Delta, Emirates in a war of words over ATL-Dubai route
Delta will cease its Atlanta-Dubai route in February 2016
Last week I wrote about the news that Delta would cease its Atlanta-Dubai service in February 2016. Since that announcement, Emirates and Delta have engaged in corporate sniping over the motivations behind the Atlanta-based carrier's move. Emirates Airlines fired a return volley, refuting the impact of the big three Gulf carriers - Emirates, Etihad and Qatar - on Delta's decision. Air Transport World reported that the Dubai-based carrier had prepared an analysis that showed Delta's ATL-DXB route to be “'highly profitable' with “an estimated route profitability of over $10 million per annum, or a route net margin of 7%.” An Emirates spokesperson went on to suggest that Delta's move was either political or merely born of network profitability optimization and that Emirates is studying DXB-ATL service of its own after Delta's pull-out.
Emirates Airlines has disputed that the carrier had any role in Delta's decision to end ATL-DXB service
“We can only conclude that this is a political move to position Delta as a ‘victim’ of the Gulf carriers—which is laughable considering Delta’s size and profitability; or it is perhaps because they wish to redeploy their aircraft on other trans-Atlantic routes that have even higher yields due to the anti-trust immunity Delta enjoys with its alliance partners. In which case, Delta should admit that its goal is to make even more money, and leave the Gulf airlines out of it.”
Emirates does make a valid point that Delta's move could simply be the result of redeploying the 777 aircraft used for ATL-DXB to more profitable routes. However, if the 7% net margin is correct, this figure is just over half of Delta's overall net profit margin of 11.8% in Q3 2015. One can reasonably ask why this particular route exhibits markedly lower profitability than than the company overall. No doubt competition is a factor, but Delta faces competition on scores of the routes that it flies. What is the nature of competition - potentially, government-subsidized competition - on this particular route? Ben Schlappig at One Mile at a Time argues that an optimization move is not the same as being "forced" off a route as Delta claimed. However, if unfair competitive factors are the root cause of depressed profitability, a prudent business ultimately has to decide when they have to abandon a product or service. Squeezing out competition is precisely the goal of a competitor - to use Delta's word - "dumping" subsidized capacity into a market.
Emirates Airlines serves 11 destinations in the U.S.
In a letter Tuesday to Air Transport World published by the airline, Delta sought to set the "record straight on cancelling [the] ATL-Dubai route." Delta Chief Legal Officer Peter Carter argued that the publication's claim that Delta faced no competition on the route was false. He made a point similar to one I made last week that most of the U.S.-Dubai traffic, whether on Delta or Emirates, consists of passengers connecting through a U.S. international gateway. Emirates had claimed that Delta is "protected from non-US carriers" for "Fly America" traffic, giving it an effective monopoly between Atlanta and Dubai. Carter disputed any advantage for Delta by noting that Emirates can rely on partners to effect the same passenger positioning to an international gateway. Effectively, Delta, which "is heavily reliant on connecting traffic to support its international service," is competing with all U.S.-Dubai flights since "most passengers traveling to Dubai can easily book one-stop service on Emirates through the gateway of their choice." Even to the degree that Delta has a monopoly on federal government passengers to Dubai per the "Fly America Act", the proportion of these customer to the overall passenger base is likely quite small and, therefore, not as significant as Emirates might have one believe.
Carter reiterated that Delta is at a financial disadvantage due to Emirates's access to government subsidies. The executive continued to push the point that Emirates is not under the same profitability constraints as Delta, saying, "Airlines don’t cancel profitable routes, and Delta is no exception." He stated that the ATL-Dubai "service lost money for nearly two years." While some might quibble with Carter's statement about canceling profitable routes since airlines often optimize route networks as discussed above, I think that is being too literal. Besides, Delta is claiming that the route did lose money which stands in stark contrast to Emirates's analysis. However, without more detail from either side it is not clear which airline is correct about the profitability of the route.
Despite the back and forth between the airlines, I still feel Delta has a reasonable point about government subsidies for the Middle Eastern big three carriers. That is not to say that Delta is definitely correct in its case, but there is enough evidence for the federal government to look into whether this market is fair. That being said, I still think that Air Transport World makes an excellent point that the absence of an Indian subcontinent network is the root cause of Delta terminating its Dubai service. Carter, in his letter, suggested that the same subsidies "forcing" Delta to stop serving Dubai are the reason why U.S. carriers do not have such a network, but no support was offered for this reasoning. Given the continued growth of Emirates Airlines, Etihad Airways, and Qatar Airways, along with the enhanced profile of their international hubs in the Gulf region, I seriously doubt we have heard the last on this issue.