Pontifications: National policy, national security

By Scott Hamilton

June 15, 2015, c. Leeham Co. The battle between the the Big Three US carriers, American Airlines, Delta Air Lines and United Airlines, vs the Big Three Middle Eastern carriers, Emirates Airline, Etihad Airways and Qatar Airways, was a big over-hang at the 71st International Air Transportation Assn. Annual General Assembly last week.

The US3 charge that the ME3 have received around $42bn in subsidies and claim continued government support put them at a disadvantage. Loads of information has been reported, with claims and counter-claims going back and forth. But the IATA conference attendees, including members of the media, were looking for sparks to fly between Doug Parker, CEO of American Airlines, who was on a couple of panels and who was voted president of IATA for the next year, Tim Clark, president of Emirates and Akbar Al-Baker, CEO of Qatar.

The ME3 are aggressively expanding in Europe and the US. Lufthansa Airlines is leading the opposition to the ME3 in Europe. Delta is leading the charge in the US, but at IATA, it was American’s Parker.

Clark, the Emirates COO, was quite vociferous in responding to Parker’s comments. Here’s a particularly out-spoken report. As for Parker, mindful that he now is an official of IATA (which is not involving itself in this fight), he was asked several times over the course of the two days to comment on the dispute. He kept saying the same thing: we’re friends or friendly competitors, but this is an openness and fairness issue, one where US (and European) carriers can’t compete with airlines getting subsidies; and it is a government-to-government national policy dispute. The US3 asked the US government to revisit the Open Skies agreement between the US, Qatar and the United Arab Emirates, and to freeze new services by the ME3 to the US in the meantime. The US3 are waiting for a response from the US government.

There are, however, greater implications for the US.

The US Department of Defense relies heavily on Qatar for a stable military base in the Middle East. The relations between the US and Qatar already are strained because of Qatar’s support of US enemies. The US and the UAE quietly cooperate in the fight against ISIS, with fighters (as in airplanes) using a base in the UAE as a staging area. US national security interests with Qatar and the UAE could wind up having a role to play in any review of Open Skies. Qatar and the UAE could threaten to throw out the US (though this could also open up ways for ISIS to enter these countries).

And then there is the ever-present issue: oil. Right now the Arab countries are over-producing to drive oil prices down and, hopefully, shaky US oil companies who entered the oil business on fracking technology would be driven out of business. I’m not sure how the Arabs might use oil as a retaliatory weapon. Cutting production in hopes of raising prices will only benefit US oil producers–the US isn’t as beholden to the Middle East for oil as it once was. Further flooding the market with oil certainly won’t hurt airlines. But oil remains a pretty big tool Middle Eastern countries can use.

The volatile Al-Baker, whose unpredictability is well known in the industry, could pull out of oneworld, the global alliance led by American.

If the US government were to impose restrictions, and those already imposed in Europe became more widespread, this would upset the business plans of the ME3 for rapid expansion, including to the US. The consequence of this might be significant cutbacks in orders for airplanes–and Boeing would be the biggest loser. Emirates Airline is Boeing’s biggest customer for the 777-300ER, the forthcoming 777-X and it’s considering a small order for the 777-200LR. Etihad is also a big customer for the 777 but it’s also ordered the 787. So has Qatar Airways. (Airbus counts on Emirates to keep the A380 program alive, and the other two ME3 are also large Airbus customers.)

Boeing’s backlog to the ME3 is probably why it’s opposing efforts to revisit Open Skies.

Why, you may ask, do the US3 care since they have little service to the Middle East and none beyond? Because, Al-Baker told me at IATA, it’s the revenue they get from their global alliance partners who do serve the Mid-East and beyond.

Many years ago, at a Boeing briefing for the media before the international air show that year (I forget whether it was Paris or Farnborough), Boeing’s 20 year forecast noted growth of the Middle Eastern airlines would out-pace other sectors. I asked where this growth would come from, given the limited home markets of the ME3. The answer: the European legacies. Boeing said then these airlines would lose about 5% of their business to the Middle East hubs.

In the airline industry, 5% ain’t chicken feed.


3 Comments on “Pontifications: National policy, national security

  1. Russia was accusing the USA of getting the Arab countries to overproduce oil such that it would further damage the Russian economy.
    For whatever reason they are doing it, it was apparent that it is having a significant negative impact on the Russian economy.

  2. I love how our GOP-funding anti-regulation supercapitalist free market anti-subsidy Airline CEOs are really closed market government t*t dependent protectionist subsidy taking welfare rats.

    They buy politicians to rig the game in their favor (anybody surprised at this?) in all ways. They bitch about unfair labor practices of Norwegian while doing everything they can to screw over their own workers in the name of boosting short term share price. they bitch about subsidies while demanding subsidies for themselves to provide service to small markets, they bitch about foreign government tax subsidies while demanding tax subsidies from state and local governments or else they will pull jobs.

    they have bought legislation to guarantee their monopoly on domestic travel (foreign ownership rules). they bitch about the Ex-Im bank while using the EU equivalents to buy Airbus Aircraft and then have the audacity to paint the american flag on the tail.

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