Total Loss for Heavily Subsidized US Airlines Against the Big Gulf Carriers

Since the major US airlines American, Delta, and United began arguing for greater protectionism against rival airlines Emirates, Etihad, and Qatar because it’s somehow unfair for the most profitable airlines in the world to have to compete against carriers they contend are too subsidized, I’ve pointed out several inconvenient facts.

  • The US airlines are themselves heavily subsidized.

  • The US airlines don’t mind it when foreign airlines are subsidized — when it benefits them. Delta owns a stake in the most heavily subsidized Chinese airline, China Eastern. Delta has a joint business venture with Alitalia sharing revenue across the Atlantic. Alitalia benefits from investment in and control by… Etihad.

  • Any crackdown is really a move against US consumers. Without as many flights and low fares offered by Gulf competitors, American would have to pay more for air travel and buy their air travel from these US airlines. They’re calling for a direct tax on the American people, not the UAE or Qatar.

The National is reporting that as was widely expected the US government is closing its investigation of the Gulf airlines with no action. (HT: One Mile at a Time)

The US government says talks over the Open Skies policy with Arabian Gulf carriers were constructive and ended without any formal action.

The US state department held talks with Qatar government officials on Monday and with the UAE the week before over charges levelled more than a year ago by the three largest US airlines alleging Emirates, Etihad Airways and Qatar Airways were competing unfairly.

The state department said, however, that while it looked seriously at the allegations it has taken no formal action.

Over the past week, the US and the UAE and Qatar “held informal technical discussions on our bilateral civil aviation relationship”, said senior state department spokeswoman Nicole Thompson. The talks “were government-to-government only [and] we have not invoked the consultations provision of our bilateral Open Skies agreements”, she added.

US policy favors Open Skies because US consumers benefit from lower prices and more choice, US airline employment is at a seven year high with rising wages as the Gulf carriers have expanded, and smaller airline competitors like Alaska and JetBlue benefit from their partnerships with Emirates. The growth of Gulf carriers has meant more jobs in travel and tourism, in aircraft manufacturing (they’re big Boeing customers!), as well as trade.

Many nations subsidize their airlines, and run them for reasons that aren’t entirely commercial. But Emirates is clearly profitable, Etihad appears to be marginally so, and of course it’s an odd argument for the world’s most profitable airlines to call for the government to protect them from money losing airlines.

Emirates Airbus A380 Business Class Bar

Now that the issue is concluded, it’s worth remembering that the US airlines were themselves heavily subsidized during their own history at similar points to the Gulf carriers today. And it’s also worth looking at what happened when US airlines lost money.

While Delta is probably the most aggressive in seeking subsidy, with the retirement of Delta CEO Richard “I Partner With Saudia But Protect Me From Gulf Airlines Because 9/11” Anderson and the ouster of United CEO Jeff Smisek amidst a federal investigation over seeking improper government benefits for the airline, American’s CEO Doug Parker is all that remains of the original troika speaking out against the 3 biggest Gulf airlines.

Jeff Smisek, Doug Parker, and Richard Anderson

The US Airlines Have a Similar Story of Being Born in Subsidy

Many current travelers remember or are aware of the 1978 Airline Deregulation Act. Up until then the Civil Aeronautics Board set prices and schedules and aimed to ensure airline profitability.

But few remember how the airlines came to be regulated in the first place. In the early days of US civil aviation the largest airline customer was the federal government in the form of the US Postal Service.

The 1925 Kelly Act authorized the Postal Service to contract with private airlines to carry the mail. That led to airlines received most of their revenue carrying mail. Often priced to the customer by the piece regardless of weight, with the government charged for weight, airlines were known to mail bricks and other large objects to themselves in other cities to pump up their revenue.

The 1930 Air Mail Act changed how mail was priced and gave broad contracting powers to the Postmaster General. The Postmaster used this power to consolidate contracts under three major airlines, forcing many airlines out of business. This came to fruition out of a 1930 meeting that became known as the ‘Spoils Conference’.

In its infancy, American Airlines received support from the Roosevelt Administration’s Reconstruction Finance Corporation for its first major aircraft order. Airline CEO C.R. Smith was close to Roosevelt, and was even best man in FDR’s son’s wedding.

It’s easy to dismiss this as ancient history, but the US airlines are criticizing the Gulf carriers as born in subsidy when it’s exactly where they came from themselves.

American’s CEO Runs the Airline Today Because of Direct Government Subsidy

American Airlines CEO Doug Parker personally made the successful case for federal government subsidized loans for American West Airlines when he ran that carrier. He argued that the airline wouldn’t survive without government backing.

America West was sound enough that Parker was able to merge it with US Airways (as US Airways came out of its second bankruptcy in two years) before going on to merge the US Airways operation with American.

When US Airways exited from its first bankruptcy of the last decade in 2003, it did so with $900 million in loans backed by the federal government. Not only that but the State of Alabama’s retirement fund became the largest owner of the airline, kicking in,

$500 million in interim financing, $240 million for an equity stake, $75 million in at-risk financing and a refinancing of $340 million in US Airways jet leases

US Airways even received free advertising on the chain of television stations owned by the State of Alabama. It was precisely the bad investments made by Alabama retirement chief David Bronner that put US Airways into Parker’s hands. (Ironically, the Alabama pension system would have made money on US Airways if they had gone in with Parker on it after the second bankruptcy but Bronner refused because he wouldn’t get to be in charge saying “They just want your money and don’t want you to have any control.”)

Moreover US Airways offloaded four pensions on the federal Pension Benefit Guaranty Corporation at a $2.8 billion loss to the agency.

And the federal Pension Benefit Guaranty Corporation actually played a direct role orchestrating who wound up in charge at American Airlines. They helped swing the American Airlines bankruptcy creditors committee to support a merger with US Airways — because the US Airways plan didn’t involve terminating more pensions while a standalone emergence from bankruptcy, with pension termination, would have made the Pension Benefit Guaranty Corporation the largest airline creditor swamping claims held by that committee.

American’s CEO is in that chair because the federal government put him there. Now, as the government’s chosen instrument and coming off of the second most profitable 2nd quarter in the airline’s history (after last year!), the government has turned down his request to prevent competition against his airline.

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, 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. Time to look into the antitrust Atlantic++ agreements!
    They need to disappear too urgently. Total violation of free trade and competition.

  2. Gary, you’re wrong about Smisek’s firing. It was those SOCKS he’s wearing. Totally inappropriate.

    Richard Anderson, in addition to funky socks—well, notice the cuff of his pants falling out. The look on his face seems to acknowledge he’s not comfortable with his wardrobe.

    These 2 guys remind me of the old Continental bosses imitating lines from the movie “Airplane” in the hallway of their offices when they were in great financial difficulty.
    I recall one of them being quoted as saying, “Looks like we picked the wrong week to top sniffing glue!”

  3. I have no idea what, if anything, the State Department has decided on this question, but I would caution you that relying on The National to provide unbiased and accurate information about this dispute is fraught with peril. In case you don’t know, the National is yet another wholly-owned government enterprise in the UAE.

  4. @Gary Leff — My caution to you about believing what UAE-owned enterprises say was prescient. The State Department has taken the unusual step of coming forward and stating that the information contained in that newspaper article is false. Their investigation and talks with the Mideast nations are ongoing.

    I hope you will also correct the misimpression you have left with your readers by prominently posting a retraction. I also hope you will learn from this experience and be less trusting of what other UAE-owned companies say (like whether they are “profitable”).

  5. @iahphx you need to actually read what the State Department spokesperson said, and what the State Department is saying now, NOT what you want to hear or want them to say.

    Per the article you link to the State Department is NOT saying the article I link to is false. They issued a (minor technical) clarification. They didn’t disavow the report or the quotes from their own spokesperson.

    The National reported accurately the State Department spokesperson’s comments. The State Department does not deny this. So your suggestion to be less trusting of UAE media is off base. I discount media reports frequently, but this was a direct quote from a State Department spokesperson.

    The State Department says that talks are ongoing. This was in the UAE report as well. They haven’t formally closed the file. The State Department is all about diplomacy, it was probably a breach of protocol for their spokesperson to share the outcome that she did.

    The State Department spokesperson said what the outcome would be when the file is closed. The State Department said, but the file isn’t closed. Those two statements don’t even contradict each other.

    The article you cite even concludes “the allegations, which started more than 18 months ago, have mostly fizzled out”

  6. @Gary Leff — Now you’re just being silly. The UAE newspaper report you relied upon to gloat is false. As, the article itself states, the State Department “refuted” the report. That’s all that we really know at this time. You relied on a source that has been discredited and you refuse to admit it. And since you still seem unfamiliar about how the press works in the Middle East, I’d noted that this “walk back” has come from ANOTHER Dubai newspaper, the Gulf News. The comment that the allegations have “fizzled” in that reporter’s belief (which seems ill-placed given that he’s reporting that the US investigation is still ongoing!). Given his employer, it would be reasonable to conclude that he may have a bias similar to your own.

  7. @iahphx now you’re just making stuff up. The State Department did not disavow the quote from their own spokesperson about what the result of the inquiry would be, they only ‘refuted’ the idea that the inquiry had formally ended.

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