Six months into the trade dispute between the massively subsidized Gulf airlines - Emirates, Etihad Airways, and Qatar Airways - and U.S. network carriers, the tactics of the two sides have become familiar. American Airlines, Delta Air Lines, United Airlines, and their labor union partners have marshaled a mountain of evidence, persuasive data, and arguments to prove that the Gulf trio's enormous expansion into the U.S. market violates the Open Skies agreements between the U.S. and the United Arab Emirates (UAE) and Qatar. On the other side, the Gulf three keep repeating the same falsehoods, on the familiar but cynical belief that if you keep repeating fibs people will begin to believe them.
One of the biggest lollapaloozas they've thrown into this debate is that this subsidized growth has been an unalloyed good, with no counter-impact. Last month, Emirates argued that U.S. carriers "suffer no loss at all - they are actually growing their business." Anyone reasonably conversant with the laws of commerce understands that in such situations there will be gainers and losers. The Gulf airlines have deliberately omitted a key fact: their gain has been offset by U.S. airline traffic loss, causing significant harm to U.S. network airlines, jeopardizing thousands of the middle-class U.S. jobs they provide, and threatening service to small- and medium-sized American cities.
Numerous seasoned airline observers have explained this in recent months. MIT Professor William Swelbar, at that school's International Center for Air Transportation, and one of the clearest and most credible experts on the airline industry, wrote in July that "[T]he onboard traffic of the Gulf carriers' flights is largely made up of traffic that is diverted away from U.S. carrier flights and those of their alliance partners, as well as other non-Gulf foreign carriers."
More recently, the economics consulting firm Compass Lexecon undertook a study of the impact of Emirates, Etihad, and Qatar Airways expansion on four markets, Washington, D.C., Boston, Dallas/Fort Worth and Seattle. They chose these markets because Emirates specifically cited them in their filing to the U.S. Department of Transportation; the Compass Lexecon study was included in an August filing made by the Partnership for Open & Fair Skies to the U.S. government. Far from growing in these cities, in the wake of Emirates' entry, bookings on U.S. carriers and their joint venture partners dropped an average of 14.3 percent in Washington, D.C., 10.8 percent in Boston, 7.6 percent in Dallas/Fort Worth, and 21.4 percent in Seattle.
Veteran aviation journalist Ted Reed, another highly credible voice, summarized the Compass Lexecon research for an article in The Street. Here's a quick look at U.S. carrier and European partner booking declines from Seattle to cities in India - one of the most important Asian destinations for connecting passengers - following Emirates' service launch:
Hyderabad-63%
Chennai-43%
Bangalore-36%
Mumbai-26%
Delhi-19%
This will only get worse - Emirates recently doubled Seattle capacity, to 626 daily seats, with a second daily nonstop to Dubai.
Understanding Network Effects
Washington, Boston, Dallas/Fort Worth and Seattle are important markets, but they are just the tip of the iceberg. The U.S. airline system is an interdependent network: erosion of key parts affects the whole. On a typical American, Delta or United overseas flight, more than half the customers connect from or to a domestic U.S. flight. Thus, as the international network is squeezed by unfair competition from the Gulf three, the domestic network will shrink, too.
And it's important to understand that network change in hub and spoke systems is exponential and not linear, both for growth and for decline. This means that a reduction from 10 flights to 7 drives an overall network decrease much greater than 30%. If, for example, subsidized Gulf growth forced Delta to drop an Atlanta to Europe flight (which in turn "fed" Air France or KLM flights to places in the Middle East, Asia, or Africa), there would be follow-on impacts on domestic flights to and from Atlanta. This is a key reason why airport and civic leaders in small and medium-sized U.S. cities like Minneapolis/St. Paul, New Orleans, Columbia, SC, Corpus Christi and dozens more have filed comments opposing the unbridled growth of the Gulf trio. In short, we're all connected, and these subsidized players are threatening to disconnect us.
These reports and studies buttress the case that Emirates, Etihad Airways and Qatar Airways and their government owners are trying to tear apart the foundations of Open Skies - fair competition in an unrestricted marketplace - by using wheelbarrows of cash from state treasuries. It's time for the Obama administration to take action.