Gulf carriers have taken the world travel market by storm, adding new destinations and buying up stakes in foreign competitors. Their rapid expansion poses a unique threat to European and US airlines alike.
Since the 1980s, the United Arab Emirates’ rulers have sought to transform their country from oil exporter to tourist destination, reducing their dependency on gas revenues while gaining credibility as a centre for international business. Non-oil trade across the UAE has more than quadrupled over the last decade, as travellers flock to its artificial palm-shaped islands and gaze at the Burj Khalifa, the world’s tallest tower.
But at the centre of the UAE’s strategy lies the creation of world-class airlines, with an air traffic infrastructure savvy enough to accommodate millions of international travellers.
Dubai-based Emirates and Abu Dhabi-based Etihad have since taken shape, connecting virtually any two cities in the world with just one stop. Dubai International Airport, now the world’s busiest international travel hub, is situated within just eight flying hours from over two-thirds of the world’s population.
The rapid growth of Gulf carriers does not stop with the UAE, however. Qatar Airways, the state-owned Doha-based flagship carrier, just opened its sixth US-destination in Miami, Florida.
Taken together, carriers in the Gulf saw a 9.3 percent year over year increase in Revenue-Passenger-Kilometers (RPK) in 2014. RPK is the standard unit of measure for airline productivity, calculated by multiplying the number of paying passengers by the distance traveled. European and North American airlines, for comparison, saw just a 2.2 percent increase in RPK over the same period.
The gap between Gulf airlines and its Western competitors is only likely widen, as Emirates, Etihad, and Qatar Airways continue their expansion through organic growth, alliances, and minority purchases.
Growth in the Gulf comes at steep price for the West
Western carriers have paid a steep price as competitors from the Gulf tap into European and US markets. While Emirates and Qatar Airways have relied on fleet expansion and airline alliances to establish a stronger global presence, Etihad has taken a different, riskier approach: buying up minority stakes in major European airlines.
Etihad is set to purchase a 49 percent stake in Alitalia, a Rome-based carrier. The purchase is the latest in a string of minority stakes that Etihad hopes will feed passengers into its long-haul routes through Abu Dhabi International Airport. Alitalia joins Virgin Australia, Air Berlin, and Jet Airways of India, among others.
Global passenger flows are shifting, with Middle East airlines outpacing their European competitors (Source: IATA)
While stakes in foreign airlines give Etihad greater access to attractive new markets, they also provide rivals with a new source of foreign competition. In the wake of recent purchases, executives from European rivals Deutsche Lufthansa and Air France urged the European Commission to examine whether investments from state-owned foreign airlines violate EU subsidy rules.
The European Commission is also examining whether large minority stakes give foreign carriers undue influence over EU airlines, effectively controlling the airlines’ investment and operational decisions. Although foreign airlines are not permitted majority control over EU airlines, large minority stakes such as Etihad’s recent purchase in Alitalia make the foreign carrier the largest shareholder.
New competition from the Gulf is facing pushback in the United States, as well. While the rise of Gulf airlines has brought success to Boeing, the United States’ top exporter, many foreign airline purchases are made with the help of loan guarantees from Washington.
Delta Air Lines CEO Richard Anderson has stepped up lobbying against the Export-Import Bank of the United States, which helped finance $37 billion in exports last year. “The competition is heavily tilted in favor of foreign airlines receiving government subsidies, both from airlines’ home governments, and – amazing – from our own,” Anderson said at a House hearing in Washington.
But Emirates and its Gulf rivals claim they do not receive subsidies at home. And while Boeing may be fueling the rise of US airline competition through aircraft sales, the Export-Import Bank is likely to be reauthorized before its charter expires this fall.
Halting the foreign credit guarantees would likely amount to a partial collapse in many US manufacturers’ foreign sales, since European rivals such as Airbus receive similar help from government agencies. Nearly all Democrats in the House are expected to endorse reauthorization of the bank, and over 40 Republicans have signed onto a document expressing support.
While opposition persists, carriers in the Gulf are sure to continue their expansion into Western markets, adding new destinations, expanding their fleets, and purchasing stakes in smaller competitors. It will take more than just an EU probe or US House hearing to halt the competition.
