Impact of Middle East Emerging Carriers on US and EU Legacy Airlines by Matthieu de Vergnes M.Eng Mechanical Engineering Imperial College London, 2015 SUBMITTED TO THE INSTITUTE FOR DATA, SYSTEMS, AND SOCIETY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN TECHNOLOGY AND POLICY AT THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY JUNE 2017 @ 2017 Massachusetts Institute of Technology. All rights reserved. Author……...…………………………………………………………………….……………….... Institute for Data, Systems, and Society May 12, 2017 Certified by………………………………………………………………………………………… Peter P. Belobaba Principal Research Scientist of Aeronautics and Astronautics Thesis Supervisor Accepted by…………………………………………………………………...…………………… Munther Dahleh William A. Coolidge Professor, Electrical Engineering and Computer Science Director of the Institute for Data, Systems, and Society 1 2 Impact of Middle East Emerging Carriers on US and EU Legacy Airlines by Matthieu de Vergnes Submitted to the Institute for Data, Systems, and Society on May 12, 2017, in partial fulfillment of the requirements for the degree of Master of Science in Technology and Policy Abstract Airlines in the Middle East have captured significant attention from governments, media and consumers over the past decade. By building large networks that facilitate international connections at their hubs, Middle East carriers are able to compete in a wide range of origin destination markets around the globe. Three of these carriers stand out with their recent expansion to European, US and Asian destinations: Emirates, Etihad Airways and Qatar Airways, also known as the ME3 carriers. From a capacity perspective, ME3 airlines have grown very rapidly on routes where they compete with US and European airlines. Over the 2010-2015 period, from Europe to the ME, ME3 airlines increased their seat capacity by 97% against a 1% reduction by European legacy carriers. At the same time, ME3 carriers increased the number of seats from the US by 181% while, as of 2017, US carriers have cut all flights to the Middle East, with the exception of Israel. In addition, ME3 capacity to Asia, and in particular to India, grew significantly. From a traffic perspective, ME3 carriers have had a significant impact in markets beyond the Middle East. Passenger traffic in the EU-India and US-India markets grew by 14% and 26% respectively since 2010. Most of the growth was driven by ME3 carriers, allowing them to reach 26% and 37% market share in these markets in 2015. The ME3 capacity growth likely stimulated the overall demand in markets to India but has also caused some diversion of traffic away from nonME3 carriers. In a two-way fixed effect econometric model, we estimated that the presence of ME3 carriers in average EU-India and US-India markets diverted, respectively, 20% and 32% of nonME3 traffic to ME3 carriers. The growing influence of ME3 carriers has led to significant controversy over claims of subsidies and unfair competition from both US and ME3 airlines. Based on a brief review of the various claims, we found that both sides have received government backing. It is difficult to determine whether either of the parties have violated established competition rules while benefiting from this support. Nonetheless, the dispute is likely to continue, if not for legal purposes at least for public relations and political purposes. Thesis Supervisor: Peter P. Belobaba Title: Principal Research Scientist of Aeronautics and Astronautics 3 4 Acknowledgements This thesis marks the end of two unforgettable years in the Technology and Policy Program, in the International Center for Air Transportation, at MIT, and in Cambridge in general. Reflecting back on my time, no words could capture the uniqueness of this experience, shaped by truly inspiring individuals. First and foremost, I would like to thank my thesis advisor Dr. Peter Belobaba. Peter took me on his team despite my limited background in the airline industry, and I will always be grateful for his trust from day one. I am particularly thankful for Peter’s patience, advice, and constant support. It was a privilege to be inspired by an expert with such knowledge and dedication. I would also like to thank the members of the PODS Consortium and the Airline Industry Consortium for funding my work and education. In particular, Amadeus provided critical data for my research. Thanks to Professor Sara Ellison from the Department of Economics for her guidance in building the econometric model. Thanks to Craig Hopperstad and Matt Berge for their continuous help in the development of my PODS research. This experience would not have been the same without the team with whom I have shared unquantifiable hours in our memorable lab discussing life, politics, and of course the latest airline news. Thank you Adam, Alex, Ben, and Oren! ¡Gracias Germán y Juan Pablo por no haberme dejado viendo el fútbol en soledad en el laboratorio! A special thanks to Mike for his mentorship throughout my two years in the lab, both in my PODS and AIC research. Some of the results in this thesis would not have been possible without your help. Thanks to all of you for making the PODS trips to Dallas, Doha, DC and soon Montreal so enjoyable! The Technology and Policy Program is a special group within the MIT community and benefits from unbelievable support. Thanks to Barb for always finding solutions to my problems (including taking my first MIT exam over skype) and to Ed for helping me make it here. Thanks to TPP classes of 2016, 2018 and of course, to the best of all, class of 2017. I would particularly like to thank Dhivya, Guillaume, Nic and, Sam with whom I have shared many lunches, weekends, or volcano boarding in Nicaragua. Thanks to my friends for distracting me from the lab, and keeping my weekends workless. Thanks Rafa and João, get ready for my visits next year! Thank you Victor for your constant generosity and cheerfulness, even when we capsize twice in the Charles within 2 minutes. I was also lucky enough to accompany Anne, Elise, Mali, Rami and Victor in the bureau of the Francophone Club. Cette année a été riche en activités, riche en succès, merci! Finally, life would not have been the same without our amazing Discoteca Chupitos on Berkshire Street. Grazie to my partners in crime Nic and Nicola! I look forward to many more whiteboard brainstorming sessions, crypto discussions, high energy debates, Cuba trips, Brahmin nights, and Monday Lunchtime shows. This was the beginning of an adventure which will continue between Rome, Milan, Paris, Tropea, London, New York, San Francisco and more! Last but not least, I would like to thank my family for the care and encouragement they have shown during the past two years, and more importantly during my entire life. Mom, Dad, je n’aurais jamais eu l’occasion de venir ici sans votre confiance et soutien permanents. Charles, Laure, par vos attentions, votre humour, votre entêtement, vous avez été, et serez toujours, les modèles de votre éternel petit frère. 5 6 Contents Chapter 1 Introduction ............................................................................................................................... 15 1.1 Situation of the Global Airline Industry ............................................................................................ 15 1.2 Profitability of the Airline Industry ................................................................................................... 16 1.3 Recent Industry trends ...................................................................................................................... 17 1.4 Bilateral Issues .................................................................................................................................. 20 US vs ME3 Carriers .............................................................................................................................. 20 EU vs ME3 Carriers .............................................................................................................................. 20 1.5 Thesis Objective ................................................................................................................................ 21 1.6 Thesis Structure ................................................................................................................................ 21 Chapter 2 Middle East Emerging Carriers ................................................................................................... 22 2.1 Introduction ...................................................................................................................................... 22 2.2 Background ....................................................................................................................................... 22 2.3 ME3 Growth ...................................................................................................................................... 23 2.4 Emirates (EK) ..................................................................................................................................... 26 2.5 Etihad Airways (EY) ........................................................................................................................... 28 2.6 Qatar Airways (QR) ........................................................................................................................... 30 2.7 Other Major ME Airlines ................................................................................................................... 32 Low Cost Carriers ................................................................................................................................ 33 Legacy Carriers .................................................................................................................................... 33 2.8 Turkish Airlines (TK) .......................................................................................................................... 34 2.9 Conclusion ......................................................................................................................................... 36 Chapter 3 Evolution of Airline Capacities to/from the Middle East ........................................................... 38 3.1 Introduction ...................................................................................................................................... 38 3.2 Routes to the ME .............................................................................................................................. 38 Europe - Middle East ........................................................................................................................... 38 North America - Middle East ............................................................................................................... 50 Impact on US vs EU carriers ................................................................................................................ 57 3.3 Beyond the Middle East .................................................................................................................... 57 Indian Subcontinent ............................................................................................................................ 57 Southeast Asia ..................................................................................................................................... 69 3.4 Conclusion ......................................................................................................................................... 77 Chapter 4 Impact of ME3 Capacity Growth on OD Traffic to India ............................................................. 79 7 4.1 Introduction ...................................................................................................................................... 79 4.2 Amadeus Travel Intelligence Traffic Estimation ............................................................................... 80 4.3 Aggregate Traffic Flows to India from Europe and the USA ............................................................. 81 From Europe ....................................................................................................................................... 81 From the United States ....................................................................................................................... 88 4.4 Traffic flows by OD market from Europe and the United States to India ......................................... 94 From Europe ....................................................................................................................................... 94 From the United States ....................................................................................................................... 98 4.5 Conclusion ....................................................................................................................................... 103 Chapter 5 Quantifying Diversion versus Stimulation of NonME3 Carrier Traffic ..................................... 104 5.1 Introduction .................................................................................................................................... 104 5.2 The Model ....................................................................................................................................... 105 5.3 Data Sources ................................................................................................................................... 106 5.4 Data Processing ............................................................................................................................... 107 5.5 Results ............................................................................................................................................. 108 Europe - India OD markets ................................................................................................................ 108 United States - India OD markets...................................................................................................... 110 5.6 Conclusion ....................................................................................................................................... 112 Chapter 6 Subsidy Debate Between US and ME3 carriers ........................................................................ 113 6.1 Introduction .................................................................................................................................... 113 6.2 Airline Subsidies and the Associated Regulation ............................................................................ 113 6.3 Potential Subsidies Received by US Legacy Airlines ....................................................................... 115 Development of Aviation .................................................................................................................. 115 Equal Service to Communities .......................................................................................................... 115 Claims of an Advantageous Legal System ......................................................................................... 116 6.4 Potential Subsidies Received by ME3 carriers ................................................................................ 117 Etihad (EY) ......................................................................................................................................... 117 Qatar Airways (QR) ........................................................................................................................... 119 Emirates (EK) ..................................................................................................................................... 120 Other Artificial Advantages ............................................................................................................... 120 6.5 Conclusion ....................................................................................................................................... 121 Chapter 7 Conclusion ................................................................................................................................ 122 Future Research .................................................................................................................................... 125 8 Appendix ................................................................................................................................................... 126 References ................................................................................................................................................ 129 9 Table of Figures Figure 1.1: Yearly passengers by world region between 1995 and 2015[2] ............................................... 15 Figure 1.2: US Airlines Net Income in millions of USD [6] ........................................................................... 17 Figure 2.1: Catchment area around hub location for EU, US and ME3 carriers - IATA Member Airlines – R=2000 miles ............................................................................................................................................... 23 Figure 2.2: Seat growth for ME3 carriers and each first airline by region according to RPKs .................... 24 Figure 2.3: Emirates number of seats and destinations since 2005 ........................................................... 27 Figure 2.4: Share of seats by region of destination from Dubai on EK ....................................................... 27 Figure 2.5: Etihad Airways number of seats and destinations since 2005 ................................................. 28 Figure 2.6: Share of seats by region of destination from Abu Dhabi on EY ................................................ 29 Figure 2.7: Qatar Airways number of seats and destinations since 2005 .................................................. 30 Figure 2.8: Share of seats by region of destination from Doha on QR ....................................................... 31 Figure 2.9: Seat share by region of destination and carrier from the UAE ................................................. 33 Figure 2.10: Seat share by region of destination and carrier in 2015 from Muscat (left) and Jeddah (right) .................................................................................................................................................................... 34 Figure 2.11: Turkish Airlines number of seats and destinations since 2005 .............................................. 35 Figure 2.12: TK seat share by region of destination from IST ..................................................................... 35 Figure 2.13: Average Stage Length by airline in 2015 (miles) ..................................................................... 36 Figure 3.1: Number of flights between Europe and the ME between 2010 and 2015 by carrier type ...... 40 Figure 3.2: Number of seats on flights between Europe and the ME between 2010 and 2015 by carrier type ............................................................................................................................................................. 40 Figure 3.3: Evolution of number of seats per flight by carrier type ............................................................ 41 Figure 3.4: Changes in ASM share between 2010 and 2015 ...................................................................... 41 Figure 3.5: Seat share amongst EU Carriers on EU-ME routes ................................................................... 42 Figure 3.6: Number of seats on flights from selected European countries to the ME ............................... 43 Figure 3.7: Changes in seats to ME3 hubs by route and carrier between 2010 and 2015 ......................... 44 Figure 3.8: Capacity changes to ME secondary hubs between 2010 and 2015 by EU legacy carrier ......... 45 Figure 3.9: Capacity changes to ME secondary hubs between 2010 and 2015 by ME3 legacy carrier ...... 45 Figure 3.10: Absolute seat growth on EU-ME routes from 2010 to 2015 by departure airport ................ 46 Figure 3.11: Number of flights on North America - ME routes (bidirectional) from 2010 to 2015 ............ 51 Figure 3.12: Number of seats on North America - ME routes (bidirectional) from 2010 to 2015 ............. 52 Figure 3.13: Evolution of number of seats by aircraft type ........................................................................ 52 Figure 3.14: Changes in ASM share between 2010 and 2015 .................................................................... 53 Figure 3.15: Seat Share amongst US carriers on US-ME routes .................................................................. 53 Figure 3.16: Number of seats on flights from the US to the ME (directional) between 2010 and 2015 .... 54 Figure 3.17: Number of seats on flights from the US to the ME (directional) between 2004 and 2015 .... 54 Figure 3.18: Change in service by US airlines to ME destinations between 2010 and 2015 ...................... 56 Figure 3.19: Decomposition of seats to ME3 hubs by US airport in 2015 .................................................. 56 Figure 3.20: Number of seats to and from the Indian Subcontinent by region of origin/destination and carrier type .................................................................................................................................................. 58 Figure 3.21: Airlines ranked by seat share on routes between Europe and India in 2010 and 2015 ......... 59 Figure 3.22: Number of seats by European carrier between 2010 and 2015 ............................................. 60 Figure 3.23: Number of seats by Asian carrier between 2010 and 2015 ................................................... 60 10