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 ..................................................................................................................