(Published in Aviation Business ME Magazine - Issue May 2015) www.aviationbusinessme.com
Protectionism as ‘Mother of all Subsidies’? Campaign against the ‘Big Three’ Gulf carriers
A battle is raging in the world of commercial aviation that is pitting legacy American and European airlines against new comers eager the shake up the market. The United States and European Union must decide whose side, if any, to take, all the while avoiding the unraveling of existing Open Skies agreements that were concluded to foster greater competition.
The home countries of the Gulf carriers, like the U.S. and many other countries, recognize the importance of a vibrant aviation sector and have invested resources in top-notch airports and aviation infrastructure and provided start-up funding to their airlines, much as the U.S. did with mail contracts and other support during the infancy of commercial aviation. Moreover, the three CEOs cannot prove commercial harm, let alone offer a rationale to challenge Open Skies agreements based upon gulf carriers’ alleged ‘market-distorting’ advantages. U.S. carriers have very little head-to-head competition with the Gulf carriers so that those carriers are in no position to divert substantial amounts of traffic from U.S. airlines. The truth is that at least two U.S. airlines are attacking the Gulf carriers to prop up their European airline alliance partners… Lufthansa and Air France.
In recent years, the Amercian and European markets have witnessed substantial industry consolidation via mergers and takeovers. American, Delta and United (‘North American Big Three’ - NAB3) now control the lion's share of the US market, with at some stage many carriers having accessed to protection under Chapter 11 of the U.S. bankruptcy code, as well as support airlines received post-9/11. The ‘European Big Three’ (EB3) dominant player are also the result of consolidation with Air France, which merged with Dutch KLM; and Lufthansa, which took over Swiss and Austrian Airlines and owns 45 percent of Brussels Airlines. British Airways has merged with Spain's Iberia to form IAG but is striking a different tone to Air France and Lufthansa and declining to join the anti-Gulf campaign. The two other mentioned European markets (and several of their subsidiaries) stressed already last December by the European Commission that competition with Gulf carriers should be more equitable with only third- and fourth-freedom rights covered in a comprehensive air service agreement, and further traffic rights to Gulf airlines would be linked to ‘a positive evolution of the competitive environment’. The third and fourth ‘freedom of the air’ dicta cover the rights to carry traffic to and from an airline’s home country. As we know, the Gulf carriers’ business model is built to a large degree on connecting traffic and beyond (sixth freedom), thus the condition has to be unacceptable to the GCC and its airlines…
Successive US administrations, Democrat and Republican, have negotiated 114 ‘Open Skies’ agreements with foreign governments since the 1990s, with the United Arab Emirates since 1999 and with Qatar since 2001. By abolishing limits on the number and frequency of destinations that airlines can serve, these agreements have let newcomers like the Gulf carriers into the market. Their success has raised eyebrows, especially after the November 2013 Dubai Airshow where Emirates, Etihad and Qatar between them placed orders for several hundred wide-bodied planes, including Boeing's 777X and the Airbus’s A380. With wide-bodied planes used mainly for intercontinental flights, it was clear from these orders that they were harboring ambitions of greatly expanding their market share. One market that will remain shut to them, however, is US domestic flights, which are firmly ring-fenced from all foreign competitors, including European ones.
Meanwhile, in the US, the federal government got some skin in the game by calling an ‘open forum’ for three departments – state, transport and commerce – to hear evidence from interested parties about the allegations. The forum is a sign that the administration is taking the allegations seriously even it is just part of Barack Obama’s ‘open government’ as talking shop without any power to recommend prosecution… Without any doubt, the debate will be not about the U.S. versus the Gulf carriers. The compelling interests of other U.S. stakeholders who support vigorous airline competition are in play including consumers, U.S. airports and communities (that have suffered greatly reduced air services as a consequence of airline mergers) and corporations that now pay more for commercial air services because of those mergers. Stakeholders who would be damaged if this gambit succeeded also include cargo carriers (FedEx wants no part of it and neither do many others) and their customers, airplane manufacturers and their suppliers and other carriers that challenge the NAB3’s hegemony over the U.S. skies such as Southwest Airlines, JetBlue and Alaska Airlines. Asking the government to protect those known as the most profitable airlines in the world from competition would, of course, result in the ‘Mother of all Subsidies’ as fares and ancillary fees would artificially climb… Last but not least, to ensure a ‘level playing field’ we should highlight a 1999 report from the public policy research arm of the United States Congress conservatively stating that between 1918 and 1998 the U.S. Government spent $155 billion dollars in support of aviation activities… and 59 percent of U.S. airlines’ alliance partners are state owned and supported. That Congressional Research Services (CRS) report is factual from an unbiased, credible and highly respected institution, and for those five of the world’s largest airlines there is a long journey ahead to provide similar quality of services as the consumer’s interests is so far not on the table of those willing to wind back the clock.