US airlines vs Gulf carriers: Redefining Open Skies

THE new American mantra for aviation is fair skies, not open skies. With the rise of the Gulf carriers and their increased presence in the US, home carriers are banding to press the Department of Transportation (DOT) to review the long-standing Open Skies policy and the agreements executed thus far. Their grouse: Unfair competition because of large government subsidies received by Emirates Airlines, Etihad Airways and Qatar Airways that place US carriers at a disadvantage.

This is not a new argument presented by opposing airlines; even in the days of restrictive bilateral negotiations, it was a hurdle many airlines from the less developed countries in Asia faced as they expanded into the more lucrative markets of the western hemisphere. Their successes from delivering a product reputed for excellent customer service and operated on high productivity had been clouded by accusations of payouts by their home governments that enabled them to compete on cost.

Courtesy Airbus

Courtesy Airbus

Emirates president and CEO Tim Clark warned: “If you go down this minefield, you must ask yourself to what extent all the foreign carriers serving the US are subsidised. Take China, take Thailand, take Malaysia, take Japan, take New Zealand. I could go on forever.”

Mr Clark may have unwittingly in his defence roped in other carriers into the contentious ring. But the US is unlikely to be interested in the reference, at least not for now. Broad brush strokes do not work; just because one person is not censured does not guarantee immunity for another person in a similar situation. Having said that, this does not necessarily mean the US has a case. The issue is much more complex than that. For one thing, the success of the Gulf carriers makes them more noticeable.

Note, however, Mr Clark is not saying Emirates is similarly subsidised by the UAE government. On the contrary, he insisted the airline did not receive any, rejecting the report produced by the American carriers that the three named Gulf carriers received US$42 billion in subsidies. Mr Clark said: “The requirement from the government of Dubai has been and remains the same. There will be no support for your operations, you will be required to make money.”

All the arguments for and against in the debate – depending on which side of the wall you stand – seem to centre on the issue of government subsidies, complicated by political affiliation and extending beyond support for the airlines to other related businesses including the funding of home airport development that is viewed as directly benefitting them. Where do you draw the line when ownership of several projects is traced to a common designator? In many countries, airport development is undertaken by the government as a national project and the facilities are viewed as common to all users.

Refuting the American accusation, Gulf carriers are pointing out how American carriers have also received government support. All the major airlines have sought refuge in the bankruptcy laws at some point. There were government bailouts after the 911 attacks. In some ways the US aviation policy is protectionist: The domestic market is not widely open to foreign carriers, and the government’s approval of consolidation to create mega entities only serve to limit competition. Etihad chief executive James Hogan countered that American carriers have been granted antitrust immunity (ATI) to protect lucrative transatlantic routes operated jointly with European carriers: American Airlines with British Airways, Delta Airlines with Air France, and United Airlines with Lufthansa. Mr Hogan said: “I think this is a protectionist move to protect the ATI routes across the Atlantic; that’s the irony.
Etihad courtesy etihad

The debate must bring us back to the genesis of Open Skies. For more than twenty years, the US has been championing open and greater competition that has resulted in lower airfares and more choices for travellers of airlines and destinations. US airlines themselves have supported the push, benefitting from new markets outside the US. Since 1992, the US has signed more than 100 open skies agreements. But the playing field is changing as global competition intensifies with the growth of more successful foreign carriers reaching into the heart of the US. It is fair to expect a customary review when circumstances change, but any compromise on the principle of competition may be a step back.

Mr Clark warned that the agenda of the American carriers is threatening “the bedrock of the modern day aviation system. By challenging open skies, you are not just challenging the aero-political situation, you are challenging the very essence of economic liberalization the US has championed for decades.” He expressed hope that the US administration “will not stand for this nonsense.” The American carriers on the other hand insisted that they “welcome robust competition provided the playing field is level. A reopening of those open-skies agreements is the first step and the right step to ensure competition is preserved and enhanced.”

The crux of the matter appears to be what constitutes a level playing field. Will a revised Open Skies policy be qualified by an attempt to box it in? The thrust of the policy has been competition, but makes true competition? Is the US being anti-competition in opposing the entry of Norwegian Air Shuttle, even with nary a hint of government subsidy? As Mr Clark warned, “Once you talk about fair skies, you enter into a quagmire of definition, and you have to be very careful how you go.” Indeed, is there such a thing as truly fair skies? Even as more countries have declared their support of liberalisation, many of them are still protective of their turf, rightly or wrongly. A case in point: Singapore Airlines (SIA) has tried and failed to gain access across the Pacific from London Heathrow to the US east coast, and across the Pacific from Sydney to the US west coast. Yet other airlines that came lately were granted those rights, which is anomalous to the often cited fear of overcapacity that would hurt the industry.

In 2011, Emirates tussled with Canada which rejected its application to operate more flights to Toronto. The Canadian government was concerned that UAE carriers (including Etihad which was also applying for access to Canada) would enjoy an unfair advantage over Air Canada in tapping into its international traffic, the outcome of which would be the loss of Canadian jobs; the unfair advantage was similarly pinned down to subsidies Emirates received from the UAE government. In apparent retaliation, the UAE evicted Canada from its military base near Dubai and imposed a hefty visa fee for visiting Canadians. It is so easy for what is a commercial matter to be politicised, adding to its complexity.

The industry is divided. An organization known as Americans for Fair Skies is campaigning in support of the US government. It says: “This is an important first step towards restoring fairness to our skies and stopping the largest trade violation in history.” Outside the US, not surprisingly, Lufthansa had openly stated its support of the US carriers. When Carsten Spohr assumed appointment to helm the German carrier, he expressed concerns about encroachment by Gulf carriers in Europe and set himself the task of tackling that issue. Interestingly even Etihad, an affected party to the dispute, actually “applauds” the US government “for setting up a transparent process to deal fairly and responsibly with the claims. Etihad Airways is committed to setting the record straight regarding these unsubstantiated allegations.” While Emirates argues in defence, Etihad is issuing DOT a challenge.

Conversely, not everyone in the US is supporting the US carriers’ pressure on its administration to review its Open Skies policy, if not specifically the agreements executed with the Gulf carriers. US airlines may feel the pinch of competition by foreign carriers, but US airports are welcoming of the increased traffic that those carriers bring. Then there are consumer groups who are benefitting from lower airfares, better service and wider consumer choice. Business Travel Coalition chairman Kevin Mitchell wrote in a letter to the government: “Now that US airlines have secured antitrust immunity, industry consolidation and concomitantly rising airfares and ancillary fees, and are achieving record unprecedented profits, some carriers shamelessly seek to close off US markets to competition from foreign carriers.” JetBlue chief executive Robin Hayes for one is not joining the protesters.

Mr Clark would remind the US government how Gulf carriers have contributed to not only the growth of traffic but also providing access to markets not previously served by any US carrier. An example was the connection between Seattle and Hyderabab in India via Dubai. He said: “Look at where these people are going and ask yourself where was Delta, where was Untied, where was American when the world was becoming more globalized?”

While DOT said it would address the concerns raised by the US carriers, its spokesman Brian Farber qualified that the administration “remains committed to the open skies policy which has greatly benefitted the travelling public, the US aviation industry, American cities and the broader US economy through increased travel and trade, and job growth.” There will be wide ramifications, no doubt. Open Skies is not just about a specific airline’s bottom line. In defending the case for Gulf carriers, Mr Hogan had said: “We make no apologies for offering new competitive choice for travellers. Open skies should be about customer choice.” But is it really, one wonders, in practice?

It is unlikely that the US government will turn the Open Skies policy topsy turvy and go for a clean slate, renegotiating the agreements with the Gulf carriers. One can anticipate new restrictions in the road ahead, and tweaks where ambiguity permits. Its impact will be global. Some European parties are already watching closely moves by Gulf carriers to gain a bigger slice of the European pie, not just the competition in offering seats but also in the bold acquisition of stakes in European carriers. In Australia, Etihad is a co-owner of Virgin Australia. Emirates operates a mega alliance with Qantas. It would be interesting if the Australian government grants Emirates, but not SIA, rights to fly transpacific from its ports.

Unbeknownst to many, there may be a price to pay for success. The Gulf carriers may have become victims of their own successes, in the same way that it is once said of SIA in its heyday.

This article was first published in Aspire Aviation.

Europe’s aviation challenges

HOPE of Europe-based airlines bouncing back into good times on the back of an improved economy is not turning out to be as expected. Much of the good news reported last year seems to be short-lived.

Air France-KLM is among the airlines that have issued profit warnings, even though it expects higher earnings compared with 2013. The issue is the trending back down in growth. The airline is expecting to fall short of the forecast with revenue falling from 2.5 billion euros (USD 3.39 billion) to between 2.2 billion and 2.3 billion euros. It has cited rising competition from other carriers on the long-haul especially to North America and Asia, over-capacity as a consequence of the competition, weak cargo demand, and currency restrictions in Venezuela for the negative impact on its profitability.

Courtesy Reuters

Courtesy Reuters


Lufthansa has already announced a similar profit warning ahead of Air France-KLM. The German flag carrier is expecting lower than forecast profits – 1 billion euros compared to a high of 1.5 billion euros. Consequently it is also reducing its 2015 earnings forecast from 2.65 billion euros to 2 billion euros. Also citing competition for its woes, Lufthansa faces the same currency restrictions in Venezuela, which would reduce its profitability by 60 million euros. Additionally, the airline was plagued by a pilot strike in April that cost it another 60 million euros. The slowdown is evident in reduced seats offered over the winter, according to Lufthansa chief financial officer Simone Menne.

Irish airline Aer Lingus has also issued a warning on reduced profits estimated to be 10 to 20 per cent lower than last year’s, following a strike by cabin crew last month that caused disruption to some 200 flights and, according to a statement issued by the airline, “significant damage to Aer Lingus’ trading and forward bookings for several months into the future.”

The International Air Transport Association (IATA) was optimistic about a positive year for the global industry, expecting 2014 profits (US$3.2 billion) to almost double that of 2013 (US$1.7 billion). Although it has revised its forecast a little downward on account of new uncertainties in fuel prices as a consequence of geopolitical risks threatening Ukraine and the Middle East, and of capital outflows moving away from emerging economies largely to a strongly revived US economy, it will still be a much better year globally. But compared with other regions, the latest performance statistics for June showed that breakeven load factors are highest in Europe – the result of low yields and high regulatory costs. So, even though the region scored the second highest load factors, its financial performance fell behind the United States, the Middle East and Asia Pacific.

Of the top 10 countries ranked by the number of international passengers identified by IATA, five are in Europe: United Kingdom, Germany, Spain, France and Italy. About a quarter of the world`s tourist arrivals are concentrated in Europe (excluding Russia). Yet the situation is not all that rosy. The weakness of Europe seems to stem from inherent issues that have caused home airlines to direct their umbrage at the competition posed by foreign carriers, rather than the other way around as impacted first by external factors.

While foreign carriers in the Middle East and Asia Pacific have often been accused of unfair competition from a lower cost base and in some cases allegedly supported by government subsidies, the corollary is that airline operations in Europe are faced with high costs that include wages and airport charges, high taxes, cumbersome regulations and the propensity of costly industrial strikes. Some of the costs are levied directly on air travellers or through the airlines, since invariably the fees are passed on to the passengers. The UK is notorious for the suite of fees, among them the Air Passenger Duty which continues to escalate and which has become a significant source of revenue for the authorities. A new carbon tax would have been introduced in 2013 if not for the protest by the international community.

Courtesy Etihad Airways

Courtesy Etihad Airways

On the competition posed by foreign carriers, the biggest threat appears to come from cash-rich Middle East airlines. When Lufthansa`s newly appointed CEO Carsten Spohr took over the helm in May, he identified the Gulf carriers as the most daunting challenge for his tenure, and that tackling this would be a priority for him. The Gulf carriers are widely recognized as the big three in the Middle East, namely Emirates Airlines, Etihad Airways and Qatar Airways. Mr Spohr suggested that Gulf carriers are not competing on a level playing field. The rate at which Etihad picked up stakes in European carriers (and around the world) has raised concerns of a Middle Eastern dominance that would be detrimental to their survival. Among the carriers that Etihad has bought into are Air Berlin, Air Serbia, Darwin Airlines and most recently Alitalia. Etihad`s CEO James Hogan defends his airline`s strategy as one of rescuing ailing European carriers on the brink of collapse, though not denying it is at the same time seeking growth through partnership.

Yet, to be fair, European carriers themselves have seen much consolidation among themselves too. Air France and KLM have merged. Lufthansa owns Swiss International. British Airways, Iberia and Vueling make up the International Airlines Group. According to IATA, improved profitability in Europe may be attributed in part to efficiencies brought about by consolidation, not necessarily among airlines within the region itself but also across borders such as the partnership between British Airways and American Airlines and the acquisition of a 49-per-cent stake by Delta Airlines in Virgin Atlantic. But it is a hard fact to swallow when, as an example, Air France-KLM could have had upped their ante in Alitalia and become majority stakeholder but have had their stake reduced substantially instead with the participation of Etihad.

Mr Hogan said: “Gulf carriers are not the cause of Europe’s aviation challenges.” Rather, an airline like Etihad has seized the opportunity availed by the region’s weakness, itself blessed by its rich resources and thanks no less to Europe’s liberal aviation policies for which it (Europe) should be commended.

European carriers have said that the competition has forced down ticket prices and resulted in over-capacity. It is easy to see what happens to margins if costs are not similarly managed, Interestingly Lufthansa sees the answer in low-cost services to be launched to Asia and possibly extended to Australia, packing in more seats in its wide-body jets to lower seat costs which will in turn mean lower fares. The elusive dream of a viable budget long-haul in spite of the failed Hong Kong-London run by Hong Kong’s Oasis Airlines and the short-lived services to London and Paris from Kuala Lumpur by AirAsia X continues to lure. Norwegian Air Shuttle became the latest operator to take up that challenge when it launched services from London’s Gatwick Airport to Los Angles, Fort Lauderdale and New York. But Norwegian’s derring-do is on a different plane as Lufthansa’s strategy aimed at countering the cheap fares offered by the competition, that if you can’t beat them, join them and hopefully beat them at their game.

On that score, Lufthansa may have already been defeated if Mr Spohr is thinking of targeting the Gulf carriers, which have so far deemed it not necessary to go down that road which continues to be lined with the usual financial risks of high costs and low yields, and the traveller’s reservations about the lack of basic creature comforts for the long hours of flying. It is therefore not the safest of bets for Lufthansa.

Mr Spohr has not decided whether Lufthansa would go it alone or join hands with Turkish Airlines. There is a redeeming feature here. Turkish and Istanbul’s Ataturk Airport could be the challenge to Gulf carriers and Dubai International in the race to be the hub connecting Europe and the rest of the world with some help. This is the kind of counter move that can really reshape the competition rather than merely playing the same game that has been mastered by the competitor.

This article was first published in Aspire Aviation.

Qatar Airways takes on Singapore Airlines

Photo courtesy AisaOne

Photo courtesy AisaOne

IN an interview with the Straits Times at the Singapore Air Show, Qatar Airways chief Akbar al-Baker said: “I don’t think that there is any airline operating into Singapore, including Singapore Airlines (SIA), that offers this (Qatar’s) high standard of product.” (The Straits Times, Feb 13, 2014)

If anyone were to refute Mr al-Baker’s claim, he would probably point you to the 2013 Skytrax survey, which placed Qatar second after Emirates Airlines in the best airlines category. SIA was third.

Indeed, SIA should be flattered that many airlines have over the years used it as the benchmark for excellence. But it should be concerned that a number of them are now moving ahead, the competition coming strong from Middle East carriers that besides Qatar, include Emirates and Etihad Airways. In fact, Emirates which modelled itself on SIA could claim it has beaten the master at its game.

It is now up to SIA to show it is still the leader in the field when it looks like the Middle East carriers have brought the battle to its home ground. Of the three rivals, SIA may have found a friend in Etihad. Both airlines have stakes in Virgin Australia. Etihad chief James Hogan has said there is room for the two airlines to cooperate. Emirates has entered into a non-equity mega alliance with Qantas, and its impact on the kangaroo route competition cannot be underestimated.

Mr al-Baker however does not believe in the “smaller” alliances and chose to be a part of OneWorld instead. Referring to the Etihad strategy of picking up stakes in several airlines that include Virgin Australia, airberlin, Aer Lingus and Air Seychelles, Mr al-baker said: “We feel that joining a larger alliance serves the same purpose without those huge investments.” (See Etihad Airways on a roll picking up stakes in other airlines, Feb 4, 2014) Whatever the strategy, SIA is up against not one but three equally aggressive rivals from the same region.

It’s the age of mega carriers: Will Air France-KLM raise its stake in ailing Alitalia?

Courtesy Wikipedia Commons

Courtesy Wikipedia Commons


Alitalia is fighting bankruptcy as its shareholders initiate efforts to raise funds in light of its main fuel supplier threatening to cut off supply. The Italian postal service will contribute 75m euros (US$101.6m) to the rescue package of 500m euros.

Meantime, Air France-KLM – already the biggest shareholder of the beleaguered airline – waits to see if it should increase, possibly double, its stake of 25 per cent. Air France-KLM chief executive Alexandre de Juniac is in favour of the takeover to gain greater access to the Italian market, but the Franco-Dutch board is cautious about the debt incurred by Alitalia. The Italian flag carrier last made a profit in 2002 and has so far lost 294m euros in the first half of this year. Air France once made a bid in 2008 to take over the airline but was thwarted by a consortium led by then Prime Minister Silvio Berlusconi. The timing today may not be right as the new Air France-KLM is itself struggling with restructuring and cost issues.

The age of the mega carriers has long arrived and it appears the trend, predicted in as early as the ‘80s, looks set to continue. In Europe, besides the Air France-KLM merger, there is the International Airline Group comprising British Airways and Iberia. Lufthansa wholly owns Austrian Airlines and Swiss, and owns 45 per cent of Brussels Airlines, 14.44 per cent of Luxair, and varying interests in a string of other airlines. The competitive field – not only in Europe but also in the United States and to a lesser extent elsewhere – has narrowed to a few mega groups of airlines with fiscal partner interests beyond mere marketing alliances.

In the United States, United Airlines is merged with Continental Airlines under United Continental Holdings; Northwest Airlines is merged with Delta Air Lines; and American Airlines is merged with US Airways. Delta made news when it acquired a 49-per-cent stake in Virgin Atlantic, the stake bought from Singapore Airlines (SIA) which until then had maintained a passive interest in its holding. For Delta, more than for SIA, it would materially increase its presence across the Atlantic.

In South America, LAN Airlines of Chile absorbed TAM Airlines of Brazil to form LATAM.

Somehow the trend is less prominent in Asia and the extended region where flag competing flag carriers generally prefer marketing alliances such as the partnership between Qantas and Emirates, and that between Singapore Airlines (SIA) and Virgin Australia. But it is changing as the competition intensifies in a tight market and as blocs begin to form to make bigger bites, and as countries relax their rules on foreign ownership. SIA now owns 19.9 per cent of Virgin, which is also 19.9 per cent owned by Etihad Airways and 23 per cent owned by Air New Zealand (ANZ). ANZ has announced it will increase its stake to 25.9 per cent, and thus continues to be Virgin’s largest shareholder outside the Virgin Group.

Cash-rich Middle-East carrier Etihad seems to be particularly active on this front, picking up stakes in Air Berlin, Air Seychelles and Aer Lingus, and targeting to complete a 49-per-cent acquisition of Air Serbia in January next year.

Yet the interest seems more as a matter of pure investment or hedging against a shifting competitive landscape. There is no white knight appearing in the horizon to rescue ailing Kingfisher Airlines while many foreign carriers have expressed interest to enter the large and growing Indian market now that India has relaxed its policy on foreign ownership. Etihad is more interested in the less vulnerable Jet Airways. Malaysian budget operator AirAsia and SIA have initiated separate deals with local investors to start new airlines. There is really no valid reason to buy into debts unless the potential for recoup plus growth is visible, almost tangible. But the Indian market has been somewhat of a come-and-go melee, susceptible to changing regulations.

Yet what should make the Alitalia case different for Air France-KLM? It is probably one of market proximity, where the impact may be more immediately felt by the suitors. It goes beyond passive investment – a case in point as mentioned earlier is the SIA/Virgin deal compared with Delta/Virgin deal – to more strategic considerations of how the acquisition would advance the Air France-KLM cause vis-à-vis its competitors within the same region. It becomes an issue of survival in itself.

Interestingly, Etihad was asked if it would be interested to buy into Alitalia, and chief executive James Hogan sidestepped the issue, telling AFP: “At the moment I’m focussed on India, transactions in India. We look at many businesses but we are primarily focused on Jet Airways.” Yet it is rumoured that Hogan has been meeting up with Air France-KLM to discuss the matter, purportedly to persuade Air France-KLM to raise its stake or let someone take its place. Does it appear obvious enough who that “someone” may be? You make a guess.