve well. According to the Airbus’s Global Market Forecast, emerging markets will account for nearly two-thirds of all air travel by 2033.
The three hubs of Dubai, Abu Dhabi, and Doha are blessed with fortunate commercial geography: They are a four-hour flight to one-third of the world’s population and an eight-hour flight to two-thirds. Any self-respecting McKinsey study would have told these governments to build air hubs and national airlines to exploit their comparative geographic advantage. And they did.
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It was inevitable, then, that the Gulf carriers would eventually begin direct flights to the United States in hopes of encouraging Asian, African, Middle Eastern, and Australian travelers to use Dubai or Abu Dhabi instead of Frankfurt or London as their stopover hub en route to the United States — and, conversely, bringing U.S. travelers to Doha or Dubai on their way to Delhi, Bangkok, or Sydney. Over the past five years, the Gulf carriers have flooded the zone, with some 252 direct flights a week from their respective hubs to 10 U.S. cities, from Seattle to Chicago to New York. It’s a sound business model: feed the demand of growing traveler needs while hitting the most important market in the world.
Unsurprisingly, Delta, United, and American Airlines — the three largest U.S. carriers — are displeased. The Gulf airlines, after all, are cutting into the U.S. long-haul business, the most lucrative in aviation. Just ask Lufthansa what that looks like: The German carrier has had its market share slashed by nearly a third since 2005, as some 3 million Germans annually opt for the Gulf carriers to take them to Asia. This has been good for German consumers, to be sure. But not for Lufthansa. The same goes for the U.S. Big Three: Increased capacity may be good for the consumer, but not for them. After suffering record losses in 2008, it was their refusal to expand capacity on domestic flights, thus raising their prices, that helped them recover.
Since 2005, U.S. airlines have also been consolidating at a rapid clip: America West with U.S. Airways, Northwest with Delta, Continental with United, AirTran with Southwest, and then, most recently, U.S. Airways with American. The U.S. Airways-American merger prompted a Justice Department antitrust lawsuit. “In recent years, major airlines have, in tandem, raised fares, imposed new and higher fees and reduced service,” the Justice Department noted. Then Attorney General Eric Holder said in an August 2013 statement that “This transaction would result in consumers paying the price — in higher airfares, higher fees and fewer choices.” Ultimately, the merger was approved. Today, as a result of these consolidations, only four carriers handle 80 percent of U.S. airline seat capacity.
The war for airspace
Now, Delta, United, and American are engaged in an orchestrated campaign, suggesting that the Middle Eastern carriers have benefited unfairly from some $40 billion in subsidies from Gulf governments over the past decade. They demand that Washington curtail those carriers’ direct flights into the United States and are taking their complaint directly to the White House via that most time-honored of Washington swords: a white paper detailing their extensive allegations. They have also created a 501(c)(4) organization, Americans for Fair Skies, that is flooding the capital with advertisements, including ads on this very website.
The message of Americans for Fair Skies is simple: The Gulf carriers are operating on an uneven playing field, deriving tremendous benefits from their state ownership, including a slew of alleged subsidies. “This unprecedented level of support allows the Gulf airlines to operate not as businesses, as U.S. airlines do, but as arms of their well-heeled predatory governments,” the organization states on its website.
The Gulf carriers generally retort that consumers enjoy their award-winning premium service and benefit from their global connectivity all across Asia, Africa, and the Middle East. The independent Skytrax airline ratings agency seems to agree: The Gulf Big Three made it to the top 10 list at the agency’s prestigious 2014 World Airline Awards, while the U.S. Big Three barely cracked the top 50: Delta came in at 49, United at 53, and American at 89.
“Stop complaining,” says Danny Sebright, president of the U.S.-UAE Business Council, to U.S. carriers, and “start competing.” Sebright is not alone. A broad network of American businesses — from Boeing to FedEx, from JetBlue to a constellation of airport councils and travel services companies — are crying foul against the U.S. carriers. It’s obvious why Boeing is uncomfortable with the U.S. carriers’ effort to limit the Middle Eastern airlines. After all, the Gulf carriers are among the biggest foreign buyers of its aircraft. At the 2013 Dubai Airshow, Emirates and Etihad dazzled the aviation world with some $100 billion in orders for Boeing aircraft. A few months later, Qatar Airways ordered another 50 Boeing aircraft, at a list price of $37.7 billion. If you’re keeping tabs, that’s nearly $140 billion of aircraft orders in less than six months. And between now and 2027, the Gulf carriers will add another 534 new wide-body aircraft to their fleets, according to Credit Suisse. That’s a lot of Boeing and Airbus planes — and lots of American and European manufacturing jobs.
But the story goes deeper than that, and it underscores a cornerstone of U.S. aviation policy: accords known as “open skies” agreements. Since 1992, the United States has negotiated more than 100 such agreements around the world, which are widely credited with expanding the global footprint of the U.S. Big Three. According to the State Department, the policy also benefits American cities like Dallas-Fort Worth, Detroit, Las Vegas, Memphis, Minneapolis, Portland, and Salt Lake City, which had virtually no international flights prior to 1992. It’s also a boon to U.S. tourism, air cargo, airports, and the aviation industry writ large.
So are the U.S. carriers trying to constrict their competition? In a word, yes. But are they the equivalent of Radio Shack, stuck in an old model, watching a new world with sleek new players pass them by? Hardly. In fact, the U.S. airline industry performed like gangbusters in 2014, with operating profits at $12 billion for the year — a dramatic turnaround from 2008, when the recession resulted in some $5.6 billion in operating losses. In 2014, American Airlines topped $4.1 billion in net income, Delta reaped $2.8 billion, and United’s profits were nearly $2 billion. The markets also rewarded the airlines: the Bloomberg U.S. Airlines index was up 81 percent last year.
What’s more, the entire industry is headed for a strong 2015. The trade organization Airlines for America’s chief economist, John Heimlich, said that lower oil prices will finally give the U.S. carriers some “breathing room” to reinvest in the product and raise capacity. As for Emirates, its profit for the financial year ending March 31, 2014, was a relatively modest $600 million.
So, why is everyone so afraid of Emirates?
The monster in Dubai
Founded in 1985 in Dubai with two airplanes leased from Pakistan International Airlines, Emirates is now the largest airline in the world in terms of international passengers carried.
In one of the great tales of commercial genesis, Emirates was hatched in a moment of pique: Sheikh Mohammed bin Rashid Al Maktoum, then the crown prince of Dubai and now its current ruler, was locked in a battle with a government-owned airline — ironically, in a dispute over open skies. The airline in question was Gulf Air, partly owned by Bahrain, Qatar, Oman, and Dubai’s neighbor and fellow emirate, Abu Dhabi. Gulf Air was fighting with Pakistan International Airlines (PIA) over landing rights: PIA had played the protectionist card, closing off certain cities to foreign carriers, including Gulf Air.
So Gulf Air asked Dubai authorities to “retaliate” by limiting PIA landings in Dubai, an airport on the rise in the early 1980s. But Sheikh Mohammed refused, according to historian Graeme Wilson in a book about modern Dubai, citing his open-skies policy. Gulf Air hit back, drastically cutting off the number of its flights to Dubai.
Angered, Sheikh Mohammed decided to build his own carrier, commissioning a report from the consultancy Deloitte & Touche on the feasibility of starting a state-owned airline. But the impatient Sheikh Mohammed got antsy and decided he couldn’t wait for the study, Wilson writes in Rashid’s Legacy: The Genesis of the Maktoum Family and the History of Dubai. Instead, he tapped veteran British Airways executive Maurice Flanagan to get started and seeded the fledgling airline with $10 million.
Thus was born Emirates airline. Its first three routes were to Karachi, Mumbai, and Delhi — an early sign that the airline understood the growing clout of emerging markets and Dubai’s strategic potential as a hub for South Asia travel. It soon became clear that the demand for air travel was growing, and Emirates capitalized, opening routes to Europe, the Middle East, and other parts of Asia. By the early 1990s, it had grown into an important player, driven by a team of former British Airways executives and backed by a hyper-ambitious sheikh who understood the value of his geography.
From its Dubai hub, Emirates now flies to 148 destinations across six continents. Its advertisements are ubiquitous at the World Cup, on the U.S. tennis circuit, and in the pages of high-brow magazines. Its “Hello Tomorrow” ad campaign evokes the world of the creative class: globalized, multicultural travelers, attending fashion shows and raves, trolling through neon-lit shopping centers in Tokyo, stealing romantic moments on rooftops in Brooklyn, or jumping on a crowded bus in India. It has become a global brand icon.
Today, Emirates is one of the most significant carriers in several of the fastest-growing markets in Africa, which accounts for about 10 percent of Emirates’ global revenues. According to a study by Oxford Economics, Emirates alone contributes about $800 million to South Africa’s economy. It’s the only international airline that flies to all three of South Africa’s hubs; from Dubai, it also flies directly to 25 destinations across Africa. (Remember the old story of flying from West Africa to East Africa by stopping over in Paris? Now, chances are you’ll be stopping over in Dubai.)
As with all rising companies, Emirates has disrupted an existing market and bloodied the waters for its competitors. Its early success arguably also spawned regional competitors: Qatar Airways (founded in 1993) and Etihad (founded in 2003). Etihad is Abu Dhabi-based and government-owned, and it is driving traffic to its hub in the Emirati capital, linking travelers across what its CEO James Hogan has called “a new Silk Road” of air travel. In that respect, it looks a lot like Emirates. But Etihad does something different: It’s also a major investor in other airlines, rescuing Alitalia from near bankruptcy and taking strategic stakes in carriers from Germany to India. There is more than a tinge of rivalry between Emirates and Etihad, not unlike the underlying historical rivalry between the ruling family of Dubai, the Al Maktoum, and the ruling family of Abu Dhabi, the Al Nahyan (despite the fact that the emirates are part of the same country, each retains a certain amount of autonomy). Indeed, the two airlines compete with each other just as fiercely as, say, American versus United.
Qatar Airways, for its part, is backed by the government of Qatar, the richest country per capita on the planet. Of course, its population is too small to fill up all those airplanes, so it, too, follows a hub-based, long-haul strategy.
State-owned or supported?
In late January, the U.S. carriers’ Fair Skies report outlined some serious charges regarding market-distorting subsidies by their Gulf-based competition: cash injections, interest-free loans, artificially low airport charges, state support for fuel-hedging losses, and non-unionized labor at Gulf airports. The charges against Etihad and Qatar Airways are even more serious: American, Delta, and United claim that those carriers’ accumulated losses mean that neither airline would be in existence without state support.
But the reality is that most airlines around the world began as state-owned enterprises, and many remain so. In a recent speech in Washington, D.C., Hogan noted that his airline is “fully compliant with the international financial reporting standards” and provides “full transparency to the 76 financial institutions which provide us with more than $10.5 billion in loans.” He also noted that none of those loans was backed by sovereign guarantees. “They have committed loans because they have confidence in us and believe in our business model and plan.”
Besides, Hogan said, the U.S. Big Three carry 34 times more passengers than Etihad and were “gifted amazing infrastructure — airports, terminals, slots, landing rights, fuel tax breaks, and more — over decades.”
As for Emirates, they fired back with a glossy white paper of their own, devoting an entire issue of their aviation policy magazine, Open Sky, to a rebuttal of the charges against them. The report noted that Emirates’ services across the United States contribute $2.9 billion to the U.S. economy and that the airline only competes with U.S. carriers on two routes. “Despite what some carriers may think, air passengers are not proprietary to airlines,” it wrote, in a report dripping with a tone of professorial sarcasm toward a daft student. “What Emirates is doing is competing in the marketplace — we don’t ‘take’ or ‘steal’ customers. We offer a great product at a competitive price, which appeals to the consumers who choose to fly with us.”
Emirates refuted all allegations of subsidies, and noted that its success owes to deep emerging markets penetration, such as “305 weekly flights to the five BRICS countries and 94 weekly flights to Pakistan and Bangladesh,” while the three U.S. carriers “offer only modest air services in several of these markets, limiting consumer choice and sacrificing lucrative business.” That sound you hear is an army of lobbyists for the U.S. side preparing a counterpoint. And on it goes.
It’s worth noting that state support is, well, complicated. It’s not as if U.S. carriers take to the skies without their own state-backed safety nets. After the 9/11 attacks, U.S. carriers received some $15 billion in direct cash payments and loan guarantees from Washington. What’s more, the Fly America Act demands that U.S. government employees use U.S. carriers for domestic and international travel — a boon to the industry. On my regular United Airlines economy-class flights to Dubai, I sit among a virtual army of U.S. military contractors headed to Kabul, Baghdad, and Islamabad via Dubai. According to the General Services Administration, the U.S. government spends a whopping $9 billion on travel. Isn’t that a form of state support?
Washington offers another form of subsidy that helps the American aviation business: The U.S. Export-Import Bank finances the multibillion-dollar purchases of Boeing aircraft by the Gulf “Big Three” — as well as other carriers from around the world. So it’s not Gulf oil money buying these aircraft, but U.S. taxpayer money — repaid at interest, of course. This adds another layer of complexity to the debate.
Seizing the middle seat
At the heart of this air war, however, is a battle for profits: a cutthroat corporate competition to capture the growth of a new global middle class, which is expected to grow from 2 billion to nearly 5 billion by 2030. And where is that middle class growing most rapidly? In emerging markets — mostly Asia — which will account for nearly two out of three members of this new global middle class by 2030.
Emirates and the other Gulf carriers have been chasing the emerging middle class since their inceptions. Consider this: 36 percent of Emirates’ and Etihad’s traffic to the United States comprises travelers from India. For Qatar Airways, that figure is 28 percent. For Etihad, more than 50 percent of passengers traveling to the United States originated in India or Pakistan. Indian airline executives may lament that Emirates has become “the national airline of India,” but Indian travelers have little complaint. The demand is huge: India is on its way to becoming the world’s third-largest aviation market by 2020, with some 85 million international passengers and 336 million domestic passengers per year, according to its Ministry of Civil Aviation.
Clearly, there are a whole lot of South Asians who travel to the United States and Americans of South Asian descent flying to the region. (United is the only carrier with direct flights to India.) There’s a reason Etihad chose Chicago among its first U.S. destinations: its large Indian-American community. It’s hard to feel sorry for U.S. carriers that largely ignored the Indian and South Asian markets and are now crying foul because Gulf carriers are leveraging them so effectively. As Emirates CEO Tim Clark noted, his company had simply exploited an underserved market: “When the world started to knit together and energize and all these people started traveling, where were the American carriers then?”
Is geography destiny?
The United States has always enjoyed a fortunate political geography — a land blessed by two oceans, far away from the carnage of Europe or the roiling politics of the Middle East and Asia. Economically, politically, and culturally, it’s still the most important country in the world. Naysayers need only observe the long lines of people from around the world who want desperately to immigrate to the United States. With the deepest and most liquid capital markets in the world, the most innovative companies, the best universities, and a political system that — to paraphrase Winston Churchill — is the worst in the world, except for all of the others, don’t bet against America in the long run.
The United States may be the most important country in the world, but the Gulf Big Three carriers are based literally at the center of the world. A McKinsey map from 2012 outlining the globe’s shifting economic center of gravity shows the weight moving decidedly eastward, currently on a path roughly toward the airport in Dubai.
This spring, I spent an afternoon hopping across terminals in Dubai International Airport to see this global air superhub for myself. Terminal 3, dedicated to Emirates, is massive, glossy, and futuristic — a steel and glass caravansary of the emerging 21st-century New Silk Road. But walking into terminals 1 and 2, you see a grittier side: small airlines with no advertising budgets shuttling travelers across South Asia, Iran, Central Asia, and Africa. Here you see Turkmenistan Airlines, Russia’s Transaero, Nigeria’s Arik Air, Pakistan International Airlines, Afghanistan’s Kam Air, India’s SpiceJet, Saudi Arabia’s Flynas, Ethiopian Airlines, Iran Aseman Airlines, and on and on. On the blinking arrivals and departures screens: Lahore, Aden, Delhi, London, Cairo, Tehran, Muscat, Moscow, Kerman, Kuwait, Hong Kong, Manila, Mumbai, Ahmedabad.
Dubai is often dismissed by its critics as a place lacking in history, a global ingénue with a nouveau riche sensibility. A city can hardly be blamed for its lack of civilizational heft, but what the city and its leaders have done in the aviation space has helped them create a future. Dubai is not oil rich: The black gold accounts for about 2 percent of its GDP. By contrast, aviation accounts for more than a quarter of its GDP, and growing. A recent study points out that, by 2030, aviation will account for 44.7 percent of Dubai’s GDP. Beyond Emirates, there is the Dubai-based low-cost carrier FlyDubai. It’s one of the fastest-growing carriers in the world, often competing with Emirates, but also taking travelers to places its bigger, more glamorous cousin will not: the third- and fourth-tier cities of Africa and Asia.
Then, there’s Dnata, the state-owned airports service provider that offers cargo-handling and catering to airports across Europe and Asia — 72 countries in total. Consider this: Dubai-based Dnata provides catering services for 22 airports across Italy. Yes, Italy. It also does ground handling and cargo and logistics in the Geneva and Zurich airports, and it has completed the trifecta at London Heathrow: ground handling, cargo and logistics, and catering. It also handles services in 16 other airports across Britain, 10 airports in Australia, and one in the United States.
Down the road from Dubai, in the emirate of Sharjah, the low-cost carrier Air Arabia does battle with FlyDubai and has put Sharjah on the regional aviation map. Meanwhile, Abu Dhabi International Airport is rising from the desert. It currently serves some 12 million passengers and aims to serve 40 million by 2017. And watch out for Etihad: Its strategy of buying strategic stakes in foreign carriers is quietly making it an aviation powerhouse.
But for dizzying numbers, consider the following: Dubai has opened a new airport that, upon its completion in 2027, will have the annual capacity for 160 million passengers and 12 million metric tons of freight. It will be part of a logistics corridor that will link to Dubai’s Jebel Ali seaport, the world’s ninth-busiest container terminal port. The airport’s name: Al Maktoum International, named after the merchant-prince ruling family.
The United Arab Emirates’ aviation strategy — driven largely by each emirate — may not be a model that everyone can follow, but it’s a good example of an emerging market overachieving. It’s also something that U.S. policymakers should celebrate rather than penalize. The benefits to U.S. industry, consumers, and labor are clear, but there’s something more intangible at play here: In a region littered with economic failure and underperformance, this is a Middle Eastern success story that supports jobs, grows economies, and builds connectivity.
The numbers don’t lie. And at the airport in Dubai, one needn’t do anything more than look around to see the future of emerging-markets travel, of South and Central Asians, Arabs and Iranians, Russians and Africans, Eastern Europeans and Chinese, lining up, boarding their planes, and flying high into the Dubai sky.
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