On June 28, Delta released a full-length video educating employees, “on Gulf carrier subsidies.” The 15-minute video, which is worth a watch, is presumably aimed at trying to inform internal stakeholders about the alleged, “unfair practices” of the largest Middle Eastern carriers, Emirates, Etihad and Qatar Airways, and rally support behind a multi-year campaign that the airline has been waging against continued growth by these supposed, “state-subsidized” airlines that place the jobs of people employed by U.S. airlines at risk.
The video is both beautiful and frustrating at the same time. It is beautiful because simply from an aesthetics perspective, it is well-produced, with a lot of gorgeous production value for #AvGeeks (perhaps the irony here is that the footage of the Gulf carriers shows stunning views of their aircraft, airports and interior cabins) with a lot of key stakeholders across the industry.
But the video is also very frustrating because it is filled with so many fallacies that are introduced by this video which, to someone lacking the in-depth knowledge about the commercial aviation industry, could be taken at face value without knowing that are so many counter-arguments to so many points raised by the video.
I’ll admit, openly, that I am not an omniscient expert about many things in this industry, but there are some really dubious claims that are misleading, or just plain wrong.
And this has become a huge problem in the media today.
I’ll make a disclaimer before I proceed: I do not try to be an airline apologist. And, for the record, I absolutely adore Delta Air Lines as a company. I just finished the book, “Glory Lost and Found: How Delta Climbed from Despair to Dominance in the Post-9/11 Era,” written by Seth Kaplan and Jay Shabat, and it only augmented my respect for the corporation.
But I also cannot condone rhetoric or hubris which can be really harmful. Here are some assumptions and statements that this video makes, which I dislike. Feel free to agree, disagree or challenge, but let’s remember to keep it friendly. After all, academia can only be enlightening to people with differing opinions as long as we show respect towards others’ points of view (and this is something I am working on myself).
The “Subsidies” Saga
One of the most glaring things that we all know, as consumers who have been around within the past decade, is that Delta has been protected by a lot of national laws and policies that have enabled it, along with the other two largest U.S.-based carriers, American and United, to profit immensely in today’s operating environment. Bankruptcy and mergers are the most influential among them. Granted, we only know as much as we’ve been told about the financial data that has been made public to us by the Middle Eastern carriers, but nevertheless, we know enough about what the U.S. industry to conclude that Delta (and others’) success could not have been made possible without the financial credit loaned to them by others.
This is not new, but always worth pointing out, at a high-level, in the unending saga that is the US vs. ME3 debate.
Nobody Can Win in India
The next thing that disappointed me was the allegation that the ME3 are taking routes away from U.S. carriers. Even before the Gulf carriers expanded massively into the U.S., routes that were operated by U.S. airlines into markets like the Middle East, Africa and India (which arguably is where the Gulf carriers have “siphoned” the most traffic away) were nominal, at best. United has operated two nonstop routes to Delhi and Mumbai for over a decade, American operated a nonstop Chicago – Delhi service from 2005 to 2012, and Delta briefly ran nonstop service from New York, later Atlanta, to Mumbai from 2006 through 2008/2009. Net-net, the growth of the Middle East carriers in the U.S. has not been commensurate to any withdrawal, or reduction, of U.S. carrier presence in the Indian subcontinent market simply because few routes were even flown there in the first place.
In contrast, U.S. carriers have actually expanded in India, rather substantially, through their joint venture partners across the Atlantic and Pacific. In Europe, American has Indian market access via its JV partner British Airways, and in Asia, through Japan Airlines. In the past five years, both Japan Airlines and British Airways have added numerous links from the U.S. to their respective hubs in Tokyo and London Heathrow to help feed Indian routes (British Airways serves Bangalore, Delhi, Hyderabad, Mumbai and Chennai) while Japan Airlines has added service to Delhi. Meanwhile, British Airways has expanded in the U.S. to serve Austin, New Orleans and San Jose, while Japan Airlines has added Dallas/Ft. Worth, Boston and San Diego.
SkyTeam has also expanded between the U.S. and India thanks to the new JV partnership with Jet Airways. Air France – KLM and Delta offer multiple daily connections between a broad range of U.S. markets over their hubs in Amsterdam and Paris to Indian cities. Jet is also adding links from non-hub markets like Bangalore and Chennai to Amsterdam and Paris, respectively. Let’s also not forget the presence of Delta’s JV with Virgin Atlantic at London Heathrow, which links to Delhi and Mumbai on Jet Airways’ metal. In the Pacific, Delta has just signed a JV with Korean Air, which may extend to include Indian and other South Asian markets as part of the JV scope, including Delhi, Mumbai, Kathmandu, and Colombo.
In other regions of the world, such as the Middle East and Africa, the presence of U.S. carriers has always been minimal. American has never served the MEA region, while United previously served Bahrain, Dubai, Doha and Kuwait City largely due to military and government contracts (these were all operated from its Washington Dulles hub) which became obsolete when the U.S. began pulling troops from Iraq and Afghanistan. Delta’s service to the Middle East has been more sporadic with various short-lived jaunts such as Atlanta – Kuwait City or New York – Amman which never really stood much of a chance for survival, anyways. In Africa, Delta has held its ground reasonably well against the ME3 with service from Atlanta to Johannesburg and Lagos, and from New York from Accra to Dakar.
If anybody should be more alarmed about threats to 6th-freedom traffic between the U.S. and Africa or the Middle East, it should be the JV partners that U.S. carriers have in Europe. However, we rarely hear about this since people would rather fly nonstop from the U.S. to Africa (if the route is available) or connect over London, Paris, Amsterdam or Frankfurt since the travel time appears less circuitous than Dubai, Doha or Abu Dhabi. In actuality, India appears to be the main concern on peoples’ minds, but U.S. airlines have had the aircraft to return to India for several years, yet have opted not to reinstate India nonstops. The Gulf carriers deservedly win because their geographies are unbeatable, and a 1-stop connection between smaller Indian, Pakistani, Sri Lankan or Bangladeshi markets (which could never be viable nonstop from many European cities, much less U.S. markets) are preferred over 2-stop connections.
And, I’m sorry, I don’t buy the lamenting of, “we used to serve India forever, and now we can’t,” logic because Delta’s history in India has been sporadic, at best. It dates back to the 1990’s when the carrier overtook Pan Am’s Frankfurt hub and briefly operated services to Delhi and Mumbai. Obviously, these routes couldn’t compete against Lufthansa’s powerful Frankfurt hub, so Delhi was eventually dropped and Mumbai was served off-and-on from Frankfurt and Paris. Then, there was the experimentation with nonstops from Atlanta and New York in the mid-2000’s, which didn’t last very long. Delta then eventually served Mumbai from Amsterdam when it merged with Northwest in 2008, inheriting the 5th-freeom route until March 2015. So in theory, yes, Delta has had some presence in India, but it has not been robust by any means.
Let’s also not forget that it’s contradictory to tout the massively powerful (and profitable!) joint venture agreement Delta has with Air France, KLM and Virgin Atlantic over Paris, Amsterdam and London Heathrow which can easily connect millions of Delta passengers over these hubs (the largest airports in Europe) to Indian markets.
Widebody Woes
The next thing I took a challenge with was the aircraft orders, and how the ME3 have over 500 widebody aircraft on order, while the U.S. has only 159 and China has 76. On top of this, there was Ed Bastion’s assertion that the only markets which can support such orders: China, Japan, and the U.S.
If widebody aircraft orders were correlated as closely with the top economies of the world, then in a similar fashion, Lufthansa, British Airways, Air France, Air India, Alitalia, LATAM and Air Canada should be widebody-only airlines as well.
Why are they not? Because aircraft orders are not positively correlated to the size of the economy. Yes, the GDP can play an influence, but it is not a determining factor. Countries like the U.S., Canada, India, China, Germany, France and Brazil orient their aviation models around domestic to domestic, domestic to international, and international to international routing structures.
Conversely, the aviation models for the Gulf countries are purely based around international to international connecting routes.
What’s more noteworthy is that not all of the ME3 have a widebody-only fleet type: in fact, only one does, which is Emirates, and that has actually come to hurt them in recent times. It is why Emirates is merging with Fly Dubai, which enables it to acquire narrow-body assets relatively quickly.
Domestic to domestic, as well as domestic to international, relies heavily on narrow-body airframes because the former thrives on a lower-volume, higher-frequency schedule model, and the latter survives on short-haul feeder flights into a longer-haul route. Etihad, for example, operates mostly narrowbody services to the subcontinent, enabled greatly once it acquired a 49% stake in Jet Airways, which fed into its widebody services in Abu Dhabi.
Additionally, Emirates is not the first carrier to pursue a widebody-only strategy: it’s been tried and used before by countries like Singapore (a city-state) and Hong Kong (a separate administrative region) which carry large volumes of transit traffic between densely-populated regions.
The Gulf Carriers Ate Europe (and Australasia’s) Lunch
Another point of contention that I take issue with is the assertion that the European Airlines were, fifteen years ago, some of the “strongest in the world” and that they’ve been, “harmed massively” by the Gulf carriers.
Again, the Gulf carriers played a minor role in, “harming” these carriers, “massively.” What really actually took them down was the following:
- Unsustainably high labor costs enabled through EU labor laws, as well as regulatory taxes
- The success of highly-profitable ultra-low-cost carriers, such as Ryanair, Wizzair, EasyJet and Norwegian, which ate up traffic on short-haul routes (which were loss-making for airlines like Air France and Lufthansa, only subsidized by profitable long-haul routes)
- Global economic woes following September 11, 2001, war in the Middle East, the Global Financial Crisis, the Eurozone crisis, the outbreak of widespread illnesses and tourism harmed by terror attacks
These characteristics all existed, and most of them continue to exist, independently of the Gulf carriers. The rise of the ME3 have forced them to respond in a much more aggressive timeline, resulting in an ever-evolving attempt to restructure the short-haul business model (such as outsourcing to “within-airline” carriers like Air France HOP!, Eurowings, Germanwings, Vueling, etc) or cutting in-flight services across cabins on long-haul flights.
The Delta video also uses other regional examples, such as Cathay Pacific, Singapore Airlines and Qantas. Well, a few things have been more problematic for each of these carriers beyond the Gulf carriers:
- Cathay Pacific made some poor fuel-hedging decisions, which cost them HK$8.46bn in 2016 and 2015
- SIA has been struggling with the reduction in oil traffic, which has decreased premium demand for many of its oil traffic markets, as well as a huge influx in local low-cost carrier competition
- Qantas dealt with a lot of internal woes through the first half of the 2010s, largely from being an, “end-of-line” carrier that had bled a lot of its traffic to low-cost carriers and from internal strife and lack of strategic vision. Many of those problems have since been resolved since making a massive comeback in 2015 and 2016, and one of the key pillars of its turnaround was, lo and behold, a major partnership with Emirates
The Air Canada Example
The final point of contention that I have with the Delta video is the use of Air Canada as an example of an airline that has successfully persuaded its local regulatory authorities to limit the growth of Gulf carriers to the benefit of the national carrier. Delta has pointed to how Air Canada has grown its network 25% over the past few years, is profitable, etc.
Well, the challenge with this logic is that Air Canada has leveraged this tactic before with the Canadian government, and has even done this once before against – wait for it – one of the airlines that Delta claims has been, “victimized” by the Gulf carriers.
In fall 2013, around the time that SIA was ditching its nonstop ultra-long haul flights to the U.S., I wrote about how there was an article published in the New York Times in 1991 that had much relevance to that point in time. The article, which is a fascinating read, discusses how Air Canada had petitioned the Canadian government to cancel SIA’s thrice-weekly service from Singapore to Toronto (via Amsterdam and Vienna) because it was, “siphoning off potential Air Canada passengers,” and the Canadian government effectively canceled SIA’s rights to serve YYZ.
Hmm…
Let’s not also forget that Air Canada’s 25% growth, while great for consumers, hasn’t been necessarily embraced with a lot of warmth from investors. A lot of that growth has come from Air Canada Rouge, which is a lower-cost, leisure-oriented subsidiary that has been extremely controversial. Furthermore, the pursuit of, “volume over yield” at Air Canada has been viewed with a lot of skepticism amongst investors. One investor on its recent Q1 2016 earnings call noted that nothing in the results indicated that, “the airline’s strategy is yielding incrementally positive profits, margins, ROIC, or free cash flow.”
Granted, this was one of the weaker quarters for the airline, but it places a lot of scrutiny over whether the ability to, “grow” across the world, “thanks to the limitations imposed on the Gulf carriers,” is helping Air Canada become, “wildly successful.”
Concluding Thoughts: Fighting Fire with Fire is Futile
It would be really nice if this could have all been put to rest last year when we discovered that audits showed, “no allegations of unfair practices” by the Gulf carriers when The Coalition for Fair and Open Skies had alleged otherwise.
But, as I said in the beginning if there’s anything that I really enjoyed about the video, it was the production quality.
Expect a media response from the ME3, and it likely will come with faux wood or gold.
