It was just a couple weeks ago that I wrote about how American, Delta, and United have banded together to request that the US reconsider open skies agreements with Qatar and the United Arab Emirates. At the time, what was known publicly didn’t seem like a very strong case to me. When I was at the American Leadership Conference (Disclosure: American provided flights and hotel for the ALC), the airline presented many of us with the details but we were told they weren’t public. Now they finally are, and it’s time to talk about this.
We’ll get into details below, but in short… I do think there is compelling proof of subsidies totaling over $40 billion. The weakest case is, of course, against Emirates which is the only one of the three (Qatar and Etihad being the other two) to have shown any sustainable business case for itself. But so what? Should we care as long as it means cheap flights and easy connections? We should indeed care, but we shouldn’t do anything near what the US carriers are suggesting. That doesn’t mean that doing things “as is” is the right way forward either.
The airlines, primarily under Delta’s lead, hired forensic accountants to go back and dig up dirt over the last 10 years. Apparently, to fly to some countries you have to file financial information, so these guys went around the world and found these little scraps of info. What they found was a ton of money being flooded into the three carriers.
For Emirates, the biggest chunk that was found was $2.4 billion in fuel hedges that went south. The government just assumed those losses. The rest of the substantiated claims are pretty weak, though there is a lot of unknown here. Emirates is owned by the government and has a lot of sister companies. While the airline does put out audited financials, it doesn’t say whether the transactions between Emirates and its sister companies are at arm’s length. In other words, we don’t know if they’re getting below market price, but the assumption is they are. Still, I think Emirates is really just a sideshow here. It’s Qatar and Etihad that are the most clear cases.
Both Qatar and Etihad have received massive amounts of capital infusion from their governments. They’ve also been loaded up with a ton of interest-free loans with either a very-distant or no timeline for repayment. That may be the way business is done over there, but on a global stage it counts as a subsidy per World Trade Organization guidelines. The UAE and Qatar are signatories, so the WTO rules apply.
In fact, it has been noted (as you’ll see in the docs) that neither Qatar nor Etihad would have been going concerns without massive further investments of capital. They would have and should have gone under until the government poured more money in each time.
There are many more examples of subsidies for those carriers, but you can read the details yourself in the documents. Now, here’s the question… who cares?
Today, the “harm” being inflicted on US carriers is primarily on traffic going beyond these Middle East hubs to India and Southeast Asia. The US carriers don’t have a lot of service in these markets anyway. It’s only through their joint venture partners that this becomes a threat. Even then, we’re not talking about the kind of numbers that will hurt that much.
More importantly, travelers gain incredible new single stop connections that wouldn’t otherwise exist. Think about someone wanting to go from Seattle to Trivandrum. You can connect a lot of dots that don’t get connected as easily otherwise when these gulf carriers are involved. And yes, fares tend to be cheap. At the same time, the damage to US carriers seems to be relatively slight. I don’t see how you can justify curtailing this.
Where I see the real issue, however, is in fifth freedom flights. Of the freedoms of the air, the fifth is becoming one of the more controversial. Fifth freedom rights allows an airline in one country to carry passengers from a second country to a third country as long as the flight starts in the airline’s home country. It was originally created because airplanes didn’t have the distance to connect all the dots around the world. They needed to go somewhere in between, and they needed a way to make those flights viable. Today, that’s rarely the case, but Air New Zealand uses it every day.
Air New Zealand flies from Auckland to LA and on to London because it can’t fly it nonstop. It would be tough to make that viable without being able to carry local passengers between LA and London, so there is an agreement between the two countries to allow that service.
As part of the open skies agreements between the UAE/Qatar and the US, the carriers are allowed fifth freedom rights. But the reality is that these airlines don’t need fifth freedoms. Emirates isn’t flying Dubai-Milan-New York because it can’t fly it nonstop. It flies it because it thinks it can undercut everyone else in the market and use its low costs to its advantage.
If you think about it, the gulf carriers could fly from Dubai to pretty much anywhere in Asia or Europe and then on to the US, causing serious damage to the US carriers. I know some of you still don’t care. If it means cheaper flights with better service across the pond, then so what?
The reality is that it could get really ugly, really fast. If the Middle East carriers skim the international markets with the most traffic, then the US carriers will have to cut back service. When international flights get cut, the whole network becomes vulnerable. The end result is probably less service for smaller and mid-tier cities. It’s just the way the network effect works.
That’s quite a catastrophic prediction, but it could happen if unlimited fifth freedom rights were allowed for carriers with true structural advantages. These airlines have a massive number of airplanes on order and have to put them somewhere.
Of course, it’s never that simple. Etihad owns a huge chunk of Alitalia, which is a joint venture partner of Delta’s. Qatar just bought 10 percent of British Airways parent IAG. How do these things all come together? And what should be allowed?
We won’t know for a long time. The next step would be for the US government to decide that it agrees with this. It can then enter into consultations with the UAE and Qatar to try to resolve the issue. If it can’t be resolved, then the US can pull out with a year’s notice if it wants.
But first, the US would have to decide it wanted to enter into consultations. That’s not a given. We have some pretty powerful military interests in those areas plus a lot of consumer benefit on the table. The offset is potential harm to US airlines if this is allowed to continue.
This web is a tangled one indeed, and there’s no clear answer. One thing that is clear to me is that the US carriers have done nothing to help their case in the public eye so far. This whole thing has been botched from the beginning, first by talking about this report but not releasing it, then by Delta CEO Richard Anderson linking the issue to 9/11. They have dug themselves a huge hole that they have to climb out of.
And what they want isn’t going to ring true with consumers because they can’t see the negative impacts yet. I do think that fences on fifth freedoms may very well make sense. But other than that, it’s hard to see how this should be restricted.