Fending off new competition from Emirates and other Persian Gulf carriers will have to become a crucial part of strategies at European legacy airlines.

Carriers such as British Airways, Air France-KLM and Lufthansa, let alone smaller players, have become extremely concerned about the strong growth of Persian Gulf airlines in recent years. The Europeans consider Emirates, Qatar Airways and Etihad Airways a major threat to profits in their most lucrative market segment, long-haul routes, after low-cost carriers have taken over much of the short-haul sector. The legacy carriers are testing strategies to compete with LCCs more effectively and seem to have found some tools that can narrow their rivals’ cost advantage. But harder to find are strategies to counter challenges from new competitors in the intercontinental market.

Most of the European airline sector seems to be caught in a defensive model. Airlines are trying to persuade their governments not to grant Emirates more traffic rights even as they lobby for a more liberal air services agreement across the North Atlantic from which they hope to benefit.

But keeping Emirates out of their home markets is not likely to be successful in the long term, most observers agree. The U.K. and the United Arab Emirates (UAE) entertain an open-skies agreement that allows Emirates as many flights to the U.K. as it wishes. In other countries, such as Germany , greater market access seems to be only a matter of time.

While European airline executives are confident they can prove that Etihad or Qatar Airways benefit from state aid and thus have an argument that may stick with lawmakers, the one airline they are by far most concerned about is Emirates. Members of the Association of European Airlines (AEA) have been trying to prove a state-aid case for Emirates two years ago. Senior executives such as Air France-KLM Chairman Jean-Cyril Spinetta and Lufthansa CEO Wolfgang Mayrhuber continue to argue that carriers including Emirates benefit from “pretty much inexhaustible financial means from oil sources,” but the 2007-08 AEA fact-finding mission into alleged Emirates subsidies led nowhere.

The focus of the European legacy carriers has therefore shifted recently.They are now pushing for the abolition of export financing schemes that non-European or non-U.S. carriers can use to finance Boeing and Airbus aircraft.

“Our ability to fund the acquisition of new aircraft is handicapped by this rule, which prevents us from using export credit guarantees to secure financing at favorable rates for purchases from Airbus and Boeing,” says British Airways Chief Executive Willie Walsh.

At the European Aviation Club in Brussels in September, Walsh said, “ Europe is funding our competitors with cheap access to financing. I think it’s wrong that Europe has funded the expansion of Emirates, because that is exactly what the agencies are doing.”

It is estimated that in 2009 a third of all Airbus and Boeing orders were funded using export credit guarantees, says Walsh. “We believe these guarantees are not operating in a way they were intended, and urge the [European Union] to amend the rules to remove the competitive distortions that have developed.”

But European governments face a dilemma: If they protect their airlines by terminating aircraft export support, they will in turn hurt Airbus. “The last thing they want is to upset Emirates, because we’re the only ones buying airplanes,” Emirates President Tim Clark says.

European carriers reply that export credits are not beneficial to Airbus either, because the growth of Emirates weakens European hubs, thus demand declines for Airbus aircraft from customers closer to home. But a common European airline position has not yet been established and it is so far unclear if, once formalized, it could form the basis for joint action.

“From Europe ’s standpoint, selling A380s and A350XWBs is more important than protecting Lufthansa, BA and Air France,” says Richard Aboulafia, vice president of analysis at the Teal Group. “The most the legacy carriers can hope to achieve is an end to export credit finance for the Mideast carriers, but that would only hurt Emirates, not [Etihad and Qatar Airways],” given their alleged access to state funds.

And, if it is true that only a minority of Emirates’ aircraft is actually financed through export guarantees, the question remains as to how efficient such measures would really be. A unilateral European decision would only affect Airbus, not Boeing or other international manufacturers.

Aside from hoping for government assistance against a new competitor, European airlines have yet to find a proactive strategy to capitalize on Emirates’ weaknesses in the marketplace.

Such a strategy would likely include many measures that together would improve the competitiveness of European carriers. Making the short-haul business profitable again is becoming all the more crucial because it would grant European legacy airlines more pricing flexibility on long-haul operations. They are suffering today because, unlike Emirates, they cannot sustain lower long-haul fares—they need high yields to compensate for losses in the short-haul sector.

One option could be to counter Emirates by its own means, by taking control of a hub that can effectively compete with Dubai . That hub already exists—in Istanbul . Turkish Airlines has ambitions to almost double in size over the next five years and make its home base a major transfer center. Turkish Airlines’ network has much overlap with that of Emirates, but in many ways Istanbul is better situated than Dubai . It is closer to the important European markets and Central Asia , so Turkish can use cheaper narrowbodies in many markets that Emirates serves with its all-widebody fleet. And elapsed time through Istanbul is often shorter compared to a trip with connecting flights in Dubai .

Turkish is continuing to invest heavily in its fleet and service quality. CEO Temel Kotil says the carrier’s goal is to raise its share of transfer traffic in the next five years to 66% from 25% now. Seemingly the biggest hurdle for the Star Alliance carrier is one that is all too familiar for its European peers: infrastructure. Ataturk International Airport needs to be expanded and will eventually have to be replaced, if Turkish is to meet its targets.

But industry executives admit the plan to use Turkish’s strategic role in the Star Alliance as a tool against Emirates is only beginning to evolve. BA’s Walsh and Stefan Lauer of Lufthansa’s executive board have started to talk publicly about the possibility of intercontinental mergers that would create even bigger and more powerful blocks with large bases at either end of their long-haul routes. Maybe they should not look quite as far as the Far East but deal with the strategic opportunities offered by Turkish.

However, Kotil points out that so far his airline, the fourth-largest European carrier, is not keen to join forces. It rather considers itself to be the nucleus of a fourth European airline group, in addition to BA, Lufthansa and Air France-KLM. Kotil has expressed interest in acquiring other smaller airlines, but he says they would be treated more as a financial investment than a strategic move.

Nathan Zielke, an airline consultant at Arthur D. Little, says European legacy airlines should strengthen their existing alliances by enhancing offers for business travelers, such as more attractive frequent-flier programs and broader networks. He recommends that carriers also look at boosting long-haul business-class cabins at the expense of economy class in order to pick up as much of the intercontinental market as possible in the current upturn.