Ottawa is right on Emirates


By Fred Lazar

Emirates Airlines has intensified its lobby campaign to gain greater access to the Canadian market, and it has support at FP Comment, as seen in Terence Corcoran’s column and an article by Peter Harbison, the executive chairman of the Centre for Asia Pacific Aviation, both appearing March 20.

The gist of Harbison’s article can be summarized by its sub-heading: Air Canada’s protectionist response to Emirate’s expansion plans does more harm than good. And he complained that Ottawa steadfastly underwrites anything they think is good for Air Canada.

There is reality, then there is theory, and events of the past couple of years should have made it quite clear that most of the time, theory has nothing to do with reality.

If air transportation services were covered by the GATT, Air Canada would have had the Canadian Government launch a countervailing duty case against Emirates, the national airline of Dubai, and Etihad, the national airline of the UAE. And most likely, it would have won the case since both of these airlines (and the third amigo, Qatar), are subsidized by their respective governments. There isn’t a level playing field in this industry. However, this industry is not yet covered by the GATT.

The governments backing the three amigos (they are all owned by their respective governments) continue to invest heavily in building up their airports. Abu Dhabi is investing an additional €32-€40-billion in its airport; Qatar is investing €8.7-billion in the airport in Doha; and Dubai, assuming it can get the financing, has planned an investment of up to €26-billion in the Dubai World Central Airport. I doubt that their airlines will be picking up much of the tab on these investments.

There are several important lessons here. All of which have been conveniently ignored by the apologists for Emirates et al.

As the airline industry continues to evolve, we will move towards a global network consisting of 8-12 gateway airports, 20 or so regional hub airports, a number of local hub airports and hundreds of stub airports. The gateway airports will dominate the system and the dominant airline at these airports will offer non-stop and one-stop service to most of the world.

A number of studies have shown how these gateway airports will give their cities an enormous advantage in competing for talent and money in the global economy.

In a 2003 report, the U.K. Civil Aviation Authority pointed out: “Air transport links are vital to many businesses, whether for transporting goods or for business travel… Good air transport links have the potential to contribute to national productivity and aviation is of particular importance to the City of London and to tourism, our two largest exporters of invisibles. Air transport links also support foreign direct investment into and out of the U.K., often accompanied by improved technology and innovation… The development of a successful airport may also encourage the formation of clusters of industries.”

A classic study of the economic effects of deregulation in the U.S. found that most of the economic benefits came from the time savings for travellers as a result of the restructuring of the networks by the airlines to offer more frequencies and more non-stop and one-stop flights through their hubs. It will matter to Canadians whether they connect through Toronto or Vancouver, or they have to make an additional stop and change planes and airlines in order to travel through Atlanta, Los Angeles, London, Dubai or elsewhere.

An examination of the leading airports in the world, as measured by total number of passengers or cargo volumes, shows that with a few exceptions, the major airports serve as the hub for an airline. Without a major airline developing an airport as a hub with increasing global connections, an airport will not join the ranks of the gateway airports, and might not even become a regional hub.

In Canada, Toronto and possibly Vancouver, because of their locations, have the potential to become a gateway airport, or at least a regional hub, but only as long as Air Canada survives and grows. Air Canada will not have the opportunity to deploy its Boeing 787s (currently on order) to expand the number of spokes from these two hubs and the reach of its network if the three amigos are able to dump capacity into Canada. Emirates, for example, has about 130 aircraft in its fleet with 150 wide bodies on order. It needs to operate these aircraft somewhere.

Finally, while each of the three amigos has ambitious expansion plans, only one of their hubs will end up as a gateway airport. There will not be three in the Gulf region. Consequently, they will fight it out among themselves to dominate, and the fight might be quite prolonged (except for Emirates since it has the weakest financial backing) and quite bloody.

If the fight were limited to these three, there would be little concern for Air Canada and other airlines. Unfortunately, the battle will spill over into the global marketplace and will greatly damage the airlines lacking the deep pockets (built on oil and gas revenues) of two of the amigos. The Competition Bureau in Canada will not recognize or will not respond to the predatory actions, and so Air Canada, and with it the prospects for Toronto and Vancouver, will be severely impacted with its survival in jeopardy.

Should we be concerned that Air Canada’s Calin Rovinescu might have his company’s self interest at heart in attacking Emirates? No, we should be concerned instead about the Canadian Government caving in to the demands of the three amigos, and the significant negative impacts that this would have for Toronto, Vancouver and all Canadian travelers and companies.

Financial Post
Fred Lazar is Associate Professor of Economics at the Schulich School of Business at York University.