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Last year, Qatar Airways, part of the Middle East 3 (ME3) airlines with Etihad Airways and Emirates Airlines and backed by the Qatari government, bought a 49% stake in Meridiana, Italy’s second-largest airline, and renamed it Air Italy. The purchase was a way to expand the airline’s footprint as Qatari planes now fly routes from Italy to the U.S. But when Air Italy announced that it was adding even more flights to the U.S. earlier this month, U.S. airlines and lawmakers cried foul, saying that Air Italy would not be able to add these routes without Qatar Airways’ financial backing, thus violating (if not technically then at least in spirit) an agreement signed by the ME3 last year vowing that the Gulf carriers would not add such routes.

U.S. airlines have long argued that the ME3 unfairly benefit from government subsidies, and the recent Qatar Airways/Air Italy flap brings up questions about the continued economic justification for nationally owned and backed airlines. Post-World War II, there was a need for government-backed airlines because aviation was a young, risky industry and the ability to make money wasn’t clear. Because airlines started off as government-supported, they became important politically. Politicians are still worried about airlines going out of business, even in the U.S., through the NTSB, where there aren’t any national airlines.

On other side of the equation, some smaller countries have let their national airlines die, such as Malev Hungarian Airlines, which ceased operations in 2012. The closure had a brief impact on Hungary as connections to Budapest weren’t great for a short period of time, but now it’s a better situation, with airlines like Wizz Air, Ryanair and Lufthansa providing service to and from Hungary. This proves that it’s not the end of the world if a national airline goes out of business.

The rationale for the government backing of the ME3 is that much like countries need good roads or a reliable power grid, a strong air network enables economic activity: tourism and being able to host corporate headquarters, for example. For the ME3, airlines are a way to grow and diversify their countries’ economies beyond oil, but the Qatar Airways/Air Italy expansion brings up an interesting point: While Qatar Airways only technically owns 49% of Air Italy, it seems pretty clear that the former is actually driving the strategy. Qatar Airways wanted to expand beyond its airport in Qatar, so it bought a stake in Air Italy to access new markets, running multiple flights between the U.S. and Europe, which isn’t something you would think that a carrier from the Middle East would be doing. They’ve gone past the idea of “Let’s support our economy” to “Let’s try to take a piece of another country’s economy.” 

Outside of smaller, developing countries, where economies aren’t well-developed and, thus, governments need to support air service either by building airports or subsidizing flights by larger airlines to their countries, the economic rationale for governments to support national airlines is crumbling. The Malev example shows that it’s not a big deal when an airline fails—there are others that are ready to go in and pick up routes quickly. Yet the ME3 continue to be supported by their governments, and such government backing is a non-market force that’s distorting the industry. While it remains to be seen what the future holds for national airlines, the bottom line is that in developed countries, there’s no longer an economic justification for them.


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Topics: Airlines, ME3, Qatar Airways, Air Italy, Travel and Transportation