Here’s How the US Airlines Can Compete And Win Against the Big Gulf Airlines (Instead of Lobbying the Government for Protectionist Policies)

I’ve written extensively about the protectionism that US airlines are seeking from the government in bashing Emirates, Etihad, and Qatar — and about the hypocrisy as US airlines lobby for and take huge subsidies while attacking only those competitors they’re worried about for doing the same thing while ignoring the even greater subsidies offered to state airlines that they partner with (Think for instance Delta and Saudia, United and Air India).

Gulf Carriers Receive Subsidies and So Do US Airlines

There are certainly subsidies that have at various times helped to prop up the various major Gulf airlines, as we’ve seen with airlines around the world. Sometimes those subsidies have seemed larger than life, though it’s easy to forget the privileged position over time of British Airways at Heathrow and the gifting of Concorde. And it’s easy to forget that the birth of the US airline industry was laid out in industrial policy conducted by the Postmaster General who decided in essence which airlines would fly what routes profitably. Not to mention the huge anti-consumer subsidies embodied by the Civil Aeronautics Board which set prices at a level, and kept out competition, to allow airlines to earn profits.

Even today US airlines receive subsidies that have gone as high as $2 billion a year as part of the program which makes aircraft available to the government in the unlikely future event of national security needs. And those same airlines take fuel tax subsidies. Delta received nine figures for its oil refinery. The US aviation industry is one of the most heavily regulated and subsidized in the country.

Clearly US airlines go to the government not as exponents of the virtues of free markets, but hat in hand looking for still more cronyist handouts.

US Airlines Should Understand the Nature of the Competition

US airlines really should compete, but not in the way most people suspect. For the most part they don’t even fly overlapping routes now, although US airlines are trying to make it sound like they do. US carriers barely serve India and don’t serve Bangladesh or Pakistan. They don’t serve North Africa. They don’t offer much service to the Middle East.

But they’re worried about fifth freedom flights (Emirates flies New York – Milan now, though the US airlines of course do not worry about Kuwait flying New York – London).

They can realistically compete against Gulf carriers across the Atlantic, at such time as those carriers actually offer meaningful service on those routes. They just need to understand the nature of the competition.

The Big Gulf Carriers Aren’t That Great, They’ve Just Convinced You They Are

Etihad and Emirates have impressive first class offerings that US airlines don’t have. They do sell those seats, more than US airlines, and not just because the product is quality.

  • They are serving markets where those seats have greater demand — ultra-long haul with installed client base that will pay for it.
  • Etihad is more aggressive than virtually any carrier in the world in monetizing their premium cabins through aggressive online auctions for upgrades and cash upgrades at check-in (I’ll often see signs suggesting you ask about cash upgrades at the counter). Etihad first class regularly goes out full — and not with non-revs the way that US carriers have experienced when offering three-cabin first class (where it becomes known as “employee class”).

Apart from the sales of the products, they have a marketing strategy that does work. By becoming known for over the top offerings like showers and multi-room suites, they develop a reputation for quality that gives them a halo effect for their other cabins.


    Emirates A380 First Class Suite

In much the same way that world recognition for Australia’s Penfolds Grange as one of the top wines around created a reputation for the country as able to produce great wine which filtered down to an acceptance and openness to standard Cabs and Chardonnays — the top premium services experienced by a very few create the impression of quality which permeates down even to economy.

The Big Gulf Carriers Aren’t Offering on Average a Better Hard Product than US airlines

The idea that the Gulf carriers have hugely subsidized hard products that US carriers can’t keep up against is a rather strange notion. The part of aviation that’s really expensive, the hard product, is actually better in economy and business class on US carriers in many cases.

  • Emirates puts 10 across in coach on its 777s. Delta and United each have 9 seats across (though United is rumored to be looking at going to 10). That makes the US carrier hard products superior in coach for that aircraft.
  • Emirates and Qatar offer angled business class seats on many planes. In fact, outside of the large Emirates fleet business class is generally angled.
  • In contrast Delta, United and American (which still lags through end of year) are ahead in offering full flat seats. That makes most US carrier products better in business class. (Although United’s legacy 777 8-across business class is a sorry excuse for a long haul product, and they deserve to be beaten up in international competition for it.)

      American Airlines Fully Flat Business Seat

The Gulf Carriers Are Fierce Competitors… But Mostly With Each Other

These three flag carriers are fiercely competitive… with each other. Abu Dhabi has to up its game because it’s only an hour’s drive from Dubai. So they offer complimentary car service for premium passengers and complimentary bus service for coach. They want to be a viable option for the Dubai financial center. In much the same way Newark, Baltimore, and Oakland were once backwaters.

Etihad also has to match Emirates service and so they throw themselves into markets like Dallas, and then Emirates ups its game with an Airbus A380. Prices fall as all 3 compete with each other, but none are willing to give up. It’s not dissimilar from how the major US airlines have historically behaved when new market entrants have come along — think Vanguard or Legend. American started flying planes that matched Legend’s all premium seating model, and then eliminated the configuration as soon as Legend was spent out of business.

Gulf Carriers Do Offer Marginally Better Service, and US Airlines Could Gain A Lot By Following Their Plot

Qatar, Emirates, and Etihad service is actually not stellar by world standards, which is to say they aren’t even close to the best in the world. The US airlines aren’t railing against Singapore Airlines service (who could credibly present ad campaigns like this one). They’re railing against carriers whose crews often offer confused and forgetful service.

Compared to the service offered by US airlines, though, it’s top notch.

US airlines shouldn’t be making huge investments in 3-bedroom first class residences or onboard showers. They shouldn’t be building out entire levels of airport terminals dedicated to first class passengers (although the Emirates first class lounge in the A terminal at Dubai isn’t one of the world’s best). Those are big capital investments which likely wouldn’t repay themselves in the US context.


    Emirates First Class Lounge, Dubai

They should be taking a cue from their world counterparts though in offering friendly and consistent, well-executed service.

Good Service on US Airline Flights is Because of Good Flight Attendants, Not Good Airlines

I’ve had some amazing flights with truly top notch crews onboard US airlines. But those are the exception rather than the rule. And most importantly when there are great service-oriented crews it is because of the inner drive and commitment of those individual flight attendants rather than because of anything systemic coming from their companies. In other words, they choose to offer good service rather than offering good service as a matter of course. They deserve far more kudos in those cases as individuals than others do.

On the whole flight attendants at US airlines are not personally better off providing good service than they are providing mediocre service. The incentives just aren’t right. There’s little consequence most of the time for poor performance, and little benefit to giving a little something extra to treat passengers well. At US airlines, most of the time, flight attendants are there ‘primarily for your safety’ and it shows.

It’s worth noting that this isn’t even a union issue, per se, although the particulars of the status quo are certainly entrenched into current union contracts and would be difficult to dislodge.

  • Scheduling of who works what routes and when, and in what position on the aircraft, shouldn’t be simply a function of seniority.
  • Great service should be embedded in the culture, from training to regular re-training. And it should be constantly evaluated and remarked upon.
  • Poor performers should be weeded out, and great performers should be rewarded with pay and with route and schedule flexibility.

These are merely a few of the things that ought to be in place in order to develop a reputation for top service. That’s a level on which US airlines should compete with all airlines around the world (and not just their targeted ‘Gulf 3’ who really don’t have that much of an advantage here to start with).

US Protectionism Makes US Airlines Worse, Unprepared for World Competition

US government action against the Gulf carriers, to protect US airlines, just entrenches the poor service and high prices we’ve become used to.

The truth is that we need the Gulf carriers to shake US airlines out of their complacency and help them to imagine a world where they can be better — not by making huge investments that don’t earn their cost of capital. US airlines are already making big investments in their international fleets at least in premium product offerings.

Protectionism stands in the way of disruptive innovation. US airlines need to re-orient their cultures and incentives to offer service levels commensurate with their capital investments. Then they’ll build the kind of real reputation that the Gulf carriers today enjoy on a very thin basis.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Bravo, Gary. I might quibble with a few details of your analysis. But basically you’re spot on. Keep hammering home the points you make in this post.

  2. The US3 have had it easy from the US Government. Mergers, tax credits and bankruptcy. They have all done it and they’re still crying boo-hoo. Instead of crying foul with open sky, maybe they should stop pissing off their customers. The US3 should make better business decisions on their aircraft and service levels. For example, I don’t know who at DL picked the lay flat seat in the B777 but if your are over 5′ 10″ tall, you can’t sleep on it. Competition NOT crying will level the playing field.

  3. Gary, I think this is really well-written, and makes the argument that I would if I could have put it to paper!

    If I have any exception with your argument, it’s about US airline staff not having incentives to provide good service – when you follow on by saying that great service should be embedded in the culture.

    The problem is that the management of the US airlines (Delta possibly excepted) has created a culture that is antithetical to embedding great service.

    For example:

    — the endless fee-charging culture, whatever the economics, do not align with offering good service. They offer flexible pricing for consumers, which may be a plus, but service is not part of the equation.

    –a complete lack of flexibility to ticketing rules whose charges have become heinous. How can a reservations agent provide good service when they can be fired for providing it?

    — management’s continual focus on cost cutting in the place where good service remains a requirement: at the airport. There are fewer staff, a more trying experience for passengers and staff alike, and decaying infrastructure – even in the terminals that the airlines themselves own. It’s hard to provide good service when your check-in line takes an hour to get through (and then to be charged for the privilege of checking your bag), when the roof leaks, the kiosks are on the fritz, and the airport toilets are backed up.

    — continuous wage stagnation for non-union employees.

    I agree that incentives should be provided to embed good service, but our airlines’ management don’t care. They want fewer airlines, fewer seats, and greater consolidation in the industry. That’s what works for them and their shareholders, and that’s why they expend all of their energies on reducing competition – rather than providing it.

  4. My take is that for domestic trips is such a pain dealing with airlines, that I will never see them as a premium product for international routes.

  5. On your point about those gulf airlines being fiercely competitive with each other. The reason that can Etihad can offer $3500 business class tickets out of ORD to India is that they can lose $$ on that route and know that the government owners in Abu Dhabi are going to step in and cover any shortfall.

    Let’s be real here, those airlines are quasi-state run and owned for the benefit of those ME governments.

    We can all wax poetic about service levels, hard product, subsidies, etc…. But the reality is that the chairman of the board of Etihad is also on the Executive Council of Abu Dhabi. It would be like any of the US3’s chairmen being in the President’s cabinet, but with a whole lot more power.

    They might be pretty well run, have young FA’s, and cool first class seats. But lets face it, the leaders/owners of the ME airlines are oppressive government oligarchs.

  6. @efs, and how do you know any Chinese run airline is any different? The world is littered with subsidized, market distorting govt owned enterprises. What’s hyperbolic about the big 3 is their take on only the me3 which they only care about since they see them expanding to trans-atlantic fifth freedom flights.

    And frankly, i’d side with the big 3 if their service was even remotely friendly. I have status and it makes it a little better for me, but even then, these airlines are making fat profits with terrible service… I have zero sympathy for them.

  7. @efs “It would be like any of the US3’s chairmen being in the President’s cabinet, but with a whole lot more power.”

    The longest-serving Chairman of American Airlines, CR Smith (who arranged government subsidies for the airline’s first major aircraft order from the Reconstruction Finance Corporation) served as Secretary of Commerce in the Johnson administration. Note that he left American to join the President’s cabinet, and then returned to American.

  8. He’s right at the end of the day it’s all about service and the US carriers are far behind. As well as the planes used are old and lacking. I know there is the issue of 10 versus 9 across but think about this US flyers are on average a lot “wider’ and heavier than their counterparts around the world that is a fact.

    My guess is the US carriers will continue to wine and complain while slowly very slowly improving their service. Key word slowly.

  9. I agree with much you have written. However, one point I think you fail to make is the current movement of valuing capital over labor. As long as CEO/CFO/VPs continue to operate in a “heads I win, tails you lose you stupid working slob” nothing will change. Part of the way ME airlines can thrive in this business environment can be summed up in one word, “salavery.” Don’t kid yourself that the Arab states ended this practice when Jack Kennedy worked a deal with the House of Saudi that we’ll “give” you ARab-AMerican oil COmpany of you outlaw slavery. It’s alive & well….

  10. Well stated article. Nonetheless, I’d take worse service with a 19 inch wide seat and 33 inches of pitch than almost anything else in coach, particularly on long haul. Good service is nice but not being crammed into an obscenely small space is better.

  11. Once again, your take on this Middle East airline situation is dead wrong and misleading. First, you really have to stop saying that the US airlines receive “huge subsidies” from our government. That’s just ludicrous. The USA airlines — and their passengers — actually pay huge taxes to the USA government. Yes, they receive benefits, too, but they are not “subsidized.” You like to go back to 1934 and the aftermath of the 9/11 bombings to find “subsidies,” but that is obviously a red herring when they’re getting no cash now and the Middle East airlines are getting tens of billions.

    The reality is that there is no economic way to compete against gov’t owned airlines getting billions and spending it freely. Fortunately, the USA airlines are largely protected from this insanity by geography. I’d bet the percentage of your readers who would be candidates to regularly transit the Middle East is tiny, and would still overstate demand among USA travelers. That said, as these airlines continue to take delivery of a mind-boggling percentage of the widebody airlines being built in the world (about half) fares will continue to be depressed to Asian, Pacific and African destinations. Depressed below what any non-subsidized airline could obtain a profit from flying these routes. I am certain that as the full absurdity of this situation dawns on Washington, the OpenSkies agreements with the Middle East airlines will be amended. Because while everyone likes low prices and good service, we — as Americans — do understand fundamental fairness and the need to protect American companies and workers.

  12. @IAHPHX

    Explain to us finally on these interwebs why you are so absolute in your dismissal , without any spelled out rational, that US airlines have an S continue to receive subsidies. On FT and here everyone has made their argument how they see it and you continue to come out with broad statements and positions like “I’m an airline investor for many years it doesn’t work” but fail to ever actually address the specifics raised by people or justify why the air postal service wasn’t a subsidy or how competitively distortive ch11 is as govt enabled process or Domestic Ownership Rules. There is a clear disingenuous aspect to your posts based solely on the fact that you dismiss the acts of the past and current that benefit the US airlines but are quick to inflate the acts of the gulf carriers Airlines ams their owners in the recent history, as would be an incumbent would want to ensure the up and comer never enjoys any benefits fra Ted when the incumbent ascended to their position. Simply your posts remind me of the type of intellectually laziness and argument style I deal with regularly on Capitol Hill by the K street lobbyists and other groups whose position is shaky at best and dead wrong at worst but they still insist it’s the way to go.

    Still given all that I still think the core mistake in your view and that our govt is likely to make is to hold onto a North American/Euro-centric View of what a successful airline can and should be. The positions that dismiss that Emirates is a viable enterprise running a one hub operation in the center of the world carrying many passengers previously seen as not viable while bringing new level of convenience for premium pax going to previously undeserved places with a single stop do so at their own self-imposed peril. See Detroit with the Japanese autos, Nokia, Motorola, BlackBerry with Apple and Android, IBM with MS and Apple.

  13. @ Gary Leff

    That was 50 years ago. 50 years… If you look at the position of Commerce Secretary it has been dominated by CEO’s coming from corporations and then after their term going back to corps.

    The issue is that the ME3 are actively lead by government officials, for the benefit of those governments. They are sovereign nations and they can choose to operate that way, but so is the US and our government’s interest should be in the general welfare of the US, not but bunch of ME oligarchs.

    Here is another one.. Chairman of Emirates Board: His Highness Sheikh Ahmed bin Saeed Al Maktoum. ” President of DCAA and Chairman of Dubai Airports….. Sheikh Ahmed holds a number of government positions and plays an increasingly pivotal role in leading the emirate’s finance and energy sectors” This is directly from Emirates group website.

    Hmmm.. I wonder how Emirates got that $1 billion bad fuel hedge erased from their books.

    People can all hate on the US3 for their bad service, old flight attendants (those women who want have careers), lack of ostentatious first class suites, and all the other things that goes with being efficient and squeezing the last penny out of customers. But hey, that is what capitalism is. Not state run and owned enterprises.

  14. I’m sorry but money/financing is absolutely not a problem/issue for the Middle East airlines.
    Buying a fleet of 200 A380’s or 777X’s or A350’s, not a problem…
    Building a First Class terminal as huge as an airport, not a problem…
    This just won’t get approved by US Airlines (nor their boards or unions) nor would they get financing.
    Actually anything outrageous/ridiculous/over the top (in terms of monetary cost) is not going to be a problem for the ME airlines.
    This is obstacle # 1 and US airlines can’t compete on this front.

    The second obstacle is unions.
    Flight attendant working “too hard” on a US airline, the union’s got your back…
    Working until your 70’s, not a chance on a ME airline…
    Flight attendant being/getting “fat”, not a chance with a ME airline…
    Flight attendant being/getting pregnant, not a chance on a ME airline…
    And the list goes on and on…

  15. @Gary

    “flight attendants are their ‘primarily for your safety’” should read “there”

    @Joe

    “the endless fee-charging culture, whatever the economics, do not align with offering good service.”

    I completely agree. For an example in the LCC side of things- there is a tangible difference between say the employees of Spirit, who have to spend their time ruining people’s day by charging hidden fees and dealing with upset customers, and those of Southwest, who can spend their time actually providing customer service. The exact same employee could be either good or bad depending on the work environment and service culture of the airline.

  16. Lost in this discussion is the economic benefit that other U.S. companies gain from the growth of the ME3 carriers. I am confident that the net effect of the ME3 is positive for the U.S. economy, even if the U.S. carriers are disadvantaged. Every Boeing or Airbus aircraft that rolls off the line is loaded with U.S. content.

  17. @efs,

    That is rather rich to dismiss the 50yr old claim, just because the US airlines did their eating early doesn’t mean they are still not benefitting. It’s like dismissing that the US economy and its standing today was not helped by slavery. Those benefits accrue and pay dividends overtime, whether its operational or an accumulated asset base. The US3 are built on and thrive on the skeletons of their predecessors, you cannot just erase those benefits because of a change of legal entity or new corporate brand.

    Crony capitalism and state-owned enterprises are not that different. It is only different for those with agendas and who are not willing to see what is clearly in front of them. I would think the people arguing about the so called terrible state supported ME3 arlines would be first fighting the more egregious TATL and TPAC JVs that are maintaining higher than natural fares on some of the world’s most lucrative routes while also limiting expansion of players like Norwegian who have had a positive impact on Scandinavian airfare that would be welcome for the rest of western Europe-US.

    Sadly, it’s the case that real competition is not the interest rather it is about competition on the terms of the US3 and no one else.

  18. The pseudo-libertarian rants here are hilarious, @topgunner’s unreadable disconnectedness seems quite on par with other small collections of entitled white guys in that group.

    And, @Gary Leff, if you want to rant about those Evil Unions, first educate yourself as to how they helped make the US great by helping to build a large Middle Class. Now look at a chart with union membership and income inequality in the US over the last decades.

    Gary, you and your dummy libertarians, all entitled White Males, have a lot to learn about everyone else who isn’t. Too bad you can only see things in terms of your own selfish money stash.

    And before you zealots start swinging, I retired at 40 and am quite happily going to put ALL my social security to less entitled folks. I’m White, and Male, but at least I know that I won the DNA lottery and was born on 3rd base.

  19. @Eyes Open, your reading of my argument is off. I’m of the position that the US3 arguments and those of their supporters are disingenuous because they are so selective of the fact basis.

    Somehow makes me an entitled white guy for insisting that the US3 are dismissing their headstart at subsidies, not too dissimilar from your own recognition that you won the DNA lottery and were born on 3rd base?

  20. Delta has received a $2BN gift from Georgia over the past decade in the form of fuel tax exemptions ALONE.

    … and I’m sure there’s been other concessions for Delta and the other airlines around the country as well.

    The difference between the US carriers and the Gulf carriers comes down to CEOs and shareholders. The US airlines (and any public company) have an obsession with their stock prices and shareholders. AT the expense of ignoring the paying customers, which is where all of that magical revenue comes from. It’s a top-down problem. The CEO’s could give a rip less about the customers, thus staff have the same anti-customer attitude.

    I agree with Gary — SERVICE is where it’s at. Focusing on customer satisfaction, instead of how to shave $0.01 from the cost of everything, is where it’s at. I’m not sure about anyone else’s office, but our policy is to get off of US metal as fast as possible to get better service. Even if it costs more. We’ll gladly pay to not get hassled and nickel-and-dimed. I’m old enough to remember when flying was enjoyable and something you looked forward to. Now I’d rather travel by land, even if it means driving myself.

  21. Emirates, Qatar and Etihad have much better inflight service, in general ( exceptions to this rule do exist, however ) than their US counterparts, and this included both the hard and soft product.

    The US airlines and Arab airlines in question operate in completely different markets and therefore the idea that one represents a threat to the other is wrong.

    Also, people should note thousands of people all over the world apply to work for these airlines each year, partly because working conditions there are excellent, so whatever the logic of allowing or disallowing the MEB3 unfettered access to the US market, their treatment of employees does not figure highly on them.

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