Thursday, April 24, 2014

EX-IM Bank Again...

EX-IM Bank is again in the news; Delta, A4A and ALPA are adamant about defunding it because it stifles competition by providing export facilities to competing airlines especially the Gulf carriers. The fact that Korean, a SkyTeam partner of Delta or GOL obtained an EX-IM guaranteed bond financing to support its engine work at Delta TechOps is of no consequence. Delta's assertion is; EX-IM Bank allows carriers like Emirate, Qatar and Etihad cheaper financing therefore allowing them to offer cheaper fares which creates unfair competition. Hence the defunding campaign, regardless of the requirements of any other economic sector such as Aerospace,Nuclear energy, etc. It would have been better for Delta to lobby for tighter rules on guarantees for aircraft purchases.

EX-IM Bank and Boeing have maintained that defunding is akin to unilateral disarmament. Airlines will just buy from Airbus and utilize whatever the European credit agencies have to offer. Defunding will not change the level of competition, just the type of aircraft used.

Delta has been risk averse when it comes to buying new technology aircraft. Delta's CEO is on record for the "preference of proven technology". They feel that buying at the end of the development and production cycle allows them to purchase aircraft at lower prices. Others, including the Gulf carriers prefer to be launch customers with all the technology risks and possible delays this entails. Being a launch customer allows an airline a greater say in the aircraft design, aircraft mission requirements and most importantly a much lower price ever.

Delta's acquisition and/or lease of older aircraft like the MD80s and B717 provides them with lower asset costs, their use on short and low utilization sectors offsets the fuel price and when maintenance is due the aircraft is parted out or retired. The preference to refurbish older aircraft with the latest interior and cabin IFE and Wi-Fi in Delta's thinking provides an equal level of comfort to newer technology aircraft and most importantly better profitability. This maybe true in the short term but cabin noise levels, ability of the aircraft systems to support modern IFE and  new ATM requirements and overall reliability will eventually catch up.

To put the unfair competition of Gulf carriers in perspective, out of the 180 million international passengers that travel to and from the USA approximately 6 million (3.33%) hail from the Middle East of which 2.4 million (41%) are carried by US carriers and 3.6 million (59%) are carried by International carriers. There are seven carriers that operate non stop services to the USA; Etihad, Emirates, Qatar Airways, Saudia, Egypt Air, Royal Jordanian and Royal Air Maroc. Out of these, four are members of an alliance, but all of them code share with a US carrier for travel within the USA.
- American code shares with Etihad, Qatar Airways and Royal Jordanian (the latter two are members of
- Saudia code shares with Delta (a SkyTeam alliance member);
- Egypt Air code shares with United (a Star alliance memeber); and
- Emirates, Etihad and Royal Air Maroc code share with Jet Blue.
They bring revenue to the cities they serve in terms of employment, tourist traffic, use of the airport facilities (dedicated lounges) and most importantly better connections to the rest of the world.

All these MENA carriers come from relatively small countries with little or no domestic travel and have always relied on transit traffic that caters to holiday traffic, visiting friends and relatives and yes to the immigrant communities in the USA. For some reason US carriers do not pay much attention to the rising numbers of immigrants from MENA, India, Pakistan and Asia. these groups constitute the bulk of the traffic carried by these carriers, especially the Gulf Carriers. They compete on service, advanced entertainment systems and passenger amenities, high technology aircraft with high fuel efficiency and ultra long flights (12 to 16 hours/sector) that lower the asset cost per flight hour and most importantly very few or no ancillary fees.

US carriers have gained profitability in the last few years by:
- exercising capacity control (a 2% growth at best) while the Middle East was expanding at double digit
   rates (10% to 15%);
- lowering their labor costs, sometimes at the expense of customer service on ground and in flight;
- utilizing older aircraft (it was not until the last three to five years that US carriers embarked on fleet
  renewals, Delta not as much, and cabin upgrades); and of course
- escalating ancillary fees.

Hardly the stuff of fierce competition.

The Gulf carriers will expand into the USA by virtue of the open skies regimes they have with the USA and their global presence. They will compete with Delta and others; whether they use Airbus or Boeing aircraft is not an issue for them.

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