Thursday, 19 March 2015

* The success of Gulf airlines stems not from illicit subsidies

Financial Times
John Gapper
Ncole Kidman looks very relaxed in Etihad Airways’ new advertisements, as she floats gently down on to a bed in its three-room Residence first-class cabin — a mere $20,000 to fly Abu Dhabi to London. The same cannot be said of rivals to Etihad, Emirates and Qatar, the Gulf airlines that are roiling the business of air travel.

The bosses of Emirates and Etihad flew to Washington this week, presumably in comfort, to rebut complaints from US airlines that they compete unfairly. American Airlines, Delta and United did better in the past, when global competition was muted and Americans flying abroad were sufficiently loyal, or unworldly, to book business-class seats that did not lie flat.

US airlines are not the only ones feeling sore. The French and German governments, prodded by Lufthansa and Air France-KLM, have complained to the EU. Lufthansa is unhappy about what it calls “unprecedented cut-throat competition in the international marketplace” — the sort of thing that benefits consumers.

Ah yes, consumers. In their 55-page “white paper” attacking the Gulf airlines, the US airlines only find space for that word once, in the opening passage about the original aims of the Open Skies deal that allows Gulf airlines to fly to cities such as New York, San Francisco and Washington. After that, they discuss passenger flow and traffic quite a lot, but the C word is absent.

What about workers? This word recurs frequently because Gulf airlines are not unionised, whereas US airlines are. The document includes in its $42bn of “unfair subsidies” $3.1bn for lower wages caused by the fact that the Gulf states ban unions. This is a peculiar notion, given that only 7 per cent of US private-sector workers are unionised.

This Washington lobbying sounds distinctly like companies that used to provide mediocre services in ageing aircraft on international flights, and only responded to competition belatedly, complaining about more energetic rivals. Willie Walsh, chief executive of IAG, owner of British Airways and Iberia, wrote recently of “protectionism rearing its head again”.

Customers enjoy what the Gulf airlines offer. Many Americans now connect through the Gulf on route to the Indian subcontinent and Southeast Asia, rather than paying more to fly direct on a US airline. The Gulf carriers have sucked business from European hubs — Dubai has surpassed Heathrow as the busiest international airport.

They have done so fast, Etihad was only founded in 2003, by exploiting their natural advantages brilliantly. The first is location. The Gulf sits at a crossroads on the “new Silk Road” between east and west, and has emerged as a continental hub for sub-Saharan Africa. The only geographical crossroads the US forms is with itself.

The second advantage is starting from scratch, without the legacy practices the US airlines and European flag carriers face. The Gulf carriers are the second wave of the low-cost revolution started by Southwest Airlines in 1971 after a failed legal campaign to block it by US airlines including Continental (now part of United), for skirting federal regulation.

The Gulf airlines have taken the essentials of that model — newer aircraft, flying from airports with lower fees direct to smaller cities rather than through hubs, with better service — and applied it globally. They are the most eager customers of Boeing and Airbus for the latest, most fuel-efficient models of large wide-body jets such as the Boeing 777 and the Airbus 380.

They have come out of nowhere, now followed by Turkish Airlines, to steal a march on older airlines. “There are always disrupters who change the game and make the incumbents squeal. There might be aspects of unfair competition at the margins but it misses the central point that they came up with a more efficient way of doing things,” says Jonathan Wober, financial analyst at the Capa Centre for Aviation.

Their third advantage is being owned by determined, autocratic governments that want to turn their economies into trading hubs rather than simply living off oil and gas wealth. Dubai, the poor cousin of Abu Dhabi, was the first to try and gained hugely, with aviation and related activity such as tourism now forming a quarter of its economy.

Has it done so unfairly? The evidence is flimsy. Ignoring the alleged unfairness of Emirates not having to negotiate with unions, the US airlines’ came up with about $5bn of “subsidies” over a decade — largely the Dubai government assuming lossmaking fuel hedges in 2009 (a claim dismissed as “tosh” by Tim Clark, Emirates’ chief executive) and $2.3bn attributed to low airport charges.

The latter is a head-scratcher. Yes, it costs nearly 10 times as much to land a Boeing 777 at Heathrow as at Dubai, and nearly six times as much at Chicago O’Hare. But Dubai has a lot of desert, and can build a gigantic airport when it feels like it. This makes it cheaper, but so what? Does the rest of the world complain that the US has plenty of arable land and shale gas?

Even taken at face value, the figures are hardly game-changing. Over a decade, $5bn is $500m per year — about 2.3 per cent of Emirates’ operating costs in 2014. The truth is that most of the Gulf success stems not from illicit subsidies but from innovation, trading on their advantages and making a bet that paid off. Good luck to them.

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