shutterstock_81166510.jpgI just completed a trip to India on Etihad Airlines, which reminded me of how good the service is on the Middle East 3 (ME3) airlines: Emirates Airlines, Etihad Airways and Qatar Airways. It’s the kind of service once lauded in an Emirates ad with Jennifer Aniston, where the actress has a nightmare that she’s on a plane with no shower and no cocktail lounge, only to wake up on a luxurious Emirates plane, which, of course, has both.

The ME3 have been on a growth tear, stealing a lot of traffic from legacy carriers in Europe, in particular. The ME3 currently flies 575 aircraft, up from 25 in 1996, according to Aviation Week. The ME3 also have more than 24% of the global widebody aircraft order backlog for Boeing and Airbus, and most of their orders are for expansion of service, whereas for the US3 (American Airlines, Delta and United) and the EU3 (International Airlines Group, Lufthansa Group and Air France/KLM), the majority of aircraft orders are for replacement of existing fleet.

However, the ME3’s growth is coming to an end, as the airlines are consolidating, cutting costs and deferring aircraft orders. Emirates, the largest customer for Airbus’ A380 plane, recently said it would delay purchases of the aircraft for this year and next, according to The New York Times.

Here’s a closer look at the ME3’s advantages and disadvantages, and why the airlines’ heyday could be over.

ME3’s Advantages:

  • Low cost of capital: The big U.S. and European airlines are claiming that Middle Eastern governments are subsidizing their airlines. While there may or may not be something that meets the technical definition of a subsidy, it’s clear that the ME3 have access to much cheaper capital than their U.S. or European counterparts.

  • Favorable labor laws: Most of the ME3’s staff of young, happy, attractive crew members are hired on contract. The ME3 are able to manage their cabin staff in a way that U.S. and European airlines cannot, resulting in much younger cabin crews. The CEO of Qatar Airways recently apologized for saying that U.S. airline passengers were “always being served by grandmothers,” in a speech where he also said that the average age of his cabin crew was 26.

  • Favorable taxation, duties and airport fees: Middle Eastern governments view airlines as a way to grow and diversify their economies and put people to work in a sector other than oil. As a result, the landing fees at airports are lower than in the U.S. or Europe, and the government doesn’t charge taxes on tickets. The U.K., for instance, is the polar opposite. In London, the government charges hundreds of pounds in taxes on long-haul airline tickets, and capacity at Heathrow airport has been strained for more than a decade, where initial construction on a third runway is years away, if it ever happens. 

But despite the ME3’s superior product and service, it can’t charge as much as major U.S. and European carriers, which brings us to their disadvantages.

ME3’s Disadvantages:

  • Small local markets: In terms of population, Dubai, at 2.7 million, Abu Dhabi, at 2.9 million and Doha, at 956, 500, are smaller than the metro areas of the top three hub cities for U.S. carriers: Dallas-Ft. Worth (7.2 million), the hub for American; New York (20.1 million), the hub for United; and Atlanta (5.8 million), the hub for Delta. Furthermore, fewer people are flying to the Middle East. Many of the people who live in these cities are foreign laborers in the construction or domestic sectors, so the actual population of potential travelers is even smaller. Nor are they major tourist destinations for people outside of the immediate region.

  • Dependent on connecting traffic: Because the ME3 airlines don’t have a base of local traffic, nor do they have the draw to bring people to Middle Eastern cities, they are dependent on connecting traffic to fill many seats on their planes. Connecting traffic has to be priced for less than direct traffic since people will always pay more for nonstop flights, especially the most lucrative business travelers.

  • Dependent on India traffic: India’s aviation market has historically been weak, as the previous government propped up Air India and prevented other airlines from competing with it. However, the new government, run by Prime Minister Narendra Modi, has taken a different approach, encouraging other airlines to grow. The Indian government’s regulation of its aviation industry has been good for Middle Eastern carriers because they’re close to India and have a huge number of flights there. If Indian airlines get stronger and have the right planes to fly longer international routes, they will compete more effectively for traffic originating in India.

  • Weak loyalty programs: ME3’s loyalty programs aren’t engaging many travelers because they aren’t attractive to anyone who isn’t local. If you’re living in the U.S., you probably don’t care about being a member of a Middle Eastern airline loyalty program because the only time you could get points is if you’re traveling to, or through, an ME3 hub.

Overall, the ME3 have to have a better product by necessity, and they’re going to get less for it. Furthermore, there’s an end to how much traffic they can get. They’ll have to pursue increasingly marginal connective traffic and longer, thinner routes, and will be more vulnerable to competitive moves. While much of the global airline traffic has been coming from the ME3, we’ll likely see a scenario where traffic moves more slowly overall, but the growth is distributed much more evenly among airlines across the world.


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Topics: Airlines, Airline Fees, ME3