The 3 biggest US airlines are in the middle of a fight to protect their turf from a trio of lavish Middle Eastern carriers
Benjamin Zhang
Jeff Smisek United Airlines
(REUTERS/Shannon Stapleton) Former United Airlines CEO Jeff Smisek.
Over the past 15 years, Emirates, Etihad, and Qatar have grown to become three of world's most highly regarded international airlines.
Through a series of agreements between the US government and their respective home nations, the Middle Eastern trio — dubbed the ME3 — have increased their presence in the US market.
However, American, United, and Delta Air Lines — the three biggest US airlines, dubbed the US3— allege that ME3's explosive growth and lavish spending are a result of billions of dollars of unfair government subsidies.
Now the US3 wants the federal government to roll back these agreements that let ME3 encroach on their turf.
This week, that campaign suffered a major setback.
"Munoz will not be well equipped to fight the ME3," Airways News senior business analyst Vinay Bhaskara told Business Insider in an interview. "He will be too busy righting the ship internally."
Munoz seemed to echo this sentiment, telling analysts on a call that he plans to spend his first three months on the job meeting with various groups at United to get a better feel for the company.
He also needs to spend his time hashing out the airline's various labor and technology problems.
These aren't small issues. The airline is embroiled in difficult negotiations with both its flight attendants' and technician's unions that have dragged on for months. Munoz will also have to address the company's notoriously unreliable IT system, which has failed several times over the past few months, causing the planes to be grounded for long periods.
Moreover, the fact that Smisek is leaving under a cloud of allegations that United lavished officials at the Port Authority of New York and New Jersey with dinners and even a special plane route as it sought favors, could mean lawmakers will be far less likely to take up the cause.
The feud is far more than your average business argument, and it boils down this way:
US and international airlines operate globally under a series of "Open Skies" agreements between the US and other nations that aim to free up competition and lessen protectionism. The point is to "expand international passenger and cargo flights by eliminating government interference in commercial airline decisions about routes, capacity and pricing," according to the State Department
united airlines plane
(Flickr/aero_icarus) A United Airlines Boeing 747-400.
The three Middle Eastern carriers have been party to Open Skies agreements for as long as 15 years, and over the last decade, Emirates, Etihad, and Qatar have aggressively moved into the US market, ready to compete with large fleets of new, lavishly appointed jets and award-winning service.
With their international business threatened, the US carriers are now arguing that competition with the Middle Eastern carriers has become inherently unbalanced. They want the US government to freeze the ME3's expansion into the US market and to renegotiate the Open Skies agreements with Qatar and the United Arab Emirates.
According to the Partnership for Open and Fair Skies — the lobbying group representing American, Delta, and United Airlines — the ME3 have received roughly $42 billion in subsidies over the past decade from the governments of the UAE and Qatar.
"(The ME3) rely entirely on taking traffic from others, through subsidies — whether subsidized pricing, product levels, or marketing," Smisek told Buying Business Travel's Paul Revel earlier this year. "I suspect there are billions of additional dollars (outside of the $42 billion) of additional subsidies buried in interested-party transactions."
Emirates Airbus A380
(REUTERS/Thomas Peter) The bar on board an Emirates A380 superjumbo.
The partnership's spokeswoman, Jill Zuckman, disputed the notion that Smisek's abrupt departure will undermine the US airlines campaign.
Bhaskara doesn't quite agree. Even if there's no real legal effect on the Open Skies campaign, the scandal surrounding Smisek's exit could be damaging enough from a PR perspective to weaken support in Washington.
"It won’t do incalculable damage, but the little dings add up, and the chance of getting Washington to do something falls every time a scandal like this happens," Bhaskara said.
Furthermore, the loss of Smisek means the US3 has one less spokesperson. Thus far in the dispute, Delta CEO Richard Anderson has by far been the most vocal of the US chief executives. However, with American Airlines CEO Doug Parker reticent on the issue, Smisek's departure means Anderson will have to carry on the campaign without a tag-team partner.
The conflict
To be clear, the US airlines aren't concerned about Gulf carriers flying domestic routes around America. In fact, Emirates, Etihad, and Qatar Airways are configured for long-haul international flying only.
What American, Delta, and United are keen to protect are their valuable international flights into and out of the US.
Which raises the question: What exactly are the US carriers looking for in a new agreement? After all, any renegotiation of an Open Skies agreement could have far-reaching diplomatic and business consequences.
Qatar Airways Airbus A330-200
(Flickr/Aero Icarus) Qatar Airways Airbus A330-200.
Do they want to kick Emirates, Etihad, and Qatar out of the US market?
"No," Bhaskara said. "They want restrictions on the routes and destinations foreign carriers can fly into the US."
In recent years, Middle Eastern airlines have expanded in to US cities with direct flights from their respective countries of origin. For the most part, this expansion has been met with little opposition.
However, in 2013, Emirates began operating flights between Milan, Italy, and New York — flights coming from outside the carrier's home market.
According to Bhaskara, this is the source of the conflict.
Any flights from the Middle East with a stop in a European city allow the carrier to sell tickets on the portion of the trip between Europe and the US.
This is a potentially game-changing development because transatlantic routes are some of the most profitable and competitive in the world.
Any increased competition in the arena would be troublesome. But the arrival of three highly accomplished and deep-pocketed interlopers could be cataclysmic for US carriers and their European alliance partners.
The US airlines make their case
According to the partnership, the three Middle Eastern carriers are said to have received $12 billion in interest-free loans and shareholder advances — and $8.8 billion in interest savings from government loan guarantees and interest-free loans.
Delta CEO Richard Anderson
(Spencer Platt/Getty Images) Delta CEO Richard Anderson.
On top of that, they've allegedly received $11.2 billion in equity infusions and grants, as well as another $9.6 billion in wage savings from below-market labor costs and other subsidies.
The US carriers contend that they have no problem taking on another airline, but here they believe they're competing against a foreign government.
According to the partnership, 800 American jobs will be lost every time a US airline loses an international route to Emirates, Etihad, and Qatar Airways.
The Middle Eastern airlines' side of the debate
The Middle Eastern airlines have repeatedly denied the allegations of subsidies. Emirates, Etihad, and Qatar have claimed their new aircraft purchases, rapid expansion, and plush accommodations have been the result of their profitability.
In fact, Emirates has reported profits for 27 consecutive years. According to the FT, Emirates president Sir Tim Clark claims his airline has received no more than the $200 million it got from the Dubai government when Emirates launched in 1985.
Clark believes the US carriers' more recent financial performance, which has been stellar, makes it difficult for them to plead poverty.
Emirates Airlines CEO Sir Tim Clarke
(REUTERS/Ahmed Jadallah) Tim Clark, president of Emirates, talks to reporters during a flight tour organized by the airline in Dubai
And the Gulf carriers have asserted that their presence in the US will help create jobs.
According to Airways News, Al Baker claims Qatar's presence in the US accounts for $19 billion in current Boeing orders and $50 billion in future orders, along with $900 million in 2014 from US spending by Qatari visitors.
What does this mean for travelers?
According to Bhaskara, all the increased capacity from the Gulf carriers will benefit consumers in the form of cheaper tickets.
Even if Emirates, Etihad, and Qatar Airways do receive subsidies from their governments, "think of it as the citizens of Dubai, Abu Dhabi, and Qatar subsidizing cheap tickets for US fliers," he said.
The overwhelming majority of transatlantic flights are controlled by the US carriers and their Oneworld, Star Alliance, and Skyteam partner airlines. Increased competition from the Middle East on these routes will almost certainly cut into the profits of Delta, American, and United Airlines.
american airlines plane dallas airport storm clouds
(Flickr/Trey Ratcliff) An American Airlines jet at Dallas-Fort Worth airport.
But competition could force the US carriers to upgrade their aircraft and their levels of service to match those of Emirates, Etihad, and Qatar. The Middle Eastern trio are routinely named among the best airlines in the world.
The Gulf carriers would like for the American flyer to buy into the thesis that the availability of affordable seats onboard their planes will force US airlines to up the quality of their service.
The partnership doesn't agree. According to Zuckman, further expansion into the US market by the ME3 will lead to US airlines cutting once profitable long-haul routes — thus leading to the loss of American jobs.
The two sides in this debate are far apart. And that means this conflict probably won't end anytime soon.
