Last week, the U.S. government declared that passengers on flights to the U.S. from 10 airports in Muslim-majority countries would no longer be allowed to bring larger electronic devices like laptops and tablets on board. Government officials said that this was a security measure meant to thwart potential terrorist attacks.
Continue Reading Below
Most industry observers doubt that banning laptops and tablets from the cabin on certain routes will do anything to improve national security. But even if this measure has genuine security benefits, one thing is certain: The electronics ban is a huge gift to European airlines -- and their American joint venture partners.
European airlines will benefit from new U.S. security rules impacting Middle Eastern hubs. Image source: Pixabay.
U.S. airlines ask for protection
Among the 10 airports that are affected by the new U.S. security rules, three stand out: Dubai International Airport, Abu Dhabi International Airport, and Doha's Hamad International Airport. Those airports serve as hubs for three fast-growing Middle Eastern airlines: Emirates, Etihad Airways, and Qatar Airways (often known collectively as the ME3).
Top U.S. carriers American Airlines (NASDAQ: AAL), Delta Air Lines (NYSE: DAL), and United Continental (NYSE: UAL) have accused the ME3 of being government-subsidized companies. For the past two years, they have been calling for the U.S. government to renegotiate Open Skies treaties with Qatar and the United Arab Emirates to slow or stop the growth of the ME3 in the U.S.
Representatives for American, Delta, and United contend that the expansion of the ME3 has stolen traffic from them, forcing the U.S. carriers to cancel various routes. This has led to fewer American jobs. The three airlines renewed their call for government intervention almost as soon as Donald Trump won last year's presidential election.
Making life difficult for the ME3
The new security rules will be extremely inconvenient for many travelers flying to the U.S. on the ME3 carriers. First, many travelers are wary of checking their electronic devices, for fear that they could be lost, broken, or even hacked while in transit.
Second, Emirates, Etihad Airways, and Qatar Airways all have big followings among business travelers due to their high service standards. Few business travelers can afford to sit through an entire 15-hour flight without working. Smartphones will still be permitted on board, but it's not the same as having a laptop if you need to be productive.
Travelers flying to the U.S. on Emirates will no longer be able to bring laptops and tablets on board. Image source: Pixabay.
Thus, the ME3's hubs in Dubai, Abu Dhabi, and Doha will be at a competitive disadvantage relative to other hubs that aren't affected by the electronics ban.
While he didn't say the move was a protectionist ploy, Emirates CEO Tim Clark expressed surprise in a recent interview with The Associated Press, noting that Dubai has very strict security screenings. Whether or not the security concerns are genuine, the electronics ban is sure to cause some travelers to avoid connecting through any of the affected hubs.
This could be a game changer
A relatively small number of people travel between the U.S. and Qatar and the United Arab Emirates on the ME3 carriers. Emirates, Etihad, and Qatar Airways flights to the U.S. are primarily filled with travelers connecting at those carriers' hubs from other destinations across the world, but especially in the Middle East, South Asia, and Africa.
There are very few nonstop flights from the U.S. to airports in this region. Even fewer are operated by U.S. airlines. (United Airlines is the only U.S. carrier still flying to India; Delta is the only one to fly anywhere in Africa.) Thus, U.S. airlines won't get much of a direct benefit if more travelers try to avoid hubs like Dubai. Instead, the top European airlines will be the primary beneficiaries.
Before the rise of the ME3, the typical way to get from the U.S. to India, the Persian Gulf, or Africa was to connect through Europe on the likes of British Airways, Lufthansa, Air France, and KLM. Emirates and its peers have won a huge chunk of that traffic over the past decade.
The heavily unionized European carriers don't have low enough costs to compete effectively against the ME3, except on routes for which a routing through the Persian Gulf would be very circuitous. However, the inconvenience of having to check a laptop gives them a huge convenience advantage. As a result, more travelers flying from India to the U.S. may choose to connect in London or Frankfurt rather than Dubai or Doha.
Regaining some of this connecting traffic would be great for the European legacy carriers (and their U.S. partners -- more on that below). It would help to address an imbalance of supply and demand that has been causing airfares to plunge on transatlantic routes recently.
What it means for the U.S. airlines
In the short run, American Airlines, Delta Air Lines, and United Continental will all benefit at least indirectly if it becomes more desirable to connect in Europe compared to the Middle East.
All three have joint ventures with big European carriers that involve revenue or profit sharing. As a result -- to give just one example -- American Airlines benefits from customers flying between the U.S. and India via London on British Airways.
In the long run, if the carry-on ban for large electronics stays in effect for Dubai, Abu Dhabi, and Doha, it could provide an opening for U.S. airlines to offer more nonstop service to places like India and Africa. However, American, Delta, and United have all been very judicious about adding expensive new long-haul routes in recent years. For now, European airlines will be the main winners.
10 stocks we like better than United Continental HoldingsWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and United Continental Holdings wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of February 6, 2017