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Battling Gulf airlines' expansion

Michael ScaturroMay 28, 2015

Gulf-based airlines Etihad, Qatar, and Emirates have been rapidly expanding their networks in Europe, from German feeder cities like Berlin and Cologne. But Europe's flag carriers and their US allies are fighting back.

Image: Airbus S.A.S. Photo by master films/A. Doumenjou

Airlines based in the United Arab Emirates and Qatar have launched a full-pronged attack on the European aviation market by expanding long-haul service in Germany and creating hubs in cities like Italy's business capital Milan. But a coalition of EU-based airlines, backed by their US airline partners, alleges the Gulf airlines are benefiting from government subsidies that give them an unfair advantage.

"The Gulf carriers are subsidized by their national treasuries," said Jill Zuckman, spokesperson for Open and Fair Skies, a lobbying group backed by US and European airlines. "They can do whatever they want, like fly the biggest planes from small German cities, because they are subsidized," Zuckman added.

Tough market place

European aviation authorities, however, have begun to strike back. Earlier this week, Dutch authorities froze Gulf carriers' flights at existing levels to prevent them from increasing to twice daily flights at Amsterdam's Schiphol airport.

It's a move that Zuckman says is long overdue - and one she hopes the US will follow. "In the US, we are hoping to get a resolution before the country's aviation system is damaged in the same way the European system has been damaged."

European carriers like Air France-KLM and Lufthansa are increasingly finding themselves in a squeeze: while low-cost carriers like Ryanair and Easyjet have won over budget travelers, the Gulf carriers - with their on-board showers and private suites - are picking off the top-end flyers.

Lufthansa plane
European airlines such as Lufthansa are increasingly finding themselves in a bindImage: picture-alliance/dpa/Dedert

Combine that with numerous labor strikes and the higher cost of doing business in Europe, and the EU airlines find themselves in a bind.

Fifth freedom factor

EU and US airlines also question the Gulf airlines' use of fifth freedom rights - these rules permit airlines to fly between cities outside of their home countries. A Delta flight between Singapore and Tokyo or a Lufthansa flight between Kuala Lumpur and Bangkok would be considered an example.

The flights are supposed to feed traffic to flights that route back to airlines' home markets, but many airlines sell seats on these fifth freedom flights without requiring flyers to continue onward to the airline's home market.

Emirates' Milan to New York fifth freedom flight is seen as a major bone of contention. US and EU airlines say that because Emirates is state owned and subsidized, it can test out new routes like the Milan-JFK route with new airplanes like the Airbus A380, and sell tickets on those flights at below-market rates.

Emirates counters that the route - underserved after Alitalia cut service a year earlier - connects Italy's business hub and wealthiest region to New York, and thus makes perfect sense.

In Germany, Abu Dhabi-based Etihad is seen as posing a major threat to German flag carrier Lufthansa. Etihad offers direct flights to Abu Dhabi from Cologne, Hamburg, Dusseldorf, and Berlin. It has also made significant investments in European airlines like Aer Lingus, Air Serbia, Air Berlin and Alitalia.

A study by Richard Klophaus of the Competence Center Aviation Management at Worms University of Applied Sciences, notes that these investments could allow Etihad to create a steady stream of European traffic that could sustain several fifth freedom trans-Atlantic services - further cutting into routes presently served by EU and US carriers.

However, Klophaus says that's unlikely to happen right now due to "regulatory constraints and commercial reasons."

Intense competition

The Gulf carriers have also increased their market share on routes operated between India and the United States through Europe. In 2008, Gulf airlines accounted for a mere 2.8 percent of booked seats from Dallas Fort Worth to Mumbai, and US/European airlines took 81.1 percent of booked seats.

But by 2014, that had flipped completely - with Gulf carriers scooping up about 69.6 percent of booking share on this route, and the share of European/US airlines slipping to 28.7 percent.

Experts like Zuckman say that's because the Gulf airlines are able to offer rock-bottom prices on brand new airplanes. Her trade group says that Etihad, Emirates, and Qatar airways are subsidized to the tune of $42 billion through loans and free landing fees. That has meant intense competition - not only for US and EU airlines, but even among the Gulf airlines themselves, who are engaged in a sort of race to the bottom to offer the cheapest fares possible, Zuckman stresses.

It's still unclear whether the US will follow the Dutch in freezing the number of flights the Gulf carriers are allowed to operate from American airports. Zuckman, for her part, says the Gulf airlines seem to be taking the threat seriously.

"They are sort of racing around the clock to add new flights to the US before a freeze might be imposed," she noted.