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October 10, 2017

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U.S. Airlines Throw Spotlight on Gulf Rivals

July 7, 2017

 

 

U.S. pilots have voiced their concerns over the proposal by Qatar Airways to purchase a stake in American Airlines Group Inc. (AAL).

 

The airline industry is more regulated than many and the investment proposal comes as the U.S. government is pressuring Qatar over its foreign policy. This raises the question of whether politics will influence the crosswinds of global investment.

 

This story involves the sovereign wealth funds of a tiny kingdom with a population half that of the Dallas-Fort Worth area, where American Airlines is currently based. Qatar is restructuring its national investment portfolio. Like many hydrocarbon producers such as Norway and Russia, Qatar seeks to stash its wealth for future generations while diversifying out of the energy sector. Such investments can also be tools of “soft power”, described by Joseph Nye of Harvard University “as the ability to influence and pursue goals by means other than force.”

 

 

Coinciding with its bid for a stake in American Airlines at the end of June, Qatar lit up New York’s Empire State Building in the colors of Qatar Airways — allegedly to mark the 10th anniversary of flights to the U.S. The Qatar Investment Authority has a 10% stake in the 102-story building, which it bought in August 2016.

 

Qatar Airways informed the Securities and Exchange Commission that it wishes to assume a 10% stake in American Airlines (In January 2015, Qatar Airways bought a 10% stake in British Airway’s parent group International Consolidated Airlines Group SA [ICAGY] — increased to 15% in May 2016 and then to 20% in August 2016. It also acquired 49% of Italy’s Meridiana in July 2016 and in December 2016, assumed a 10% stake in LATAM Airlines Group of Chile).

 

This may simply be a logical step by a major player in the airline industry — yet notably one that Qatar Airway’s CEO Akbar Al Baker did not mention during a half-hour interview that he gave to Al Jazeera’s business reporters earlier this month. Due to the dispute with its neighbors, Qatar Airways flights are suspended in Saudi Arabia, UAE, Egypt and Bahrain. This gives Qatar Airways another reason to diversify by building a stake in the largest U.S. airline.

 

The reaction of American Airlines Group (AAL), Delta Air Lines (DAL) and United Continental Holdings, Inc. (UAL) has been hostile, though this is hardly surprising. It is not the first time they have expressed concerns over the rapid growth over the likes of Qatar Airways, Etihad Airways and Emirates.

 

Prominent U.S. airlines claim that Middle East governments unfairly subsidize their carriers. This smacks a little of sour grapes in an industry that depends more than most on government stacking of the deck, from lucrative defense contracts that subsidize aircraft production and taxation policies that support aviation infrastructure, to the blatantly political allocation of landing slots.

 

But all this just scratches the surface. Government has always been a big buyer of plane tickets, and remains a significant customer through civilian and military programs – exclusively from domestic operators.

 

Under the Partnership for Open and Fair Skies, the three leading U.S. airlines have asked the U.S. government to obstruct the expansion of the three top Gulf carriers. Is this really about protecting American jobs – as claimed by the various airline worker unions – or is it rather a turf war?

 

Delta has invested in China Eastern Airlines, buying a 3.5% stake in July 2015, and American bought 2.7% of China Southern Airlines in March 2017. Both of these Chinese airlines are state-owned. The U.S. airline industry is not monolithic, and others carriers such as JetBlue and FedEx have distanced themselves from the big three, saying these airlines benefit unfairly from federal bailouts, Chapter 11 bankruptcies and anti-trust immunity.

 

On Thursday, 22nd June, American Airlines CEO Doug Parker wrote, "While anyone can purchase our shares in the open market, we aren't particularly excited about Qatar's outreach."

 

The big three U.S. airlines will struggle to prove that anti-competitive behavior by the Gulf airlines is hurting their business, as they operate few rival flights according to the Business Travel Coalition.

 

As the Gulf airlines are not direct competitors, the big three are more likely acting in support of their European partners. It is these European code-share partners which face growing competition from the Gulf airlines, according to a 2015 report by the CAPA Centre for Aviation.

 

So the big three could see little benefit, even if they successfully lobby the U.S. government to obstruct the ambitions of the Gulf airlines. Investors in the big three U.S. airlines would also see little upside from restrictions on investment by the Gulf carriers.

 

Qatar, Etihad and Emirates have geographical advantages centered on a populous region with rising incomes, within a comfortable reach of Europe, Africa and Asia.

 

Investors might do better to turn their attention to the actual territory where the Gulf and European airlines are competing – including those emerging markets that are just discovering the benefits of mass tourism and business travel.

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