ATW Editor's Blog

United CEO plays fast and loose with facts in NY speech on Gulf carriers

RSS

United CEO Jeff Smisek was practically punching the air yesterday in a hard-hitting speech in New York that focused mainly on the Gulf carriers, which he said represent the single biggest threat to US aviation. But how correct were the many accusations he flung?

I was at the Wings Club lunch event, which was oversold despite it being the club’s first July event. I reported and posted the main content of Smisek’s speech, which you can read here and here (the first covers his Middle East points while the second covers the initial part of the speech, which focused on airlines behaving like businesses.)

Let me say that Smisek’s remarks on US airlines operating like businesses were bang on point. He never mentioned the DOJ and DOT investigations launched this summer into alleged collusion and price-gouging (both ridiculous in my mind), but this part of the speech was clearly aimed as much at Washington as it was customers who buy overpriced sodas and hotdogs at a stadium and do not question why they should pay more for a stadium seat with a good view, but think it outrageous to pay for a better seat on an airliner or for a bag that costs more for the airline to transport.

So good for Smisek for saying it clear and loud: airlines are businesses and it’s time everyone recognized that.

Smisek then moved to the Gulf carriers and why United, Delta and American are sticking to their guns in their campaign against the expansion of Emirates, Etihad and Qatar in the US market through their countries’ Open Skies agreements.

A couple of things I’d like to note. Smisek delivered his speech away from the podium and without any notes. It was a very slick, engaging and dynamic speech with several soundbites that he knew would be attention-grabbers and raise a laugh, which they did. The Gulf carriers had been “caught with their subsidies down by their ankles”; “it’s good to be king” – a reference to Mohammed bin Rashid Al Maktoum’s power while flashing an organizational chart of UAE leadership that all pointed to Maktoum.

My feeling was that he has given close versions of this speech several times before to those people and organizations that the so-called Partnership for Fair and Open Skies has reached out to support their campaign.

There were many pilots in the room from several airlines, including United, American, Delta and Southwest. Pilot unions were among the first to support the campaign and Smisek several times referred to hundreds of US job losses that would result from Gulf carrier expansion.

But what about some of the points he presented as facts? Below are my counterpoints to some of those “facts” and why this was in the end a clever speech, but not one that did the US campaign much credit.

Smisek: “All three Gulf carriers are losing tons of money”

Counterpoint: All the evidence with Emirates is that it is very profitable; ATW figures show Emirates Group posting a $1.5 billion net profit for 2014. The report commissioned by American, Delta and United made a significant error saying Emirates passed on fuel hedge losses to the Dubai government and Emirates documented the real facts in its report. Etihad reported a 2014 net profit of $73 million, its fourth consecutive year of profit.

Smisek: “Airline traffic should grow at about the same rate as GDP; the Gulf carriers have been growing almost four times GDP.”

Counterpoint: My thanks to Airline/Aircraft Projects Inc. consultant Craig Jenks who was in the room and points out that in growth economies, such as those the Gulf carriers predominantly serve, airline traffic typically grows at about twice that of GDP.

Smisek: “Lufthansa, Air France-KLM and British Airways have been decimated by the Gulf carriers”

Counterpoint: None of these airlines are decimated. All three carriers, as reported in the ATW 2015 World Airline Report, ranked in the top 10 of world carriers by passenger RPKs for 2014 and by operating revenue. BA owner IAG was the world’s sixth most profitable, with a net profit of $1 billion. Lufthansa and AF-KLM’s financial problems are at least in part related to their internal struggles with unions to restructure costs and be competitive with Europe’s successful low cost carriers. Smisek did caveat this statement, saying BA was “a little better protected” because of its Heathrow hub. But that gives scant credit to IAG’s smart management and, as a side note, ignores the fact that IAG CEO Willie Walsh has made clear that the US campaign (and adjacent campaigns in Europe) are protectionist. Qatar Airways, by the way, now owns a 10% stake in IAG and is a oneworld member alongside BA and American.

Smisek: “these [Gulf] carriers would not exist without government subsidies.”

Counterpoint: Many, if not all legacy European carriers and many Asian carriers, too, exist only because of the initial funding and support they received from their then-government owners. A similar sentence could be said of the three consolidated majors: none would exist today without Chapter 11 and the ability to wipe out debt through Chapter 11-protected restructuring. And, as the ATW 2015 World Airline Report shows, Emirates and Etihad are profitable.

Smisek: the Gulf carriers represent “the biggest single threat to our new-found prosperity”.

Counterpoint: with thanks again to AAP’s Jenks, who calculates that without the Gulf carriers, United might perhaps run three extra India flights and one extra Frankfurt flight due to alliance partner Lufthansa being able to operate better FRA-India service; not a make-or-break for prosperity

Smisek: the US/UAE Open Skies agreement gave UAE carriers “unfettered access to the US market, while the US got access to … Dubai”.

Counterpoint: Size of country is not the point of Open Skies treaties. Indeed, the case could be made that it’s the smaller country that should fear being swamped by US airline capacity. Regardless, the US has Open Skies agreements with The Netherlands, Singapore, Panama and many other small-country states.

Smisek: (referring to a question about Emirates’ Dubai-Milan-New York JFK fifth freedom route) “They are flouting their right to stop and refuel in Europe to add point-to-point business, even though today’s aircraft technology doesn’t need refueling to get from the Emirates to the US”.

Counterpoint: Commercial fifth freedom rights are in all Open Skies agreements and have nothing to do with “fuel stops”.

Smisek: [Etihad’s] new Residence-class suites with butler service is something that “no one would pay for” and can only be offered by a subsidized airline.

Counterpoint: Etihad’s first Residence booking on its Abu Dhabi-JFK route, which starts Dec. 1, sold within hours of becoming available.

Smisek: If airlines were governed by WTO rules, Gulf carrier activity “would be a clear case of dumping”.

Counterpoint: Irrelevant. Airlines are not under WTO jurisdiction and it’s the last thing US airlines – and unions – want because it would open them up to changing their current ownership/citizenship and cabotage protections.

Finally, back to that “good to be the king” remark. Actually, Maktoum is Vice President and Prime Minister of the UAE and Emir of Dubai.

Please or Register to post comments.

What's ATW Editor's Blog?

Karen Walker Blog

Blog Archive