The Airlines’ Secret Document Making the Case Against Gulf Airlines Has Been Released… and It’s Still Unpersuasive

Now that the airlines’ previously ‘secret documents’ condemning Gulf carrier subsidies have been made public (.pdf), Cranky Flier argues the US carriers have a good case, at least in part.

  • He suggests the case against Emirates is weak, but quite strong against the subsidies received by Qatar and Etihad.
  • He agrees with my position that the US and Gulf airlines really don’t compete directly today.
  • But he believes the potential for future competition, largely on transatlantic routes between the US and Europe, make ‘unfair competition’ worthy of scrutiny

It’s worth noting that the complaints about Emirates center around government support for the aviation industry — building the Dubai airport (US airports are almost exclusively government built), giving the airport’s largest tenant a privileged position (just as Delta as the largest tenant in Atlanta has a privileged position and how domestic airlines other than American are shunted off in the E concourse in Dallas), and innuendo about opaque transactions without any proof of subsidy or transfer (that may well exist, but the paper doesn’t prove it).

The concern Cranky seemed persuaded by is that Gulf carriers could start transatlantic flights between Europe and US which would compete against US carriers. And that really isn’t happening now. This would be an issue at the point where those flights begin in a material amount. Until then the issue just isn’t ripe, and shouldn’t be a US government priority – precisely because Open Skies promotes both consumer interests and security cooperation, which are at least if not more important the protecting US private airline interests.

It’s Emirates flying Milan – New York, a flight that was controversial on the Italy side of the equation. And Cranky acknowledges Emirates isn’t really so relevant to this discussion. At this point US airlines are simply positing some theoretical future harm. You don’t go blowing up international agreements over that.

At the point where there’s meaningful competition, we really do have to look seriously at issues like consumer benefit, which don’t get as much attention because consumers don’t really have lobbyists in the manner that airlines do (concentrated benefits, dispersed costs).

And if we start to care enough to sort through whether there’s actual unfairness, I think we have to ask about the fuel tax subsidies Delta receives from Georgia, and the subsidies Delta received for its oil refinery in Pennsylvania. (These subsidies make the airlines’ white paper criticizing the Gulf carriers not paying fuel tax especially bizarre.)

When we criticize state subsidies for aircraft, we should ask about where American Airlines got the funding for its very first large aircraft order (the sleeper version of the DC-3)… the Reconstruction Finance Corporation. Indeed, commercial aviation’s launch in the US was wholly directed by the Postal Service.

The Gulf carriers might respond that US airlines received direct payment from the federal government after 9/11, and the US government as well created the Air Transportation Stabilization Board authorized to provide up to $10 billion in subsidized loans. (America West, subsequently merged with US Airways and now with American, was on such recipient.) And the US bankruptcy process, while designed to ensure creditors receive the maximum amount of funds owed, generates lower costs by rejecting commitments and debts. Indeed, one might ask the federal government about United’s pensions and US Airways pensions.

The subsidies received in the early days of the US industry (remember we’re talking about the relatively early days of the Gulf aviation industry here) seem relevant and missing from the analysis. US airlines aren’t looking for free markets, they’re looking for protection from competition.

Any international case may take place within the context of WTO rules and definitions, but the case proceeds in a political and not merely definitional context.

There are plenty of state-owned, subsidized airlines flying to the US. Many are partners of US carriers, and even have fifth freedom rights. The US has an Open Skies agreement with Saudi Arabia, a Delta partner, and especially ironic considering remarks by Delta’s CEO trying to connect Qatar, Emirates, and Etihad to the 9/11 terrorist attacks (since there’s a reasonable case to be made that at least some portion of the Saudi government tacitly supported the attacks).

Furthermore, the rhetoric used by those making the case against Gulf carriers is deplorable and xenophobic.

This is pure cynicism on the part of US airlines. If they want a real hearing on subsidies received by Middle Eastern carriers, they need to start by renouncing their own subsidies. They need to start by renouncing the protectionism that keeps foreign ownership out of the US domestic airline market. They need to start by rejecting the protectionism that limits competition at places like Dallas Love Field (where Southwest is happy to see legal limits on the number of gates, since they control 90% of them, and American is happy as well since it limits growth of competition with their hub at Dallas Fort Worth).

If they cared about free markets in aviation, they would care about free markets in aviation. Instead they want to use complaints about others’ subsidies as a fig leaf to push for greater government intervention to limit competition and harm consumers. And they should be ashamed of themselves.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. A couple of things Cranky fails to take into account, the US3 have had plenty of help from the U.S. Government.
    1 – mega-mergers. This has zapped all of the competition on the domestic front. Oil prices have dropped 50% but airfares continue to climb.
    2 – BANKRUPTCY. UA did it in 2002. DL did it in 2005. AA did it in 2011. Labor costs too high? No problem, we will file bankruptcy and bust labor contracts.
    If it weren’t for the ME3, we would all be flying in cattle cars with wings.
    Add to that the total devaluation of UA and DL loyalty programs. I’m sorry, did I say loyalty? What loyalty? The big boys have taken that away too.
    So let’s recap – no competition, sky high air fares, less room, fewer benefits. I would say that the US3 are winning!
    Cranky, give me a break.

  2. As usual, corporate America claims to be for “free markets” but this case (and many others) shows exactly what they’re for – their own profits. Nothing wrong with that, but we should be clear about that when judging their claims.

  3. You nailed it. I’m tired of crony capitalism, protectionism and subsidies. Corporate executives and government officials all slurping from the same trough. Enough. Compete, don’t whine, offer a better product, service or price. Or, fold up and go home.

  4. i suspect many Americans including myself will welcome new TATL players to break down US3/EU monoply over TATL routes. It’s ridiculous how we have to pay $1000+ for 6-8 hour flight!

    I think EK do have 5th freedom rights from Japan/Singapore… Can’t wait to see RA, JS, and DP make new round of stupid comments.

  5. If the US3 succeed in their protectionist agenda and the Arab airlines are banned from the US, and therefore US airlines are banned from Arab states, the winners are going to be European airlines which can take connecting traffic. They also are struggling under the volume of seats being sold by the Arab3, and would be delighted to fill them this way.

  6. Gary, I mean this fully as a compliment – I wish this was more of the writing you did. Hell, I wish it was more of the writing I did, when I get around to writing at all. We tend to agree when it comes to economic arguments.

    The whole “case” by the big 3 US airlines is fluff. For every subsidy the gulf carriers receive, the US industry has received in kind at some point in history – some recent, like bankruptcy and rubber stamp mergers. Fact is, this is an industry with high barriers to entry (regulatory, licensing, scarcity of qualified pilots) not to mention the sheer costs involved to start up (I won’t tell you is a true barrier to entry). To enter the playing field, airlines have to find some help somewhere. They all got it at some point. Right now, the newer gulf players are getting free airports and blank check investments. That can’t last forever, just as the benefits the US players received didn’t.

    I do hope we see some added competition from foreign carriers to europe on fifth freedom routes. It’s sorely needed. Clearly JFK-MXP hasn’t put AA, DL or AZ out of business, even while AZ itself is mismanaged to the point of putting itself out of business. With a little more of that, maybe we see some lower fares in economy, and some better premium products in the front cabins. Let’s keep in mind, Emirates is still putting 10 across in Y on that route, they’re just charging a lower fare.

    As far as I’m concerned, I’m thrilled as a consumer, given that the US industry’s talking points hold no merit and that they’ll inevitably be forced to compete.

  7. Again, people’s dislike of the US carriers and ignorance about airline economics (which is logical, given that you don’t NEED to know about airline economics as a passenger) clouds their judgment here. Airlines do tend to receive gov’t assistance in one form or another. But no airlines receive the kind of aid that the Middle East airlines currently receive. This is why there are a crazy number of nonstop flights from the USA to the Arabian Peninsula even though there is almost no demand for such service. Instead, the Middle East airlines fly whatever passengers they get onward to Asia. This is no business in the traditional sense, in that the economics are horrific. I guess some folks are OK with foreign governments competing against American companies through massive subsidies, but I think it’s wrong. It’s bad for Americans, and our gov’t should not allow it.

  8. @iahphx really, how about the $2B PER YEAR that US airlines receive as part of the program to promote the availability of civilian aircraft for military use in the event it’s needed? How about the Fly America Act requiring the single largest travel buyer in the world to buy from US airlines?

  9. Gary, you are wasting your time with IAHPHX, based on the FT thread the person started and their continued strawman arguments, unfounded conlcusions, baseless hyperbole, they are not worth the effort of reasoned argument and comparing like-to-like. Even the simple concept that US Aviation has about 50yr headstart on the Gulf carriers and has accumulated subsidies that they are enjoying now, goes over their head.

    It’s not the Gulf carriers’ fault that the US airlines have mismanaged the many years headstart and subsidies they got from the USG and other local governments, including sweetheart deals stemming from US foreign policy (e.g. access to Japan and in LATAM), that they seemingly find themselves threatened by the new upstarts who have a government led focus on aviation, a geographic advantage, and socioeconomic comparative advantage. Nobody complains about the dominance of US financial institutions due to the fact that they have direct influence and protection, if not complicity, from the issuer and manager of the world’s reserve currency.

    The US3 are run for quarterly and annual financial profit, while the ME3 are run for strategic and long run economic profit, that doesn’t make the latter an illegitimate business and the other more appropriate. They are just driving towards different results, and for some reason closed minds that cannot accept that anything other than a wall street sheep keep spouting about unfairness.

  10. @ Gary Leff — Whoa, where on earth did you get that $2 billion CRAF subsidy for USA airlines? If that were true, it would be an outrageous subsidy. But to my knowledge, it’s completely wrong. Wikipedia says the US gov’t gives CONTRACTS to CRAF-participating airlines to transport the military. These contracts are worth a little more than $400 million a year, and they go to a variety of airplane owners, not just the major USA commercial carriers. And you have to provide services (transport) for that money: it’s not money for nothing, like we’re talking about in the Middle East.

    http://en.wikipedia.org/wiki/Civil_Reserve_Air_Fleet

    Whether this program is a good use of taxpayer dollars is debatable. As a practical matter, it’s hard for me to imagine USA airlines not making planes available to the military in times of crisis. But, regardless, we’re talking very small potatoes. The military is going to need to sign contracts for routine troop transport anyway.

    Comparing this to the tens of billions of dollars of Middle East airlines subsidies is disingenuous at best. An apology and correction is warranted here.

  11. @ Gary Leff — Gary, that Wikipedia entry (which is both very dated and vague) says nothing about the US Airlines getting $2 billion/year in gov’t subsidies. A better description of the contracts is contained here:

    http://www.defenseindustrydaily.com/the-us-militarys-international-airlift-contracts-05066/

    According to this article, the 2015 CRAF contracts are worth $441 million, and it’s going to a slew of companies who can offer charter flights, not just the major US airlines. It is payment for services rendered: military charters — like to get the troops home from Afghanistan. Your post unequivocally suggests that the US airlines are getting $2 billion a year to have planes available for military use if needed. That is flat out wrong, and a correction is appropriate. It is nothing whatsoever like the tens of billions in subsidies provided by the UAE governments to their state-owned airlines. Rather, it is almost exactly like the US gov’t paying the airlines to transport mail — and small potatoes to boot.

  12. @ Topgunner — I think Gary’s readers and Flyertalk readers can judge for themselves who’s spouting hyperbole and who’s not. But any airline enthusiast who stops and thinks for a moment can easily see that the Middle East airlines are operating in a way that no other airlines on Earth operate. Tim Clark could be a genius and the management of all the other airlines idiots. Or he could be getting a massive subsidy. You may not have a problem with that subsidy, but I think most fair-minded Americans would.

  13. @iahphx – YOU are the one that posted the Wikipedia entry and now are claiming it’s unreliable? It suggested that $418mm as a baseline and then noted a single year in which $1.5 billion was added on top. Your source then suggested $1.918 billion (so I guess didn’t support my contention of $2 billion – hah) total for a single year.

    So I guess you can keep arguing now with your own sources. In any case these are payments made to air carriers who agree to make their planes available for military use, though the bulk of the payments go for transporting cargo rather than having the government’s own aircraft do it.

  14. The absurdity of your argument here speaks for itself. I quoted the relevant Wikipedia stat, and then you mistakenly “extrapolated” from their vague data. I then provided the actual data, and you start blustering.

    So you’re not going to admit that you’re wrong about CRAF “subsidies”? That’s a shame, because misinformation does nobody any good.

  15. @iahphx – there’s a 400mm annual floor and it ranges up from there to as much as 2b/yr, that’s huge, and when coupled with fuel tax subsidies and with loans and all of the other things the airlines have benefited from over the years there’s not a material difference here. the us airlines want to shut down competition and are using subsidies as their hammer. sure, middle eastern carriers are subsidized (as are the carriers they aren’t complaining about like saudia). if they want to take a position that there shouldn’t be any including for themselves i’ll listen…

  16. Frankly, I don’t give a damn where the funding comes from for any carrier out there. I do around 200-K a year and if I can fly a foreign carrier rather than a crappy US one, I’ll do it every time. That said, European lines seem to be catching the “american disease” and, with a couple of exceptions, are going down market with service and comfort. The major Asian carriers, however, still offer the best of all worlds.

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