Today, the U.S. airline industry is dominated by three giant global airlines: American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE:DAL), and United Continental (NYSE:UAL). All three have banded together to fight a common threat: rapidly expanding Middle Eastern airlines that appear to be the beneficiaries of state support.
American, Delta, and United want the U.S. to renegotiate its Open Skies treaties with the United Arab Emirates and Qatar to stem the Gulf carriers' rapid capacity increases in the U.S. But they are now meeting fierce resistance from some other companies, including two smaller rivals in the airline industry: JetBlue Airways (NASDAQ:JBLU) and Hawaiian Airlines (NASDAQ:HA).
What's at stake
Emirates, Qatar Airways, and Etihad Airways have built business models based on driving huge passenger volumes through their hubs in the Middle East. These hubs are favorably located for connecting passengers between Asia and Australia on the one hand and Europe, Africa, and the Western Hemisphere on the other.
While all three have been growing quickly for a long time, it's only in the past few years that they have started to emphasize the U.S. as a growth market. As they have added flights to the U.S., they have made it virtually impossible for U.S. airlines to fly profitably to the UAE or Qatar.
American, Delta, and United allege that the Gulf carriers have received $42 billion in subsidies from their home governments since 2004. The three legacy carriers have created a trade group called the Partnership for Open and Fair Skies, which is lobbying the U.S. government to renegotiate its Open Skies treaties with Qatar and the United Arab Emirates to prevent this state-sponsored "dumping."
Not surprisingly, Emirates and the other Gulf carriers have strongly objected to these allegations. They deny that they are subsidized by their governments, and claim that their flights to the U.S. offer big consumer benefits.
Picking the other side
JetBlue and Hawaiian Airlines have joined with two major cargo airlines to oppose the legacy carriers' efforts. As the U.S. Airlines for Open Skies Coalition, they argue that any move to slow the growth of the Gulf carriers would undermine the entire Open Skies framework that removes government regulation of which airlines fly which routes.
It's not very surprising to see JetBlue and Hawaiian Airlines take the side of the Gulf carriers in this trade dispute. They have very different interests from American, Delta, and United, as neither flies to the Middle East or India -- the two regions for which the Gulf carriers are starting to dominate traffic to and from the U.S.
JetBlue actually has interline partnerships with all three big Gulf carriers. Since JetBlue has a major domestic presence at New York's JFK Airport -- the top international gateway in the U.S. -- many international airlines want to partner with it to provide connecting traffic.
The JetBlue-Emirates relationship has become particularly close recently. JetBlue began flying between Boston and Detroit last March on the same day that Emirates started flying to Boston. Emirates is already planning to add a second daily flight to Boston later this year, which will expand connecting opportunities with JetBlue at the latter's second-largest base.
Hawaiian Airlines doesn't depend on the Gulf carriers for much, if any, connecting traffic. But it still has a big stake in the outcome of this dispute as a carrier with a significant international footprint and long-term international growth plans.
In the past few years, Hawaiian Airlines has taken advantage of U.S. Open Skies treaties with South Korea and New Zealand to open new routes from Honolulu to Seoul and Auckland. It has also been pushing for more liberalization of the airline market, believing that it can out-compete rivals when placed on a fair footing.
The U.S. Department of Transportation has shown a bias lately toward awarding scarce international route rights to American, Delta, and United to serve business travelers. Thus, it's in Hawaiian's interest to support the expansion of Open Skies -- and oppose anything that could slow that process -- in order to take the DOT out of the decision-making process. Otherwise, it could find itself continually shut out of the best markets.
Different interests, different positions
I don't think JetBlue and Hawaiian Airlines are looking to spite American Airlines, Delta Air Lines, and United Continental by opposing their proposal to renegotiate the Open Skies treaties with the UAE and Qatar. They just have different interests at stake because they have different business models.
For American, Delta, and United, the growth of the Gulf carriers is depriving them of potentially lucrative growth opportunities. Most notably, they have been unable to compete effectively on flights to India as Emirates, Etihad, and Qatar Airways have undercut them on price for coach tickets while offering better first class service.
On the other hand, primarily domestic carriers like JetBlue can benefit from foreign carriers adding new U.S. routes by providing domestic connecting traffic. As for Hawaiian Airlines, its long-term growth depends on the liberalization of international air travel, so it has a strong strategic interest in avoiding a return to protectionism.
It's not clear how the U.S. government will respond to this controversy. However, whatever it does could have a big impact on the U.S. airline industry -- from the largest carriers to the very smallest.
Adam Levine-Weinberg owns shares of Hawaiian Holdings and United Continental Holdings, and is long January 2017 $17 calls on JetBlue Airways, long November 2015 $40 calls on American Airlines Group, and long January 2017 $40 calls on Delta Air Lines, The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.