Special Report Contents

• Catching up with the Gulf’s big three

• The return of Iran’s aviation sector

• New Saudi entrants prepare for take-off

On 1 September, a water salute welcomed an Airbus A380 owned by Dubai’s Emirates airline, as it made its inaugural landing at Orlando International airport.

Orlando is the 10th US city served by Emirates’ non-stop flights from Dubai. Other cities the airline currently serves include Boston, New York, Chicago, Houston, Los Angeles, San Francisco, Seattle and Washington.

These routes would not have been possible if it were not for the Open Skies agreement between the US and the UAE governments, which came into effect in 2003.

Until then, passengers originating from Dubai usually had to take at least one connecting flight from a European city to reach a US destination, often on board one of the American airlines, and vice versa, which was time-consuming, expensive and inefficient.

Today, two other Gulf airlines, which have active and provisional Open Skies agreements with the US government, respectively operate direct flights to the US. Qatar Airways flies to seven cities daily (set to increase to 10 during the first half of 2016), while Abu Dhabi’s Etihad Airways serves six.

Big Three

If the largest US airlines – American, Delta and United – collectively referred to as the US Big Three, had their way, however, they would rather the three Gulf carriers did not further expand their American networks.

The Big Three this year have been pushing Washington to open consultative talks with the Gulf airlines to renegotiate certain terms of the Open Skies agreement and, while doing so, freeze the Gulf carriers’ access to American markets at current levels.

In a 55-page white paper submitted to the US departments of state, commerce and transport in January, the Big Three allege that the Gulf airlines are guilty of violating the Open Skies agreement by receiving some $42bn in subsidies from their home governments over a period of 10 years. The subsidies are alleged to have taken the form of interest-free loans, very low airport charges, equity infusions and fuel hedging benefits.

Such subsidies they say have underpinned the rapid growth of the Gulf carriers and distorted the supposed even playing field, which undermines the Open Skies agreement.

The US Department of Transport (DoT) has now begun reviewing the arguments presented by both camps and the public. The public consultation period closed on 3 August.

Complex issue

Analysts believe the US government will not give in to the lobbying by the US airlines.

“The issue goes beyond the aviation industry and the Open Skies agreement,” says John Strickland, director at UK-based JLS Consulting. “This is a very complex issue with potentially broad ramifications for both the US and the Gulf states.”

Essentially, any decision will affect the existing trade and defence relationships between the countries involved. There is a massive import and export trade flow in both directions. The US’ Boeing is a major supplier of aircraft to all three Gulf airlines, and Dubai in particular is a major logistics hub for US cargo carrier FedEx, which operates 44 flights a week to the emirate.

FedEx, fellow US cargo carrier Atlas Air, low-cost domestic carrier JetBlue and Hawaiian Airlines have formed a coalition in support of the Gulf airlines in the ongoing dispute. JetBlue and Hawaiian Airlines’ support for the Gulf carriers arises from the premise that these long-haul flights are driving internal traffic, which directly benefits their domestic operations.

Symbiotic relationship

In addition to being an important supply chain link for cargoes originating from the US, American commercial carriers also rely on the Open Skies agreement to overfly partner countries to refuel or repair their aircrafts and to transport supplies and troops between the US and partner countries or other destinations such as Afghanistan and Iraq.

The Gulf airlines… have demonstrated strong management by offering superior customer experience

John Strickland, JLS Consulting

Furthermore, the Gulf airlines are understood to have transported more than 140,000 international visitors to the US in 2014 alone, benefiting a wide array of local businesses such as hotels, car rentals, retailers and restaurants.

This fact was not ignored by Orlando Mayor Buddy Dryer, who said in a statement during the inaugural flight of Emirates to his city that the service opens a “new world of opportunity for Orlando to pursue tourism and business exchanges with the Middle East, Africa and Asia”.

Computer manufacturer Dell likewise voiced its support of the Open Skies agreement, citing in a letter that the policy is essential if “we are to have a supply chain that meets the needs of our customers and the American public”.

Washington’s response

Saj Ahmad, aviation analyst at London-based Strategy AeroResearch, is confident the US government will not allow itself to be bullied by the Big Three.

“For a start, the US government needs continued support from the Arab governments in the fight against terror groups such as [Islamic State in Iraq and Syria] and Al-Qaeda, so they will not be forced into accepting all the complaints from the US airlines and summarily halt or restrict growth of Arabian airlines, especially when they are all also government-owned,” he says. “The fallout would be catastrophic.”

Ahmad adds that the US airlines and their Gulf rivals do not compete directly in the US domestic market, a key factor that he says will sway the DoT’s decision towards rejecting the US airlines’ request for review.

“The Big Three are churning out huge profits every quarter as a result of their dominance and reliance on the domestic US market to which no Arab airline has access, so it’s not a question of competition at all,” he says.

Ahmad predicts the DoT will allow the Gulf airlines to continue to expand in the US market because the US airlines have consistently failed to serve the GCC properly. Apart from Dubai, the Big Three do not offer direct flights to any other GCC city. Delta and United operate daily flights to Dubai from Atlanta and Washington, respectively, although Delta is set to reduce its flights to Dubai to four or five a week starting October. 

The Big Three, he adds, had 50 years to serve the GCC, even before any Arab airlines existed, but they chose and still choose not to do so.

Government support

Furthermore, based on the arguments and counter-arguments presented this year, one can infer that both camps have received varying levels of monetary or non-monetary support from their home governments at certain points of their operations.

These could come in the form of equity infusions or preferential airport fees, or in the case of the Big Three through antitrust immunity, which allows them not only to consolidate but to jointly determine air fares and seat capacity to boost their fiscal standing. Whether these subsidies are unfair is now up for the DoT to decide.

“The more important question is how well managed an airline is,” says Strickland, who has spent the past 32 years monitoring the aviation industry. “The Gulf airlines, led by Emirates, have demonstrated strong management by offering superior customer experience and tapping into new markets in Africa and Asia, which have yielded positive fiscal results.”  

The same cannot be said of the US Big Three, whose customer service levels and prices cannot be compared with those offered by their Gulf rivals, making the latter the preferred choice for many passengers.

Ultimately, it seems, the burden will fall squarely onto the US government, whose policies towards its own aviation sector need some mending. “It is not the UAE’s fault that the US cannot and will not invest in its own aviation market,” says Ahmad. “That is a policy for the US to resolve.”