24 January 2017 10:35:18 IST

A management and technology professional with 17 years of experience at Big-4 business consulting firms, and seven years of experience in high-technology manufacturing, Rajkamal Rao is a results-driven strategy expert. A US citizen with OCI (Overseas Citizen of India) privileges that allow him to live and work in India, he divides his time between the two countries. Rao heads Rao Advisors, a firm that counsels students aspiring to study in the United States on ways to maximise their return on investment. He lives with his wife and son in Texas. Rao has been a columnist for from the year the website was launched, in 2015, and writes regularly for BusinessLine as well. Twitter: @rajkamalrao

The sheer domination of ME3 airlines

Etihad, Qatar and Emirates are snatching market share from established European and American carriers

The three Middle Eastern carriers — Etihad, Qatar and Emirates, now commonly referred to in the aviation industry as the ME3 airlines — have become particularly dominant in recent years. They have been continuously taking away market share from the established European carriers, such as Lufthansa, British Airways, Air France, KLM and the big US airlines, American, United or Delta Airlines.

And they are doing this the hard way — by buying new planes, hiring pilots, expanding capacity, extending networks and increasing flight frequencies. Their governments are fully in on their plans, investing billions of dollars in modern mega airport hubs in Abu Dhabi, Doha and Dubai. The $32-billion expansion plan in Dubai to construct Al Maktoum International Airport may well turn out to be the world’s largest commercial airport, when it opens later this year.

What’s the difference?

From a marketing angle, it seems as though the airline business is all about passenger convenience and comfort. Glossy ads depict new planes with lots of features, such as mood-lighting in cabins, well-accoutered toilets and bigger sized windows. Airlines heavily promote luxury in upper classes on long-haul flights, such as lie-flat beds, and in the case of Emirates, a fully stocked bar and private shower for passengers on its A380 aircraft.

But at its core, what differentiates one airline from another is the network. How many places does an airline fly to? What is the frequency of flights between two cities? What alliances does an airline have to ensure seamless travel of passengers and bags from one remote corner of the world to another?

The western airlines know that their strength on the playing field has always been the network. The Europeans have had a strong network of flights in Europe and to Asia. The Americans are dominant in the US, Canada and Central America. So, the western airlines combined their networks through various airline alliances, such as the Star network which, for example, connects US-based United Airlines flights to Lufthansa flights operating out of Frankfurt or Munich.

Problem of alliances

Alliance airlines buy capacity on each others’ planes, create code-shared flights, coordinate arrival and departure schedules to make easy connections possible, and provide priority processing for bags at hub airports. Over time, the alliances have grown to include smaller carriers. Today, the Star Alliance network offers more than 1,000 destinations and more than 20,000 flights daily across 26 airline partners.

Which is actually a problem. Airline rules are complicated and an alliance does not have the same strong teeth as one independent airline. Customer service can suffer when organisations tend to get big, especially with alliances which are loosely tethered with little top-down governance.

The ME3 airlines sought to take a different path — to offer a large network on their own, using alliances only to connect domestically. Emirates has an alliance with JetBlue and Alaska Airlines, carriers known for operating frequent domestic flights in the US.

Leveraging their deep pockets, the ME3 took advantage of “open-skies” agreements to buy more planes and operate more flights in a far-flung network that touches major cities in every part of the globe.

Again, consider Emirates as profiled in a superb article in an American business magazine: “The airline is flying at astonishing capacity. Nine Emirates A380s land in London every day, along with five in Bangkok and four at JFK. In South Africa, Johannesburg gets four daily 777s, Cape Town three, and Durban one. Daily flights to those three cities by US carriers number one, zero, and zero.”

The A380 is the largest passenger aircraft in the world. How can Emirates drum up sufficient traffic to fly nine of those into Heathrow each day from a single hub? How can western carriers ever compete against such domination?

A case in point

The Dallas-Ft. Worth International Airport in the US is a case in point. Until a decade ago, passengers flying to India had just two airlines offering one-stop connections: British Airways, connecting in London, and Lufthansa, connecting in Frankfurt.

Because British Airways operates its OneWorld alliance with American Airlines, passengers had three daily flights to choose from to go from Dallas to London, and then on to the daily non-stop to India, generally one a day to most cities (Mumbai and Delhi get two flights). The limited capacity allowed the western airlines to charge a premium for flights to India.

Not any more. All the ME3 airlines operate now to Dallas from hubs in Abu Dhabi, Doha and Dubai, offering one-stop connections to India. Etihad’s partnership with Jet Airways has vastly expanded the former’s network. With so many seats available, all airlines have been forced to lower ticket prices — a win-win situation for passengers. But for the western carriers, this has been a huge blow.

No unions, less taxes

The ME3 airlines do not operate under the progressive labour policies of western carriers. Its workforce is not unionised and the word “strike” is an alien term. Meanwhile, western carriers continue to suffer from work stoppages — recently by Lufthansa pilots and British Airways on-board crews. Passengers do not like their travel plans to be held hostage to internal disputes between airlines and their employees. So, many choose ME3 airlines over western carriers.

And then, there are taxes. Being state-owned or supported by their rulers, ME3 airlines do not pay income or property taxes. The costs of building and maintaining airports are assumed by the rulers, and not passed on to passengers in the form of airport taxes and fees.

For a flight from India to the US, British Airways charges $245 in government taxes (including a clean fuel tax) to connect through London's Heathrow. Etihad Airways, in contrast, charges $45 to connect via Abu Dhabi. Lower taxes result in lower ticket prices, hence driving increasing traffic to the ME3 airlines.

The world’s airlines have largely become a commodity business. Aviation safety is excellent because the newest planes from Boeing and Airbus can practically fly themselves from point to point. Whatever may be the story five years from now, one thing appears certain — ME3 airlines will continue to be key players in anything concerning the aviation business.