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Motley Fool analyst looks at possibility of ME Carriers "Crushing" US Carriers

General Lee

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Motley Fool analyst looks at possibility of ME Carriers "Crushing" US Carriers

Will Middle Eastern Carriers Crush the U.S. Airlines?


By Adam Levine-Weinberg Motley Fool
November 24, 2013

In the wake of big aircraft orders from the Persian Gulf region's top three airlines, much ink has been spilled over the fates of other international carriers. Indeed, the fast growing Gulf carriers are rapidly gaining market share for international travel. Emirates -- the largest of them -- has already become the top international airline by passenger traffic, and it is continuing to grow rapidly.


Emirates, Qatar Airways, and Etihad Airways pose a very real threat to the top European airlines. Luckily, the threat to U.S. legacy carriers such as Delta Air Lines (NYSE: DAL ) , United Continental (NYSE: UAL ) , and AMR (NASDAQOTH: AAMRQ ) is fairly minimal. For a combination of geographical and strategic reasons, Emirates and its cohorts are unlikely to make much headway in the U.S. market.

A geographical problem

Emirates, Qatar Airways, and Etihad Airways have exploited favorable geography to drive lots of connecting traffic through their hubs. For travelers heading between Europe (or even South America) and Asia or Australia, the Persian Gulf region is a reasonably convenient connection point.

Emirates has taken this strategy to its logical extreme: It operates only wide-body aircraft, and its fleet skews toward the very largest wide bodies on the market. These big planes are typically the cheapest to operate on a per-seat basis, which allows Emirates to offer lower prices to attract more customers. Since Emirates has a single mega-hub in Dubai, it can fill these seats with passengers traveling on to many different final destinations.

By contrast, for travelers going from the U.S. to Europe, East Asia, or Latin America (i.e., all of the top international destinations), the Persian Gulf is thousands of miles out of the way. India and the Middle East are two of the few destinations for which Dubai, Doha, and Abu Dhabi are sensible connection points.

As a result, the Gulf carriers' business models don't work well in the United States. Few travelers heading from New York to Shanghai will be interested in going 3,500 miles out of the way to Dubai. Moreover, the additional flying distance would increase costs. The Gulf carriers can still fly to a handful of the top U.S. metro areas, but they need to manage supply based on the comparatively limited demand for travel between the U.S. and the Middle East/South Asia.

A new threat?

Some industry observers think Emirates can pose a more direct threat to Delta Air Lines, United Continental, and AMR by flying nonstop between the U.S. and cities in Europe and Asia. This fear ratcheted up when Emirates began flying from New York to Milan this fall. On that route, it competes with all three top U.S. carriers and Alitalia, each of which has one daily flight.

Delta Air Lines and joint venture partner Alitalia each operate one daily flight from New York to Milan.

However, Emirates has characterized the New York-Milan route as a "one-off" thing. Indeed, that route is somewhat unusual, because while Milan is a large business market, it is underserved because of Alitalia's decision to locate its main hub in Rome instead. This created an opening for Emirates to fill a very large plane (a Boeing 777-300ER) without relying on the connecting volume of its Dubai hub.

By contrast, for high-volume routes such as New York-London, New York-Paris, Chicago-London, or Los Angeles-Tokyo, the U.S. carriers and their international partners will be much harder to unseat.

AMR has joint ventures with British Airways and Japan Airlines; Delta Air Lines has joint ventures with Air France and Virgin Atlantic; United Continental has joint ventures with Lufthansa and ANA. For most major routes, at least one of these joint ventures benefits from hubs on either end, allowing frequent service. Emirates would have more trouble breaking into these well-supplied markets.

United flies Boeing 757s like this one on many international routes.

On the other hand, for lower-volume routes (especially to Europe), U.S. carriers use smaller aircraft such as the Boeing 757 or 767. The 757 typically seats fewer than 200 passengers in an international configuration, whereas most of Emirates' planes have 300 to 500 seats. If a carrier like United can only fill a 757 for an international flight, despite having a large hub at Newark Airport to generate passenger "feed," Emirates doesn't have a prayer of filling a much larger 777.

Foolish bottom line

Emirates -- and its regional rivals Qatar Airways and Etihad Airways -- is clearly looking to expand. After two huge orders last week, Emirates has 385 widebody planes on order, worth as much as $166 billion at list prices. Emirates is already the largest airline in the world by international traffic, and it is clearly on pace to become the largest by overall traffic within the next decade.

Fortunately, the U.S. carriers can hide behind favorable geography and strong U.S. hubs. While Emirates and the other Gulf carriers are well positioned to steal traffic from European and Asian competitors, their hubs cannot offer reasonable connections for most international routes to and from the United States. There are also very few routes like New York-Milan, where Gulf carriers could feasibly compete "away from home."

The top European and Asian airlines need to gear up for a costly battle with Emirates, Qatar Airways, and Etihad Airways. Otherwise, they could lose a large part of their high-value international business traffic. However, for the U.S. legacy carriers -- Delta, United, and American -- this threat is overblown.



Just posting an article EK guys.... This from a M?tley Fool analyst. It's interesting at least...



Bye Bye---General Lee
 
Last edited:

fareview

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I agree that the US Is better positioned than Europe....this is underscored by the extraordinary move by LH today to cancel its codeshare with TK due to Turkish cannabilising LHS German regional routes. Article in German.

http://biztravel.fvw.de/turkish-airlines-aus-fuer-code-sharing-mit-lufthansa/393/125837/4070

This may have profound implications for Star Alliance.

The other point of relevance is the fact that center of global aviation has moved; - once US/Europe centered, now headed East. US/Europe in 1992 represented 73% of global traffic demand, 52 % in 2012, and estimated 39% by 2032. (Source : Turkish Airlines investor Conference this week in IST)

The US majors will want to tap into that paradigm shift. AA have made the move, loads of ads in TV here at the moment on Oneworld & Qatar. TK may now be open to a partnership outside Star due LH move today.

Interesting times....,many if us have said it...there is one major (DL) and two M/east-ish mega carriers without a US partner...EK would be a great grab for DL.

On the other hand EK could be the odd one out as the other aggressively seeks code shares

fv
 

General Lee

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I agree that the US Is better positioned than Europe....this is underscored by the extraordinary move by LH today to cancel its codeshare with TK due to Turkish cannabilising LHS German regional routes. Article in German.

http://biztravel.fvw.de/turkish-airlines-aus-fuer-code-sharing-mit-lufthansa/393/125837/4070

This may have profound implications for Star Alliance.

The other point of relevance is the fact that center of global aviation has moved; - once US/Europe centered, now headed East. US/Europe in 1992 represented 73% of global traffic demand, 52 % in 2012, and estimated 39% by 2032. (Source : Turkish Airlines investor Conference this week in IST)

The US majors will want to tap into that paradigm shift. AA have made the move, loads of ads in TV here at the moment on Oneworld & Qatar. TK may now be open to a partnership outside Star due LH move today.

Interesting times....,many if us have said it...there is one major (DL) and two M/east-ish mega carriers without a US partner...EK would be a great grab for DL.

On the other hand EK could be the odd one out as the other aggressively seeks code shares

fv

fv,

I agree, EK will be an interesting piece of the puzzle. It's almost too big to have as a partner, which could be good or bad. Any perspective partner would love EK for its great hub and connections, but that would mean sharing incoming revenue and routing lots of pax through DXB, possibly instead of other hubs in need of profits. Good post.


Bye Bye---General Lee
 

fareview

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What is more interesting is LH right now. The CEO said six months ago that he would no longer rule out a deal with a M/E carrier.

A carrier of that importance needs connections going South & East...which if I am reading correctly is now gone with the TK cancellation

More to this move methinks.

fv
 

General Lee

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What is more interesting is LH right now. The CEO said six months ago that he would no longer rule out a deal with a M/E carrier.

A carrier of that importance needs connections going South & East...which if I am reading correctly is now gone with the TK cancellation

More to this move methinks.

fv

Turk really is an unknown player here. Do they want to be a team player, or do they want domination? They have access to almost every big city in Europe, and that makes them dangerous to European National airlines. They will be a big player, and IST is a great location for a hub. They had a big investor conference a few days ago and laid out some impressive future plans. Their fleet is varied, allowing them to fly A330s to Male and Narita, 777-300ERs to LAX and JFK, all the way down to A319s to Salzburg and Donetsk.


Bye Bye---General Lee
 
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Freight Dog

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That's just it - for ME carriers, and in this I include Turkish, it's all about location, location, location. I think Delta or really any legacy US airline partering up with a ME carrier would be a wise move.

I agree that EK is probably too big and too developed, but EY is actively establishing codeshares with others and they also have a fairly big network and a huge order of aircraft coming. What's amazing also is that no US passenger airline flies to AUH, yet that's really where the money is in the UAE.

Why American as Etihad's code sharing partner doesn't fly from all their hubs to AUH to connect with EY's inward network to subcontinent, Africa, Indonesia is beyond me... Instead, as EY gets more and more aircraft, they're flying into all of AA's airports - currently JFK, ORD, LAX soon... also IAD. EK and EY flights from the US are PACKED with people continuing onward and using DXB and AUH as transit points... why don't US airlines jump all over that?
 

flyboyike

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EK and EY flights from the US are PACKED with people continuing onward and using DXB and AUH as transit points... why don't US airlines jump all over that?

Because they are convinced (as are some on this forum) that "Americans will never connect through DXB, they just won't", all the evidence to the contrary be damned.
 

Freight Dog

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Because they are convinced (as are some on this forum) that "Americans will never connect through DXB, they just won't", all the evidence to the contrary be damned.

Define "Americans"

You talking about hillbillies or Indians with US passports? ;)
 

sinkrate

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The CEO's of the EU carriers have all said - publicly - that they cannot compete with EK and cannot survive in their current form. The mid east and asia are a very large part of their markets. Eventually the EU carriers will be forced into something more than a marketing partnership with EK if they want to survive. The price of that will be direct access to the US-EU market for EK.

The same can be said for the Asian carriers. JAL already has failed. Cathay and SIA are facing some stiff challenges in the Asia - EU market. Eventually EK will force them to match their costs or surrender that market.
 

typhoonpilot

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The CEO's of the EU carriers have all said - publicly - that they cannot compete with EK and cannot survive in their current form. The mid east and asia are a very large part of their markets. Eventually the EU carriers will be forced into something more than a marketing partnership with EK if they want to survive. The price of that will be direct access to the US-EU market for EK.

The same can be said for the Asian carriers. JAL already has failed. Cathay and SIA are facing some stiff challenges in the Asia - EU market. Eventually EK will force them to match their costs or surrender that market.


....but if I want to buy a ticket from DXB to CAN, it is consistently way cheaper on CX than on EK. It just requires a little back tracking and extra travel time.

CX and SQ are having trouble primarily because of their geographical position. It has become more efficient to connect through the Middle East hubs than HKG and SIN. CX still holds the keys to a lot of the China market via their subsidiary Dragonair. Both cities are also large O and D markets.


TP
 

Little G-Force

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The short answer is with 18% year over year passenger growth in Asia, all of these carriers in the story will be able to peacefully coexist. There is ample pie at the table for everybody. The news is already out the the A380 production line days are numbered....it is was a good idea in theory, but not in practice.
 

General Lee

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Because they are convinced (as are some on this forum) that "Americans will never connect through DXB, they just won't", all the evidence to the contrary be damned.

Hi Ike, I know you want to get on with EK and hate how your career has gone so far. Passengers who want to go to Europe or Asia from the US won't go to Dubai first, it is too far. Even the analyst stated that, which is stating the obvious. Now, pax wanting to go to India or Pakistan, then yes, maybe US originating pax may go through Dubai or Abu Dhabi. Sorry, it just makes sense.


Bye Bye---General Lee
 

flyboyike

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Hi Ike, I know you want to get on with EK and hate how your career has gone so far. Passengers who want to go to Europe or Asia from the US won't go to Dubai first, it is too far. Even the analyst stated that, which is stating the obvious. Now, pax wanting to go to India or Pakistan, then yes, maybe US originating pax may go through Dubai or Abu Dhabi. Sorry, it just makes sense.


Bye Bye---General Lee

As soon as my career actually starts, I promise you'll be the first to know whether I hate it or not.
 
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