Holiday Travel: It’s All About Network

In the coming weeks, tens of millions of Americans will take to the skies, flying short distances and long to reunite with family and friends. The airline network that enables the hugs, laughs, and tears is often taken for granted. It’s a lot like the electric grid – it’s just there when we flip the switch.

This holiday season, our domestic airline grid is very much switched on, but it is under threat. The source is not immediately obvious: the rapid and enormous growth of three massively-subsidized Gulf airlines – Emirates, Etihad Airways, and Qatar Airways. If this seems like a disconnect, like carolers singing “The Star Spangled Banner” instead of “Jingle Bells,” read on.

The three Gulf carriers have violated terms of the Open Skies aviation agreements that the United States has signed with the governments of the United Arab Emirates and Qatar. These agreements give Gulf airlines unlimited access to the entire U.S. – the largest airline market in the world – but clearly state that their governments cannot subsidize them. Naturally, Emirates, Etihad, and Qatar Airways, and their local apologists like the U.S. Travel Association, nominally deny the subsidies, but American Airlines, Delta Air Lines, and United Airlines have proven more than $50 billion in government support and other unfair benefits since 2004.

In an effort to preserve their rule-breaking massive subsidies, the Gulf carriers have now activated their network of supporters to push out misleading commentary around this issue. Recent blog posts and commissioned opinion polls from the Gulf carrier allies use debunked claims or illogical attacks to minimize the impact the Gulf carrier subsidies have on the U.S. aviation industry, or even to deny they exist at all – despite hundreds of pages of well-documented evidence and research. Not ones to play fair, the Gulf carriers and their allies are even refusing to abide by U.S. disclosure rules that require anyone taking foreign government money in this country to register as a foreign agent. All of this is being done to stop the public from learning the truth about the harm perpetrated by this massive trade cheating.

To understand how this impacts the U.S. domestic network, you have to have understand how hub-and-spoke networks function. The picture below shows a greatly simplified hub-and-spoke network – using a single hub as an example. B is the airline hub, while A, D and C represent the spokes, or additional routes from the hub. Just as a bicycle wheel wobbles when spokes are broken or missing, in airline networks each spoke depends on the others for strength and viability. For example, there may not be enough demand for an airline to fly from A to B (a hub city in this case), but when the A-to-B flight “feeds” passengers onto flights from B to C and the other spokes, as well as onto the long overseas flight from B to D, the A to B flight becomes viable.

For more than 20 years, U.S. airlines have been adding a lot of long-distance international services – like a United flight from Washington, D.C., to Munich, Germany – made possible by the growth of tourism in both directions, the rise of multinational businesses, immigration, and other factors. The new Munich flights would not be possible without the passengers that connect through Washington from dozens of cities like Pittsburgh, Pennsylvania, and St. Louis, Missouri. More than half of all passengers on a typical American, Delta, or United overseas flight make a connection to or from a domestic flight.

These long-distance (B to D) flights become yet more viable through global alliances like oneworld, SkyTeam, and Star Alliance, co-founded, respectively, by American, Delta, and United. With alliances, U.S. airline networks become even more robust, because now they are truly worldwide, and look more like this (but with many more spokes from multiple hubs):

While the benefits of strong global networks are clear, they also entail risks, because the broader network adds more interdependency and thus vulnerability to external threats. Today, the biggest threat to the domestic U.S. network comes from the state-owned Gulf airlines. These three aren’t subject to the expectations of real investors and lenders – they still believe in Santa Claus, for obvious reasons. So Gulf carrier route-planning strategies are based on a strategy of dominating global travel, rather than customer demand and the other commercial realities that drive network decisions at real airlines.

The Gulf trio claim that their expansion in the U.S. has not harmed our network carriers, but the facts prove otherwise. Each new U.S. gateway that Emirates, Etihad, and Qatar Airways add in subsidy-fueled growth reduces the viability of 1) U.S.-operated transatlantic flights; 2) the services U.S. airlines’ joint venture partners operate beyond European hubs (like Amsterdam for KLM, allied with Delta) to points all across Asia, Africa, and the Middle East; and 3) crucially, the whole U.S. domestic network.

To be clear, U.S. airlines are happy to compete fairly with airlines that follow the rules of international competition. But the Gulf carriers have no interest in fair play. American and Delta have canceled all but two flights to the huge U.S.-India market because they could not compete with the subsidized Gulf carriers. As U.S. airlines are forced to cancel long-distance international routes, domestic spokes lose traffic, and at some point a flight becomes unprofitable and gets canceled. This should be a real concern to people in Birmingham, Alabama, Grand Junction, Colorado, and dozens of other small and mid-sized cities. And if that threat does not seem in the present, just look into the future: the Gulf carriers have nearly 600 widebody aircraft on order, including 40 Boeing 787s ordered on November 12; by contrast, U.S. airlines have ordered just 159 big jets.

Local officials and economic-development experts know that losing air service does not just damage civic pride, but causes real economic pain. Airlines and airports generate enormous economic activity – it’s been estimated that each U.S. daily widebody roundtrip lost or forgone because of subsidized Gulf carrier competition results in a net loss of over 1,500 U.S. jobs. Whether a long-haul international flight ends or a domestic “feeder” flight is canceled, job loss and reduced economic activity is of three kinds: direct (a U.S. flight attendant is laid off); indirect (the U.S. airline buys less from local suppliers); and induced (the direct and indirect declines cycle through the economy – the flight attendant doesn’t go out to eat or buy a new car, so the restaurant and car dealer lose business). This is not theory – it’s how the economy works.

At holiday time, we think of others: families and friends, of course, and many others in our home towns and beyond. As you take wing in the coming weeks, pause for a moment to think about how we are all connected, no less via the airline grid than many other linkages.

A suggested New Year’s Resolution for the Trump Administration: stop Gulf airline trade cheating. U.S. airlines don’t need “protection,” just a level playing field to compete globally.

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