US and Euro­pean air­lines chal­lenge sub­si­dies to Mideast car­ri­ers

Financial Mirror (Cyprus) - - FRONT PAGE - By Paul Au­sick

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

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