US3 vs ME3

The rhetoric has calmed down since the earlier days, from accusations of complicity in 9/11 to massive subsidies and the inability to compete against rich states to the US3 just requiring the US government to seek consultation with the UAE and Qatar regarding subsidies to the ME3.

The rhetoric included issues ranging from subsidies to labor unions and gay rights.
It appears that subsidies are like beauty, strictly in the eye of the beholder. While the ME3 talk about equity the US3 talk about subsidy and then Chapter 11 is thrown in the mix as an undue advantage accorded to US industry. The US3 counter and rightly so that this is the law of the land but then without it the US3 would not be with us today.

As for labor unions; the ME3 employ expatriates who sign up for a package that  pobably is superior to whatever they can get at there home countries, so why would they care about unionizing.  But then labor unions are governed by each country's law, just like Chapter 11 I guess.

Similarly, the anti gay issue has nothing to do with fair competition. The ME3 have gay people in their staff, and as long as they do not break any pertinent country laws, they remain employed. But then do the US3 want the US government to discuss labor unions and LGBT rights laws in the UAE and Qatar, of course not, then why bring it up other than to muddy the waters. After all the track record in the USA when it comes to these two issues is not the most pogrssive, with laws enacted in individual States that roll back the rights to unionize and gay rights.

The position of the US3 is opposed by almost all segments of the industry from Aircraft manufacturers', OEM's, the travel and tourist industry, airports and cities. Then why all the screaming?
The US3 are making record profits and there is very little overlap in the international routes they operate with those of the ME3. Is it an anticompetitive sentiment and a myopic view of what constitutes competition? Partly yes, look at the postion taken against Norwegian 's application to operate to the USA or the stance of Delta against the EXIM bank as an indication. The ME3 counter with; compete on  service; invest in new modern aircraft, state of the art IFE systems and customer service on board and on the ground and passngers will come back.

The issue that really scares the US3 and their EU Lgacy airlines partners is 5th freedom rights from Europe and the ensuing comptition on the North Atlantic market. FedEx and that segment of the market oppose the US3 position because they do not want any changes to these 5th freedom rigths. Emirates Airline's Milan/New York route was opposed by both the US3 and the EU Legacy airlines because it directly affects North Atlantic traffic. Tim Clark, Emirate's president intimated last week that the airline might exercise its 5th freedom rights under the bilateral if it proves profitable. He basically declared if a European city asks Emirates to operate because they feel there isn't enough capacity to the USA then subject to profitability Emirates will operate. Etihad has that option but then they do not really need the bilateral to operate on the North Atlantic, they have their own EU approved equity partners; Alitalia, airberlin to name a few.

Welcome to the global travel market.

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
  OneWorld);
- 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.

2013 In Prespective

2013 has been an interesting year for aviation and the airline industry, in some ways a year of firsts. The following are some of the exciting events that will continue to shape the industry in 2014 and beyond. 

On board connectivity

Finally, the FCC and the FAA have paved the way to the use of mobile devices on board aircraft from departure to arrival, with inflight WI-FI available after 10,000 feet. The use of mobiles have triggered the debate of whether voice calls should be allowed; BA and Delta have decided not to allow mobile calls inflight, but the debate continues and most airlines awaiting passenger feedback. The prospect has raised the issue of cyber security with some airlines planning to have two (2) WI-FI networks on board; one for the cockpit and another for the cabin. 

The largest airline in the world 

The merger of American Airlines and US Airways is finalized creating the world's largest airline. Of course the road ahead is very difficult and how successful the new AA remains to be seen. Personally, I liked the old in bankruptcy AA the level of service improved and fleet renewal is underway.

The rise of the GULF Global carriers

The three Gulf carriers continued their double digit growth in different ways

- They launched the B777X along with Lufthansa and Cathay Pacific;

- Emirates ordered fifty (50) A380s and stabilized Airbus's production plans for the short term;

- Etihad equity stake in Jet Airways was finally approved. Etihad did not lose anytime in announcing its 

  plans for the Indian market;

- Etihad acquired 33% of Darwin Airlines, a Swiss regionals and will rebrand it as Etihad Regional.    

  Furthermore, they are in discussion with Alitalia for an equity stake; and

- Qatar Airways joined One World.

This prompted Star Alliance to invite Air India to join the alliance in an attempt by Lufthansa to preserve its share of the Indian international market. More interesting is US carriers, lead by Delta, request for protection from the government to limit access of the Gulf carriers and other international carriers and access to EXIM Bank financing.

These are by no means the only events facing the industry in 2014 but probably will have a large impact. Barring major geopolitical and natural disasters the industry is expected to continue its growth, hopefully at a better rate than this year.

Wishing you all a Happy and Prosperous 2014