Differing Views on Whether the Agreement Between the US and UAE Is Worth Anything

After years of fighting, it looked like we had an official end to the dispute between the three biggest US airlines and the three big Middle Eastern ones. Now, however, there seems to be a dispute over the only provision that really mattered all that much: whether Emirates and Etihad could operate fifth freedom flights from the US to places like Europe and Asia. There’s more to the agreement, but this is really the crux of the argument, and neither side seems to agree on, well, what exactly was agreed upon.

This argument stretches back for many years. The big three in the US, led by Delta, pushed the US government to do something about the three big Middle East carriers: Emirates, Etihad, and Qatar. As the story went, these airlines were massively subsidized and they needed to be stopped from taking advantage of US aviation policy. If that didn’t happen, they would put the US airlines out of business.

I had trouble picking a side on this. On the one hand, there’s no question that these airlines were very heavily subsidized (especially Qatar and Etihad). But on the other hand, there was real consumer benefit connecting people all over the world in ways that were far more difficult previously. I settled on a somewhat nuanced stance, and that was around the idea of fifth freedoms. A fifth freedom flight is one that starts or ends in the airline’s country of origin. It then goes to a second country and then on to a third. The airline has the right to carry passengers locally between the second and third countries. Emirates, for example, flies from Dubai to Milan and then on to New York (and back). The Milan to New York flight is a fifth freedom flight.

While I generally believed there to be too much consumer benefit to really push back on flights operating over the airlines home hub, these fifth freedom flights seemed like a step too far. The airlines could take advantage of their lower costs from operating in their home country but export that to routes in higher cost areas where no local airline could compete. If there was anything that should have been stopped, it was that.

Earlier this year, Qatar and the US came to an agreement that effectively noted that Qatar Airways had no plans to introduce new fifth freedom flights. That may sound good, but instead Qatar just invested in airlines that could do the flying for them, such as Air Italy. Now, we have the United Arab Emirates (UAE) following along with what seems to be a very similar agreement.

According to the press release put out by the US Department of State (yes, it still barely exists despite what you may have heard), the two nations agreed on some things that they “memorialized in a Record of Discussion dated May 11.” Um, right.

In this so-called Record of Discussion, the release goes on to detail the following.

  • “The two governments recognize the possible adverse impact of government support on competition.”
  • “They express their understanding that financial transparency is best served when airlines issue annual financial reports audited in accordance with internationally-recognized accounting standards.”
  • “Those airlines should endeavor to take steps to ensure that material transactions with government-owned providers of goods and services of either country are based on commercial terms.”

So, yeah. That. What this really means is that the airlines will have to be more transparent financially and use international standards in reporting. Emirates has been doing this (and the release about the Record of Discussion noted as such), but Etihad has most definitely not. Once Etihad finishes restructuring and pulling itself out of the financial abyss it finds itself in, then it’ll report as well. I can’t wait to see that, though I’m sure things will have been cleaned up before the numbers start rolling out. Also, this talk of having arms-length transactions based on commercial terms is nice, but it’s also not entirely clear how this will be proven.

In the end, this says nothing about fifth freedom flights, so, what about them? Well, the US side had reported that there was a freeze on adding these flights, but the Chairman and CEO of Emirates said that’s not true. According to Arabian Business, an Emirates spokesperson added “contrary to some media reports, there is no freeze on any of the operating rights prescribed in the Air Transport Agreement or any tacit undertakings to do so.” The US, however, apparently came away with a different understanding.

Peter Navarro, Assistant to the President of the United States, spoke out about how it “was disconcerting to me to have [the UAE] issue a statement that basically disowned the side letter.” This side letter, in his eyes, put a freeze on fifth freedom flights to and from the US.

So what’s the truth? I don’t know. What we do know is that Etihad isn’t in a place to add fifth freedom flights. It’s just struggling to create a viable airline, and it can’t even think about growth right now. Emirates, however, has long been the least subsidized yet it is the only one that has had an interest in fifth freedom routes. Is it banned from adding more? We apparently don’t know. We also don’t know if Emirates would even want to add more fifth freedom flights to the two it operates to the US today. It’s currently struggling through a weak period.

I assume this will be clarified at some point, but that day may not happen until Emirates tries to add another fifth freedom flight. Everything else in the agreement is mostly fluff. With any luck, this will end the whole spat, but somehow I’m not convinced just yet. I’ll believe it when I hear both sides saying the same thing.

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Wild Bill
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What happened to free trade? Whenever a government tries to manage a market nothing good ever comes of it.

iahphx
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iahphx

Seriously? You think it’s “free trade” when a foreign government pumps BILLIONS of dollars into an industry that competes with American companies? As has been previously noted in this dispute, a company can compete with another company, but it can’t compete with a government. If you ran a US business whose product was suddenly being swamped by a foreign competitor who’s country was massively subsidizing its operations, would you not go to the US gov’t for help? I certainly would, and I’d be appalled if Washington didn’t help me out with this trade dispute.

Chris Lobdell
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Chris Lobdell

True but the argument can be made in many instances. The US airlines accepted billions in aid following 9/11. Should that count? Boeing receives substantial aid in the form of inflated defense contracts that allows them to compete against in the commercial sector against Boeing. Tack on Boeing trying to get the C-Series effectively killed in the US through their trade complaints and you can’t argue the US plays fair either. Ultimately, it comes down to transparency. Even if they keep getting aid, at least we need to know how much aid it is.

Bobber
Guest
Bobber

“Tack on Boeing trying to get the C-Series effectively killed in the US through their trade complaints”

Exactly – you should have seen the Twitter outbursts from Boeing today about Airbus subsidies and WTO; ‘people who live in glass houses’, and all that…

Tim Dunn
Member
Tim Dunn

Chris L, Perhaps you can list them but I am quite sure that the grants to US airlines for hardening cockpit doors was far less than you think. And there really were no other subsidies from 9/11 to US airlines. The loan program made money. Bankruptcy is not a government subsidy despite what so many people say; bankruptcy is a government supervised reorganization of a business and its creditors exchanging debt for equity. Yes, transparency matters and the US subsidizes business in other means but 9/11 amounted to very little – besides being the result of war. CF does need… Read more »

Chris
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Chris

Meh, American bankruptcy law in its Chapter 11 form is both far more generous to companies and far more accessible (i.e. easier to use and used more) than its international counterparts, and that’s taking for granted counterparts where it actually exists, because in many countries, it doesn’t: bankrupt is bankrupt. Cranky had an article on the potential fate of Norwegian a few months ago; go research the Norwegian cousin of Chapter 11 and what the success rate is coming out of it alive and you’ll likely conclude that “bankruptcy” is not an option for Norwegian in Norway if it wants… Read more »

Zack Rules
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Zack Rules

I have never thought 5th freedom routes had a major impact on US or EU carriers. EK once flew Hamburg-JFK but now flies just Athens-EWR and Milan-JFK. Delta has what 50-60 transatlantic routes? It would be nice if officials would open up routes without nonstop service, MXP-BOS/ORD/PHL/IAD etc.

I think the current Delta leadership is embarrassed by this fight and is just looking for a face-saving way of backing down.

Doug Swalen
Guest

It really comes down to what was in the “confidential” side letter. Given that Qatar was the first to sign and it too didn’t agree to outright ban 5th Freedom flying…only to say it had no plans to fly 5th Freedom…I can’t see the UAE going for an even more restrictive deal. The AP got its hands on the “agreement”… http://www.startribune.com/apnewsbreak-us-emirates-strike-deal-resolving-airline-spat/482400632/ “The reality is somewhere in between. In the side letter, the Emiratis do not explicitly promise never to add more such routes, but simply indicate none are planned. Still, the agreement rests on a tacit understanding between the U.S.… Read more »

Tim Dunn
Member
Tim Dunn

First of all, there are very real standards for financial transparency and the US3 have long charged that the ME3 used government subsidized subsidiaries to reduce their costs. International accounting standards require that such information be disclosed. It is not insignificant that the ME3 have all agreed to accept true international accounting standards and even if Emirates is doing it now, it didn’t in the past. Remember that this dispute has gone on for years. Second, the agreement does have a one year verification period so there is very little reason to believe that the ME3 will return to subsidies… Read more »

iahphx
Member
iahphx

Well said. Anyone who knows anything about airline financials knows that what the ME3 has done the past decade was not done “for profit.” Doha isn’t going to be able to support flights from all corners of the globe, especially when Qatar and Dubai are offering the same levels of absurd service. This type of craziness has never happened anywhere else in the world, because (I guess) there have never been kingdoms with enough cash willing to absorb the billions in losses. That said, every massively unprofitable business ultimately fails — even those with massive government aid. We’ve been seeing… Read more »

TimH
Member

There’s so many loopholes in the agreement that it’s practically a new form of Swiss cheese. Etihad not having to report financials in any real sense until AFTER the airline “turns around” is pretty ridiculous, when you think about it: “We’ll be clear about how much money the government is pumping into the airline after the government is mostly done pumping money into the airline.” There are counterarguments (US airlines have taken advantage of American bankruptcy laws, which are more generous than say, the UAE’s, or “fly American” provisions which ensure that many, many millions of tickets sold to US… Read more »

iahphx
Member

It seems to me like there’s plenty of potential for this dispute to pop back into the headlines. At least for the duration of the Trump Administration, it’s pretty clear what the UAE and Qatar airlines are allowed, and not allowed, to do under the agreement. Navarro made it perfectly clear: “For the stability of this agreement, it is important that the industry lay down the marker of what the expectations are, as will the White House and State so that at this point in time there’s clarity what will happen moving forward. What we expect moving forward is transparency,… Read more »

Doug Swalen
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Doug Swalen

“I don’t think Emirates would be stupid enough to try to launch a Fifth Freedom flight during the Trump Administration. It would almost certainly be blocked”

I don’t think they can block it…not without killing the Open Skies agreement…and that would almost certainly cause more near term pain for US interests than UAE interests because of US freight operations.

Thomas
Guest
Thomas

“I don’t think Emirates would be stupid enough to try to launch a Fifth Freedom flight during the Trump Administration.”

They already did. The ATH EWR Fifth Freedom was announced on 23 Jan 2017 and begin service on 12 March 2017.

Steve
Guest
Steve

So now we have, under the Trump administration, MOA’s instead of treaties? MOA’s that no one in under obligation to actually adhere to. And they say they’ll accept GAAP and they won’t cook the books. Ridiculous. This administration is run by idiots and fools.

Tim Dunn
Member
Tim Dunn

once again, you do realize that there is a 1 year check-up point in the agreement and the US is free to return to the issue again? As for 5th freedom flights (comment above), EK is parking scores of widebody aircraft which is supposedly because they can’t staff them – because western airlines pay pilots so much more. If/when the ME3 airlines have to start pulling down legs of a hub, the economics of that hub start deteriorating fairly quickly. We saw that with the blockade of Qatar which lost connections to a number of its major markets. Let’s also… Read more »

Nick
Guest

If my folks give me $20 to buy gas, and they give my sister $200,000 to buy a house, we are both technically being subsidized by our folks, but I think you’d be hard pressed to say it’s the same. US carriers and some other carriers have been helped out by their national or local government’s from time to time. But there it’s transparent (for the most part) and limited in scope. Fuel tax breaks to keep a hub, landing fee waivers to start a new route, EAS for small communities. I don’t think any of those compare to billions… Read more »

Chris
Guest
Chris

This is a lot of cherrypicking. We are only kidding ourselves if we pretend the US “subsidies” are all transparent. “A subsidy by any other name…” What is the combined total of all the direct “subsidies”: Chapter 11 bankruptcies, EAS, “fly American” rules, landing fees waivers, fuel tax breaks, “incentives” from local governments? And what about indirect subsidies? The US government awards massive defense contracts to Boeing which allows Boeing to sell its commercial aircraft at lower costs. Airlines get better deals, meaning their overhead is lower, meaning they can offer lower fares. Not to mention the atrocious salaries that… Read more »

Alex Hill
Member
Alex Hill

One thing that doesn’t bother me from a legal point of view is Qatar Airlines and Etihad investing in European airlines to provide feed as long as those airlines are subject to European labor standards, safety regulations, compensation rules, etc. As Cranky says, using fifth freedom routes to skirt those rules and limit a country’s ability to regulate businesses in the country is the problem there much more than where the money is coming from.

Tim Dunn
Member
Tim Dunn

Let’s be clear what is a subsidy and what is not. First, payments to airlines post 9/11 were not only clearly explained in the airlines’ financial statements but they were a direct result of war. You can call 9/11 whatever you want but when 3000 people are killed in a day and a significant number of high profile buildings are destroyed, that is as much of a definition of war as any I have heard. I would love to hear someone give me an example of a similar level of destruction and death in any other country and not have… Read more »

David
Guest

Why not just read it for yourself. It’s right here: https://www.state.gov/documents/organization/282448.pdf