The Big Three: U.S. Airlines Versus Persian Gulf Carriers

Less than a decade ago, there was only one flight a day from the United States to the UAE and Qatar—a New York to Dubai route operated by Emirates. Today, the three Gulf mega-carriers, Emirates, Etihad and Qatar Airways, operate 25 daily nonstop flights from the U.S. to the Gulf. These new routes are just one way these three heavily-subsidized companies have expanded rapidly in recent years. For example, the Gulf carriers have grown their combined seat capacity to the U.S. by over 1,500% since the U.S. negotiated Open Skies agreements with their governments. In just the past year, their daily departures have shot up 32%. Such rapid growth has raised eyebrows among aviation analysts. The Gulf airlines assert that their expansion is the result of burgeoning market demand, fueled by rising incomes in Asia and elsewhere. But evidence suggests that their expansion, made possible by their massive subsidization, is instead about flooding markets and crowding out U.S. competitors. The Gulf carriers are not growing the market—they are diverting traffic from U.S. airlines and their European allies by violating Open Skies policies.

(Disclaimer: Mr. Britton is an independent consultant to a number of clients, including American Airlines, Inc.)

Understanding the market

To make sense of what’s going on, it’s important to understand basic airline geography and what government experts and economists call “relevant markets.” Emirates, Etihad and Qatar Airways fly nonstop from 11 cities in the U.S. to their home hubs in Dubai, Abu Dhabi and Doha, respectively. But demand for these nonstop flights, called local markets, is relatively small because the respective populations of these places are only about 2.3 million, 2.1 million and 900,000. Further, a large portion of these populations consists of expatriates, including laborers who lack the means to fly, except when returning home.

With such small traveling populations, demand for flights to and from these local markets isn’t significant enough to prompt expansion. Rather, what the three Gulf mega-carriers have captured is the market for connecting traffic from the U.S., Europe, South America and many other regions via their three hubs to much of the other side of the world. Emirates alone links the U.S., via Dubai, with 17 cities in the Middle East; 21 in Africa; 36 in South, Southeast and East Asia; and 7 in Australia and New Zealand. These Gulf mega-airlines benefit from a completely fair—and strategic—geographic advantage of central location. As they frequently remind us, about 60% of the world’s population lives within six flying hours of the Gulf.

Many people looking at the issue get this basic geography wrong—for example, an academic paper soon to be published in Transportation Research Part A: Policy and Practice defines the relevant market as solely U.S.-Middle East. Although the paper is cited approvingly by the three Gulf carriers, the true market is far bigger than that.

From the U.S., for example, India is the largest “beyond” market for Emirates, Etihad and Qatar, and their shares of bookings through travel agents and other intermediaries more than quadrupled from 2008 to 2014, from 8.3% to 34.9%. The following table shows the impact of this growth on U.S. airlines and their European partners on typical routes from 2008 to 2014:

Data from MIDT, collected from ticket-distribution systems like Sabre and Amadeus

With this additional context, one can see a more accurate picture: Gulf airline expansion has clearly come at the expense of U.S. and European partners (as well as other carriers). The Gulf carriers tell us that they are simply offering a better product than their competitors to a growing market. As I have written, however, they are not competing on a level playing field. And virtue of the subsidies and other unfair benefits they receive, these three airlines have expanded far faster than market forces could possibly account for.

Phantom demand

Contrary to their assertions, Emirates, Etihad and Qatar Airways are expanding at rates that are clearly divorced from economic pressures. While their competitors are restrained by the demands of shareholders, these carriers are free to undercut the market through subsidized growth. Economic data makes it clear that Gulf carrier claims about market demand simply don’t add up.

Aviation analysts often use GDP growth as a proxy for overall growth in air transport demand. However, the Gulf carriers are growing their capacity at rates that far exceed global GDP growth:


With world GDP growth at 3%, it is not surprising to see the U.S. carriers and the rest of the world within a percentage point of that level. In contrast, the three Gulf carriers are expanding at nearly four times the rate of global economic growth. They are adding massive amounts of seat capacity in markets that aren’t growing fast enough to support the influx. In manufacturing industries, this practice is called dumping. One veteran of several decades in the airline industry recently characterized Gulf market expansion as “Gee, Boeing (or Airbus) has delivered another new airplane. We have to find a place to put it.”

Commercial aviation is a textbook example of supply, demand and price

What does all this overcapacity do? In short, it drives down yields for all airlines, not just some. Commercial aviation is a textbook example of the relationship between supply, demand and price: grow capacity enormously in a slow-growing market and prices will fall. If you’re subsidized, losing pots of money doesn’t matter. If investors own the airline, it matters greatly.

In the short term, lower prices may appear to benefit consumers, but in the medium- and long-term the damage to U.S. carriers will hurt us all in at least two ways. First, U.S. airlines and their European allies will be forced to reduce long-haul flying. We are already seeing this effect. American Airlines and Delta both withdrew from the enormous India market because they could not operate profitably in the face of massively subsidized competition from the Gulf megacarriers. Second, this decline in international flying will 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. And because network decline is exponential and not linear (simple example: shrinking from 10 flights to 7 drives an overall network decrease much greater than 30%), the impact will be large and damaging. Small and medium-sized U.S. cities, already worried about reduced service, should be even more concerned.

Governments of Abu Dhabi, Dubai and Qatar are simultaneously competing with each other

It gets worse going forward. For one thing, the governments of Abu Dhabi, Dubai and Qatar are simultaneously competing with each other, not just with their airlines, but with essentially identical economic development strategies aimed at diversifying their economies. This means Emirates, Etihad and Qatar must always match each other’s increases in capacity—chasing the same slow-growing pools of passengers. And they’re doing that with gusto: by 2020, their combined widebody (big planes with two aisles) capacity will exceed the entire U.S. fleet of widebody aircraft. As of 2014, Emirates had 217 aircraft in their fleet, with orders and options for 349 more, including 83 500-passenger A380s. Etihad has ordered and optioned 253 planes in addition to their existing 98. And Qatar will add 319 to its existing 134 planes.

After looking at the data that U.S. airlines gathered on these three airlines, an economist colleague said, “The revelation was how well the U.S. carriers have empirically established lack of stimulation. Contrary to the Gulf airlines’ contentions, they are not growing the market, but taking traffic from existing airlines.” And Emirates, Etihad, and Qatar are able to do that because they receive massive subsidies and other unfair benefits from their government owners, $42 billion in the last decade alone. We cannot expect U.S. airlines to compete against backers with such deep pockets.

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