Will Middle Eastern Carriers Crush the U.S. Airlines?

In the wake of big aircraft orders from the Persian Gulf region's top three airlines, much ink has been spilled over the fates of other international carriers. Indeed, the fast growing Gulf carriers are rapidly gaining market share for international travel. Emirates -- the largest of them -- has already become the top international airline by passenger traffic, and it is continuing to grow rapidly.

Emirates is building a massive fleet of jumbo jets. Photo: Emirates.


Emirates, Qatar Airways, and Etihad Airways pose a very real threat to the top European airlines. Luckily, the threat to U.S. legacy carriers such as Delta Air Lines , United Continental , and AMR is fairly minimal. For a combination of geographical and strategic reasons, Emirates and its cohorts are unlikely to make much headway in the U.S. market.

A geographical problem
Emirates, Qatar Airways, and Etihad Airways have exploited favorable geography to drive lots of connecting traffic through their hubs. For travelers heading between Europe (or even South America) and Asia or Australia, the Persian Gulf region is a reasonably convenient connection point.

Emirates has taken this strategy to its logical extreme: It operates only wide-body aircraft, and its fleet skews toward the very largest wide bodies on the market. These big planes are typically the cheapest to operate on a per-seat basis, which allows Emirates to offer lower prices to attract more customers. Since Emirates has a single mega-hub in Dubai, it can fill these seats with passengers traveling on to many different final destinations.

By contrast, for travelers going from the U.S. to Europe, East Asia, or Latin America (i.e., all of the top international destinations), the Persian Gulf is thousands of miles out of the way. India and the Middle East are two of the few destinations for which Dubai, Doha, and Abu Dhabi are sensible connection points.

As a result, the Gulf carriers' business models don't work well in the United States. Few travelers heading from New York to Shanghai will be interested in going 3,500 miles out of the way to Dubai. Moreover, the additional flying distance would increase costs. The Gulf carriers can still fly to a handful of the top U.S. metro areas, but they need to manage supply based on the comparatively limited demand for travel between the U.S. and the Middle East/South Asia.

A new threat?
Some industry observers think Emirates can pose a more direct threat to Delta Air Lines, United Continental, and AMR by flying nonstop between the U.S. and cities in Europe and Asia. This fear ratcheted up when Emirates began flying from New York to Milan this fall. On that route, it competes with all three top U.S. carriers and Alitalia, each of which has one daily flight.

Delta Air Lines and joint venture partner Alitalia each operate one daily flight from New York to Milan.

However, Emirates has characterized the New York-Milan route as a "one-off" thing. Indeed, that route is somewhat unusual, because while Milan is a large business market, it is underserved because of Alitalia's decision to locate its main hub in Rome instead. This created an opening for Emirates to fill a very large plane (a Boeing 777-300ER) without relying on the connecting volume of its Dubai hub.

By contrast, for high-volume routes such as New York-London, New York-Paris, Chicago-London, or Los Angeles-Tokyo, the U.S. carriers and their international partners will be much harder to unseat.

AMR has joint ventures with British Airways and Japan Airlines; Delta Air Lines has joint ventures with Air France and Virgin Atlantic; United Continental has joint ventures with Lufthansa and ANA. For most major routes, at least one of these joint ventures benefits from hubs on either end, allowing frequent service. Emirates would have more trouble breaking into these well-supplied markets.

United flies Boeing 757s like this one on many international routes.

On the other hand, for lower-volume routes (especially to Europe), U.S. carriers use smaller aircraft such as the Boeing 757 or 767. The 757 typically seats fewer than 200 passengers in an international configuration, whereas most of Emirates' planes have 300 to 500 seats. If a carrier like United can only fill a 757 for an international flight, despite having a large hub at Newark Airport to generate passenger "feed," Emirates doesn't have a prayer of filling a much larger 777.

Foolish bottom line
Emirates -- and its regional rivals Qatar Airways and Etihad Airways -- is clearly looking to expand. After two huge orders last week, Emirates has 385 widebody planes on order, worth as much as $166 billion at list prices. Emirates is already the largest airline in the world by international traffic, and it is clearly on pace to become the largest by overall traffic within the next decade.

Fortunately, the U.S. carriers can hide behind favorable geography and strong U.S. hubs. While Emirates and the other Gulf carriers are well positioned to steal traffic from European and Asian competitors, their hubs cannot offer reasonable connections for most international routes to and from the United States. There are also very few routes like New York-Milan, where Gulf carriers could feasibly compete "away from home."

The top European and Asian airlines need to gear up for a costly battle with Emirates, Qatar Airways, and Etihad Airways. Otherwise, they could lose a large part of their high-value international business traffic. However, for the U.S. legacy carriers -- Delta, United, and American -- this threat is overblown.

Check out our top stock pick for 2014
The market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!

The article Will Middle Eastern Carriers Crush the U.S. Airlines? originally appeared on Fool.com.

Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum