Delta Air Lines exits Dubai as Air Canada arrives. The impact of open skies vs protectionism


For Delta Air Lines, withdrawal from its Dubai route is purely due to the impact open skies has had in unleashing capacity (which it calls subsidised) and hubs it cannot compete with. Delta announced on 28-Oct-2015 that it is withdrawing its sole Middle East route, Atlanta-Dubai. Delta does not however suggest the route is unprofitable; indeed an Emirates calculation suggests Delta would conservatively have been clearing "a route net margin" of 7% - near to twice the global average. The Gulf carrier speculates that Delta would prefer to place the Dubai route's aircraft on the higher margin US-European JV flights operated with anti-trust immunity.

Meanwhile, overtly protectionist Air Canada is moving in the opposite direction, on 03-Nov-2015 commencing service to Dubai and on 01-Nov-2015 to Delhi.

Delta's cancelled Dubai flight and Air Canada's new one are services to the epicentre of the new world's hub. Dubai presents the opportunities across the region but also the formidable size of Emirates, which seized the moment before others woke up. Air Canada has relative confidence as its government, unlike most others, has blocked Gulf carrier competition. For consumers open skies in the US has delivered extensive benefits while protectionism in Canada is limiting travel options and the economy.

  • Delta Air Lines is withdrawing its Atlanta-Dubai route due to the impact of open skies and competition from subsidised Gulf carriers.
  • Delta's Dubai route was not unprofitable, with estimates suggesting it had a route net margin of 7%.
  • Air Canada is launching services to Dubai and Delhi, taking advantage of the restrictions on competition in the Canadian market.
  • The lack of competition in the Canadian market is limiting travel options and the economy.
  • United Airlines will be the only US carrier serving Dubai after Delta's withdrawal.
  • The US government's Fly America Act requires government employees to fly on US carriers, which benefits United's Dubai service.

Delta Air Lines to end Atlanta-Dubai service in Feb-2016

Delta operates 86% of its available seats and 61% of its ASKs/ASMs within the highly profitable closed US domestic market. Of international segments, Western Europe accounts for 42% of ASKs/ASMs, and this too is profitable as it is operated on a joint venture basis, enjoying anti-trust immunity to coordinate capacity and pricing with its former competitors. In short, the markets Gulf carriers link to North America - the Middle East, Africa and Indian sub-continent - do not enjoy a similar level of attraction at Delta.

Delta's once daily Dubai service compares to an average of 58 daily European flights over 2015. Earlier in Oct-2015, Delta announced a record third quarter profit of USD2.2 billion - placing it among the most profitable airlines in the world.

Delta Air Lines international ASKs/ASMs by region: 26-Oct-2015 to 1-Nov-2015

Nonetheless, do not let a good crisis go to waste. Following its high profile campaign against the Gulf airlines, Delta would certainly like to convey that the closing of its Dubai service is indicative of clouds ahead. Delta's media statement on the suspension was entitled: "Subsidized Gulf carrier competition forces Delta to cancel ATL-Dubai".

Delta does not suggest the route was unprofitable, although this omission does not give an affirmative view either way. Emirates issued a statement rejecting Gulf carriers being responsible for the route's cancellation, saying its modelling shows the route makes USD10 million in per profit per annum for Delta at a margin of 7%. Although Emirates points out this is nearly twice IATA's 2015 global airline profit margin of 4%, Delta operates overall with a higher margin than the global average.

Delta's Atlanta-Dubai service was its only route to the Gulf, launched in 2007 and made daily in 2008. Delta in Aug-2015 announced it would seasonally reduce its Dubai service to four or five times weekly from Oct-2015 and resume daily service in Apr-2016, although many expected Delta was planning a "slow kill" of the route and that daily resumption - or any service in the medium/long-term - would not eventuate.

Delta fudges the numbers on Gulf carrier growth, but its problem is the lack of a hub

Delta's announcement of its withdrawal blames its Dubai exit on Gulf carriers. The first three paragraphs are:

"Delta will no longer fly between Atlanta and Dubai effective Feb. 11, 2016. The announcement comes amid overcapacity on U.S. routes to the Middle East operated by government-owned and heavily subsidized airlines, and less than a month after Delta reduced service between the world's busiest airport and the Middle East's largest hub.

"The 777 aircraft used to operate ATL-DXB will be redeployed to other Trans-Atlantic markets where it can compete on a level playing field that's not distorted by subsidized state-owned airlines.

"Between 2008 and 2014, about 11,000 daily seats were added between the U.S. and Dubai, Doha, and Abu Dhabi - more than 95 percent of which are flown by Gulf carriers Emirates, Qatar and Etihad airlines. Of the 14 daily flights between the U.S. and Dubai, only two are operated by U.S. carriers. Despite the increase in passengers traveling on these flights, the number whose journeys actually originate or end in the Gulf has essentially remained flat."

Delta's figure of 11,000 daily seats being added is technically accurate but perhaps a little misleading. Delta specifies these seats are between the markets, in other words both to and from, counted individually. A return Dubai-New York seat is counted as twice, once for Dubai-New York and once for New York-Dubai. The purpose of this counting is unclear since seats can rarely be added in only one direction, and passengers rarely fly in only one direction (such accounting does, however, inflate the figure).

Over the seven years between 2008 and 2014, Gulf carriers have added approximately 5,480 return seats a day (or about the 11,000 figure Delta cites for two one-ways). If extending the comparison to 2015, the addition is 8,150 daily seats. The largest increases have occurred over the last two years.

US-Abu Dhabi/Doha/Dubai one-way average daily seat capacity by carrier geography, and annual increase from Gulf carriers: 2005-2015

Gulf carriers are largely flying passengers beyond their home markets, a common event in today's world. Delta for example in 2014 operated approximately 3,800 one-way seats a day to Amsterdam, a market which is far smaller than London or Paris. Delta benefits from accessing the beyond network of locally-based KLM. It is this partnership and hub role that allows Delta to sustain such a disproportionate presence; American Airlines, which has no local partner at Amsterdam, had only 160 daily seats to Amsterdam in 2014. United had 2,100 seats a day to Frankfurt, home to United partner Lufthansa, but Delta, without a local partner at Frankfurt, had only 700.

Delta argues it could not make Dubai as an end market work. It was an end market relative to Emirates, which has about 80% transfer traffic. But Delta still achieved a high rate of connections, with Emirates' published analysis of MIDT data for the year to Jul-2015 indicating over 55% of Delta's Dubai passengers connected beyond to points in Afghanistan, the Gulf, India and Iraq.

Delta even quietly had an interline agreement with Emirates. United meanwhile partners with a range of carriers, from flydubai to Safi Airways. Delta had a monopoly on the Atlanta-Gulf market since no Gulf carrier serves that market (Qatar commences service in 2016, one of a number of routes announced earlier in 2015). Emirates offers non-stop service to Dubai from 10 US points while there are numerous one-stop options from other carriers (JetBlue-Emirates, other Gulf carriers, other airlines).

See related report: Emirates and Qatar Airways announce new US services - for commercial as well as strategic reasons

CAPA has previously discussed the opportunity to work with Gulf carriers to their Gulf hubs and beyond markets. US carriers already receive not insignificant inbound feed (codeshare, interline) from Gulf carriers.

See related reports:

Delta's Dubai load factor was weaker in Jan-2015 and Feb-2015 compared to 2013 and 2014, but in Mar-2015 and Apr-2015 performance further weakened to below 2012 levels.

Delta Air Lines Atlanta-Dubai load factors: 2012-2015

Since 2012, Delta has achieved a higher load factor than United to Dubai with exception of a few months. This does not indicate yield or profitability information, however.

Load factor for Delta Air Lines Atlanta-Dubai and United Airlines Washington Dulles-Dubai/Kuwait: 2012-2015

United's load factor to Dubai has particularly weakened since late 2014, with United's load factor often being about 10-18ppt lower than Delta to Dubai.

Delta Air Lines and United Airlines load factor comparison to Dubai: 2012-2015

United Airlines remains in Dubai - probably because of "subsidies"

Delta's exit from Dubai will leave United Airlines as the only US carrier in Dubai and wider Middle East region (excluding Tel Aviv). American Airlines has never served the region. United offers a daily service from Washington Dulles to Dubai as well as four weekly flights from Dulles to Kuwait and continuing on to Bahrain.

These flights are largely sustained due to US government travel originating out of the Washington area. But such travel is not conducted on open terms. Under 49 U.S.C. 40118 ("Fly America Act"), government employees on official business/duties must fly on US carriers. This is US-operated services but also codeshares on foreign carriers sold by US airlines. (This policy is not unique to the US, but the Act's long reach - to consultants and others - means the volume of traffic is vastly more extensive.)

There are codeshares on Gulf carrier services from Washington Dulles (and other points, but this discussion will be limited to Washington, the main point of government travel). United's Dubai service carries Air Canada's code while its Kuwait-Bahrain service has no codeshare service. For a spot check on fares for a sample week-long trip in early December, United is USD5 more expensive than Emirates on the Washington-Dubai route in economy. JetBlue codeshares on Emirates' service, but the JetBlue codeshare is USD1000 more expensive at USD2435. The lowest fare on the market from any carrier including a reasonable connection time is USD931 offered by Qatar Airways

In business, the difference between Emirates and United is far larger. Emirates is USD6537 while United is USD9188. The JetBlue codeshare on Emirates in business class is USD15,250.

Spot check on Washington Dulles-Middle East routes: 02-Dec-2015 to 09-Dec-2015

Airline IAD Service US carrier codeshares Gulf-marketed fare US-marketed fare Other fares
Emirates Dubai, Daily 777-300ER JetBlue USD1362 USD2435 (JetBlue) USD931 (Qatar)
Etihad Abu Dhabi, Daily 787-9 American USD1375 USD1561 (American) USD1031 (Qatar)
Qatar Doha, Daily 777-300ER American USD1494 USD1731 (American) USD796 (United/Lufthansa)
United Dubai, daily 777-200ER N/A N/A USD1367 USD931 (Qatar)
United Kuwait-Bahrain, 4x weekly 777-200ER N/A N/A USD1451 USD831 (Qatar)

United does not serve Abu Dhabi or Doha, although Abu Dhabi can be quickly accessed by driving from Dubai. To both of those cities, the Gulf-marketed fares are lower than the fares sold by their US codeshare partner (in both instances, American). To Abu Dhabi the lowest fare in the market is with Qatar Airways while to Doha it is from United and Lufthansa.

For a US government employee needing to travel to Abu Dhabi or Doha, the codeshares on US carriers add cost despite the fact that the seat the employee flies on will be exactly the same irrespective of which airline sold it. Gulf carriers and others have argued this policy is a subsidy to US airlines.

US BTS data shows United's Washington Dulles-Dubai load factors starting to decline in late-2013 and continuing through 2014. Only data through Apr-2015 is available as the latest, and load factors have declined below 70%. This does not give any indication on yield performance. Although United is seeing a decrease in passenger numbers (capacity has been flat), the overall Washington-Gulf and broader US-Gulf market is seeing significant growth.

United Airlines Washington Dulles-Dubai load factors: 2012-2015

United Airlines will discontinue Washington-Kuwait-Bahrain service effective 13-Jan-2016. There was speculation United was ordered by the Kuwait government to stop the service in retaliation for a US DOT ruling against Kuwait Airways regarding discrimination, but United later said the service did not meet financial expectations. United had the only service between the US and Bahrain, and only non-stop (in at least one direction) to Kuwait; Kuwait Airways flies to New York JFK via London Heathrow. Kuwait and Bahrain have become smaller markets and are largely terminating points whereas Dubai is a large market and United has some interline partnerships to connect beyond Dubai.

The Kuwait service did not experience a significant decrease in load factor (again, no indication on yields) until Mar-2015, with Apr-2015 also showing weakness. Further data for the year is unavailable. United in Sep-2013 reduced the service from daily to four weekly, and this helped improve load factors with 2013 and 2014 generally performing better than 2012.

United Airlines Washington Dulles-Kuwait load factors: 2012-2015

United's Kuwait service generally lagged its Dubai service in terms of load factor, but in mid-2014 the load factor performance became similar, largely due to Dubai's performance weakening. But as noted earlier, in 2015 Kuwait's performance weakened. United's Dubai performance is deteriorating but US government travel can provide plump yields.

However, as the US' presence in the Middle East declines, demand could decrease. Wider availability of US carrier codeshares to Dubai could further compromise United's offering, although United has the advantage of a non-stop service.

United Airlines Washington Dulles-Kuwait and Washington Dulles-Dubai load factor comparison: 2012-2015

Air Canada meanwhile launches Dubai and Delhi - supported by restrictions on competition

Delta's announcement of exiting Dubai is followed a week later by Air Canada's 03-Nov-2015 launch of three times weekly Toronto-Dubai service on its 787. The route was announced at the same time Air Canada announced four weekly Toronto-Delhi flights, also on the 787 (this commences 01-Nov-2015).

See related report: Air Canada shakes out its network with high profile long-haul service and small domestic routes

Air Canada is entering Dubai (and Delhi) with a smaller footprint than Delta, but there are significant structural differences in the competitive landscape - namely a lack of competition. Canada's protectionist application of its "Blue Sky" (rather than open sky) policy has capped Gulf carriers, as well as Turkish Airlines. Emirates is permitted only three weekly Toronto A380 flights, Etihad three weekly Toronto 777-300ER services, Qatar three weekly Montreal 777-300ER flights and Turkish five weekly Toronto 777-300ER flights and three weekly Montreal A330-300 flights; none of the Gulf carriers is daily - across the entire country.

The flat lines of Gulf carriers in the graph below of Canada-Middle East (including Israel) services attests to their aeropolitical challenges of growing in the Canadian market. Air Canada's Dubai route is its first to the Gulf. Its only other Middle East service has been to Israel.

Canada to Middle East (seats per week, one way): 19-Sep-2011 to 10-Apr-2016

The result of limited capacity rights for Gulf and Turkish carriers is traffic to the Gulf and Indian sub-continent flowing with Air Canada and ATI partners over European hubs on Air Canada's European partners, mainly Lufthansa. North America is the largest international market from Canada, comprising 58% of international seats to/from Canada, but this is largely point-to-point traffic.

The second-largest market is Western Europe with 15% of international seats, and there is a higher proportion of passengers using these services to connect in Europe to points beyond.

In this important market Air Canada holds the largest share with 44% of Canada-Europe seats. JV partner Lufthansa holds 7% and Swiss 1%, giving that JV grouping a comfortable majority. The second-largest carrier - KLM - has just under 10% of the market.

Canada international seat capacity by region: 26-Oct-2015 to 1-Nov-2015

Air Canada would be familiar with the amount of existing traffic that could be re-routed from a European connection to a Dubai and Delhi non-stop flight. From Delhi Air Canada has partnership access to fellow Star carrier Air India (although Air India is excluded from its bigger Star brothers' closed JVs). Air Canada's Dubai service does not involve any change to its limited partnership with Etihad at Abu Dhabi. Dubai is the far larger local market compared to Abu Dhabi, but Air Canada will not be able to access any beyond feed on Etihad.

There is no local partner for Air Canada in Dubai, but there will be small transfer opportunities with various regional partners; most of the traffic will originate or terminate in Dubai. Air Canada will also be able to capture some traffic from the US as part of its strategy to increase connecting traffic from the larger market over the border.

Average daily seats to the US from Gulf carriers have increased by 8,150 between 2008 and 2015. But in that same time period, average daily seats to Canada from Gulf carriers have increased by only 224 - less than a daily widebody. Most of this growth was around the turn of the decade; Gulf carrier capacity between 2012 and 2015 is virtually unchanged.

Average one-way daily seats to Canada and the US from Gulf carriers: 2005-2015

If open skies between Canada and Gulf nations existed, Canada would surely see an additional daily flight or two from each of the carriers almost immediately, with more services opened in the short/medium-term.

But in exchange for protectionism, Air Canada offers three weekly flights to Dubai and four weekly to Delhi. In this aeropolitical regime, Canadian consumers and Canada's economy are being short-changed.

Despite the restrictive Canadian market, it is Air Canada pilots and their counterparts in Germany (German Cockpit Association, Vereinigung Cockpit) that led the Associations of Star Alliance Pilots (ASAP) unanimously to pass a resolution calling for their governments to review all air service agreements between Star Alliance airlines' home nations and the UAE and Qatar, to ensure compliance with "fair competition" provisions. The ASAP 'Fair Competition and a Level Playing Field' resolution:

  • Underscores that the governments of the UAE and Qatar have "formulated economic development strategies that depend on massive financial subsidies to support expansion of international air passenger traffic through their hub cities and as key elements of their countries' future economic development strategies";
  • Stated that it is "only due to government subsidies that Qatar Airways, Etihad Airways, and Emirates Airline have grown at an unprecedented rate".

ASAP executive board chairman Capt Ron Pellatt (from Air Canada) commented that some Star Alliance airlines are "being forced to withdraw or reduce services, putting pilots' and other employees' jobs at risk" as a result of the "massive subsidies" received by the three Middle Eastern airlines. (There was no reference to any reasoning for excluding further access to Turkish Airlines, which, like Air India, is excluded from the trans-Atlantic JVs.)

Airline arguments for closed markets ignore consumer benefits

Delta's exit brings wider opportunities for consumers and the economy than if Delta's service was to be maintained at the expense of a cap on Gulf carrier services - as Delta is pushing for.

Delta lately has been beating the anti-Gulf drum on its own. United Airlines has had a turbulent two months with the ousting of its chief executive over possible corruption and then his replacement going on medical leave. United has had to search fairly wide across its management ranks for a leader capable of taking up the helm but who is also distant from the old management.

Meanwhile American has integrated with merger partner US Airways, the latter brand now having disappeared. They turn their attention to merger synergies and new opportunities - one of which may still be a deeper partnership with Etihad and an American-operated 787-9 service to Etihad's hub at Abu Dhabi.

Whatever support Delta had from the political arena, it appears to be fading. The US Department of Justice has expressed concern over limiting Gulf carrier competition, the WTO has said it will not be roped in on trade dispute grounds and presidential candidates are not warming up to US carriers: presidential candidate Hillary Clinton, sensitive to popular concerns, recently publicly lamented how airfares have increased.

If politics keeps the status quo in place, it will be up to commercial reasoning to exploit these new hubs in the Gulf. US airlines have led the world in JVs, anti-trust immunity and fortress hubs. Ironically the most recent expansion - hopes of a hub in Shanghai - comes from Delta. Preserving the status quo - US-Gulf open skies - in the US is a positive outcome. Canada sticking to protectionist ways is not. But even there, a new Trudeau-led government may take a new look at the merits of maintaining Canada's existing policy settings.

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