Welcome news arrived last week in the trade dispute between the massively subsidized Emirates, Etihad, and Qatar Airways, and U.S. network carriers American Airlines, Delta Air Lines, and United Airlines: the Trump administration indicated that the State Department would begin talks with Gulf airlines’ owners, the governments of the United Arab Emirates (UAE) and Qatar.
In essence, these two countries are violating terms of their Open Skies aviation agreements with the United States. These agreements – the U.S. has more than 120 with nations worldwide – give U.S. and foreign airlines unrestricted rights to serve the other nation, but clearly state that carriers cannot be subsidized. A massive investigation by forensic accountants and lawyers clearly demonstrated more than $50 billion in subsidies and other unfair benefits to the three state-owned airlines since 2004. The three Gulf carriers of course deny receiving government cash, but have provided no substantive data to rebut the charges.
These government-to-government discussions are good news for the three U.S. airlines and their employees, which have already been hurt by the massive expansion of Emirates, Etihad Airways, and Qatar Airways across the U.S. In just over two years, the three airlines have increased seats to the U.S. by more than 50 percent – far faster than the global rate of demand for air travel. Unlike investor-owned U.S. carriers, these airlines and the ruling families that own them don’t need to worry about normal commercial realities like customer demand and profit – those things are unimportant, because growing their airlines, regardless of cost, is central to a development strategy to diversify their economies.
U.S. network carriers and airline trade unions are delighted with the prospect of government-to-government discussions. This Trump initiative appears to be far more resolute than the tepid discussions that the Obama administration held with the UAE and Qatar in summer 2016, for five reasons:
1. It appears that Secretary of State Tillerson is involved in the process; the Obama administration delegated the task to an undersecretary who, albeit experienced, lacked the clout of the cabinet head.
2. The State Department will specifically inquire about Gulf carrier plans for additional “Fifth Freedom” flights, which carry passengers between two foreign countries, provided that the flight begins in or continues on to the carrier’s home country. Emirates is already operating two such services, between Milan and New York, and Athens and Newark – technically, each flight begins in Dubai, but their real interest is in grabbing more Europe-U.S. traffic. Fifth Freedom services are a 70-year-old relic; when aircraft range was short, fuel stops were needed, and airlines could not economically operate a long, multi-stop route without the right to carry “local” customers between countries. As more capable jets took to the sky, most carriers began reducing the number of Fifth Freedom flights, but the Gulf carriers are focused on adding them, further threatening U.S. airlines and their European joint-venture partners.
3. According to a summary document that POLITICO obtained, the State Department believes that direct bilateral discussions provide greater leverage than pursuing a rarely-used process under the 1974 International Air Traffic Fair Competitive Practices Act (IATFCPA), which would require that the Department of Transportation investigate the dispute. The Gulf carriers’ U.S. apologists had urged use of IATFCPA, which most Washington aviation experts regard as unnecessary and ineffective for this issue.
4. The State Department summary document specifically included the word “transparency,” an obvious reference to the Gulf carriers’ lack of open and complete financial statements. Under UAE and Qatari accounting rules, companies are not required to provide the kind of thorough financial accounting that is the norm for companies in the U.S. and Europe. Emirates, Etihad, and Qatar Airways all resort to accounting tricks and shenanigans that would not pass muster here, such as self-dealing and bogus “profitable” transactions.
5. Finally, State’s summary document notes that “if sufficient progress is not made by a date certain (e.g., the end of the year), additional steps should be considered, which could include Article 15.” Article 15 of the Open Skies agreements specifies steps to be taken to terminate the pact. That’s strong medicine.
Everyone who believes in fair competition ought to be pleased with this key step in resolving an egregious case of trade cheating that has already harmed the U.S. airline industry, its employees, suppliers, and the communities they serve.