ASSAULT FROM THE EAST

Military commanders fear fighting on two fronts, yet that is the spectre U.S. carriers face. As aggressive Gulf rivals attack their markets across the Atlantic an even more serious threat is emerging as Chinese airlines expand into North America.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

June 1st 2015

Print Friendly

The news has not grabbed the headlines yet, but when it does, it will mark out 2015 as a landmark year in trans-Pacific airline operations. Just two years ago, American airlines flew close to double the number of flights to China as Chinese airlines did to the U.S. Read More »

This year, in the peak northern summer travel season, Air China, China Eastern Airlines, China Southern Airlines and Hainan Airlines will overtake their U.S. rivals for the first time on the trans-Pacific route.

According to OAG data and the CAPA consultancy, Mainland China’s four biggest airlines will operate 2,028 U.S.-China flights a week from July to September 2015 compared with 1,853 flights by U.S. carriers. Each week, for three months, Chinese airlines will operate 9.4% more flights and 14.5% more seats across the Pacific than their North America counterparts.

And the threat from Asia is increasing. Hainan Airlines has announced a twice a week Changsha-Los Angeles service that is not yet bookable and therefore not included in the data. It is another significant shift in aviation’s balance of power and adds statistical weight to the argument that the axis of airline influence is moving east.

Carriers in the U.S. might be having their most profitable period in years, but the twin threats from the Gulf and China mean they must fight on two fronts to retain their global industry influence.

For the last two months, America’s big three airlines, United Airlines, Delta Air Lines and American Airlines, have attempted to discredit the Gulf’s Emirates Airline, Etihad Airways and Qatar Airways by alleging their success is fed by US$40 billion in Gulf government subsidies. They are hoping to convince Washington to contain the Middle East carriers’ North American expansion and revise the terms of an Open Skies agreement.

Several analysts believe that American airlines have become so focused on the Gulf that they will be taken by surprise when they are hit by the even bigger threat to their market share from across the Pacific.

According to the Civil Aviation Administration of China (CAAC), 6.13 million airline passenger trips were made between China and the U.S. last year; a number expected to grow by around 15% annually. Whoever captures the biggest piece of that expanding pie will dominate the market.

The CAPA consultancy said the U.S. airlines fear competing with the Gulf carriers, which operate under Open Skies regimes into the North America. Of more lasting importance, it said is how critical the North American market, and especially the U.S., will be to Chinese airlines’ international growth.

For years, the U.S. has wanted Open Skies with the Mainland, but China resisted because its airlines were smaller. They wanted gradual expansion. “Now the tables are turning. The rapid change of pace, with more growth clearly to come, is giving U.S. airlines cause to reflect on their experience with Gulf carriers,” said analysts.

A new round of bilateral negotiations between China and the U.S. is approaching. It is thought U.S. airlines may no longer favour Open Skies with China and will want to prevent another onslaught of foreign carrier capacity into their territory. “Consumers, tourism bodies and the U.S. government may have another fight looming,” CAPA said.

Like their Gulf counterparts, Chinese airlines are making no secret of their intentions to expand. Air China vice president and North America general manager, Dr. Zihan Chi, said at a recent U.S. conference that China-U.S. services were “low-hanging fruit”. Hainan Airlines vice president, Hou Wei, said North America was the biggest opportunity for his airline.

Subsidised Indian carriers drove us from India says Delta boss Delta Airlines chief executive, Richard Anderson, claimed North American carriers had to abandon India because of the subsidies Indian carriers receive from their national and provincial governments. Anderson, in a speech at the U.S. National Press Club in Washington DC last month, said: “India is a very big country. It has a huge relationship with the U.S., particularly for Information Technology, and there is huge agricultural trade between the two countries. “But in essence, we don’t really have an aviation trade. We have exited the market completely because subsidized [Indian] carriers have come into the market place to shift the traffic from us and take us out of the market place.” Anderson said Delta and American Airlines should be in India “but that it was not sustainable when there are US$41 billion in subsidies (allegedly for Indian airlines). It is very difficult, if not impossible for us to compete. And that harm is immediate.” He added the recent U.S. White Paper on American aviation “had proved beyond doubt” there are subsidies provided by several governments as they are in India. “Those countries all required these airlines to file their financial statements,” he said. “Oddly enough, in the U.S. we don’t require that. But other countries do. And these are certified financial statements that show these subsidies. They are full disclosed. You can’t refute the evidence. It is overwhelming.”

Hainan has announced it will buy 30 B787-9s and that most of them will be used for North American services. China Eastern Airlines’ order for 20 B777-300ERs will be primarily utilized on North American flights.

Air China, China Eastern and China Southern are building their trans-Pacific networks by adding flights to New York from thriving inland cities such as Wuhan and Chengdu. Fujian-headquartered Xiamen Airlines has ordered six B787s and raised the possibility of flights to the U.S. later this year.

But it would be misleading to suggest the big U.S. carriers are totally ignoring the threat from the East. Delta’s chief executive, Richard Anderson, recently told his employees in a recorded message that the airline wants to create an international hub in Shanghai to build on a growing relationship with China Eastern. Both airlines are SkyTeam alliance members.

Delta will launch a daily Los Angeles - Shanghai service later this year. “As we plan for our long-term future, it becomes clearer every day that China will be a major part of our business,” he said.

American Airlines chief executive, William Parker, visited China on his first trip abroad after taking charge at the carrier. He admitted that although the group is the largest airline in the world, it has been late in targeting the China market.

“I visited China because we think it is a crucial market and is very important for our growth,” he said in an interview. “China is relatively small for us now, but it has huge potential. China will become a very important emerging market for us. We think the Asia-Pacific will grow the fastest because economic growth here is the fastest in the world,” he said. “Secondly, we are smaller than our competitors in this region, so our growth rate can be higher.”

American flies to Shanghai from Chicago, Los Angeles and Dallas/Fort Worth, and from Chicago to Beijing. In May, it launched a service from Dallas/Fort Worth to Beijing. Parker said the airline is concentrating on tier one cities, but depending on how air rights negotiations proceed, tier two and three cities could be the future focus for the Dallas/Fort Worth headquartered airline.

The largest U.S. carrier in the China market is United Airlines. Its president and chief executive, Jeff Smisek, said China is very profitable and important for the airline and that United intends to expand to more Chinese cities.

Stiffer competition and Chinese airlines’ improved service quality are pushing United to remain competitive, he said. “It is healthy for everyone, no matter whether it’s the passengers or carriers,” he said. Smisek is concerned over-capacity could develop on China routes and warned if capacity grew faster than demand, fares would fall and damage the market.

In the meantime, while China’s U.S. onslaught is gathering pace, there are no signs that the angry war of words between the big three North American carriers and the major Gulf airlines is abating. United, Delta and American are maintaining the rage and standing by their accusations that Emirates, Etihad and Qatar have benefitted from more than $40 billion in subsidies from their government owners in the last ten years.

In mid May, Etihad Airways published a report written by an independent consultancy, The Risk Advisory Group, which said the three largest U.S. airlines have received US$71.48 billion in government assistance, of which most of it has been provided since 2000. The report said the funding support was largely associated with Chapter 11 restructuring and bailouts from the Pension Benefit Guaranty Corporation. The accused American carriers said the report was wrong.

Etihad alleged the benefits have helped American, Delta and United “to transition from the verge of bankruptcy to today’s industry leaders, each achieving multi-billion dollar profits”.

The Risk Advisory Group said the biggest beneficiary was Chicago-headquartered United Airlines, which received funding of US$44.4 billion, and added the three airlines were beneficiaries of billions of dollars in fuel tax savings and tax incentives.

Also in May, Emirates president, Sir Tim Clark, pointed out it had taken the U.S. carriers two years to compile their report on alleged subsidies. “If it took them two years and we have a response to make - which has to be robust - we will require more time to do that. So we will do that. We will deal a sledge hammer blow to that report. So watch this space. It’s coming.”

Europe jumps aboard the anti-Gulf bandwagon The Gulf subsidies row appeared to take a serious turn for the worst last month when Dutch newspaper, Financieele Dagblad, reported the Netherlands’ minister for infrastructure and the environment, Wilma Mansveld, confirmed her government had frozen landing rights expansion for Emirates Airline, Etihad Airways and Qatar Airlines at Amsterdam’s Schiphol Airport. “I want, together with my European colleagues, to take a tougher approach to the rise of airlines in the Middle East if there is talk of unfair competition,“ Mansveld told the newspaper. The decision is a response to European airlines’ complaints, including struggling Air France-KLM, that the Gulf carriers benefit from government subsidies to the detriment of the complainant European airlines. At press time, the effected Middle East carriers said they had not been notified of the Dutch decision. An Emirates Airline spokesperson said that “under the UAE-Netherlands air services agreement, there are no restrictions on the number of frequencies and the size of the aircraft used”. Emirates flies double daily between Dubai and Amsterdam. Etihad operates a daily Abu Dhabi-Schiphol service and code shares with Air France-KLM. Qatar Airways will commence flying from Doha to the Netherlands capital this month.

Emirates chairman and chief executive, Sheikh Ahmed bin Saeed Al Maktoum, told reporters in Dubai the airline is pressing ahead with global expansion that could include more U.S. routes.

He wouldn’t name potential destinations and cited competitive reasons and confidentiality agreements for his reticence.

“We cannot stop. This is really the direction of the UAE government and the Dubai government. The minute you stop, somebody will pass you. In terms of expansion, we will continue,” he said. Emirates recently announced plans for daily flights to Orlando, its 10th U.S. destination, to begin in September.

Qatar Airways will expand its services in the U.S and has announced its first direct flights to Los Angeles, Boston and Atlanta from its Doha hub and its second daily flight to New York.

It will operate B777s to Los Angeles and Atlanta and the new A350 to Boston and for its second New York flight. The Los Angeles service begins next January, followed by Boston in March and Atlanta in July.

The U.S. airlines, in a joint statement, said these additional flights and capacity increases “will exacerbate the existing harm to U.S. airlines by diverting even more passengers away from U.S. airlines’ to the Gulf carriers’ subsidized services”.

In Washington last month Qatar’s outspoken chief executive, Akbar Al Baker, refuted the “baseless” claims of the “Big Three” U.S. airlines and called them “a transparent attempt to block new competition and limit consumer choice”.

He told a press conference U.S. Open Skies agreements are about offering choice and the ability to fly with the airline you prefer, to regions which are under-served by U.S. carriers.

“The Big Three want to restrict choice. World travelers would suffer if they succeed. Qatar Airways offers important services to the U.S. and many American interests recognize our value. We serve markets in the Gulf and Indian subcontinent that U.S. carriers do not serve,” he said.

To emphasise their value, the three chiefs of the Gulf operators, Clark, al Baker and Etihad’s James Hogan, pointed to the billions of dollars they have spent buying aircraft produced in the U.S.

It is ironic, and an example of the convoluted nature of airline operations, that in the midst of this fierce debate, the European Commission (EC) has granted anti-trust approval for a profit-sharing pact between Delta, Air France-KLM and Alitalia. Etihad has major equity in Alitalia. All three are members of the SkyTeam alliance.

The agreement was reached after a three-year investigation by the EC. The airlines offered to give up slots at Amsterdam, Rome and New York that will allow rivals to offer tickets on their flights on these routes.

Back in the U.S.-China market, Chinese airlines are acknowledged as having a larger home market and a much bigger catchment area than the U.S. “Chinese airlines have many potential advantages, including one of size. They come from a market of 1.3 billion people compared with 300 million in the U.S,” said CAPA.

“Although travel propensity may be larger in the U.S. it is rapidly increasing in China. Some 80% of Air China’s U.S.-China flights once came from a U.S. point of sale, but this has shifted to 50:50.”

In addition to their home market, Chinese airlines have been growing sixth freedom traffic from China to other parts of Asia, a far more populous catchment area than the U.S. carriers can target beyond the U.S. Air China even looks at U.S.-China-India traffic flows. With time, Chinese airlines will be much stronger sixth freedom players.

One measure U.S. airlines take to protect their long-haul markets is to charge partners high interline and codeshare rates for behind gateway flights, which gives them an advantage, CAPA said.

“Foreign airlines have partially worked around this by partnering with non-alliance U.S. carriers, mostly JetBlue, but also Virgin America. These airlines have no long-haul networks of their own so they have nothing to protect. Passengers fed to them are incremental and generally profitable,” the consultancy said.

Given the huge effort U.S. carriers have put into attacking the Gulf carriers, it is an issue that should receive another airing based on the American airlines’ with the Gulf. The four big Chinese airlines who serve the U.S. received $162 million (at Air China), $589 million (at China Eastern), $276 million (at China Southern) and $82 million (at Hainan) last year.

As well, some long-haul growth is under-written by local Chinese governments. “This amounts to more than route launch incentives, which are globally common,” said analysts. “Without the subsidies some Chinese carriers’ trans-Pacific routes would simply not be offered.”

It appears U.S. airlines are turning a blind eye to this issue, althought it is a weapon they could use to restrict Chinese expansion. “Herein is an emerging dilemma. Mainland airline expansion and Open Skies are in the interest of the U.S. Although there is no public rumbling about derailing U.S.-China Open Skies, it is not difficult to envisage the American carriers taking a similar view towards Chinese carriers as they now do to Gulf airlines,” said analysts.

China has geographical, network and cost advantages. They will be bigger than U.S. carriers.

But while there is potential for a major battle between Chinese and U.S. airlines it should not be forgotten that there are other big players in the trans-Pacific market. Global airlines based in Hong Kong, Japan, Korea and elsewhere in the region will be considering using sixth freedom rights to syphon off some of the growing China – U.S. traffic.

In the end, the U.S. carriers could ride their wave of anti-Gulf campaigning and also seek to restrict Chinese airline expansion. “Alternatively, a defeat in their anti-Gulf lobbying could bring them back to earth and [force them to] explore ways to be better partners with Chinese airlines,” CAPA said.

“As China and the U.S. run out of frequencies for growth and need a new round of air talks, the U.S. government will undoubtedly remember that whatever the rhetoric from its airlines, increased numbers of visitors to the U.S. will make an economic contribution far larger than the airline on which they fly. America has supported Open Skies. Logic suggests it will inevitably continue to do so.”