sky wars

Lufthansa Criticizes Gulf Rival's Subsidies

etihad takeoff shotshop
Are some airlines fueled by unfair subsidies?
  • Why it matters

    Why it matters

    If some airlines are subsidized and others are not, competition in the global passenger travel industry could be distorted.

  • Facts

    Facts

    • Lufthansa, Germany’s flagship airline, faces growing losses, a cash shortage and labor unrest.
    • Emirates, Etihad, Qatar and Turkish airlines’ fleets are expected to double in size by 2020.
    • At the Aviation Summit, airlines from the Gulf and United States clashed over open skies agreements.
    •  
    •  
  • Audio

    Audio

  • Pdf

The annual Aviation Summit in Washington, D.C. tends to be a calm affair, at a hotel near the White House, with plenty of hand-shaking and polite speeches.

It wasn’t just business as usual on Tuesday, when Lufthansa chief executive Carsten Spohr said an “oligarchy” of airlines from the Gulf was destroying competition on the market for passenger flights and would soon dominate the global market.

His concerns were founded on a study carried out by American Airlines, Delta and United Airlines that found Etihad, Emirates Airline and Qatar Airways received $42 million in subsidies.

“The significant expansion of the Gulf airlines is alarming politicians and decision-makers. Providers are going to have to prepare for growing hurdles in their routes to growth.”

Gerald Wissel, analyst

Mr. Spohr said alongside these subsidies, contracts between governments which have enabled airlines based in the Gulf to access the markets in Europe and the United States are also distorting competition. “A close look should be taken at the bilateral agreement with Qatar and the United Arab Emirates, and this should be renegotiated,” he said.

Mr. Spohr would probably like to get the subsidies himself if he could. Germany’s flagship airline faces a cash shortage as it continues to battle with a German pilot union over benefits for its pilots. The union, Vereinigung Cockpit, launched a three-day strike this week – its 12th – that began on Wednesday, forcing Lufthansa to cancel more than 1,000 flights over the three days.

Mr. Spohr’s remarks in Washington were directed towards James Hogan, chief executive of Etihad, the airline based in United Arab Emirates.

“I don’t apologize for anything,” Mr. Hogan responded in his speech.

Tim Clark, CEO of Emirates, announced at a press conference that he would look into the subsidies mentioned in the U.S. report and respond. “I’ll expect an apology then,” he said.

The exchange of verbal blows in Washington shows just how raw the nerves are in the industry.

Established airlines fear the rapidly-growing airlines from the Gulf region. Lufthansa has lost one-third of its market share of flights between Europe and Asia since 2005.

In the United States, the Gulf airlines are also expanding rapidly and have doubled their seating capacities since 2009 between ten U.S. cities.

Politicians are also increasingly concerned at the rapid rise of the airlines.

“The significant expansion of the Gulf airlines is alarming politicians and decision-makers. Providers are going to have to prepare for growing hurdles in their routes to growth,” said Gerald Wissel, an analyst at Airborne Consulting.

Suprisingly, Bill Shuster, a Republican U.S. congressman and chairman of the Transportation and Infrastructure Committee in the House of Representatives, is also supporting the airlines from the United States.

His position makes him a key figure for the industry and his support cannot be taken for granted. Boeing and other powerful interest groups support Etihad and the other Gulf airlines, which are important customers.

Consumer protection organizations have also supported the Gulf airlines and criticize the lack of competition in the U.S. market, which is dominated by three major providers, leading to higher prices and worse services.

Likewise, the logistics giant Fedex does not want to risk problems with its hub in Dubai.

There is a similar ambivalence in Europe. The airlines from the Gulf are important customers for Airbus. Etihad rescued Air Berlin, Germany’s second-largest airline, with a cash infusion. Airports in Berlin and Stuttgart also do not want to lose flights from the Gulf airlines.

Subsidies are also a sensitive subject in Europe. The European Union’s Council of Ministers has asked the European Commission to examine the issue, and the Commission has already met twice with six Gulf nations to discuss fairer competition. Another meeting is planned for this spring.

Much is at stake for the Gulf airlines.

They are afraid of a situation developing like in Canada, where the government only allows them three round-trip flights per week between the Middle East and Canada. As a result, they have been unable to steal away Air Canada passengers on flights to Asia and Europe.

According to The Wall Street Journal, these limitations have had consequences for diplomatic relations between the countries. After complaints from the ambassador from the U.A.E., Canada closed down a military base in Dubai. For a while, the Emirates even considered requiring Canadians to get visas in order to visit the country.

The United States made a liberal “Open Skies” agreement with the Gulf nations in the 1990s, which American Airlines, Delta and United now want to restrict. The airlines’ report said that the Gulf airlines would “plunder” their trans-Atlantic and trans-Pacific routes.

“That makes us sound like pirates,” Mr. Clark, of Emirates, said at the press conference. He argued that 95 percent of the Emirates flights are not covered by the agreement.

“I am not saying that we do not flight there anymore, but that’s not what our business model is founded on,” he said.

He called the charge that Emirates does not have a domestic market is “nonsense,” Mr. Clark added. “Lufthansa also brings passengers from the United Arab Emirates via Frankfurt to the United States.”

During his tour through Washington, Mr. Clark also spoke to the Transportation, State and Commerce Departments, as well as with economic experts at the White House. “The talks were very constructive,” he said.

 

Handelsblatt’s Jens Koenen covers the airline industry; Thomas Jahn is New York bureau chief. To contact the authors: koenen@handelsblatt.com, jahn@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!