At last week’s CAPA conference, the highlight was supposed to be the panel debate between US and Middle East carriers over whether Middle East carriers subsidies created an unfair competitive situation. The two hour panel didn’t disappoint and was very well-moderated. Despite the performance (which you can watch in its entirety here), I still can’t get motivated to really care that much about this issue. There are a lot of technically valid points on both sides, and in the end there isn’t going to be a simple answer, even though that’s exactly how the US carriers are positioning this. Though I’m not in the government, I’d imagine my lack of enthusiasm is a sign that others may have trouble rallying as well. And the general public that does get energized will almost certainly fall in favor of cheaper fares and more service on Middle East carriers. If that’s the case, it doesn’t bode well for the US carriers.
The panel was originally supposed to include Emirates CEO Tim Clark as well as IAG chief Willie Walsh, but both backed out. That left us with Will Ris (Government Affairs for American), Ben Hirst (Legal for Delta), and Lee Moak (former ALPA, now “Americans for Fair Skies”) on one side. On the other side we had Jim Callaghan (Legal for Etihad), Rush O’Keefe (Legal for FedEx), Roger Dow (head of US Travel Association), and David Scowsill (head of World Travel & Tourism Council).
A Simple Issue Between Governments… That’s Anything But
The opener came from Delta, talking about how this is a very simple case. It’s all about eliminating market distortions. According to Ben, while it may be “legitimate economic policy” for the UAE and Qatar to support their airlines, “it results in a distortion of the marketplace and is inconsistent with open skies policy in the US.” What does this all mean? The airlines just want the US government to enter into consultations with the UAE and Qatar to resolve the dispute. They kept calling it a simple trade dispute and nothing more.
Jim Callaghan from Etihad was next, and he did not pull punches. Jim is a former Ryanair guy, and you can see it in him right away. He has that chip on his shoulder from being the little guy fighting the legacies in Europe for so many years. And he said this fight is no different than that. It’s all about the big airlines, which control more than half the capacity in the world, trying to stop the little guys. Jim talked about how Etihad loves America. It buys a lot of American-made airplanes. It brings people to the US to spend money. And it puts 25,000 people a month on other US carriers when they get here. Poor little Etihad (which is backed with endless funds from its government…).
American tried to smooth things out a bit and walk a very thin tightrope. Will said this isn’t about Etihad. It’s about governments. US “trade policy is very clear on this; when we have an industry that receives massive amounts of money and has unfettered access to the US, we do something about it.” Will went on to say that American isn’t against subsidies or state ownership. The airline is against opening the doors to the US entirely to airlines that do have the advantage of massive subsidy.
This was clearly an effort to push back on the allegations that airlines all over the world get subsidies and the US carriers don’t fight them. The biggest offenders (think India or Argentina, for example) don’t have open skies agreements. Will noted that since the World Trade Organization rules don’t apply to air travel, the carriers want to simply apply those principles.
When You Absolutely, Positively Disagree With the Other US Carriers
Then came the curveball. Looking at the list of players here, something might jump out as strange. Why would FedEx be on the other side? It’s a US-based company, but it doesn’t want to stop the big, bad Middle East carriers? No. Rush started off by saying they are used to competing against the largest subsidized companies in the world – postal services. So FedEx always wants more open skies agreements to give it as much of a fair playing field as it can get. Dubai is important, because FedEx has a hub there, and it relies on the open skies agreement between the two countries to fly beyond Dubai to a host of other places. It does not want to see that go away.
Further, Rush explained that if the US carriers want WTO principles to apply, then they can’t pick and choose. Let’s use all the WTO rules, and that includes the principle of national treatment. That means the US would have to open up its airspace to cabotage (allowing foreign airlines to fly domestically). Anyone here think the US carriers want that? Nope.
The US carriers adamantly stated that they are only talking about passenger service and will ensure that cargo isn’t part of the issue. But is there any chance that the UAE says “ok, your cargo carriers can continue to take advantage of open skies while our passenger airlines can not”? No friggin’ way. This is quite a tangled web and nothing will be spared if it escalates.
Things just degenerated from there. The US carriers continued to say it was an issue for governments to decide. They just want to present the evidence and have the US uphold its trade policy. Lee Moak took it even further saying if we can’t enforce an international agreement like this, then how we can be expected to enforce any of them. Yes, he even brought up the possible Iran nuclear deal as an example. Seriously.
Meanwhile, Etihad said that this is all silly because there hasn’t been any harm. And the agreement requires harm to take action. The US carriers disagreed, saying that the fundamental basis of the deal was being undermined so harm isn’t required. Oh, but they say there’s been harm. They point to things like JFK to Milan, where Emirates flies.
All the while, the USTA and WTTC kept banging the drum about the importance of job creation. Roger Dow said that if the US carriers don’t plan to grow, then the US needs to rely on airlines like the gulf carriers to increase capacity and meet demand.
As usual, the product discussion came up. Don’t people like to fly on the Middle East carriers more? Ben from Delta very quickly noted that in the quarterly IATA surveys, Delta comes in similar to or just below Middle East carriers in some areas. But in areas like operational performance, Delta is much better. Fine. And Will from American said that while passengers might like super cheap fares and good products, that’s not how our trade policy works, because it’s not commercially sustainable and it’s distorting the market.
The Tangled Web
The inevitable “hey American, you know you codeshare with Etihad, right?” question came up. The tightrope got even thinner. Will said this isn’t an issue about any one airline. It’s about governments. If the service exists, American doesn’t want to deny its passengers in say, Albuquerque, the ability to get to Abu Dhabi via codeshare. So… that means it doesn’t want the service to exist but it’ll take advantage of it as long as it does.
Delta said it was best to deal with this subsidy issue before it started working with gulf carriers, but of course that completely ignores the fact that Delta is in an immunized joint venture with Alitalia, an airline partially owned by Etihad. This went on and on for two hours with both sides defending their positions, digging in their heels.
Escalation in Congress, Deflation in the Public
Now we have Congress getting involved. More than 250 members of Congress signed a letter asking the administration to seek consultations with the UAE and Qatar.
Despite all the fireworks, I still can’t get excited about this. Do the US carriers have a point about subsidies? They sure do. But is it worth taking action? Is the harm potential really there? As I’ve said before, I can see the fifth freedom question being the most important to address at some point, but so far that is an issue on one route only. It’s hard to get people excited about something that small no matter how insanely large the subsidies are, especially when there’s a lot of consumer benefit to be had as well. If the government acts, the public generally won’t like it.
But with the feds quickly moving to take public comment and now Congress getting into the act, we might actually see something happen here. The question is… will it hurt consumers too much for the government to consider moving forward? Possibly more importantly, will it hurt our strategic defense operations in the area? There are a ton of potential pitfalls in this, and it’s not clear that we have enough to gain to make it a worthwhile fight… yet.
[You can watch the entire 2 hour panel discussion here.]
[Original dog chasing tail photo via Shutterstock]
Two Hours of Fighting About the Middle East Carriers, and I Still Can’t Get Excited.
Well – there’s always Angry Orchard for that.
The really interesting part about this spat is how in the US business world people scream free market, but when things don’t go the way they were ment to go – all of a sudden these same people cry out for gov. protection & I’m not just talking about the airline industry. I wish I could remember who made a similar comment about this a few weeks ago when this topic came up here.
But companies scream about free markets when there is a level playing field. They’re arguing the playing field isn’t level..
Foreign ownership of airlines is forbidden by law.
Can’t think of any other industry other than the shipping industry that has that advantage.
Great, Can the American airlines buy one of the ME3 and get all the gov’t subsidies?
I think not. So its a moot point.
I predict that the US Congress will get involved and they will make it worse.
With an election year coming up congress will not really get into it if the American people are not behind it. As was said, Americans want low fares and good service which puts U.S. carriers behind the M.E. carriers.
Agreed. It’s not crystal clear of an issue, with the main “injured” party being a set of companies that get little sympathy (rightly or wrongly) from the public right now. Congress is not going to stick its neck out for them when they have bigger fish to fry.
I wonder if this depends on how its framed. If politicians make it exceedingly simple, and this is an issue of “taking American jobs” I can see it becoming a small political football.
Sounds like the US3 reps had a hard time fielding questions without deviating from their prepared talking points. They’re all for free markets, except when they’re not. They’re against government intervention, except when they’re not. Ultimately, they’re probably going to walk away wishing they’d never kicked this hornet’s nest in the first place. Do the ME3 have some structural advantages? Sure they do. But the US3 are raking in record profits, and this whole sideshow is doing little other than making them look like a bunch of complacent, oligarchical whiners.
I flew Los Angeles-Abu Dhabi-Manila and back this month with Etihad, and the difference in service levels between them and the US3 was astonishing. From start to finish, the Etihad experience (I was traveling in Business Class) was more professional, more polished, and higher quality. Crews seemed happy to be there, the food quality was light years ahead of what AA and UA are serving in J class, and the aircraft were spotless. Beyond that were the countless small touches – complimentary pajamas, coffees made to order, the ability to dine on demand, lavatories that were actually cleaned periodically during the flight.
From a consumer perspective, the ME3 win every time. They’ve built a better mousetrap, and the US3 know it. It’s impossible to get off an Etihad/Emirates/Qatar flight and not shake your head in despair at how far behind the US3 have fallen. Rather than upping their game to try and compete, the US3 have gone whining to the government to protect the hegemonic little world they’ve worked so hard to create for themselves. Sounds like that came out loud and clear at this event.
Many people like me who are supportive of the US3’s position in this argument agree that the customer experience and value with the ME3 is better.
Yes, that Eithad flight was better with more comforts and better service, and likely at a cheap price.
Do realise a good portion of your comforts and your fare were paid for by government of Abu Dhabi. In all likelihood Eithad lost a lot of money from your trip, just like they’ve lost billions in the past years. Consumers are not harmed, at least in the short term, from the ME3 subsidies.
The US3 airlines get hurt, their share of the JV revenues on trans-Atlantic traffic has been siphoned off to the Middle-East.
Stand up and compete, you say.
OK, put yourself into the position of the US3 carriers, how are you supposed to compete against airlines with unlimited funds with no end in sight of the subsidies? In a brutally competitive industry where historical margins have been wafer thin; it’s not as if they have the cushion of Apple-like gross margins.
I support free-markets and Open Skies between countries, but you have to have a semblance of a level field. The ME3 can’t have it both ways, want free-market access, get billions from their governments and have access to the world’s largest economy.
There are many aspects of US3 protectionism I don’t like either: the fly-America policy and the restriction of 25% ownership of US carriers (if Daimler can buy Chrysler, why can’t Lufthansa buy United?) stand out. The US3 have the advantage of the world’s largest aviation market (domestic US) to themselves with no foreign competition.
Nitpick: It doesn’t matter whose metal a customer flies on if its a JV, the revenue and costs are supposed to be fairly shared.
As for the ownership thing, The same and ends could be achieved by some operational restrictions, something like pilots of certain aircraft must be US citizens. (Looking at the bigger ships 767, 777, 787, A330, A350, etc. Those are rarer and go outside the US, and have strategic importance.) You could also restrict the percentage of the larger craft allowed to be outside the US at any given time..
That being said, I’m not sure the carriers are wanting to get together at the moment, and it does bring up the potential of something being flagged as cabbotage.
Well, I was traveling on an award ticket (no other reason a sensible person would fly LAX-Manila via the Middle East!) so Etihad definitely lost money on my seat. But that’s the reality of award ticketing for any carrier.
The US3 – or their predecessors – benefited hugely from government intervention over their lifetimes. Look at Delta and United’s legacy fifth-freedom rights in Asia. Look at the subsidized mail contracts that sent them all into the skies in the first place. Look at the fifty years of regulated stability they enjoyed in the domestic market. Etihad, Emirates and Qatar are all a few decades old. Were any of the US carriers operating independently at 20 years of age?
Just because the US government has elected to withdraw various forms of airline support over the ensuing decades doesn’t mean other governments should have to do the same. The US3 say they want a level playing field, but what they really want is everyone operating in *their* economic environment, so they don’t have to come up with new strategies.
James – What’s missing from this, however, is that countries are granted open skies access to the US in exchange for fair competition. So all those subsidies from the early days of flying are really not relevant. Airlines and countries can do whatever they want, but there are rules they need to abide by to gain the access.
This doesn’t mean I’m any more excited about this whole issue. But it’s probably the right way to approach it. (Cue someone to go find all the open skies agreement countries that have bailed out their airlines….)
I’ve been in this a long time, and I’m with Cranky — it’s hard for me to get worked up over open skies agreements.
Get into cabotage, and I’m a lot more interested. A few fifth freedom routes just aren’t going to make a difference.
Does anyone here really give a shit?
While this isn’t an anti-trust issue, it’s useful to look at anti-trust laws in comparison.
In the U.S., to prosecute for anti-trust you have to show damage to the end consumer. You can damage your competitor all you want, that doesn’t matter. They’re fair game. Actions are illegal only if the consumer suffers.
I’ll submit to you that we consumers are benefiting mightily from the actions of the ME3.
Well, if we’re looking at applicable law, this would be dumping, selling a product below the cost to produce it, which the ME3 are doing.
Dumping is illegal which is illegal under US law.
I can remember when US carriers( TWA and Pan Am) took advantage of 5th freedom rights with no complaints from any of the foreign carriers. Maybe the american big three should think about the same thin with flights via the ME to all of these places in India and Asia that they think are such a big problem for them.After all if there that good they shouldn’t have a problem competing.
If i would have been happened to me that’s it, am screwed up.
I read somewhere (Forbes?) that US airlines themselves actually pay for the airports and services they provide. I always thought we passengers paid through government taxes and fees on our tickets.
Am I wrong? Do the US airlines get nothing from our government? Did they actually pay for building the airports?
If so, who gets the taxes and fees we pay with our tickets?
Garrigan – There are a few ways that airports can fund their improvements.
First is through the Passenger Facility Charge (PFC). You’ll see PFCs on just about every one of your tickets. The cap right now is $4.50 per airport, and that money gets pushed through to the airport to do work.
Second is through bonds. Airports can raise revenue bonds that are backed by the fees airlines pay to the airports. This becomes part of the airline’s operating cost at the airport, so when the fees go up, airlines need to decide if it’s still viable to keep operating there. So ultimately, the passenger does pay for this. Third is the Airport Improvement Program (AIP) which provides grants to airports. But this program is funded by airline payments so it’s still not a government-funded thing.
So there isn’t money just flowing into airports from the government at all. The airlines and passengers always pay for these projects.