Foreign Airlines Should Be Able to Fly Within the US and Lose Money if They Want

There’s a fun-filled cycle of hate in the US airline industry that works in a specific way. First, something bad happens (legroom gets cut, traveler gets dragged off an airplane bleeding, person forced to pee in a cup, you name it). Then there are cries for airlines to stop being so mean. Finally, inevitably, people started putting out their own solutions; one of which is always that foreign airlines should be allowed to fly within the US. After a fair bit of negative news over the last month, we’ve reached the end of this cycle again. I’ve heard this a few times lately, most recently from Gary Leff at View from the Wing, and I agree that foreign airlines should be allowed to compete domestically… but not because it’s going to somehow improve customer service. It won’t.

For those who aren’t familiar with the government regulations determining what airlines can and can’t do, it’s probably important to explain that it’s exceedingly rare for foreign airlines to be able to fly within any one country. This is called “cabotage” and in the US, it is not allowed. In fact, US-based airlines may have no more than 25 percent of shares owned by a foreign entity before they’re considered to be foreign-owned and not permitted to fly domestically. Why? Oh, there are a host of weak reasons batted around, but it’s really just inertia with a healthy dose of protectionism added in.

What would happen if we opened the floodgates and allowed any foreign airline to come into the US? Would Etihad and Qatar bring their high levels of service along with low fares as is the case internationally? Only if they wanted to lose money doing it, and you know they wouldn’t be allowed to get subsidies from their home governments to support a domestic US operation like they can internationally.

One of the big advantages that these airlines have is their ability to deliver a better product at a lower cost, but many of those low costs would evaporate in a domestic operation. First, lower labor costs from a foreign workforce won’t be allowed within the US. Any airline that operates in the US would have to fly under US labor laws and obey minimum wage rules. I’d also imagine they wouldn’t be able to export labor from their home (or other) countries even if they were hired under US labor law. There’s been a tremendous uproar about airlines like Norwegian doing that for international flights today, and I don’t believe that’s something that would ever be allowed for domestic flying. The companies would also be unable to ban unions, as some can do in their home countries.

That eliminates a lot of the cost advantages these airlines enjoy, but it also kills some customer service “advantages.” There are a lot of reasons people can be fired in other countries that won’t fly in the US. Even if a foreign airline does try to legitimately fire people for providing poor service, it can’t get too aggressive or unionization will be right around the corner in a domestic operation. It’s a much more even playing field within one country.

But that’s ok, right? After all, Emirates could come in and provide generous legroom, great inflight entertainment, and people would flock to them. But wait, no they wouldn’t. That’s because for the vast majority of travelers, price and schedule rule. Travelers don’t want to admit this. They get angry at airlines for squeezing legroom but balk every time a fare goes up. So if you think Emirates could waltz into the US market and charge more on the vast majority of routes, then you’re nuts. Sure, it could work on a few routes here or there; big routes with a fair bit of premium demand might support it. But those routes are few and far between.

The best case scenario for a foreign airline coming into the US is to turn into something like JetBlue. But we already have JetBlue. We don’t need a foreign airline to come in to provide that level of service. If you live in Springfield or Dubuque or any of the smaller cities around the US, you’ll never have a chance in hell of seeing a foreign carrier come in.

Instead, you know what would happen? Mergers. If the US government allowed foreign airlines to fly domestically within the US without getting the same thing in return, then Lufthansa would buy United, IAG would buy American, etc. There would be a tremendous benefit to having a true merger instead of the joint ventures they have today, and these companies would likely jump on that option quickly. If the US government only allowed cabotage in exchange for the same in other markets, then you could see the reverse: United buying Lufthansa. This may actually end up being good for consumers, but it’s not going to deliver better service or more legroom. It will just mean a more seamless experience for travel around the world.

The simple reality is that most people in the US want a cheap fare, and the airlines are responding by cutting the base product in order to deliver. If foreign airlines came to the US, the high expectations for opulence would instantly result in disappointment. Or a whole lot of red ink. Or both. But go ahead and let them try… I’ll be happy to take advantage of the fare wars while they last.

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65 Comments on "Foreign Airlines Should Be Able to Fly Within the US and Lose Money if They Want"

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grichard
Guest

Why would huge mergers like this be good for customers?

The US domestic market is already at the edge of having too few airlines to support robust competition. Opening the door for something similar at the international level doesn’t sound like a self-evidently good thing.

Matt D
Guest

That was my first question. Then I realized what site I was reading. It’s pretty clear he’s an advocate of the airlines and by extension, security for the employees-masquerading as a passenger/customer “advocate”. It’s a very clever and genius ruse actually. But the public has never benefited from mergers. He is right about everything else though: those same customers DO have unfair and unrealistic expectations. But I have yet to see any compelling argument from him that convinces me why fewer choices for the consumer are better. They aren’t. But they’re fabulous for airline profits and airline employee job security.

Itami
Guest
I’m sorry, but your third sentence is nonsense to anyone who’s been following this blog for any appreciable amount of time. Cranky isn’t some discount Chris Elliott or Ralph Nader and he isn’t some reflexive labor/management apologist. He can call the US3 jackasses for connect pricing changes, call AA a jackass again for their new 737 layouts, criticize DL for ending their interline agreement with AA, post that UA has largely given up on LAX as a hub and question the recent wave of wage increases across the US industry. And yet the CEOs of the US4 plus other execs… Read more »
dlouisnicolas
Member

Well, all the international JVs are is 2+ airlines trying to coordinate their schedules (good for flyers) and prices (bad for flyers), which isn’t very different from what an airline does within itself.

Tim Dunn
Member
Another good thought provoking article. There are a number of valid economic reasons that explain US airlines’ generally lower level of customer service that are rooted in policy decisions that were made decades ago and which can’t be easily changed. Customer service at US airlines suffers because the US government is absolutely determined to force competition into US airline markets despite the capacity limitations of airports. Terminals are crowded, delays are far worse than in most other countries, and airlines have no choice but to push as much capacity through the system in order to maintain their market share against… Read more »
Marshall Jackson
Member

Maybe it’s just me, but I’ve flown most of those fancy foreign airlines (BA, LH, Swiss, Cathay, etc.) and their “domestic” products, which are exactly what we’d get here, are not really any better in my experience than UA, DL, AA, and WN. Sure, they’ll toss a small meal at you on shorter flights, but that’s never really impressed me. Does anyone really think Etihad is going to start flying an A380 between NY and MIA? Even if they could, I don’t think they will. Just my opinion.

Alex Hill
Member

BA’s Euro Traveller, at least, is now worse than AA, DL, and UA (never mind B6, AS, VX, and WN). They now charge even for water on board, and their pitch (even in Club Europe) is 30″ — awfully tight. The only advantage of BA’s European coach product is that elites get lounge access on intra-Europe itineraries.

Keith
Guest
Cranky, You are off base on this one even though you do make some valid points. One of the biggest reasons you do not see foreign ownership of domestic airlines or foreign airlines flying domestically in the US is because of the Civil Reserve Air Fleet (CRAF). The Dept of Defense uses CRAF to augment the US Air Force to carry troops both in time of war and peace (See the Air Force fact sheet at the link below). http://www.af.mil/About-Us/Fact-Sheets/Display/Article/104583/civil-reserve-air-fleet/ Imagine what would happen if either a domestic airline had foreign ownership or flew so much domestically that the US… Read more »
Gary Leff
Guest

That program is a huge boondoggle/subsidy. It’s also voluntary for US airlines. It could be just as voluntary for US airlines majority-owned by a foreign carrier. It’s not necessary for the military but if ever deemed so there’s nothing to stop a legal process to secure foreign-owned aircraft.

Eric Morris
Guest

What you said, plus end the wars to increase freedom here in the “Land of the Free”.

Mark Skinner
Guest
I suspect the model that foreign airlines would be looking at is likely transcontinental flights feeding their own networks. Thus, Emirates might fly domestically from one side of the country, say LA to feed in passengers to its flights out of the country, say New York to Europe. Thus, they would cut those passengers from US carriers. Then, since they are going from LA to NY, why not collect some domestic passengers going the same way as well? Also, a small point. There’s a difference between a subsidy, and a company using its bigger capital to dominate a market. The… Read more »
Tim Dunn
Member
your point would be valid if you used Lufthansa or Japan Airlines or Gol as your example but the whole complaint against the ME3 is that they are being subsidized by their governments. Until the US government either debunks the argument that the US global 3 airlines are making, you logically have to consider it a possibility. And part of the reason why the US carriers fought Branson’s startup of Virgin America was because they believed he was more interested in building his brand in the US at the expense of profits. his ownership was capped at 25% and Virgin… Read more »
Mark Skinner
Guest
Yes, it’s a possibility. My point was that Brett stated that the ME3 were subsidised, where as you point out, it’s only a possibility. Given the whining and moaning from US carriers over a very long time, and the considerable resources at their disposal, one would have thought if there were evidence of subsidy, that evidence would have come to light by now. The substantive point though was, yes, by the theory I suggested, foreign airlines would cherry pick at the best routes. If they did, that might make Brett’s challenge moot. If they aren’t going to challenge US airlines… Read more »
Tim Dunn
Member
Mark, I am not suggesting that the ME3 are not subsidized just that no one has yet to come up with the evidence to disprove the US3’s assertions that they are. By logic, you have to consider the possibility that they are subsidized. I do happen to believe there is ample evidence that they are subsidized but I also believe that market realities are proving more of a detriment to their continued strategies including the fact that their governments can’t continue to spend the kind of money to carry connections between Europe and Asia – the heart of the ME3’s… Read more »
Gary Leff
Guest
Agreed completely that “Foreign Airlines Should Be Able to Fly Within the US and Lose Money if They Want” however it’s rather strange to suggest that good customer service from foreign airlines is the result of low wages. My argument is simply that after a spate of mergers we have fewer large airlines, and less competition than we used to. A source of new competition would be removing barriers to competition, one of the biggest is the foreign ownership restriction. I’ve been clear throughout several posts that this isn’t a panacea. In fact it wouldn’t add competition in several markets… Read more »
Alex Hill
Member
I think that both low wages and stronger service standards are consequences of weak labor laws; stronger service standards are not a direct consequence of low wages. Weak labor laws mean that many foreign airlines have much more freedom than US airlines to terminate employees for any reason, ranging from getting too old, getting married, or no longer being pretty enough to not providing attentive service. They also have more freedom to change duties or impose new duties; US airline contracts mean that airlines can’t ask flight attendants to do something so simple as start providing a turndown service in… Read more »
Gary Leff
Guest

Foreign owned US airlines would be subject to the same laws as any other airline operating in the U.S.

Of course any airline without legacy contracts finds it easier to write contracts that provide for better service standards (like actually having to perform assigned duties to keep their jobs). As they should. And that would be a great benefit to consumers.

iahphx
Member
This discussion is academic because, in the real world, foreign airlines flying in the USA will never happen. Kind of like how I think repeal of the Railway Labor Act — or at least exclusion of airline pilots from it (there are no other highly paid professional workers in a major industry that are allowed to unionize) — would be good for workers, airlines and customers. It doesn’t matter if I’m right. Politics will insure that it never happens. But, even if it were to be allowed, I’m pretty sure it would cause more long term harm than good. The… Read more »
iahphx
Member
BTW, I do have some personal investments in USA airlines. If foreign control were to be allowed, I think the value of those investments would increase dramatically, as the stocks would be seen as severely undervalued (and they would be) in a global aviation marketplace. But just because I think I could profit from it, doesn’t mean I think it’s good policy. Of course, if they put Gary Leff in charge of this, and he makes me a boatload of money by allowing foreign ownership, I could be like Richard Branson being “forced” to make a killing by selling my… Read more »
Gary Leff
Guest

The value of airline stocks with removal of foreign ownership limits is an interesting one, you’d potentially get more demand for those stocks from foreign owners and you’d potentially get more competition. It’s unclear how that would shake out.

Gary Leff
Guest

Of course it won’t happen in the near-term, because airlines are effective at lobbying for protection. However we’re seeing relaxing of foreign ownership rules elsewhere in the world so it’s certainly not unthinkable.

Just like in the comments on my blog, iahphx, there’s never been a major piece of protection or subsidy for US airlines you didn’t like.

For consumers though more competition is better. And there’s no conceivable reason why the federal government should prevent it.

iahphx
Member

I favor the elimination of the Essential Air Service program (although I am potentially sympathetic to extremely isolated communities, particularly in Alaska).

What else do you consider “subsidized” or “protected”?

Sean S.
Guest

“there are no other highly paid professional workers in a major industry that are allowed to unionize”

What are you talking about? Do you not understand US labor law? Many highly paid professional workers are in unions, from the IFPTE which represents engineers, to SEIU/AFSCME which represents doctors and mid-level providers in many states. In fact highly paid, professional employees is one of the few bright spots in union membership growth, and where gains have been made despite losing wide-swaths of unskilled and semi-skilled labor in manufacturing.

Kilroy
Guest
> There are a lot of reasons people can be fired in other countries that won’t fly in the US. If you are specifically referring to unionized airline employees in the US, or comparing US workers to those in (say) the Middle East, that might be true. In general, however, most workers in the US are at-will employees, and there are very few reasons that they cannot be fired more, mostly relating to discrimination against a protected class. For example, one cannot be (legally) fired for reasons of gender in the US, but can be fired for daring to wear… Read more »
danwriter1
Member

This:

“That’s because for the vast majority of travelers, price and schedule rule….They get angry at airlines for squeezing legroom but balk every time a fare goes up.”

…overlooks the fact that the exact same lousy seat can vary in price by hundreds of dollars or more, depending on the day and time of year. A seat to LAS or MCO can jump by 50% when a major convention is scheduled. Sure, US fliers shop price, but price is a moving target and one that the US carriers are out ahead of the game on. Solution? More competition.

Itami
Guest

I’m afraid I don’t follow. More competition is the solution to yield management?

Alex Hill
Member

I don’t see how more competition would reduce the airlines’ use of adaptive pricing. The point is that travelers overwhelmingly choose the cheapest-available price available when they purchase the ticket.

Tim Dunn
Member

The same principle of supply and demand applies to hotels, cars, commodities (fuel most food etc) and services – restaurants etc are higher on peak days of the year.

the idea that airlines are doing something wrong that Americans don’t willingly do with other industries is non-sense.

and that is precisely why you can’t remove demand based pricing in the airline industry.

Jeremy
Guest

Since we are talking cabbatoge; the best thing that could ever happen if it were allowed would be to cruise ships.

To hell with airplanes, I want to take a cruise ship from San Francisco to Seattle or LA.

Kilroy
Guest

I believe there are a few (literally less than a handful) of cruise ships that run domestic cruises from the West Coast to Hawaii, or similar, but yes, much stricter rules for those.

Itami
Guest
Your last point about airline unbundling and passengers’ preferences for low base fares is just as true around the world. The US was only a bit early to the trend and anyone who sees cabotage as some kind of catch-all solution to their airline grievances is going to be disappointed. Look at BA’s relentless focus on cost cutting, LH/NH/AFKL/AC/SQ/QF/etc.’s emphasis on LCC subsidiaries as growth engines, or LATAM’s new single-class unbundled intra-South America product. All these carriers held up as examples of full service excellence are seeing that full service ROI is under pressure while the biggest opportunities seem to… Read more »
southbay flier
Guest

The biggest problem I see with allowing foreign carriers to come into the US is that smaller cities will become even more disconnected to the market. The biggest advantage of the current system is that you are able to get from a hub to a bunch of smaller cities with ease. There is no way EK, QR, or EY would ever actually build a network. They would become what VX was, which was useless IMO unless you only go to the few cities they served.

Bgriff
Member
Couple of observations: 1. Not only would foreign government subsidies not be allowed for foreign airlines flying domestically, but they also wouldn’t make any sense — some foreign governments subsidize their local airlines because they believe it better connects them to the world, makes their home cities more prominent, brings business and tourism, etc. None of those rationales for pouring capital into a money-losing business would hold if you’re flying domestic flights off in some other country, so even if they were allowed to subsidize a business, it’s hard to imagine why they would want to. 2. I sometimes see… Read more »
Eric C
Guest

If that happened wouldn’t the US airlines be compelled to relocate to tax havens to gain the advantages some of their foreign competitors have?

DougYWG
Guest
Two points: The ME3 are accused of paying low wages. There is no income tax in Dubai. I’m sure Delta’s or American’s flight attendants would be prepared to accept lower wages if they didn’t have to pay income tax. Second: the cabotage issue keeps raising its head in Canada too. I agree with Cranky – it should be allowed but cannot be compelled. Ain’t gonna happen. Does Air France really want to fly Toronto -Calgary eight times a day? Does QATAR really want to fly Montreal – Saskatoon? We came close: BA had fifths on Montreal – Chicago. Probably still… Read more »
A
Guest
I agree with you that we are at the end of a cycle when the “let the foreigners operators in” starts becoming a common refrain. Not sure I agree that if we saw consolidation of airlines between countries there would be any real improvement for the passenger. The more we turn an oligopoly into a monopoly the worse off the consumer is IMO. I do get a kick of out the common refrain that foreign airlines are better than US based ones. Granted I haven’t sat up front on an int’l SQ or EK flight but back of the bus… Read more »
Suzie Alcatrez
Guest

I bet Richard Branson could run an excellent airline in the US if allowed by law.

southbay flier
Guest

Could he run a highly profitable airline? VX barely made money and management was only too happy to cash out with AS’s offer. VS is 49% owned by DL and has become part of DL’s network. I don’t think VA is doing all that great financially either.

Nick
Guest
Goodbye service/decent fares to/from any city not in the top 50 in air traffic demand. Foreign airlines would come in and serve flights to/from/inbetween JFK, ORD, LAX, SFO, DFW, IAH, ATL, SEA, DCA, MIA, MCO, LAS and any other high volume routes. If mergers weren’t an option, the US4 would be forced to re-trench and defend those routes leading to insanely low fares in those markets. But the money would have to come from somewhere, and all the secondary/third markets are going to get even pricier, or they’d lose service all together. It would absolutely crush the “fly-over” states. EK,… Read more »
A
Guest

You forgot DEN, CLT, PHX, EWR, MSP, BOS, DTW, PHL, LGA, FLL, BWI, MDW, SLC, IAD, SAN, HNL, TPA, PDX….My point is in the current market if you are not in a top 30 airport you don’t have good service and likely your flights are expensive unless there is decent competition. There are old abandoned hubs like St. Louis that I think a foreign operator could takeover and setup a hub from but agree the flights would likely have to go to those top 30 spots.

Alan
Guest

If foreign airlines could fly domestically, I would like them to emulate Alaska. Seems to be a full service airline, and still make money and not squeeze passengers to death.

Jim
Guest

When you say “you know they wouldn’t be allowed to get subsidies from their home governments to support a domestic US operation like they can internationally”, I have to disagree with you. Even if there are no direct subsidies for the US operation, the airline will still benefit from subsidies provided in general. It’s not that hard to move the numbers around and make it look like the subsidies are only going to the foreign operations.

David SF eastbay
Member

When people say the Golden Age of flying, they mean what they see in old movies and TV shows of the 50s and early 60s. It was nicely dressed passengers and luxury service.

You are just not going to see that today unless you pay for it.

Marcus Au
Member
Hello from Australia where we’ve run this experiment already. In Australia there are no restrictions on foreign ownership of domestic airlines. There are restrictions on the ability of foreign owned airlines to fly internationally which means that Virgin Australia — which is about 80%+ foreign owned last i looked — has an Australian owned shell company that does its international flights. What has it meant here? Well… Qantas is kept from creating a quasi monopoly by the emergence of several foreign backed players (Virgin initially and later Tigerair) which keeps prices low relative to our population and the flight distances… Read more »
aussie-flyer
Guest

Exactly – unshackle the market

I know of one flight between LA and NYC that is operated by Qantas. However they aren’t allowed to sell tickets to American residents I believe

Stephen
Guest

If foreign airlines were allowed to fly within the US, it would encourage ULCC like Ryanair to start service within the US.

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