US-Gulf airline dispute - Europe Part 2: market share in dispute. Does anyone "own" the passenger?

This is growth that European carriers - like their US counterparts - cannot create: they lack the geography, network and cost bases. Even if there were loss of bookings, the fundamental question is: who owns the passenger? No one, IAG says: "The outdated concept of 'ownership' of passenger traffic must be rejected by all governments."

Gulf carrier growth in the US allows passengers to bypass European hubs

Part 1 of this report included a discussion of AF-KLM's view that Europe should be included in the US-Gulf dispute. The first reason, as discussed, was because of Gulf carrier presence on fifth freedom trans-Atlantic routes (although for now confined to a single daily Emirates Milan-New York service).

See related report: US-Gulf airline dispute - Europe Part 1: IAG opposes "subsidy" of US airlines, AF-KLM on 5th freedom

The second reason is far more significant in terms of passenger volume. The concern in question is US traffic that crosses the Atlantic and travels beyond European hubs. Prior to the Gulf carriers' build up in the US, passengers between North America and the Middle East, Indian subcontinent and parts of Southeast Asia and Africa typically transited over European hubs.

North American airlines have historically had limited services to regions such as Africa, India and Southeast Asia. One longstanding but now discontinued offering was Northwest's flight to Mumbai, but this was routed over Amsterdam and not flown non-stop. It is only in modern times American carriers have generously benefitted from beyond-Europe connections. Until the relatively recent anti-trust immunised joint-ventures, most American and European carriers were competitors across the Atlantic (a notable exception is the historical Northwest-KLM JV).

To bring passengers beyond Europe, American carriers were dependent on favourable beyond codeshare access from their European partners. This was not guaranteed. European airlines preferred to collect revenue across the entire journey (and not just beyond Europe) by flying passengers only on their metal. This differentiation was largely ended as the JVs introduced metal neutrality across the Atlantic. (There can be some revenue discrepancy whether, for example, the beyond Europe segment is sold and operated by Lufthansa, leaving it with all the revenue for that segment, or a Lufthansa codeshare sold by United, in which case United would collect some revenue.)

What AF-KLM and Lufthansa say about EU-US impacts from Gulf operations

A more complicated argument is that the growth of Gulf carriers in Europe is impacting European airline growth to regions including Africa, Asia and the Indian subcontinent. As a result, European carriers are limited to what beyond traffic they can offer their US JV partners. Therefore, the argument goes, Gulf carriers impact EU-US airline relationships. AF-KLM in its submission states:

The Lufthansa Group is not nearly as forthright - publicly, at least - as AF-KLM in regards to the impact on EU-US airline relationships from Gulf carriers. While Lufthansa calls for action, it stops short of AF-KLM's assertion that there is a need to "safeguard the benefits of the ground-breaking US-EU agreement".

Lufthansa's filing does not directly address the impact of Gulf carriers growing US-Asia/India traffic over Gulf hubs instead of European hubs. Lufthansa's statement below is the only time it mentions Gulf-operated fifth freedom services.

Note that Lufthansa says trans-Atlantic airlines compete, "some in Joint Ventures which are subject to comprehensive competition rules". As CAPA previously noted, over 85% of trans-Atlantic seat capacity falls under one of three JVs. Such a high percentage suggests that Lufthansa could find a more appropriate description than saying "some" airlines are in a JV. The "comprehensive competition rules" are also questionable; in Oct-2014 the SkyTeam-led JV offered regulators a number of concessions, including divesting slots, over anti-competitive concerns. Although this did occur, it was after the fact.

Unlike AF-KLM and Lufthansa, IAG makes no call to (protectionist) action. IAG does not offer statistics on changes in Europe-Asia market share, the amount of growth Gulf carriers have injected into European markets, or destinations it has closed (ostensibly due to Gulf carriers), all of which AF-KLM and Lufthansa have stated in their submissions (see next section).

IAG's one statement about competing with Gulf carriers can be summarised as "get on and deal with it". IAG writes: "Competition is a fact of life for all our businesses; we believe that embracing it offers IAG the greatest opportunities to deliver profitable growth and shareholder value over the long term. This includes markets where IAG competes successfully - i.e. profitably - with all three major Gulf carriers. British Airways has faced direct competition from Emirates for over 25 years."

Air France's views contradict partner Delta Air Lines

Air France-KLM concludes that: "this downsizing of European airlines' operations is also not without significant consequences on the benefits that the partnerships between European and US carriers are bringing to their customers as, with the rapid expansion of non-stop Gulf-US services, a growing share of the connecting traffic to and from the US is bypassing European hubs."

Its emphasis on US carrier connections beyond Europe is ironic. Less than 10% of US carriers' trans-Atlantic passengers connect beyond European hubs. This figure excludes the beyond-Europe connections for European carriers.

If the concept of "owning" passengers is allowed, then European carriers can have no greater claim to "owning" US-Indian subcontinent/Asia passengers than Gulf carriers do; both are sixth freedom operators in these markets.

American, Delta and United Airlines' connecting vs point-to-point traffic on flights from the US to/through European hubs: Mar-2014 to Feb-2015

Source: Edgeworth Economics via Etihad
Notes: European Cities include London, Paris, Frankfurt, and Amsterdam. Indian Sub-Continent includes Bangladesh, Bhutan, India, Maldives, Nepal, Sri Lanka, and Pakistan

Air France's dire concern about this market appears to contradict JV partner Delta Air Lines, the airline that supposedly feeds Air France's beyond Europe flights. Delta Chief Revenue Officer Glen Hauenstein in Dec-2013 noted traffic to the Indian subcontinent and Asia - essentially the markets of most concern in the US-Gulf debate - is not significant for Delta, and Air France-KLM has pursed that market less than its European peers.

In response to a question about Gulf carriers, Mr Hauenstein said: "I think there are two components to your question. One is the third and fourth freedoms, which would be the traffic from the United States and from Europe into the Indian subcontinent and Asia. Delta has never been a big player in that market. Our partners, Air France and KLM, were probably not as heavily invested as Lufthansa or British Airways for that matter. So they probably have a little less impact although it's significant, because those are traffic pools that they were relevant players in."

AF-KLM and Lufthansa point to loss of market share

AF-KLM and Lufthansa quote a number of statistics about the growth and impacts of Gulf carriers in Europe. They are summarised below.

AF-KLM and Lufthansa statistics about general Gulf carrier growth: 2015

• AF-KLM: Between 2004 and 2014, Gulf carriers have increased European points from 23 to 69
• AF-KLM: Between 2004 and 2014, Gulf carriers have increased European capacity by over 430% (AF-KLM, IAG and Lufthansa have grown by 23%)
• AF-KLM: Gulf carriers flew eight million passengers on European routes in 2004 and 25 million in 2014. This growth is on average 13%, almost three times the growth of the industry
• AF-KLM: Emirates, Etihad and Qatar operate 80% of total capacity between Europe and the Middle East
• AF-KLM: Europe-Gulf capacity is higher than the combined capacity of Europe to to China, Japan and Korea
• Lufthansa: average annual growth in Europe seats between 2004 and 2014 was 16.5% for the three Gulf carriers and only 2.7% for all other European airlines
• Lufthansa: Between 2003 and 2013, Gulf growth in Germany was 12.7% versus 4.3% general market growth; in Switzerland 20.6% versus 1.3% general market growth; Austria 18.8% versus 1% general market growth
• Lufthansa: 3.1 million passengers travel from and to Germany through the hubs in the Gulf instead of using direct services of German, Asian and African airlines
• Lufthansa: market size for direct connections from Switzerland to Qatar and the UAE is approximately 650 passengers per day. Some 72% of the capacity in the market is filled with passengers travelling to destinations beyond the Gulf
• Lufthansa: Between 2004 and 2014 in the Europe-Asia/Pacific market, Gulf carriers have grown 16.5%, whereas Lufthansa Group was only able to grow 1.9%, similar to the growth of the other EU network carriers

Source: AF-KLM and Lufthansa filings

AF-KLM and Lufthansa comments about changes in market share from Gulf carrier growth: 2015

• AF-KLM: Between 2008 and 2014, Gulf carriers have increased their Europe-India/Southeast Asia market share from 22% to 34%. The share of European carriers and Asian carriers has decreased from 38% to 27%
• Lufthansa: there has been a "radical shift of market shares and connectivity from Europe to the Gulf and this process has only started"

Source: AF-KLM and Lufthansa

AF-KLM offers a supplementary slide showing the loss of market share, as it calculates it. In this slide AF-KLM breaks down the loss of market share between AF-KLM/IAG/Lufthansa and Singapore/Malaysian/Thai. However, this raises many questions. For example, European carriers have lost 30.4% market share compared to a slightly slower 26.6% at Asian carriers. While Gulf carriers may change the competitive landscape, the impacts are not equal.

This limited data set might suggest Asian carriers have been able to insulate themselves slightly better.

Europe-Gulf/India/Southeast Asia marketshare: 2008-2014

Source: AF-KLM

Further, AF-KLM uses a select group of carriers. It excludes airlines like Norwegian and Finnair that are growing in the Europe-Asia market and intend to inject more growth. There are no known allegations that they receive state support and subsidies. But like the Gulf carriers, they benefit from a combination of factors such as geography and lower costs.

See related reports:

• SAS Scandinavian Airlines vs Finnair: the original Europe-Asia Nordic leader tries to fight back
• SAS capacity cuts help return to 9M operating profit as Hong Kong launch signals expansion for 2016

AF-KLM lumps together Europe's three main airline groups. Access to AF-KLM's original market share data is unavailable, but looking at scheduled seat capacity as supplied in OAG shows the three airline groups are not equal - and, in fact, AF-KLM is in the worst position. Between 2008 and 2014, Europe-Middle East/Indian Subcontinent/Southeast Asia seat capacity at AF-KLM has decreased by 6.4%. The Lufthansa Group has grown by 2.5% while IAG has grown by 11.9%.

AF-KLM, IAG and Lufthansa annual seat capacity from Europe to the Middle East/Indian subcontinent/Southeast Asia: 2008-2014

Source: CAPA - Centre for Aviation and OAG

These seat capacity changes broadly correspond to IAG demonstrating strategic and financial strength while Lufthansa and especially AF-KLM struggle to put their houses in order. There is much more happening than the Gulf airlines' expansion. Most recently, Air France threatened to cut 10% of its long-haul routes if employees did not accept a restructuring programme. Air France is also reportedly considering a move to follow Lufthansa's Eurowings plan and establish its own low cost (or lower-cost) long-haul unit.

See related reports:

• Air France-KLM struggles: 2Q profit falls on currency, weak unit revenue. Long haul under threat.
• Lufthansa SWOT: new low cost platforms are smarter strategy than resorting to protectionism

AF-KLM and Lufthansa's other statistics and underlying arguments have parallels to those from US carriers in their White Paper. For example, AF-KLM cites that there is more capacity from Europe to the Gulf than Europe to China, Japan and Korea combined despite those three Asian countries having a GDP 25 times that of the UAE and Qatar. This however neglects the reality of the Gulf being home to sixth freedom hubs, in just the way KLM's Amsterdam has proportionately more traffic than its local market may "allow".

Amsterdam after all was the godfather of sixth freedom operations, which at that time were fiercely opposed by the major European airlines.

The European carriers draw a comparison to China, Japan and Korea the same way US carriers compared Northeast Asian growth to relatively faster Gulf growth. This ignores factors such as economy and population: Japan is not growing at the rates Middle East or Indian subcontinent countries are. JVs between European and Japanese carriers may permit slower growth, as observed across the Atlantic. AF-KLM's argument excludes the aeropolitical element, such as China and Korea restricting traffic rights, leading to lower growth. (Recently, Germany rejected a request from China to increase the China-Germany bilateral. That caps one market AF-KLM says has lower seat capacity compared to Europe-Gulf.)

AF-KLM and Lufthansa make no reference to a group of airlines that, like Gulf carriers, are based in a fast-growing part of the world: Chinese carriers. It would be inconvenient to mention this considering AF-KLM has JVs with China Eastern, China Southern and Xiamen Airlines while Lufthansa is working on a JV with Air China. AF-KLM would be very well aware of Chinese growth - and that perhaps it is occurring too quickly. In summer 2015, AF-KLM saw China Southern up-gauge its Beijing-Amsterdam service from A330 to A380 while Xiamen Airlines launched inaugural European service, from Xiamen to Amsterdam. Both rely on KLM's beyond-Amsterdam connections, as well as KLM's support for ex-Europe sales.

See related reports:

• Air France-KLM's Asian partnerships: JAL codeshare ends, China Southern A380 & Xiamen to Amsterdam
• Air China-Lufthansa Group JV will control 35% of Europe-China market while easing growth tensions

There can be no doubt Gulf carriers have changed Europe-Asia traffic flows. But it can be argued with some merit that the European airlines have failed to achieve market and strategic excellence. Anxious to offset the damage occurring at home from the lower priced LCC services on their European hubs, they have sought to maintain offsetting higher yields on long haul routes where competition has been much weaker. And they have foregone opportunities to partner with the Gulf airlines, seeking instead to maintain older, more conventional relationships.

AF-KLM and Lufthansa point to closed destinations as proof of damage

In addition to alleging loss of market share as proof of damage from Gulf carriers, AF-KLM and Lufthansa attribute destinations they have closed to the Gulf carrier growth. AF-KLM makes a brief statement that "as a consequence" of Gulf growth, Air France (no mention of KLM) has closed service to Abu Dhabi, Doha, Jeddah, Chennai, Hanoi and Phnom Penh. Further, Air France has "lost major growth opportunities to these regions".

Lufthansa gives a comprehensive list of destinations it has closed across Asia and Africa. (For Austrian and Swiss, this is curiously referred to as destinations "given up" on.) The rationale for abandonment is, as Lufthansa states, that: "connectivity is shifting from the EU hubs to the Gulf - mostly at the expense of the European network carriers such as the Lufthansa Group." However, there are some destinations that immediately call into question the validity of Lufthansa's argument.

Included in the list of suspended destinations, ostensibly closed due to Gulf carriers, is Sydney. Lufthansa exited Sydney in 1995 - a year before the first Gulf carrier arrived in Australia (an Emirates service to Melbourne). The route was no longer viable in fact due to sixth freedom competition from high quality Asian airlines.

The Swiss list includes destinations such as Djerba and Monastir that do not have Gulf carrier service. Similarly, Lufthansa includes Korea's Busan as a closed destination; Busan has no Gulf carrier service either.

Lufthansa Group closed destinations: as of Jun-2015

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Source: Lufthansa

There is rarely a single cause behind route decisions. It is just as probable that much of the changes at Swiss and especially Austrian are due to internal group issues. Austrian has been criticised for limited long-haul growth so passengers can instead be directed over Lufthansa's German hubs. The weakening of the Vienna hub and lack of long-haul connections was a frustration of the Austrian government, which sought out Royal Jordanian to operate fifth freedom services from Vienna to North America.

Austrian's closed destinations list includes Shanghai. Since Lufthansa submitted its comments, Austrian has announced it will resume Shanghai service from Apr-2016. Austrian, according to media reports, had considered Shanghai service back in 2012 but instead elected to open service to Newark. This gives oxygen to the argument European and US carriers favour expansion on the immunised trans-Atlantic market rather than grow in more competitive developing markets.

It is not just competition from Gulf carriers at play here; the immunised JVs also compete actively with such airlines as Star member, Turkish Airlines. The resulting absence in new markets allows Gulf carriers to take advantage of European and American carrier under-representation.

See related report: Turkish Airlines in North America. Two new routes a year; geography favours it versus Gulf airlines

Although market share is changing, total passenger volume has increased, sometimes very considerably

In many ways, arguing about market share is a fruitless exercise. First of all, market shares have always varied; maintaining the status quo can hardly be a feature of a competitive growth market, where new entrants are inevitable. But more to the point, given aviation's vital role in stimulating economic activity, the key feature is growth. Where there is growth, calculations of market share can become mere technical issues, of interest only to those keen to preserve their status quo ante - where in fact their benchmark efficiency has been overtaken by other airlines. This includes the Gulf airlines, but also many others.

Moreover, the evidence that has been presented about market share losses is debatable and at times inaccurate. It is also misleading in reflecting merely share of market and both American and European airlines ignore the total size of the market.

The Big 3 American carriers in their White Paper made much of their loss of market share. Gulf carriers responded that in terms of total passenger volumes - not market share - US carriers and their joint venture partners have actually grown their passenger volumes.

AF-KLM further breaks down statistics about market share gains Gulf carriers have made to/from Europe.

Emirates, Etihad and Qatar market share to/from Europe: 2008-2014

Source: AF-KLM

AF-KLM singles out the Europe-Bangkok market, showing that between 2004 and 2015 European carriers have reduced weekly frequencies by eight.

Bangkok Europe-Gulf/India/Southeast Asia marketshare: 2004-2015

Source: AF-KLM

AF-KLM interprets financial statements from Etihad and Qatar as proving "subsidies appear to keep in the market non-commercially viable players". AF-KLM continues that the carriers are "offering unnecessary capacities at non-economical prices with the objective of gaining market shares at the expense of airlines operating under normal commercial conditions."

AF-KLM is essentially saying Gulf carriers are stealing market share. Lufthansa goes further, stating Gulf carriers bring no benefit to the market: "Gulf carriers generate their growth by taking substantial portions from other market participants. There is no evidence that the Gulf carriers meaningfully stimulate market growth."

Lufthansa's claim is contradicted by AF-KLM. AF-KLM shows Europe's three airline groups have decreased weekly Bangkok flights by eight while Gulf carriers have added 66 weekly flights. The loss of eight flights but gain of 66 for a net addition of 58 clearly delivers benefits to the Bangkok market. By any standards this is, to use Lufthansa's description, "meaningful" stimulation.

Europe is a significant source market for Gulf carrier flights to Southeast Asia, and especially Bangkok. Thailand visitor statistics show Western European visitors to Bangkok Suvarnabhumi airport increased by 9.6% between 2008 and 2014, the period AF-KLM uses for its market share analysis.

It should be noted 2014 was a depressed year for Thai tourism due to political instability in that country: European visitors were down 6.3% in 2014 compared to 2013, Middle East down 6.2% and Africa down 1.1%.

Change in European visitors to Bangkok Suvarnabhumi airport: 2008-2014

Source: CAPA - Centre for Aviation and Tourism Authority of Thailand

AF-KLM notes it has decreased weekly Bangkok frequencies by two. This is entirely on the Air France operation.

But not only has sister KLM not decreased frequencies, according to the data it files with OAG, KLM has increased non-stop seat capacity - and by the not insignificant sum of 38%. This means that despite AF-KLM's claim of damage by losing two weekly flights, the group has collectively grown seat capacity by 12%.

This network change could have occurred to shift the mostly leisure Bangkok market to KLM, which has a lower cost base than Air France. This returns to the earlier point of European airlines being impacted not just externally (by Gulf carriers) but also internally by bloated cost bases.

Despite Air France decreasing weekly frequencies by two between 2008 and 2014, French visitors to Bangkok have grown by 36% - significantly more than the average Western European growth into Bangkok (9.6%). Curiously, visitors to Bangkok from the Netherlands between 2008 and 2014 are flat despite the significant increase in KLM's capacity. Perhaps it is KLM that is "stealing" Air France's marketshare.

Likewise at the Lufthansa Group visitor growth has outpaced the Western European average despite the group decreasing frequencies to Bangkok. Austrian visitors to Bangkok increased by 11%, Germans 13% and Swiss 31%.

Change in European, African and Middle Eastern visitors to Bangkok Suvarnabhumi airport: 2008-2014

Source: CAPA - Centre for Aviation and Tourism Authority of Thailand

For all of Europe, including Russia and Eastern Europe, visitor numbers increased by 30.5% between 2008 and 2014. Gulf carriers are often better positioned than Western European carriers in Eastern Europe and Russia. Gulf carriers for Bangkok flights also pull traffic from the Middle East and Africa, and these two regions recorded 19.5% and 29.4% growth respectively between 2008 and 2014.

The latter two are off a lower base: Middle East visitors increased from approximately 445,000 to 532,000 while African visitors increased from 97,000 to 126,000 and European visitors increased from 3.1 million to 4.0 million.

This discussion has focused only on European visitors to Bangkok and not the increase in long-haul visitors to European countries facilitated by Gulf carriers.

Is market share loss a valid argument? Who 'owns' the passenger?

To re-cap, AF-KLM and Lufthansa have failed to acknowledge any possible impact of their own structural issues in preventing growth. Lufthansa blames Gulf carriers for its closure of stations that occurred before a Gulf carrier entered or, in fact, never entered at all. Other destinations have complex reasons for being closed. As for example with US carriers blaming their exit from Indian routes on Gulf carriers, there are multiple factors and Gulf carriers cannot be single-handedly held accountable. (Delta acknowledges this: its excuse for exiting India has varied from Gulf carriers and Ex-Im financing for Air India.)

AF-KLM and Lufthansa follow the US carriers in trying to allocate blame through lost market share. They ignore the market's volume growth: US carriers and their JV partners are carrying more passengers to the Indian subcontinent even if their share of the market is lower. AF-KLM's seat capacity to eastern markets is down, but at IAG and Lufthansa, it is up. Curiously, in the example AF-KLM chooses - Bangkok - its net capacity is significantly up even if frequencies are down.

In short, the arguments of AF-KLM and Lufthansa are in many cases, at best misleading, inaccurate and biased. But for our last consideration on this topic, we ignore all of the above to ask if losing market share is a valid argument. If there is no market growth (which is certainly not the case), there could be the consideration of local job support. AF-KLM cites AEA's finding that a long-haul Air France service supports 800 jobs in France while an Emirates service supports only 200.

Jobs created in France by operating a long-haul aircraft from/to France: 2014

Source: AF-KLM

This is a similar argument to that made from the US side, and especially by the US pilot unions. The error is also the same: it assumes Air France could replace Emirates, that US carriers could replace Gulf carriers. They cannot.

Gulf carriers have structural advantages - geography, network, lower costs - that others cannot replicate on their own. (A partnership with a Gulf carrier would bring them into the fold of geography and network, as AF-KLM seem to acknowledge with their Etihad partnership.)

As an aside, the need to foster a local sector is not dissimilar from Qantas' recent calls to limit Gulf carriers (and others) in order to protect an Australian-based aviation industry. The Australian government largely rejected Qantas' view, although there is still room for liberalisation (such as granting Qatar Airways further Australian traffic rights).

See related report: Qantas seeks political support for international growth: 'We operate below our full potential'

The ultimate question and concept in this debate about market share changes is if a passenger can be "stolen". After all, does a passenger "belong" to an airline? Part one of this report noted IAG's rejection of the US carriers' White Paper.

IAG focusses its comments on a few specific allegations, but it is on this concept of who owns the passenger that IAG weighs in with an unequivocal view. IAG writes:

As CAPA previously wrote:

If it were not so sad, the most delightful part of the "stolen" traffic syndrome (stolen from the "US carriers and their JV partners") is that it is largely inspired by the diversion of Indian traffic over the Gulf.

The one airline that has every right to feel aggrieved at the lumpy playing field is Air India. While the world's biggest airlines squabble over what used to be Air India's birthright (Indian source traffic), the languishing Indian flag carrier is far from being in a position to capitalise on the growing flows to the US, instead being very much out in the cold in this debate.

At least Air India supposedly has the "right" in principle to compete on fair and equal terms with most of the major airlines in Asia and North America. (That is hardly an "equal" contest in itself - but such is the new world.)

More importantly though, Air India is locked out of the powerful Atlantic immunised joint ventures that are feeding on its national traffic. Although it is now a Star Alliance member airline, it has to sit on the sidelines as the bigger European and North American airlines privately divide up its India traffic between them, funnelling it over their European hubs.

Here Alice makes another appearance: even more ironically, at least some of that traffic over the Gulf "diverted" away from the "US carriers and their JV partners" is now actually being carried by another Indian airline, Jet Airways. But it is doing that under codeshare with Etihad.

To suggest that Jet Airways, an Indian airline can be stealing its "own" traffic from foreign sixth freedom airlines which have grown used to feeding on the Indian market is surely a little north of cynicism. Yet it does reinforce the obscurity of this whole Alice in Wonderland regulatory argument.

See related report: Alice in Wonderland goes to India (via the Gulf)

Part 3: State aid, fair competition - and what to do?

The final part of this report will examine matters including state aid and fair competition. Lufthansa has more to say on this subject than AF-KLM. The profound difference is that where the three US carriers try to impose an obligation on Gulf carriers to conform to "laws" (often exaggerated or non-existent), AF-KLM and Lufthansa note this debate takes place in a grey area. They would like, albeit with little legal authority, to change this new world of competition.

Part one can be found here: US-Gulf airline dispute - Europe Part 1: IAG opposes "subsidy" of US airlines, AF-KLM on 5th freedom