On the other side of the globe from the United States, three airlines are poised to make one giant mess of the much-maligned global airline industry ? as if it needed any help. It may seem like a world away, but Emirates Air, Etihad, and Qatar Airways are quickly positioning themselves for domination in the airline business?and not just in the Middle East, but also in Europe, Asia, and right here in North America. If you think that an entity nine time zones away can?t affect the United States aviation industry, this article may have you rethinking that paradigm. The ?Big Three? Gulf carriers, three of the fastest growing airlines in the world, have ingeniously designed their companies to eliminate the middleman, drown their competition in a flood of capacity, and capitalize on tax breaks that would make a Fortune 500 CEO blush. While our European counterparts are already feeling the impact, the battle is quickly approaching our s*************************?with the tacit assistance of the U.S. government. This is a concern to both the U.S. airline industry and its consumers. It is a war we may not desire to fight, but it nonetheless appears inevitable. Make no mistake; it is a barrier that must be overcome to protect the jobs of the American airline worker and the American consumer?s ability to have affordable options when they fly.
VERTICAL INTEGRATION
VERTICAL INTEGRATION: Avoiding the Middleman
It has been said many times that if an airline could replace its workers with robots that could accomplish the same tasks, it would. We might not be at that stage yet, but the Gulf carriers are doing the next best thing available at the moment: vertical integration, a business-world buzzword that basically means cutting out the middleman. By playing the role of ownership, management, and government all at the same time, the Gulf Carriers start the game with quite an unlevel playing field.
Let?s take a look at Emirates Airways, parent company: The Emirates Group. According to their website, the Dubai-based airline is, ?wholly owned by the Government of Dubai, but is run as a fully commercial and independent entity.? However, their CEO and Chairman, His Highness Ahmed bin Saeed Al Maktoum, is a member of the extensive Al Maktoum bloodline, the family that monarchically reigns over Dubai today. Sound a little Henry the VIII? Perhaps.
On our side of the world, it?s common for an airline to contract with several different companies for services including fueling, catering, cleaning, maintenance, etc. When it comes time to actually fly the plane, the airlines must pay air traffic control fees, airport landing fees, and gate leasing fees, among others. This may not be the case however for the airlines of the Gulf. Some carriers, particularly Air France and Qantas, have accused Emirates Airways of receiving government subsidies, tax breaks, waived airport user fees, and other perks associated with being the ?government?s pet.? Although the airline claims that it receives no such benefit, it does own its own fuel suppliers, caterers, cleaners and more. In America, it is common to outsource these types of operations?usually to a lower-cost operator that employs contract workers. No need in Dubai: the government has outlawed unions and maintains a tight rein on competition.
Delta Airlines is dipping their toe in the water with their recent announcement that they are purchasing an oil refinery in the Northeast to try to help reduce their fuel costs. It may be a good start, but it pales in comparison to the Gulf carriers who have vertical integration from the bottom to the top of the organization as part of their core structure.
CLEARED
Cleared for take off & Taxes
On December 4th 2011, the United States government signed an agreement of intent to implement pre-clearance at Abu Dhabi airport. This may not seem like a big deal on the surface, as passengers have been pre-clearing customs before travel to the U.S. in places like Canada, Mexico, and the Caribbean for years, but by having a U.S. customs facility in United Arab Emirates (and by UAE having an open skies agreement with the U.S.), Emirates now has unfettered access to any U.S. market that it chooses. Emirates, with their current fleet of 21 Airbus 380 superjumbo jets and an additional 69 on order (which makes their fleet of 100 Boeing 777s - with 82 on order - seem ?small?) and Qatar and Etihad with a combined fleet of 174 aircraft pose an undeniable threat to the U.S. airline industry.
One trait the Big Three have in common is lack of membership in an airline alliance. Thus far, these three have resisted the urge to join many other global counterparts in alliances such as Oneworld, SkyTeam, or Star Alliance. Although they have codeshare agreements with various carriers, it seems their desire is to remain isolationists, drowning out their competition in a glut of capacity.
Tax Advantages
The tax advantage that the Big Three have is admittedly not all their fault. In a clear example of starting behind the eight ball, the U.S. Airline industry is among the highest-taxed industries in the country. At an average tax rate of about 20%, the rate at which airlines are taxed is staggering. This is even higher than the alcohol, tobacco, or firearms tax! The Gulf carriers certainly didn?t make these laws, but if the U.S. government wants its airlines to be able to compete in a global economy, this needs to be addressed, and fast.
In the meantime, the Gulf carriers airlines benefit from not having to pay the types of airport and air traffic control usage fees that U.S. carriers are accustomed to paying because, quite frankly, they own the facilities. They also are able to attract many employees including pilots and flight attendants from Western countries and pay them less than their western counterparts because of the tax advantage. For instance, an American working at one of the Gulf carriers owes no tax on their first $96,000 earned thanks to laws regarding ex-patriot pay.
Recently, another advantage came to light when several American carriers filed suit against the Export-Import Bank of America for allegedly giving unfair borrowing rates to Air India so that the carrier could purchase brand new Boeing 787s. Air India wasn?t the first carrier to take advantage of these deals though; the Gulf carriers reaped rewards as well, receiving $4-5 million per Boeing 777 per year. Though it ought to be noted that U.S. airlines have benefited from billions in Ex-Im financing on CRJ/ERJ/and EMB products. Nevertheless, it?s clear the Gulf carriers are receiving nice incentives for their Boeing purchases.
MISSION IMPOSSIBLE
Approximately 4.6 billion of the world?s 7.0 billion inhabitants reside within an eight-hour flight of Dubai, with the most populated international travel routes being between Europe, Asia, and Africa. Of course, Dubai sits conveniently right in the middle. Currently the majority of passengers at Dubai International are connecting passengers (56.7%) as opposed to originating and destination passengers (43.3%). Thus, the carriers that fly within these regions will be the first to feel the pinch of the Gulf carriers? encroachment. But it won?t stop there.
INCREASING
Increasing Range and Reign
As the Gulf carriers acquire new aircraft and increase their range and capacity with each widebody jet, they will begin to have a greater and greater effect on international travel no matter what continent you?re talking about. A cursory look at the American airline industry shows that when the legacy carriers suffer (those who do the worldwide travel), it forces them to become leaner and more efficient. This has a trickle-down effect on the domestic carriers who have already seen their cost advantages erode in the past decade as the legacy carriers have reduced their capacity and costs.
On the following page, you can see what percentage of major European, American and Asian carriers? passengers are exposed to Emirates, revealing just how far reaching the arms of the Gulf Carriers can reach.
The Gulf Carriers aren?t content to only expand their own airlines though. Recently, they have been pursuing ownership interests in foreign carriers as well. Etihad recently purchased 3% of Ireland?s Aer Lingus, while Qatar Airways purchased 35% of Belgium?s Cargolux and almost 30% of AirBerlin. Relaxation of foreign ownership laws - a growing objective of the big business/globalization community - would likely open the gates for such ownership right here in the States.
What?s more, the ?Big Three? aren?t just poised to reign over the air, they are positioning themselves to infiltrate by land and by sea as well. For instance, the most popular sport in the world is soccer, and the most popular soccer league is the English Premier League. One of the EPL?s most popular teams, Arsenal, has ?Fly Emirates? emblazoned across their jerseys and plays their matches at Emirates Stadium. They also sponsor popular Spanish and Italian clubs Real Madrid and AC Milan, respectively. Normally, the advertising and publicity that a sponsorship of this magnitude would cost a company would reach upwards of $400 Million, but you won?t find it on Emirates? balance sheet. It is paid for in full by the government of Dubai in support of tourism. Similarly, Etihad has bought naming rights to Manchester City?s stadium and they too wear jerseys publicizing Etihad?s logo. Emirates is also sponsoring the world?s first urban cable car, which is to cross the River Thames in central London. Emirates will proudly take ownership of this $57 million project with a decked out Emirates-themed cable car and stations. Don?t be fooled, these moves aren?t just party tricks the airlines are pulling to seduce their northern neighbors. These are long-term strategic initiatives that will push the brand internationally to Asia and the Americas, where English football is popularly televised.
