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.
Where’s the Beef Harm?
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]
