Flying Into Dander – Gulp Carries Face Trade War

This Sunday, Emirates is due to inaugurate its latest service to the United States – a route from Dubai to Newark that stops over in Athens and allows passengers to join the flight at that stage – a so-called ‘fifth freedom’ service under Open Skies protocols.  Similar to the two-year-old route from Dubai to JFK Airport New York that stops over in Milan, Emirates’ competitors sense a threat as the Dubai carrier starts to eat into what are generally perceived as lucrative and jealously guarded transatlantic routes.  Today, if you are a passenger wishing to travel to New York from Athens, except during the summer months, you have no choice but to stopover in another European hub.  From Sunday, Emirates in effect launches the first, year-round, non-stop flight from Athens to New York.  Perhaps unsurprisingly, critics such as Scott Kirby, President of United Airlines, see the new Emirates service as a direct challenge to President Trump’s commitment to putting ‘America First’.

When President Trump was elected to become US President on a manifesto that included returning primacy to US trade and commerce, it seemed immediately apparent that this long-running Open Skies dispute between US carriers and their Gulf rivals would provide Mr Trump with an early opportunity to demonstrate his commitment to rebuilding American jobs and the country’s industrial sector. Given that the trade war between US and European carriers on one side and their Gulf competitors on the other had been simmering over the previous three years, many observers have seen this as a ‘shovel ready’ opportunity for the new President to demonstrate his willingness to fulfil another campaign promise.

Accordingly, early pressure for the Trump administration to take action to show support for the US airline industry by curbing Gulf expansion has grown since his inauguration in January. This peaked this week as the media started to speculate whether the Administration would respond to demands from a group of 25 Congressmen from New York and New Jersey who had sent a letter to President Trump urging him to halt the new Emirates service. The Congressmen repeated claims that Emirates, together with Etihad and Qatar, have benefited from undisclosed government subsidies that breach Open Skies treaties. Moreover, their letter insisted that for every long-haul US service that is withdrawn, it comes at the cost of 1,500 US jobs.

However, it has been far from clear that President Trump is willing to seize this seemingly obvious opportunity. When US airline leaders met President Trump last month, he responded to their demands with greater caution than they many had anticipated, declaring: “We want to make life good for them [Gulf carriers] also. They come with big investments.”

It therefore seems clear that Sunday’s planned launch of the new Emirates’ service to Newark is being seen by the US airline industry and their political supporters as an early opportunity to test the new administration’s resolve to put US trade and industry ahead of foreign competition. However, it seems that this is another case where President Trump, as opposed to Candidate Trump, is coming to recognise the complexities of making moves to protect US trade and commerce that may have adverse downstream economic consequences for the well-being of the US. Moreover, Mr Trump is evidently mindful of the importance of the Gulf as an investor in the US economy and as a source of lucrative trade. It is therefore hardly surprising that he appears more reticent on this issue than many might have expected.

It was also interesting to note that the US think tank Stratfor, often seen reflecting the official line amongst the US intelligence community, has not been at all sympathetic to the arguments being deployed by US and EU carriers alleging anti-competitive behaviour on the part of their Gulf rivals. This week a Stratfor analyst argued that the Gulf’s evident success in the aviation sector is as much to do with the happenstance of geography as it is the result of Emirates and Etihad’s commercial acumen. As Asia rises as an economic powerhouse, so the effective centre of gravity of global trade is being pulled eastwards.

Stratfor’s analysis agreed that a rising tide of protectionist sentiment on both sides of the Atlantic threatens to have an adverse impact on the continued success of the new Gulf airlines in the UAE and Qatar. And Stratfor concluded that this may prove counter-productive for the West because it seems that Gulf carriers already have sufficient market in Asia and beyond not to be unduly affected by any imposed constraints in the West. Indeed, while both US and EU carriers are complaining of anti-competitive behaviour, Stratfor pointed out that the transatlantic market remains one of the most protected in the world and needs competition to avoid the appearance of a cartel.

Accordingly, while still a highly valuable and lucrative market, transatlantic routes may no longer be the most important in terms of global activity. The UAE finds itself at the hub of newly emerging trading routes, particularly between south and east Asia, and Europe and the US. Arguably, it has been the wit of UAE leaders to recognise this shifting trend early and respond accordingly that has provided the foundations for Emirates and Etihad’s emergence as highly successful airlines. While carriers in the US and EU may encourage some form of increased protectionism from their governments, the truth is that the market is already shifting away from the West and towards Asia.

The US’s European rivals are similarly concerned by the growing challenge from the Gulf – arguably more so. This was reflected in a joint letter last week from Lufthansa and Air France-KLM to the EU transport commissioner urging her to take action against the main Gulf carriers because of similarly alleged anti-competitive practises. While Emirates responded immediately, insisting that it rejected all allegations of anti-competitive behaviour and undisclosed reliance on covert government subsidies, it has again been clear that some European carriers fear that they simply cannot compete with the new Gulf airlines and will be forced to cease operations to some Asian destinations.

Given US efforts to roll back the threat posed by Emirates and its fellow Gulf airlines, it seems hardly surprising that European carriers are making similar moves. Viewed at a more macro level, it therefore seems evident that the Gulf airlines are under attack from two major trading blocs – the US and EU – simultaneously. This time around the threat also appears to be more serious, and both Emirates and Etihad may feel compelled to take further action to prove that neither is the recipient of undisclosed government support. However, the truth of the matter may be that this is less about Open Skies and alleged breaches of international competition rules, and more to do with recognition that the balance of world trade is shifting remorselessly eastwards. No amount of US and European complaining and attempts to stall change are likely to halt this tide of change.