December 1, 2013

Middle Eastern airlines’ record order worries U.S. carriers

There is little doubting the ambitions of the giant Middle Eastern airlines, but recent large plane orders demonstrated just how aggressively these carriers plan to compete in coming years.

There is little doubting the ambitions of the giant Middle Eastern airlines, but recent large plane orders demonstrated just how aggressively these carriers plan to compete in coming years.

The three airlines – Emirates, Etihad Airlines and Qatar Airways – all based in the same corner of the Persian Gulf, already operate more wide-body airplanes than all the U.S. carriers put together. But last week, at the Dubai Air Show, they announced plans to buy 350 more long-range planes from Boeing and Airbus, with orders valued at a record $162 billion and deliveries extending well into the next decade.

Emirates alone ordered 150 of the new Boeing 777X jets, with an option for 50 more, as well as an additional 50 Airbus A380s, the biggest passenger jet. It was billed as “the largest ever aircraft order in civil aviation,” a commitment worth $99 billion at list prices.

The size of these orders stunned aviation watchers. It provided a sense of the scale the airlines are after and dwarfs anything U.S. carriers have planned. American Airlines, for instance, ordered 600 planes for the next decade to replace its aging fleet, but the bulk of those are single-aisle planes for the domestic market, not twin-aisle ocean-crossing giants.

Emirates, established in 1985 with one jet plane, has been the main driver of this growth, putting Dubai, United Arab Emirates, on the map as one the world’s biggest air travel hubs. The airline, which carried 39 million passengers last year, aims for 70 million annual passengers by 2020, according to its CEO, Tim Clark. This would make Emirates the biggest airline by international passengers, he said in a speech last month.

Their strategy is simple, according to Richard Aboulafia, an aviation analyst at the Teal Group in Fairfax, Va.

“They want to take over the world,” he said.

Emirates has thrived by building routes to developing countries long neglected by traditional carriers and by providing an alternative to local airlines – connecting Europe and India, Africa and Russia, China and the Middle East. Instead of flying through traditional hubs like London or Frankfurt, Germany, these new routes run through Dubai, which the airline has turned into a hub thanks to the backing of the city’s ruling family.

The success of the Dubai model has ignited the envy of its neighbors, who have sought to copy it with their own global airlines. At the air show, Qatar’s flag carrier, Qatar Airways, said it would buy 50 Boeing 777X jets – a new aircraft that should be available by 2020. Etihad, based in neighboring Abu Dhabi and the smallest of the three, ordered 143 airplanes at the show, including 30 Boeing 787s and 50 Airbus A350s.

The airlines’ ambitions have sent ripples of concerns among their competitors, more recently in the United States, where the biggest pilots’ union, the Air Line Pilots Association, called the airlines an “economic threat” to U.S. carriers and their employees. The industry’s trade group, Airlines for America, said U.S. airlines cannot compete fairly against rivals that benefit from government subsidies.

“I can understand the frustration felt by the legacy carriers whose lunch is being eaten,” Aboulafia said, referring to Delta Air Lines, United Airlines and what will be a combined American Airlines and US Airways. “The best-case scenario for them is that all the growth goes through the Gulf and everyone else makes do with a stagnant market.”

But while some analysts say these worries might be overblown, U.S. carriers were unwilling to take any chances after seeing how disruptive Emirates has been for well-established airlines like Air France, Lufthansa or Air India.

“They’ve watched Asian and European airlines whistling past the graveyard, and now Emirates and the other Gulf carriers are getting uncomfortably close to home,” Aboulafia said.

Emirates operates about 3,200 flights a week to 135 cities and 76 countries. It started flying to 20 new destinations since the beginning of last year and plans to add service to Conakry, Guinea; Sialkot, Pakistan; and Kabul, Afghanistan, before the end of the year.

“Being the biggest airline in the world is not really the end goal,” Clark said in the speech last month. “Our aim has always been to connect travelers from around the world to Dubai, and other destinations with just a single stop via our hub.”

The airline is expanding its presence in North America, where it has made significant inroads, opening routes from Dubai to Dallas, Seattle and Washington. It has also increased the frequency of its flights to New York and serves Houston, Los Angeles and San Francisco.

Qatar Airways, which joined the Oneworld Alliance with American Airlines, started service to Chicago recently from Doha.

All this is reviving recurring complaints by traditional airlines about what they view as unfair competition by state-owned rivals. U.S. carriers are drumming up political support to oppose plans to open a customs and immigration pre-clearance facility in Abu Dhabi – similar to those that exist in Nassau, Bahamas, or at most airports in Canada – arguing that it would give an unfair advantage to Etihad, which is based there.

Rivals also object to what they view as an unfair trade advantage that benefits foreign airlines seeking financing guarantees or preferential loans to purchase Boeing planes. These favorable terms, meant to promote U.S. exports, are not available to domestic airlines.

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