Crying the Blues at Emirates and Etihad

In recent weeks, we’ve seen Emirates Airline and Etihad Airways launch a clever PR ploy to persuade the media and public officials that they are real companies subject to the same financial constraints as other airlines.

But Emirates and Etihad assuredly are not. They are instruments of their governments, wholly owned by ruling families, with easy access to wheelbarrows of cash from their state treasuries. The Partnership for Open and Fair Skies, a coalition of American Airlines, Delta Air Lines, United Airlines, and aviation trade unions, has proven that since 2004 Emirates, Etihad, and Qatar Airways have received more than $50 billion in direct and indirect subsidies and other unfair benefits from their government owners. Even if their crying the blues is genuine, the remedy for financial stress is simply to grab the wheelbarrows and shovel the cash. These airlines are far more than status symbols of tiny, rich places. They are essential elements in economic development strategies that seek to diversify the UAE economy and reduce dependence on the energy industry. There’s a lot at stake in Dubai and Abu Dhabi, and to their leaders failure is not an option.

Some may simply dismiss this scheme as an ambitious business plan. But there’s an ever-present insidiousness in the Gulf airlines’ subsidized expansion strategy. First and foremost, the subsidies blatantly violate the Open Skies agreements the United States signed with their government owners. Second, they make it impossible for fair-playing businesses to compete, destabilizing the aviation industry as a whole – an industry that in the United States alone supports millions of jobs. And third, the UAE and Qatar strategy is all the more curious – and surely offensive to many – now that there is a new president who promised in his campaign to protect American workers and ensure that our trade deals are fair and enforced.

So there’s no doubt the blue skies are turning. A recent Bloomberg Businessweekfeature on Emirates noted a range of economic and other crosswinds. Profits for the first half of 2016 dropped 75 percent, and revenue actually declined. Emirates’ Chairman and Chief Executive, His Highness Sheikh Ahmed bin Saeed Al Maktoum, said “The bleak global economic outlook appears to be the new norm, with no immediate resolution in sight.” It’s handy to blame external factors. Truth is, Emirates’ hypergrowth and aggressive decisions have harmed it and destabilized the airline industry – not just in the Middle East, but worldwide. They have added tens of thousands of seats at a rate that far exceeds growth in actual passenger demand, even in fast-growing markets in Asia. And because the airline industry is a textbook example of the relationship between supply, demand, and price, pumping in too much supply has meant prices have fallen for all airlines, including the real ones. As a consumer, that might strike you as happy news, but in the medium and long term such an approach will damage every stakeholder, including passengers.

Skies are also graying at Etihad. Like Emirates, they have grown their airline far faster than has actual demand. Unlike Emirates, however, they have used huge chunks of state largesse to invest in other airlines: 49 percent of Alitalia, 49 percent of Air Serbia, 40 percent of Air Seychelles; 29 percent of Air Berlin, and others (nearly every country has laws preventing foreign owners from more than a 50 percent share). To airline experts, the investments in Alitalia and Air Berlin seem especially imprudent. Alitalia, once wholly state-owned, has lost money for decades; there was great optimism when in 2014 Etihad spent €560 million (about $602 million) for their stake, but the Italian airline has continued to lose lots of money, and last month announced discussions with Rome and institutional investors aimed at yet another restructuring. Air Berlin, a newer, private company, has lost millions in the past decade through giddy over-expansion, and has recently restructured and retrenched in an effort to survive. By any objective assessment, most of these Etihad investments have been failures, which was likely a factor in the recent announcement that longtime CEO James Hogan and CFO James Rigney will both depart in the second half of 2017.

And Mr. Hogan’s statement two weeks ago that Etihad would not add new destinations was disingenuous. Likely crafted – and interpreted in press reports – to appear to be a concession to the Trump administration, this observer read it more like an admission that they’ve now saturated the U.S. market with subsidized capacity, and need to take a hiatus. Furthermore, Mr. Hogan chose his words carefully: “We are not flying into any further points in the U.S.A.,” doesn’t mean they won’t continue to add more flights to the six U.S. gateways they already serve.

Curiously, Qatar Airways has not joined Emirates and Etihad in the bad-news chorus; indeed, just before New Year’s they published a cheerful recap of a successful 2016. Maybe their smiles are because they have the biggest subsidy wheelbarrow of all, accounting for more than half of the $50 billion in proven subsidies.

Sadly, this turmoil is not just something happening “over there.” The three Gulf mega-carriers’ subsidized massive expansion has real impact on U.S. airlines and their European joint-venture partners. The trio’s growth in the U.S. has and will continue to result in loss of U.S. jobs, harming airlines and communities across the nation. There’s a lot of rhetoric about protectionism, but U.S. airlines don’t need protection. Remember this: economic deregulation of a once state-controlled industry began here in the United States almost 40 years ago, and U.S. carriers have learned to compete, as long as the playing field is not tilted by subsidies and other unfair benefits. Last week, President Trump met with U.S. airline CEOs. He knew about the government subsidies, and, even better, he told the executives that he wanted to help U.S. carriers compete. That’s a step in the right direction.

Originally Published on Huffington Post.