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

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 is building a massive fleet of jumbo jets. Photo: Emirates.

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 (UNKNOWN: AAMRQ.DL  ) 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.

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Read/Post Comments (7) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 24, 2013, at 9:35 PM, meched49 wrote:

    You should of been promoting AAMRQ when it was .40-.50 now it's $12.06. Talk about late to the game.

  • Report this Comment On November 24, 2013, at 9:36 PM, meched49 wrote:

    I believe AAMRQ new symbol AAL will double from here. Watch the Q drop 11-25!

  • Report this Comment On November 24, 2013, at 10:02 PM, TMFGemHunter wrote:

    I don't think AAMRQ is a good investment. It's basically a highly leveraged play on LCC. If airline multiples continue expanding, it certainly could double. But if the market pulls back, AAMRQ shareholders will end up with a smaller piece of the combined American-US Airways and the stock will crash.

    Like I said in the article, I don't think that the Middle Eastern carriers are a big threat to the U.S. legacy carriers. But the U.S. LCC and ULCC airlines are a significant long-term threat. They may not compete on the international routes, but they pull traffic away from the domestic routes that legacy carriers need to feed their hubs.


  • Report this Comment On November 25, 2013, at 1:20 AM, Leeshor wrote:

    We can only hope.

  • Report this Comment On November 25, 2013, at 2:32 AM, luciano wrote:

    one has to fly with with a US carrier to find out how badly they treat their customers on the ground and in the air.first class is no exception,except on some international routes: peanuts and uneatable crackers real bad seats compared to middle eastern and far eastern airlines which ALL fly wide bodied airplanes.

    passing through 2 or more hubs with no access to a first class lounge,unless one is a member....

    like delta's slogan "we love to fly ,but it doesn't show!'

    US carriers would have to upgrade their fleet from substandard aircraft,so old no serious cargo airline would dare to fly them anymore, to modern wide body jets and teach their flight attendants to treat customers not like cattle but like the very persons that keep their airline alive

  • Report this Comment On November 25, 2013, at 3:11 AM, Tyeward wrote:

    I really don´t think US carriers are in any real danger. If memory serves me correctly, I believe I read something about The New American (once merged) delving into a extensive codeshare agreement with EK. The major players in the US are alright, however I do feel that some airlines in some official alliances do have a little too much frequency on certain routes into the US, and that should be looked into so that US carriers can have a fair shake at providing adequate international service if they are in the same alliance. All in all, I think the danger that Gulf carriers pose would be towards the major European carriers than anything else.

  • Report this Comment On November 25, 2013, at 12:05 PM, TMFGemHunter wrote:

    @Tyeward: I haven't heard anything about an Emirates-American codeshare: doesn't seem very likely to me. Qatar Airways just joined Oneworld: maybe that's what you were thinking of?

    Emirates is actually partnering with JetBlue, Virgin America, and Alaska to provide passenger feed in places like Boston, NY, LA, SF, and Seattle.

    @luciano: I don't know where you are used to flying. Americans understand what to expect from a domestic flight. As a general rule, the fewer amenities provided, the more successful the airline in the U.S. domestic market.


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