US and European airlines challenge subsidies to Mideast carriers
In a clash that has been brewing for months, air carriers get a chance this week to battle head-on at the International Air Transport Association (IATA) annual meeting in Miami. The issue is framed differently by the combatants and there are more than a few unexpected alliances.
The general issue results from open skies agreements among the U.S. and European carriers and their Middle Eastern competitors: Etihad, Emirates and Qatar Airways, collectively called the “Middle East 3” or ME3. Under these agreements, the developed countries typically allow carriers from developing countries to operate under six so-called freedoms. The contentious freedoms are the fifth and sixth, which allow the carriers to transfer traffic from any of its aircraft to any other of its aircraft at any point on the route (that is number 5) and to serve points behind any point in its territory with or without an aircraft change (that is a shortened version of number 6).
U.S. legacy carriers United Continental Holdings Inc. (NYSE: UAL), American Airlines Group Inc. (NASDAQ: AAL) and Delta Air Lines Co. (NYSE: DAL), as well as European carriers Lufthansa and Air France-KLM, have cried “Foul!” because they claim government subsidies to the ME3 enable the foreign carriers to charge lower fares and compete unfairly with the legacy carriers.
In early June, Etihad responded to the U.S. carriers that it has received $14.3 bln in capitalisation — $9.1 bln as shareholder equity and $5.2 bln in shareholder loans — from the Abu Dhabi government. According to a report in The Wall Street Journal, Etihad claims that state-ownership of an airline is not prohibited under the open skies agreement.
Airbus and Boeing Co. (NYSE: BA) are quite satisfied with the rise of the ME3. These airlines have ordered hundreds of planes from these two makers. Boeing, for example, has received orders for 230 new planes from Emirates since 2010 and has delivered 53 in the same period (some from prior orders). Emirates placed an order for 150 of Boeing’s 777X airplanes last July, and the airline’s CEO is trying to persuade Airbus to upgrade the A380, the world’s largest passenger jet. At the end of May, Airbus had delivered 60 of the A380s to Emirates and had outstanding orders for 80 more.
In a jab at the legacy carriers, Akbar Al Baker, CEO of Qatar Airways, told the IATA meeting on Monday that protectionism is a threat to commercial aviation. The legacy carriers are pressing the U.S. government to consult with the UAE and Qatar governments. They also want the new access to the U.S. market temporarily suspended until the open skies situation is resolved.
United Airlines shares were down nearly 5% at noon on Monday, trading at $51.43 in a 52-week range of $36.65 to $74.52. The company’s rating was cut from Strong Buy to Outperform at Raymond James earlier in the day and the price target was cut from $82 to $69 per share.
Delta traded down nearly 4.5%, at $41.04 in a 52-week range of $30.12 to $51.06. Raymond James also downgraded the airline, from Strong Buy to Outperform, with a price target cut from $60 to $53.
American Airlines traded down 5.3% to $39.50, in a 52week range of $28.10 to $56.20. The stock was cut from Outperform to Market Perform. (Source: 24/7 Wall St.com)