Middle Eastern Airlines Take Flight

Seemingly out of nowhere, Etihad Airways, Emirates, and Qatar Airways, collectively called the ME3, have captured a significant portion of the air travel market in recent years. According to Fortune Magazine, in 2002 the ME3 only accounted for 2 percent all international travel. But by 2011, that number jumped to 11 percent, whereas American carriers’ market share dropped from 14 percent to 11 percent in the same period.

During the last two decades, the ME3 have made an aggressive push into the international market with the help of their respective governments. The governments not only subsidize and invest in the airlines themselves, but also in projects that are beneficial to their growth. For instance, according to the Wall Street Journal, Dubai announced it would invest a staggering $32 billion into their airport, solely to meet the rapid growth of Emirates Airlines, which had seen a 13 percent increase in traffic the year prior. According to reporting by the Wall Street Journal, Etihad received a $2.5 billion dollar injection from Abu Dhabi while according to The Economist, Qatar Airways has allegedly received over $7.7 billion in interest-free loans. It is within the realm of possibility that government-provided capital injections are being used to gain more control of foreign markets by buying other airlines’ stocks – for instance, Etihad has acquired major shares in airlines around the world, its largest share being 49 percent in the Italian flag-carrier Alitalia. Having government support, which American and European airlines lack, is a huge advantage in an industry where many companies struggle to break even.

While focusing on their infrastructure and assets, the ME3 have also been heavily investing in their products. Specifically, the ME3 have focused on the business traveler, a sector whose revenue percentage is often much higher than its physical percentage, compared to other travelers. Emirates pioneered the suite-style first class seat and sleeper business class seat way before American carriers could design their own. Along with superior hard products such as seats, ME3 airlines have heavily invested in new aircraft and have some of the youngest fleets in the industry. Having a younger fleet means lower maintenance costs and less money spent on delayed or canceled flights. Newer aircraft also burn less fuel on average. The increased efficiency along with government capital injections allow the ME3 to pass the savings onto their passengers in the form of much lower fares. Prices on routes from the United States to India are often much cheaper through the Middle East than through Europe or East Asia.

These advantages have had a major impact on airlines outside of the region. According to The Telegraph, Air France cut 2,900 jobs in 2015 citing increasing competition from ME3 as one of the major reasons. Germany’s Lufthansa is in the process of restructuring operations to increase efficiency. American carriers are now looking to renegotiate “Open Skies” agreements with Qatar and the United Arab Emirates to ensure better protection of their routes. These agreements open up the United States to foreign competition with less protectionist intervention. American carriers have consolidated efforts to stop ME3 expansion in the US by forming the Partnership for Open and Fair Skies coalition. According to Business Traveler, American carriers believe the current agreements do not maintain a fair market playing field. Delta’s CEO Richard Anderson published a statement on the Delta website saying “when the playing field is so far tilted, it is difficult in any industry to be able to compete against governments.”

The main debate in the industry is how other carriers will compete. The ME3 already have well established global networks and have cultivated a better reputation among business travelers. Skytrax, one of the leading aviation consultancies, rates each ME3 in the top ten in the world, far ahead of their American and European counterparts. Any attempt from American or European carriers to block them from markets through flight restrictions or trade barriers may anger business travelers, the market niche so many major airlines rely on to make profit.

Instead, American and North American airlines should join forces with the ME3. Trial and error in the aviation industry has shown that working together and consolidating resources often works better than trying to compete head on. According to earnings reports, United and Delta both raked in record profits of around $1 billion after merging with Continental and Northwest, respectively.  While it would be nearly impossible for any American or European airline to merge with their Middle Eastern counterpart, they could form strategic partnerships in which airlines on both sides would feed into each other’s network.

Qantas of Australia, for example, has already set up such a relationship with Emirates. For years they operated the iconic “Kangaroo Route” from London to Australia through South Asia, the traditional route of all airlines flying from England to Australia. As the ME3 expanded, yield rates on the route dropped. Qantas then decided to reroute flights through Dubai to improve profits. Emirates and Qantas added each other’s flights to their inventories and readjusted soft products such as mileage programs to be inline with each other. According to Gulf News, the partnership is performing well enough that Qantas has hinted it may launch new European routes from Dubai once it acquires new aircraft.

Partnerships such as the one between Qantas and Emirates would also be beneficial to American and European airlines. Both groups would be able to move large amounts of people to the ME3’s hubs. Conversely, the ME3s would have a large network to feed people into the networks of airlines outside the region. This type of relationship has worked well on a much larger scale with airline alliances in which a large group of airlines coordinate operations globally in order to feed into one another. It benefits the traveler by offering efficient travel options and consistency in service while allowing airlines to have full planes and therefore higher profits. Until such partnerships actualize, American and European will continue to feel their current woes.