Emirates makes Hungary latest front in Gulf-US battleground

Emirates’ inaugural A380 flight to San Francisco International Airport approaching gate on Monday, Dec. 1, 2014, in San Francisco. (AP)

Although no formal announcement has been made, it looks increasingly likely that Dubai's flag-carrier, Emirates Airline, will soon launch nonstop flights from the Hungarian capital Budapest to America.

Senior transport officials from Hungary and the UAE have voiced support for the so-called fifth-freedom route – an industry term for connecting flights between two foreign countries.

Saif al-Suwaidi, the director general of the UAE's General Civil Aviation Authority, confirmed this month that the Gulf country has requested access to two fifth-freedom services over Budapest. Without naming the destinations being discussed, Péter Szijjártó, Hungary's foreign minister, added: “We are prepared to provide this freedom and will conduct the required procedures rapidly with both the Emirates and the European Union.”

New York, home to a large number of Hungarian expatriates, is considered the most obvious choice for fifth-freedom connectivity. Hungary has lacked nonstop US services since 2012, when American Airlines withdrew from Budapest following the collapse of its partner Malév Hungarian Airlines.

The country's only transatlantic link is currently Toronto – another base for the diaspora – which is served by Air Canada and Air Transat.

In December, Emirates increased capacity on its daily Dubai-Budapest service by up-gauging from an Airbus A330-200 to a Boeing 777-300ER. It also opened a call center in the Hungarian capital two years ago, employing 300 people.

Yet even with warm ties and an open invitation from Budapest, the launch of a Gulf-operated route between Europe and America risks antagonizing regulators on both sides of the Atlantic. Emirates' only other fifth-freedom transatlantic passenger service – Milan-New York, launched in 2013 – was the subject of an unsuccessful legal challenge by Alitalia, Italy's flag-carrier, even as it courted investment from UAE-based Etihad Airways.

That challenge was dismissed by Italy's highest administrative court, which ruled that the open-skies accord between the EU and the US provides sufficient legal basis for foreign carriers to operate transatlantic flights.

Anti-Gulf lobbying

Legacy airlines in America and Europe have long lobbied against the so-called “big three” Gulf carriers – Emirates, Etihad and Qatar Airways – accusing them of receiving government subsidies that create an uneven playing field with the private sector.

The Partnership for Open and Fair Skies, a lobby group representing US aviation interests, last year published evidence that the three Gulf carriers have received $42 billion of state aid over the past decade. The group is particularly critical of Emirates' fifth-freedom Milan-New York route, arguing that it encroaches on “a market that is irrelevant to the Gulf”. It says the presence of a subsidised Gulf carrier in the city-pair could force incumbent US and European airlines to withdraw their services.

All three of America's largest carriers – Delta Air Lines, American Airlines and United Airlines – operate daily flights on the route, as does Alitalia. Despite offering the same frequencies as its US rivals, Emirates accounts for almost one-third of capacity in the market because it deploys double-decker Airbus A380s.

Unlike Milan-New York, however, no other carriers operate on the prospective Budapest-New York route.

Highlighting the benefits of Emirates entering the city-pair, Minister Szijjártó said: “This could contribute to the given airline using Budapest as a regional hub, and finally put an end to the state of affairs according to which Budapest is the last major city in Europe not to have … [year-round] direct, transatlantic flights.”

It is a compelling argument – but not one that will sway lobbyists in the US and the EU. Even without incumbent competitors, the Partnership will still accuse Emirates of creating a chilling effect that deters new market entrants. It may also argue that Emirates is shoring up Budapest at the expense of other central European hubs, notably Vienna, the home base of Austrian Airlines.

Austrian serves four points in the US, including New York. As well as being owned by Lufthansa Group, the parent of Germany's flag-carrier, Austrian jointly markets flights with Star Alliance partner United Airlines.

Fifth-freedom growth

Undeterred by his critics, Emirates president Tim Clark last year promised to explore new fifth-freedom opportunities across the Atlantic.

“Expand further from European hubs into the US? Yes, we might do that … The kind of abuse we've been getting might cause us to do it,” he told The National newspaper, referring to the Partnership's allegations of state subsidies. Clark singled out Denmark and Sweden as markets that are potentially under-served. Greece has already approached Emirates over a possible fifth-freedom link, he noted. In 2013, Emirates even said it would fly transatlantic from regional UK points if given approval.

With Swiss regulators already considering a request by the UAE for fifth-freedom access to Mexico – another vacant country-pair – a new front in the battle between the Gulf carriers and their Western rivals could be opening up.

However, fifth-freedom services are unlikely to be a game-changer for Emirates.

The Gulf carriers have built their business models firmly around sixth-freedom flying – linking two foreign destinations via a stopover in their respective home bases. Connecting services that continue beyond a foreign destination have only been selectively adopted.

That reflects the difficulty of convincing foreign governments to grant fifth-freedom rights, as well as the niche appeal of many such markets. The majority of Emirates' existing fifth-freedom services are pegged-on flights in far-flung destinations (Australia to New Zealand, for example), or intra-regional flights between under-served countries (Ghana to Ivory Coast, for example). Access to both categories is relatively easy to obtain.

Lucrative transatlantic city-pairs, by contrast, will be fiercely protected in most European capitals. If Emirates does pursue more bridgeheads on the continent, second-tier hubs like Budapest are probably the best it can hope for.

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