The CEOs of American and Delta Keep Using This Word ‘Subsidy’ But Do Not Understand What it Means

American, Delta, and United want government protection from the big Gulf airlines because they don’t think it’s fair that those airlines are – in their view – receiving subsidies from their governments.

They want the Obama administration to renegotiate treaties that allow airlines from Qatar and the United Arab Emirates to fly to the United States. And they want to block those airlines from adding new US flights.

Put another way, the US airlines want the government to mandate fewer flights for consumers and higher fares.

Arguably US airlines are more subsidized than Gulf ones and Etihad has issued a report detailing those subsidies.

The report ignores some of the most egregious example of subsidies, those provided in the ‘infant stages’ of the US airline industry (closer to the stage at which the Gulf carriers find themselves in recent years) — such as the US government carving out which airlines would fly which routes, and providing deep subsidies (through the US Postal Service) for doing so and the US government subsidizing aircraft purchases (such as the first major American Airlines aircraft order, through the Reconstruction Finance Corporation; if ever there was a crony capitalist it was long-time American Chairman C.R. Smith who was best man in FDR’s son’s wedding and served as Commerce Secretary in the Johnson administration between stints running the airline).

Instead it focuses primarily on the obligations relieved off of airline books by the US bankruptcy process and pensions taken over by a government agency. It also details jet fuel subsidies and tax breaks.

In the case of bankruptcy as a subsidy, it’s complicated. The American bankruptcy probably was a subsidy. Bankruptcy law itself isn’t intended to be. Government takeovers of airline pension obligations as subsidies are a bit clearer. And tax breaks, loan guarantees, requirements that government employees and contractors fly US airlines, payments to make aircraft available to the government at some future point that may never come… those are subsidies.

Is US Bankruptcy Law a Subsidy?

U.S. bankruptcy law is fairly unique in the world. It does use the power of the government to relieve airlines of obligations to repay creditor — not delay repayment until a time when the business is profitable, but eliminate the obligation entirely.

American Airlines is making billions of dollars and doesn’t have to use any of that to pay creditors (they’ve even asked for a return of funds from a repayment pool that had been set aside). American rejected aircraft leases, for instance, in adddition to using the government process as a bludgeon in negotiations with its unions.

American’s cost structure was uncompetitive with its legacy carrier rivals before bankruptcy. But it certainly hadn’t run out of cash, it went into bankrupcy without ‘debtor in possession’ financing. And it would have turned profitable on lower fuel prices alone had it held out (something that couldn’t have been foresee at the time of bankruptcy).

On the other hand, the idea of US bankruptcy law is to ensure maximum repayment to creditors. The notion of filing bankruptcy is that a business can’t repay them all, so how can the business be restructured into a going concern such that the most, highest tier creditors get their the largest portion possible of their money back? That’s about maximizing payments from the business within the realm of the possible, not about giving the business (really, the equity holders) a gift.

In practice the case of American’s bankruptcy looks like a subsidy, especially considering the unusual value retained by American’s stockholders, but bankruptcy law itself isn’t intended to be one.

Is Offloading Pension Obligations on the US Government a Subsidy?

It’s sophistry to suggest that having the government require private parties to accept losses, through lower or no repayment, isn’t a subsidy. That’s the government taking obligations off the books of an airline.

However some content that because it’s about reordering payment priorities, rather than direct transfer of cash from the government, it somehow ‘doesn’t count’.

In the case of pension benefit obligations, no such claim can be made, because it is literally transferring obligations made by a company to its employees to pay retired benefits to a government agency.

Now, the Pension Benefit Guarantee Corporation is funded by premiums paid in by companies with insured pensions — but any given company whose underfunded pension is transferred gets huge liabilities off of its books without having paid in huge amounts. The flat-rate premium, for instance, last year was $49 per plan participant. There’s a reason that the PBGC objects to bankruptcy courts terminating pensions (the US Airways plans were turned over to them, the American pensions – though American requested it – were not). Those pensions become obligations of the US government, and it’s expected that obligations of the agency will far exceed premiums.

US Airline CEOs Respond — Either Disingenously, or With Genuine Misunderstanding

Here’s what I tweeted about American CEO Doug Parker’s comments on the Etihad study yesterday:

American’s CEO Doug Parker exhibits a clear lack of understanding of what a subsidy is. His test for a subsidy:

There was no government support that provided support to [the bankrupt carriers] that needed to meet their obligations.

Direct cash to an airline would be a subsidy. But having the government pay your obligations for you is the exact same thing whether or not the cash runs through the company’s books. Relieving an obligation, through force of law, makes the company just as much better off as if the government had handed the company a check and then the company used that check to pay its bills.

To say that having the government pick up an obligation isn’t a subsidy is also to undermine the very claims made in the US airlines’ white paper which argues that the UAE and Qatar have picked up obligations that should belong to the airline. Apparently Parker hasn’t read or understood his own document (though it would make good sense to distance oneself from it).

Meanwhile Richard Anderson, Delta’s CEO, engages in pure misdirection. Asked about tax subsidies and government loan guarantees, he simply repies:

“If you look at our book tax rate is on our finanicals, we are a full tax payer at the highest corporate tax rate.”

That’s utterly non-responsive to the question.

What Should Happen? What Will Happen?

The US airlines say they aren’t subsidized but they are. The Gulf carriers say they aren’t subsidized but they are. Gulf carriers are owned by their governments, or by government investment vehicles. An investor unconcerned with profits or willing to make ‘bad business decisions’ isn’t a subsidy per se, and recent history is littered with bad airline investments in the US with unrealistic business models. Those weren’t ‘fair’ to airlines trying to be ‘real businesses’ either. Investors unconcerned with profits take the same form as subsidies, whether they qualify in law or not.

Of course a substantial number of the alliance partners of US airlines that they do not complain about are government-owned entities and are often substantially loss-making entities run for government purposes other than profit. Fundamentally US airlines aren’t concerned about subsidies, that’s just the wedge that allows them to make their case. Their goal is government protectionism.

Airlines should compete, not run to the government. That would make the airlines stronger and US consumers better off.

Ultimately the airlines and their lobby shops can throw a bone and Members of Congress will run and fetch — including and especially the Chairman of the House Transportation Committee whose ethics are questionable at best and who should clearly step down from the Transportation Committee and any role overseeing the airline industry.

But that’s very different from actually obtaining action either from the Executive Branch (who will prioritize cooperation in terror projects and fighting ISIS over the grumping of US airline CEOs) or Congress (who will find it unpopular with constituents to stand with unpopular airlines in favor of higher prices and less choice — even though the US carrier case has xenophobia on its side).

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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  1. The USG is not going to come to the aid of the US carriers. Whatever extent airline employment will fall as a result of the Gulf carriers, their purchase of US made aircraft and components will more than offset the loss.

  2. The Essential Air Services (EAS) program subsidizes airlines, as well. Through the EAS, airlines are paid to fly to small and rural airports to support those communities. Whether the government should be doing this or not is one question. If you believe that government should be doing this, many services in Alaska would be justified. In the Lower 48 States, much of this subsidized service goes to airports within short driving distance of major airports – many in the districts of powerful congressmen. The EAS cost only $261 Million last year, which is a drop in the bucket, but it is a subsidy to airlines. And the load factors on many of these routs is extremely low, because there is little consumer demand. There is service only due to the subsidy because consumers are generally choosing to drive to the larger airports for more flights options. So, this EAS subsidy can also not be good for greenhouse gas emissions.

  3. The more you write on this topic, the more I think you need to change your slogan to “Thoughtless Leader in Travel.”

    By the logic of this essay, collecting an insurance premium after somebody crashed your airplane into the World Trade Center would be “a subsidy.” Indeed, pretty much any encounter with the tax code (like depreciation) would be “a subsidy.”

    With specific regard to the PBGC, the fact remains that the AA pensions were NOT terminated. Had they been, the gov’t would have become AA’s largest creditor. That’s right, the owners of the airline would have had to give their money TO the gov’t. This is almost the exact opposite of what happens with the Gulf airlines! To say this was somehow a subsidy, is to say day is night. What’s your agenda?

  4. @iahphx that article says the US-AA merger was good, because it helped make the case no termination of pension benefits was necessary in the American bankruptcy. That has nothing whatsoever to do with what I’m talking about in this post. The subsidies I’m writing about here are the pensions that WERE terminated and foisted on the government in US Airways’ bankruptcy (and Delta’s).

    for some reason you’ve got a real blind spot on this issue. When talking about the subsidies ‘American’ has received that includes the subsidies of US Airways which for all intents and purposes acquired them.

    The government sets premiums in a way that systematically underfunds the system. They’re the monopoly provider that these programs have to participate in, and then guarantees payments with taxpayers as the residual funder. That’s not ‘insurance’.

  5. OMG!!!! Who is giving advice to Delta’s CEO on how to dress himself? I have no words to describe that guy. 🙁

  6. I don’t think I have a blind spot on this issue, Gary. If you watch Friday’s very interesting press conference at the National Press Club — interesting because it’s the first time I’ve ever seen the major airline CEOs give an interview together — you can get a feel for what’s going on here. It’s really very, very simple. The three Gulf airlines are doing CRAZY stuff (oh, like scheduling 25 flights from the USA to their smallish countries that can probably only support 3 flights) and having their governments pick up the tab in the name of “economic development” — all while pretending that this crazy service is actually profitable! We know from the report issued on Friday (you should read it!) that almost all of their business is taking US pax to the Indian subcontinent, because hardly any other destinations make any geographical sense whatsoever. That’s bad for the US carriers (since the overcapacity prevents anyone from making a buck flying USA-India), but what they really worry about is the huge aircraft orders the Mideast carriers have. Those planes will have to go somewhere. The fear (justified, I believe) is that those airlines will start using their odd Fifth Freedom rights to fly A380s from the USA to Europe — just like Emirates is currently doing to Milan. That won’t make the Middle East airlines any money (and, remember, they won’t care if they do!), but the overcapacity would cause everyone else to lose money, too. That’s what’s going on here. If you think this behavior is “OK” (and heck, it will lower fares for a few years if the gov’ts allowed it), say so. But this nonsense that the US airlines are “more subsidized” than the Middle East carriers is 100% pure nonsense, and you should know better.

  7. @iahphx – of course their business is flying customers to India, Pakistan, and the surrounding regions as well as the Middle East, and North Africa. These are places that the US carriers haven’t flown to, haven’t provided reasonable service to, even before the rise of these airlines in recent years. The notion that they would ‘if only’ these carriers weren’t subsidized is silly and disingenuous in the extreme.

    What’s the difference between Etihad flying Italy – US and Etihad-controlled (and historically very subsidized) Alitalia doing it, in any real sense anyway? And Delta just got approval to share passengers and revenue with Alitalia.

    Do you even see anything wrong with the privileged place that Delta and United hold in Tokyo as a result of the spoils of war?

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