Why UAE And Qatar Have The ‘World’s Best’ Airlines

Courtesy of Forbes. By Kenneth Rapoza

On a business class flight from Rome to Boston, there is no leg rest. The seat does not recline all the way. There is no separation between the passengers.  The dinner is not bad, sort of like an Applebees. In the same class cabin on a trip from New York to Abu Dhabi, tiny lights illuminate the ceiling of an Etihad flight like stars. There’s a leg rest. The seat reclines flat.  The dinner is Spago’s.  My passport fell out of my front chest pocket while sleeping, wrapped in a thick blanket. A flight attendant proceeded to rip apart the entire seat until he found it, which he did, in about a minute. On a São Paulo bound Delta flight out of Boston in the rain, a missed connection means I’m sleeping on the floor in the airport because there’s no room at the local Inn. Fair comparison? Industry experts think so.

Check out any list of the world’s leading airlines and you’ll be hard pressed to find a U.S. carrier. Within the top 10 ranked by Skytrax, only one country has two airlines on the list: the United Arab Emirates and their flagship carrier Emirates Airlines flying out of Dubai and the smaller Etihad Airways based in Abu Dhabi. UAE’s smaller neighbor, Qatar, is home to the No. 2 ranked airline Qatar Airways. It trails Emirates at No. 1. Etihad is ranked No. 7. The closest thing to an American carrier on the list is Air Canada out of Toronto.

By just about every estimate, these three Persian Gulf carriers are the best in the business.

Last year, the World Travel Awards, considered the “Oscars” of the travel industry, chose Etihad Airways as the world’s best airline.  Etihad also was picked by travel agents and industry professionals for world’s best cabin crew and best first class.

Accolades go beyond the air. It also matters on the ground — like in the airports itself.  Emirates first class lounge at Dubai International was ranked the world’s best.

“The U.S. invented the airline industry and I think we should be the best in the world, but obviously we are not,” said Thomas Horton, chairman of American Airlines.  Horton, the former CEO of American, is now non-executive chairman of American Airlines Group. The company is the result of a merger between American Airlines and former rival U.S. Airways.  Speaking at the Buttonwood Gathering last fall in New York, Horton said, “the mergers will help us compete with the likes of Emirates, I think.  This is a hyper competitive industry. We’re competing in a world marketplace and we have to think of ourselves that way.”

Boeing BA +2.17% loves these guys.  They see the Middle East airline industry growing beyond the global average.  At the Dubai Air Show in November, Emirates Airline placed a $76 billion order for 150 777 aircraft, helping make the model the largest product launch in commercial jetliner history.

Not to be outdone by Emirates, Qatar Airways ordered 50 777′s worth $19 billion and Etihad Airways ordered 25.

Boeing loves them. Passengers do to.  But when it comes to passenger satisfaction, the U.S. airlines are lagging again.

The Reputation Institute gauges the emotional connection and reputation of U.S. businesses. Last year, it measured the pulse of U.S. carriers based on the amount of trust, admiration, good feeling and esteem that the general public have over the airlines. U.S. Airways and United were ranked “weak”, while Delta and American Airlines were ranked “average”.  The only one ranked “strong” by Americans was Southwest.

Ironically, Southwest Airlines is the mirror opposite of the A-list airlines in U.A.E and Qatar.

Growing vs. Shrinking

Louisiana has a GDP of around $207 billion while tiny Qatar has a GDP of around $175 billion.  And even though its capital city, Doha, has a population just shy of 800,000, according to United Nations data, Doha International Airport’s passenger traffic is around half that of JFK International, a city of 8.3 million.

Of course, population size is irrelevant when it comes to airports. Denver’s airport is bigger than JFK as well. But while the United Arab Emirates and Qatar are small places on the map, they have have managed to become global leaders in aviation. Their airlines are growing while U.S. carriers are largely dependent on cost cutting, fees and consolidation for profits.

Etihad’s net profit last year rose 48% to $62 million.  They were the first international company to take advantage of a new Indian government policy allowing for foreign ownership of airlines. It bought a 20% stake in Jet Airways.  Emirates Airlines profit rose 4% to $600 million in the first half of 2013, according to a statement released by the company on Nov. 12.   Last year, the airline partnered with Qantas of Australia, giving the Dubai carrier greater access Down Under, as well as access to Qantas flights to Europe.

By comparison, United Airlines posted full year profits of $1.1 billion.  American Airlines Group ended 2013 with a healthy $1.9 billion in profit.

Still, the U.S. carriers are seen as locally focused, with lackluster industry policies that starve growth.  Meanwhile, state managed investment funds like the Qatar Investment Authority and the Abu Dhabi Investment Authority are putting money to work in both home-gown and in U.K. airports, like Qatar’s investment in Heathrow in 2012 and Abu Dhabi’s investment in Gatwick.

Michael Burns, an airports consultant at PwC in London, said U.A.E. and Qatar have developed their air transportation industry to be a new global hub.

“Doha, Dubai and Abu Dhabi airports have developed for three reasons,” Burns says. “One is because of new aircraft technology which means that their geographic positioning allows them access to Asia and even into Europe and the Americas thanks to larger, longer range aircraft. Another big advantage is that governments have realized the economic value in airports.”

While countries like China will also invest in airports and in its airlines, China is more like the U.S. insofar as it has a huge domestic market to tend to. Europe, meanwhile, will struggle to compete with the Gulf flagships.  Airports of Europe will surely see increased traffic from emerging markets throughout Asia and the Middle East, but they will just as likely fly into London from India aboard an Etihad jet than a Lufthansa.

“Unfortunately for us, we have for-profit, transparent airline companies,” says Lee Moak, the President of the Washington DC-based Air Line Pilots Association (ALPA), a little tongue-in-cheek.  The Gulf carriers are all state-owned. U.A.E and Qatar airlines also get funding from the market, but they are backstopped by an oil-rich government.

“The U.S. carriers are all re-configuring their premium products in a rush to compete with Qatar, Emirates and Etihad. These guys are very committed to customer service and to having a top notch airline industry in their country so they are not so dependent on oil,” Moak says. “If the airlines don’t invest, and if the government does not create policies that enable us to compete globally, then in the future you will be flying an Emirates Airlines plane to Europe instead of a Delta. Just look at what happened to Qantas in Australia. They used to be the prime source for all flights in and out of Australia until Emirates came to town.”

Over the top? For the rich who believe children shouldn’t be seen nor heard aboard a long flight, Etihad Airways introduced its Flying Nannies crew in September. (Etihad Airways file photo)

Luxury, Service & the Government

The U.A.E. and Qatar investing authorities have succeeded in a very short period of time at becoming a global hub. They want to cater to travelers who want more from a 12 hour flight. They cater to travelers who want service and comfort. These airlines, according to the industry, continue to deliver on those service commitments.

“I still think the U.S. can compete, but right now it is an uneven playing field and we are losing,” warns ALPA’s Moak.

One of the reasons is taxation. The U.S. airline industry faces higher taxes than the three Gulf majors. The aviation industry has 17 unique federal taxes and fees. Airlines-for-America estimates that about 20% of a $300 ticket for a typical, domestic round-trip itinerary with a single connection in both directions is composed of taxes. The federal tax rates paid by airlines are higher than federal taxes paid on alcohol, tobacco, and firearms, which were originally intended to discourage use.

As taxes increase, airlines must pass the cost along to consumers in the form of higher fares and fees like baggage handling, reduced services, or face tighter margins.  In a global environment that is highly volatile and competitive, raising fares is often not prudent, which means airlines are forced to swallow the tax burden or cut service.

The tax burden is anticipated to increase in the coming years, which bodes poorly for the international U.S. carriers, and not so bad for an ever-expanding Qatar, Emirates and Etihad.

“The U.A.E and Qatar have policies that promote aviation,” says Moak. “U.S. has policies that in effect penalize the airlines.”

According to the International Air Transport Association’s global air traffic data, the mature U.S. market grew by just over 1% in 2012, compared with growth of nearly 7% in the Asia-Pacific region, over 8% in Africa, over 10% in Latin America and a staggering 17% in the Middle East.

Based on market growth projections only, Etihad, Emirates and Qatar Airlines have a reason to invest in remaining the world’s best. American carriers will have to create similar high end cabins and airport customs services to compete in international markets.

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