Could American Airlines Ditch Its Fellow Legacy Carriers For Gulf Partnerships?

by Trefis Team
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Since the consolidation of the US airline industry, the top three legacy carriers – American, Delta, and United – have been operating as an oligopoly to maintain their dominance in the market. That is why, when Delta protested against the Gulf carriers for using government subsidies to establish a foothold in the US market, American and United instantly joined the battle. The US carriers have charged Emirates Airline, Etihad Airways, and Qatar Airways of receiving subsidies of more than $40 billion since 2004 from their governments, misusing these subsidies to distort ticket prices, and creating pricing pressure for the US carriers in their key markets. The Gulf carriers are using these subsidies to build a fleet of international wide-body aircraft and expand their US operations. On a consolidated basis, the three Gulf airlines expanded their US seats from less than 1.9 million in 2013 to 2.7 million in 2014.

Further, these airlines have announced their plans to expand their services in some of the high-profit routes in the US over the next two years. For instance, a few weeks back, Emirates announced its plans to launch a flight between Dubai and Orlando, and enhance its services to Boston and Seattle, while Qatar aims to grow its operations in Atlanta, Boston, and Los Angeles. Given these expansion plans, the US seats offered by these Gulf airlines is expected to reach almost 4.5 million by 2016, which is more than twice the 2013 levels. The following graph illustrates the growth trajectory of the three Gulf airlines over the last decade and the estimated growth over the next two years:

Gulf

This has intimidated the US legacy carriers who are already facing a tough time convincing their investors about the sustainability of the airline industry. As a result, the three airlines have requested the US government to review its open-skies agreements with the United Arab Emirates (UAE) and Qatar.

Is American Playing It Smart?

Despite supporting Delta and United in their fight for a level playing field, American Airlines continues to maintain strong ties with Etihad on its US-Gulf flights, Europe-Gulf routes, and services beyond the Gulf. American’s partnership with Etihad has enabled it to leverage the influx of passengers transferring to its network from Etihad. According to data provided by Etihad, over 180,000 passengers were added to the US carriers during 2014 and 50,000 passengers in the first two months of 2015. This implies that almost one-fifth of Etihad’s US passengers connect to a US airline. Since the two airlines have a strong relationship, American was clearly one of the key recipients of this passenger inflow from the Gulf airline.

Even after filing an appeal against the Gulf carriers in April 2015, American has been progressively expanding its codeshares with Eithad. Last month, the airline removed the restrictions placed on earning frequent flier miles for a passenger flying with Etihad. We believe that American’s aim behind this relaxation is to deepen its relationship with Etihad and attract a significant proportion of the 250,000 US seats that the Gulf airline aims to add in 2015. We also suppose that it would be logical for American to launch its own flight to Abu Dhabi on the days when Etihad does not operate on that route. This will solidify the partnership between American and Etihad, as it will boost American’s revenue growth while allowing Etihad to challenge Emirates’ dominance in Abu Dhabi through a combination of American-Etihad.

Apart from Etihad, American also enjoys a healthy partnership with Qatar Airways, a member of the Oneworld alliance that was founded by American. Similar to Etihad, Qatar has also been a contributor to American’s traffic growth. According to Qatar, it has provided a revenue benefit of over USD60 million in revenues to its US partners in 2014. Being the only legacy carrier to have a partnership with Qatar, American gained a large part of this revenue transfer from Qatar. In addition, Qatar has announced its plans to grow its US seats by approximately 200,000 in 2015 and 350,000 in 2016. This will be another golden opportunity for American to boost its passenger traffic, if it continues to strengthen its relations with Qatar.

Will American Change Its Stance Yet Again?

While the three US legacy carriers have been operating as a team over the last couple of years, American Airlines had surprised its fellow legacy carriers and investors last month by announcing its plan to engage in capacity expansion and/or price wars, if required, to defend its market position from smaller airlines. American’s decision to change its stance created an environment of uncertainty among the legacy carriers who had been sticking together to protect themselves from competition. This also created panic among investors who ended up selling a large portion of airline stocks in anticipation of a bleak future of the airline industry.

To add to this, William Ris, a top official at American Airlines, recently highlighted the airline’s openness to partner with the Gulf carriers on more equitable terms. This clearly indicates that American would be willing to enter into a partnership with these airlines on more favorable terms, unlike its counterparts who have not expressed their intent to engage with these carriers in any form. Thus, we believe that while American has been supporting Delta and United, the possibility of American entering into a partnership with the Gulf carriers cannot be ruled out.

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  • commented 2 years ago
  • tags: UAL AMR DAL
  • Now is necessary one genuine top air lines President.
    Wat occur with South West ?. I remember the founder President and all the initial troubles. I did with him the video of the succes.- U. de los Andes. Bogota 1994. Evideum