(Bloomberg) -- They came, they saw, they folded.
That’s certainly what appears to have come of U.S. airlines’ three-year campaign to bring their Gulf rivals to heel.
The accord signed between the U.S. and the United Arab Emirates should press pause on a long-simmering dispute over government subsidies to Emirates and Etihad Airways PJSC, but any concessions are few.
The standout change is that the U.A.E. will require its carriers to publish annual reports consistent with international accounting standards — but Emirates has been doing that anyway since 1994.
While Etihad and Qatar Airways QCSC have been more cagey about their numbers, airlines have long roughed out the finances of closely held competitors by working back from the huge volume of booking data, fuel prices, airport and traffic charges, aircraft costs, and staff salaries that are mostly in the public domain.
The fact U.S. airlines’ lobby group, the Partnership for Open & Fair Skies, has estimated the three Gulf carriers have received $42.3 billion in subsidies and unfair benefits is an indicator of just how easy it is to back out such figures from published information.
Notable by its absence is any sort of commitment on subsidies, an issue at the heart of U.S. carriers’ arguments of unfair treatment. The latest deal (according to reports) will simply note that while subsidies can be distorting, they’re a normal part of the aviation landscape.
The U.A.E. isn’t even committing to halt so-called fifth-freedom flights that have been the biggest irritant in the U.S.-Gulf aviation relationship — settling instead for a bland statement that its carriers aren’t planning any more such routes.
Those flights, which start in the Gulf before picking up passengers in Europe and continuing on to the U.S., can in effect become transatlantic routes. That threatens a lucrative oligopoly for U.S. and European airlines.
It’s not surprising Gulf carriers aren’t planning to do more fifth-freedom flying at the moment, because the entire sector is in a rut.
Qatar Airways expects to report a “very large loss” for the year ended March and may have to seek a state bailout if an embargo on the country by other Arab nations continues, Chief Executive Officer Akbar al-Baker said earlier this year.
Etihad lost $1.87 billion last year and is facing something akin to an existential crisis after its strategy to become a first-rank global carrier via a network of alliances failed. Analysts are now speculating on whether it may merge with Emirates, or perhaps morph into a premium-only carrier.
Even the mighty Emirates is cutting back. Capacity growth in its most recent fiscal year was just 2.4 percent, the slowest pace since at least 1991 and about one-eighth of its average rate over the past 25 years.
The reason for all that is largely home-grown: After years of expansion, Gulf aviation is simply at overcapacity. Net income in the region, which level-pegged with Europe and North America a few years ago, has slipped far behind.
Indeed, the wave of consolidation among North American airlines means it’s that region, rather than the Gulf, that has accounted for more than half of all profits globally over the past five years. The lap of wealth is a strange position from which to play the victim card.
The U.S. sector’s financial strength — and the improbability that rulers in the Gulf would do anything to seriously unpick the way their flag-carriers are entwined with the state — probably explains why U.S. airlines don’t have the heart to continue this fight much further.
They also have to keep an eye on the next challenge. China’s big three carriers have grown at a headlong pace in recent years, and Asia is set to take the Gulf’s crown as the fastest-expanding region in coming decades.
Air China Ltd. will surpass Delta Air Lines Inc. as the world’s biggest airline by market value within the next three years, according to Bloomberg Intelligence analyst Rahul Kapoor, and in free cash flow terms, the Chinese are already closing in. Beijing’s attempt to bully U.S. carriers into removing the designation of Taiwan, Hong Kong and Macau as separate countries is a sign of how the power is shifting.
Just as Washington missed the rise of China in the 2000s by getting caught up in a military entanglement in the Middle East, so too the U.S. carriers’ war on their Gulf rivals has distracted them from the ascent of a more formidable rival.
To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.
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