Will the U.S. Stop Emirates and Other Gulf Airlines From Expanding?

By Markets Fool.com

Recently, the three top U.S. airlines -- American Airlines , Delta Air Lines , and United Continental -- have been lobbying the federal government hard to block the rapid expansion of Middle Eastern carriers into the United States.

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The U.S. airlines have banded together as the "Partnership for Open and Fair Skies." They allege that Emirates, Etihad Airways, and Qatar Airways have received at least $40 billion in government subsidies in the past decade, putting the U.S. carriers at a big disadvantage.

The top U.S. airlines claim that the big Gulf carriers are government-subsidized.

So far, the federal government appears relatively receptive to the U.S. carriers' complaints. However, Washington is unlikely to bring the hammer down hard on the Gulf carriers, even if they are competing unfairly.

Clash over subsidies
Naturally, the Gulf carriers deny the allegations that they are government-subsidized. Emirates CEO Tim Clark went so far as to demand that American, Delta, and United apologize for their accusations after Emirates offers its full rebuttal.

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The U.S. government has been more intrigued by the airlines' claims. The interagency team reviewing the complaint has sent the airlines 20 questions about the report, and the government is taking the claims seriously, according to Reuters.

Based on the evidence compiled by the Partnership for Open and Fair Skies, the case against Qatar Airways and Etihad Airways appears very straightforward.Whether Emirates has received significant market-distorting subsidies is somewhat less obvious.

It's not that simple
However, it's not clear how the U.S. government will react, even if it finds evidence that all three Gulf carriers have benefited from subsidies. First, the U.S. has been a huge promoter of "Open Skies" agreements that deregulate international routes. FedEx and JetBlue don't want to lose the benefits of Open Skies, and have vocally opposed the position taken by American, Delta, and United.

Second, the Gulf carriers have become three of Boeing's best customers. As of the end of February, Emirates had 199 Boeing jets on order: 49 of the current 777-300ER model and 150 of the next-generation 777X.

The Gulf carriers have been some of Boeing's best customers lately. Photo source: The Boeing Co.

Additionally, Etihad has 95 outstanding orders for Boeing widebodies: 69 Dreamliners, 25 777X aircraft, and one 777 freighter. Lastly, Qatar Airways has 71 Boeing widebodies on order: 11 current-generation 777s (six 777-300ERs and five freighters), 50 777Xs, and 10 Dreamliners.

At current list prices, these planes would cost more than $120 billion. Incorporating a typical discount of a little more than 50%, the backlog from the three Gulf airlines is still worth about $60 billion. That's equivalent to a full year of sales for Boeing's commercial airplane segment.

If the U.S. were to crack down on the Gulf carriers' expansion, not only would they need fewer airplanes, they also might retaliate by shifting orders to Boeing rival Airbus. (All three are also major Airbus customers.) This could decimate Boeing's 777X program, for which the Gulf carriers are the top three customers, representing more than three-quarters of the current backlog.

Balancing priorities
To some extent, the rapid growth of the Gulf carriers in the U.S. and the low economy fares they charge have constrained the international growth of American Airlines, Delta Air Lines, and United Continental. If their growth has been aided by state subsidies, then it would be fair to penalize them to level the playing field.

However, just because it might be fair doesn't mean it would be in the national interest. While the government might want to protect U.S. airlines, it also needs to look out for broader economic and strategic interests.

The economic impact of U.S. airlines adding a few extra routes to the Middle East and the Indian subcontinent would be overshadowed by a potential cutback in Boeing orders from the Gulf carriers. The UAE and Qatar are also important military partners in an unstable region. As a result, anything more than a slap on the wrist for the Gulf carriers would be very surprising.

The article Will the U.S. Stop Emirates and Other Gulf Airlines From Expanding? originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of JetBlue Airways and The Boeing Company. The Motley Fool recommends FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.