Are the Gulf Airlines Competing Unfairly With U.S. Carriers?

For years, the three big U.S. network carriers -- American Airlines (AAL 6.60%), Delta Air Lines (DAL 2.86%), and United Continental (UAL 17.45%) -- have complained about unfair competition from Middle Eastern airlines.

The U.S. airline giants have argued that Emirates, Qatar Airways, and Etihad Airways are using government subsidies to steal market share from competitors. However, up until now, American, Delta, and United haven't offered much evidence to support their claims.

That changed last week, when the "Partnership for Open and Fair Skies" published a long "white paper" detailing the allegations. The white paper shows that sweetheart deals with other Dubai government-controlled entities have bolstered Emirates' profitability over the last 10 years -- and that Qatar Airways and Etihad Airways wouldn't be solvent without government support.

Growing like weeds
The three big Gulf carriers have grown rapidly over the past decade or so. At Emirates -- the largest of the Gulf carriers -- capacity has doubled in the last five years. Since the turn of the century, Emirates, Qatar Airways, and Etihad have increased their combined capacity by about 1,500%.

Emirates has become the largest airline in the world by international passenger traffic. Source: Emirates

This growth is likely to continue far into the future, as Emirates, Qatar, and Etihad all have even more planes on order than they have in operation today.

All three Gulf carriers operate similar business models. Each one has a single hub and relies on connecting traffic from major cities across the world through that hub. Their hubs are all within close proximity to each other.

Given that it takes years to mature a new long-haul international route to profitability, that all the Gulf carriers are expanding rapidly, and that they compete vociferously against one another, it's no wonder they've needed subsidies to stay afloat. But the evidence hasn't been compiled in one place until now.

Qatar Airways and Etihad Airways aren't self-sufficient
The white paper lays out the case against all three big Gulf carriers, but the facts are much more straightforward for Qatar Airways and Etihad Airways.

A decade ago, Etihad was just getting off the ground, and Qatar Airways was a fraction of Emirates' size. In order to create enough passenger traffic to compete with Emirates' high-volume hub model, both Etihad and Qatar Airways had to grow rapidly to achieve enough scale to remain competitive.

But shiny, new airplanes are pricey, and start-up costs for new routes are significant, too. The white paper details more than $20 billion in capital injections and interest-free loans provided by the governments of Abu Dhabi and Qatar to Etihad and Qatar Airways, respectively.

Abu Dhabi's government has poured more than $10 billion into Etihad since 2004. Source: Wikimedia.

Even the interest-free loans are (for the most part) loans in name only, as the airlines aren't required to repay any money "for the foreseeable future." This capital was provided despite the fact that Etihad and Qatar Airways were posting operating losses.

The governments of Dubai, Abu Dhabi, and Qatar all see aviation as a strategic industry, and they are willing to subsidize its growth. Without this obvious government support, Etihad Airways and Qatar Airways wouldn't be able to stay in business.

Emirates may be a legitimate business
Emirates had a big head start on Etihad Airways and Qatar Airways, and as a result, it appears to be much more self-sufficient. Emirates CEO Tim Clark has vehemently denied that his company gets state aid. That said, the U.S. airlines still found billions of dollars of apparent subsidies.

Most notably, the Dubai government picked up the tab for billions of dollars of fuel hedges gone bad during the depths of the Great Recession. Without this bailout, Emirates probably would have been unable to meet its obligations.

Dubai has also invested billions of dollars in airport infrastructure to support Emirates' growth, but it charges very low airport fees -- effectively subsidizing airlines that operate there.

The report also detailed a variety of other potential subsidies that couldn't be quantified. Nevertheless, while Emirates has a fairly modest profit margin, it seems likely it could survive with or without government support.

What next?
The Gulf carriers don't pose nearly as big a competitive threat to U.S. airlines as to carriers in Europe in Asia. That said, they are rapidly growing to dominate travel from the U.S. to India and the Middle East.

American, Delta, and United want the government to put limits on the Gulf carriers' expansion in the U.S., even if it means canceling Open Skies treaties with Qatar and the United Arab Emirates. They argue -- quite reasonably, in my opinion -- that it's unfair for U.S. airlines to have to compete with government-subsidized foreign competition.

That said, convincing the federal government to crack down on Middle Eastern airlines will be a tough sell. U.S. consumers benefit from the below-market fares offered by the Gulf carriers, and several U.S. companies have stepped up to oppose American, Delta, and United on this issue.

Furthermore, federal regulators have already demonstrated their concern about tacit collusion between the top U.S. airlines. Reducing independent foreign competition is the last thing they want to do. Even with a strong lobbying effort, the airlines may fail to produce meaningful results.