Earlier this month, two of the three massively subsidized, state-owned Gulf airlines announced additional flights to and from the United States. Emirates said it will begin daily nonstops from Fort Lauderdale to Dubai on December 15, and Etihad said it will more than double nonstops between Dallas/Fort Worth and Abu Dhabi, from three per week to seven, beginning February 2017. In two years, Emirates, Etihad Airways and Qatar Airways will have increased seat capacity to and from the U.S. by 42 percent, a staggering number that is not the result of market growth, but the fairy-tale economics of state subsidy. According to the airline database Official Airline Guide (OAG), in Dallas/Fort Worth alone the three Gulf carriers will flood nearly 2,000 seats per day (in both directions) by early next year. In manufacturing industries, this practice is called dumping, and often results in legal action against offending nations at the World Trade Organization. But there's no WTO for the airline industry.
For more than 18 months, American Airlines, Delta Air Lines, United Airlines and their union partners have been explaining to U.S. officials and others the clear evidence that the government owners of Emirates, Etihad Airways and Qatar Airways have long provided huge amounts of cash, in violation of the Open Skies agreements between the U.S. and both the United Arab Emirates (UAE) and Qatar. Open Skies agreements are the legal pacts that allow their airlines unlimited access to the U.S. market, the largest in the world.
Since 2004, proven subsidies to the Gulf trio have totaled almost $50 billion, and have enabled them to expand without the normal commercial realities by which U.S. airlines must abide. A longtime U.S. airline planner has characterized Gulf carriers' route-planning decisions as "Whoa, next week, Airbus will deliver another new A380. We have to find a place to fly it."
As I explained in a 2015 article in Forbes, to understand Gulf carrier expansion you need to understand basic airline geography. After beginning its Fort Lauderdale flights in December, Emirates, together with Etihad Airways and Qatar Airways, will fly nonstop from 13 U.S. cities to their megahubs in Dubai, Abu Dhabi and Doha. But local demand for these nonstop flights, such as Fort Lauderdale-Dubai, is relatively small because the respective populations of the Gulf airlines' hubs are small - respectively, 2.3 million, 2.1 million and 900,000. Thus, local traffic does not drive this massive expansion. Instead, the three Gulf mega-carriers have used their subsidies to leverage their strategic geographical location in the Gulf to capture the market for connecting traffic from the U.S., Europe, South America and many other regions in the Middle East, Africa, Asia, and Australia and New Zealand. As these carriers often remind us, about 60 percent of the world's population lives within six flying hours of the Gulf. Their strategy is all about connecting passengers.
What does subsidy-driven overcapacity do? It allows the airlines to operate without concerns over turning a profit. If investors own the airline, as is the case with U.S. airlines, losing pots of money matters greatly. If you're subsidized, it doesn't matter.
The result is a distorted playing field that gives the Gulf carriers a competitive advantage over U.S. carriers, and we are already seeing the damage that this is inflicting on the U.S. aviation industry as a whole. In the past year, both United and Delta have canceled their U.S.-Dubai flights. Prior to that, American Airlines and Delta both withdrew from the enormous India market because they could not operate profitably in the face of massively subsidized competition via the Gulf. Unfair Gulf competition also affects the alliances between U.S. airlines and their European partners. For example, an Indian engineer from Silicon Valley returning to visit her parents used to fly United from San Francisco to Frankfurt, then United's Star Alliance partner Lufthansa to Bengaluru, but she now flies Emirates subsidized service San Francisco-Dubai-Bengaluru.
And there is follow-on impact: declines in international flying affect the U.S. domestic network. More than half of passengers on a typical American, Delta or United overseas flight make a connection from or to a domestic flight. So as the international network is squeezed by unfair competition, the domestic network will shrink, too. The impact will be large and damaging because network decline is exponential and not linear - if a U.S. carrier shrinks from 10 long-haul international flights to seven, the result is an overall network decrease much greater than 30%, Small and medium-sized U.S. cities, already worried about reduced service, should be even more concerned.
I've been tracking the Gulf subsidy issue for several years, and as a longtime U.S. airline employee I wince at the suggestion from self-styled "thought leaders" that American, Delta and United are being "protectionist." U.S. airlines and their workers seek no protection, but a level playing field across the world. Right now the Open Skies agreements are solely benefiting the Gulf carriers, to the detriment of the U.S. airlines and their workers. It's time for the U.S. government to enforce its agreements and stand up for the U.S. aviation industry.