U.S. airlines cry foul as Persian Gulf competitors expand

International carriers at D/FW Airport


There is a dogfight going on high in the skies above the Atlantic as three big U.S. airlines seek government help in battling an invasion by upstart competitors from three tiny Persian Gulf city-states.

It is a war that will put record numbers of wide-body jetliners in the air, may lower international ticket prices in the short term, and is trapping the White House in a squeeze play between domestic and foreign pressures.

While the Obama administration agreed last month to look into allegations of unfair competition raised by the American carriers, one administration official said that “no decisions have been made” to take action against the gulf airlines.

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There is far more at stake in the battle being waged by Delta, United and American Airlines than simply who will fill the most seats in an increasingly competitive international market.

There is the United States’ reputation as a global bastion of free-market enterprise that invites competition. There are competing domestic business concerns: The three Persian Gulf airlines have placed more than $100 billion in orders with Boeing, one of the largest U.S. exporters. And the two countries in question, United Arab Emirates (UAE) and Qatar, are considered important U.S. allies in the perpetually turbulent Middle East.

Throw onto that stage six airlines. The three American carriers are survivors of a tough decade when profits disappeared, bankruptcies were rampant and mergers were the order of the day. Now their profits have bounced back, but the domestic market that once provided up to 80 percent of their passengers has matured. To grow, they need a bigger slice of the global pie.

The other three airlines — Emirates, Etihad and Qatar — are hard-charging relative newcomers to the battle for worldwide reach. They each envision their respective home-base airports in Dubai, Abu Dhabi and Doha as mega-hubs for international travel. (Dubai and Abu Dhabi are city-states run by absolute monarchs who operate under the umbrella of UAE.)

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All three airlines are government-owned; those governments see airlines as engines for economies made fabulously wealthy by oil, and they have been pumping money into them by the billions.

And there’s the rub.

The U.S. airlines say that money amounts to multibillion-dollar government subsidies, creating an unfair playing field on which they can’t hope to compete. They want the federal government to step in, seeking a formal consultation with UAE and Qatar under the Open Skies agreement and freezing new routes to the United States by those airlines until discussions reach a resolution.

The Persian Gulf trio sees things differently, arguing that their governments are investing in the airlines, rather than subsidizing them, and that thrusting relatively new carriers into the global market has required hefty investment.

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“Etihad is a David, a David who’s been facing Goliaths since 2003, when we started,” the airline’s president, James Hogan, said in a recent speech in Washington.

Hogan said the Abu Dhabi government, “like any rational shareholder in the world, has made a commitment to us because it expects a return.”

Doug Parker, CEO of American Airlines, which just merged with US Airways, counters that Emirates, Etihad and Qatar airlines have received subsidies of at least $42 billion in the past 10 years.

“There is now overwhelming evidence that the governments of Qatar and the UAE are violating the aviation trade agreements,” Parker said in addressing the U.S. Chamber of Commerce, the same group that heard from Hogan. “These actions distort the competitive marketplace in a way that is wholly inconsistent with the trade and transportation policies of the United States.”

The U.S. airlines complain that the gulf carriers are opaque about the sources and terms of their financing, but there can be no question about their intent of becoming dominant players in the global market. When ranked by the number of passengers carried, the current big three are American, Delta and United. But the ambitions of the three gulf carriers can be seen in another metric: airplane orders.

Look at just two of the hot new long-range planes on the market: the massive Airbus A380, which can seat up to 853 passengers in an all-economy-class configuration, and the fuel-efficient Boeing 787 Dreamliner.

So far, 156 of the giant Airbuses have been delivered. Emirates received 59 of them and is awaiting 81 more. Etihad and Qatar each have 10 on order. The U.S. airlines: none.

The big three U.S. airlines have ordered 125 Dreamliners, but no one has ordered more than Etihad, with 71, and Qatar is after 30 of the planes.

“They are expanding massively and capturing market share internationally,” said Bijan Vasigh, a business professor at Embry-Riddle Aeronautical University. “Obviously, the U.S. airlines — Delta, United and American Airlines — are affected adversely by this because they are losing passengers.”

The gulf airlines stick a thumb in the eye of their U.S. counterparts with the suggestion that it’s all a matter of who provides the best service. One airline-rating agency did a passenger survey last year that ranked all three gulf carriers in its top 10, while Delta came in at 49, United at 53 and American at 89.

Etihad already sponsors the British Premier League’s defending soccer champions, Manchester City, and on Monday the company announced a deal to become exclusive airline partner to the Washington Capitals, Washington Wizards, Washington Mystics and Verizon Center.

Emirates serves nine U.S. cities and plans to add a flight to Orlando. Qatar flies to seven major U.S. markets, and Etihad to six. Qatar upped the stakes this month by announcing plans to add its first direct flights from Doha to Los Angeles, Boston and Atlanta next year, and to add a second daily flight to New York.

The U.S. airlines formed a coalition, the Partnership for Open and Fair Skies, that stitched together all of the available information on their adversaries, which are not subject to the same transparency demands as publicly traded companies. The result was a 55-page white paper that details the myriad ways their rivals are financially buoyed by the governments that own them:

— Billions in loans that often are interest free, some of them ultimately forgiven or granted without any set time for repayment.

— Government guarantees that reduce interest payments for commercial loans.

— Labor costs that are lower because unions are banned.

— Exemptions from airport fees paid by other airlines landing in their home countries.

— Tax exemptions for local companies that do business with gulf airlines.

— Exemptions from customs fees paid by others bringing goods into the countries.

— Billions of government investment in airport expansion that will give one airport, Dubai’s World Central, the capacity to handle five times more traffic than Chicago’s O’Hare. Last year, World Central surpassed London Heathrow to become the globe’s busiest airport.

Between the lines, the document also underscores a stark difference between the corporate culture of Western board-of-director-driven companies and relatively small gulf cities run by emirs, royal families and a ruling elite.

It describes — with the bits and pieces of available information — how three cities that average 1.7 million residents (an enormous number of them foreigners brought in on work visas) are run by a handful of people who often play multiple roles that would be seen as conflicts of interest in the West.

“Nothing terribly new about a government-owned airline,” said an aviation lawyer, who spoke on the condition of anonymity because of the sensitivity of the issue. “The question is whether the investments are investments that would be made by a prudent investor. That’s the test.”

While that may be the test of competitive fairness, there is no mention of how airlines are financed in the Open Skies agreements that the United States signed with the Persian Gulf states. The accords were designed to give reciprocal, unfettered access so that airlines from each country could fly to the other.

But the agreements do give either party the right to call for formal consultations about anything under the sun, regardless of whether it’s mentioned.

“Through consultations, if found that they are indeed abusing the spirit of the open skies, what is the remedy?” said Bill Swelbar, an aviation expert at MIT who is advising the U.S. airlines. “The U.S. carriers seem to be suggesting, ‘Let’s freeze capacity where it is today until we get to the bottom of this.’ That seems like a pretty logical approach.”

Vasigh, at Embry-Riddle, thinks the U.S. airlines are launching a “preemptive strike” to evoke “some sort of voluntary restrictions” from the gulf carriers.

“I don’t think the U.S. will take any action to limit or revoke the open sky agreement,” Vasigh said. “We are a capitalistic society. We believe in open markets, we believe in no government regulation and so forth. It is very difficult to see the U.S. government [attempting] to impede that type of treaty they have with those countries.”

A senior Obama administration official acknowledged the tricky nature of the situation.

“A unilateral decision by us to freeze capacity would be a major breach of the Open Skies agreements,” said the official, who spoke on the condition of anonymity because consideration of the U.S. carriers’ request is ongoing. Asked if a decision to request consultations was near, the official said, “Nothing is imminent,” adding that the foreign policy and military implications of any such decision have yet to be fully discussed.

The aviation lawyer said: “It’s not conceivable to tell them they couldn’t fly to the U.S. I think all of this is a bit of a fantasy.”