The PR conflict between Gulf-based airlines Qatar Airways, Emirates, and Etihad, and the three biggest American airlines is heating up. For those of you who are just catching up, the three largest U.S. carriers—Delta, United, and American Airlines—formed a lobbying group called the Partnership for Fair and Open Skies (the Partnership) and earlier this year filed a complaint to the U.S. government accusing the three Gulf carriers of violating their Open Skies agreements, which allow foreign airlines to land in the U.S., by receiving unfair subsidies from their government owners and investors. The Delta-United-American alliance wants the Obama administration to renegotiate the Gulf carriers’ Open Skies agreements to limit the allegedly subsidized “excess” passenger capacity they have been delivering to the United States.
The Gulf carriers are much younger than the American legacy carriers but are starting to eat into the American carriers’ international market share, particularly on routes to the Indian subcontinent, by offering better service at lower prices. The Partnership claims this is only possible because of their alleged government subsidies.
In the latest round, a report apparently sponsored by the Partnership claims that the demise of the U.S. shipbuilding industry offers a cautionary tale for how foreign subsidies could kill the American aviation industry:
“The end of a level playing field in aviation, with U.S. companies facing direct competition from subsidized foreign carriers, is remarkably similar to what happened to U.S. shipbuilders in the 1980s. If these foreign carriers are indeed successful in shifting traffic from American companies to their own, then American aviation will suffer…If this foreign, subsidized capacity remain unregulated, the U.S. aviation industry will be decimated by a loss of almost 200,000 jobs.”
Two immediate problems with the report’s comparison of the U.S. aviation industry to the demise of American shipbuilding jump out at me. First, the Gulf carriers are among the largest purchasers of Boeing’s passenger aircraft. In 2014, Emirates placed a $56 billion order for a whopping 150 Boeing 777Xs. Qatar Airways also bought 50 777Xs last year and added 14 more 777s this year. Etihad snapped up 25 777Xs in 2013 and, as of 2014, had also ordered 71 of Boeing’s 787 Dreamliners. One of the Partnership’s claims is that government subsidies have helped Gulf carriers buy massive fleets of modern aircraft in a way private American companies would not or could not be able to finance themselves. Taking this assertion at face value, I fail to see how this would lead to the demise of the U.S. aviation industry, which would include American aircraft manufactures like Boeing, a la American shipbuilding in the 1980s. Certainly it would suggest the opposite.
Perhaps the author meant to limit the aviation industry comparison to just American air carriers, rather than the “apples-to-apples” comparison of shipbuilding to aircraft manufacturing. Even still, the argument does not hold. The second problem is that, even if the three legacy American carriers lose significant international market share to foreign competitors, they will hardly be put out of business. American airlines have the exclusive right to service the American domestic market. This domestic market will never go away and will never be the provenance of a foreign carrier, Gulf or otherwise. Foreign air carriers are not and legally cannot be substitutes for American carriers on the domestic market the same way a foreign-built ship could substitute for an American-built ship. The only logical comparison, in which the American product and foreign products actually are substitutes on the domestic market, is aircraft manufacture. Chicago-based Boeing is in a cushy position, locked in a duopoly with France’s Airbus for the global passenger jet market (no disrespect to our Canadian and Brazilian friends at Bombardier and Embraer). The American aviation industry will be alright.
Furthermore, the American carriers’ international routes to Europe are rather secure. Through a mechanism known as “immunization,” the U.S. Department of Trade is able to grant immunity from U.S. anti-trust laws to members of international airline alliances. The American carriers and their European counterparts (Delta and Air France-KLM in the SkyTeam alliance; United and Lufthansa in the Star Alliance; and American Airlines and British Airways in the OneWorld Alliance) have used this law to legally limit competition on transatlantic routes (which, by the way, has led to a significant increase in ticket prices compared to routes with more independent competition, according to a study by the U.S. Department of Justice). In any case, a third country airline cannot fly revenue-generating passenger routes connecting European and American cities (or any two other countries’ cities for that matter) except for routes where the European city lies as a waypoint between the third country and the American city, in which case all three countries must negotiate in order for the American and European parties to grant the third country airline the exception.
The U.S. domestic market and the transatlantic European markets are essentially locked in. In effect, the real threat from the Gulf airlines is in the market for passengers from fast-growing emerging markets, especially the Indian subcontinent. It is understandable that the U.S. carriers would be frustrated by their Gulf competitors’ ability to use government financing at extremely favorable terms to purchase new aircraft, expand their capacity on routes connecting India to the U.S. via their hubs in the Gulf and, in doing so, drive down prices and margins on those routes. But this hardly signals the “demise” of the American aviation industry, and analysts like Aaron Klein, the author of the study and a director at the Bipartisan Policy Center, should know better.
The alarmist tone of this and other Partnership research does not help its case. American travelers already sense that the Gulf carriers provide better customer service and a better flying experience at a lower price. If these Gulf carriers’ gains are unfairly earned, hyperbole and exaggeration will hardly help convince frustrated, budget-conscious, and quality-conscious American travelers to care.
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NOTE: Over the past few days I’ve been digging into the Partnership’s white paper and the Gulf airlines’ responses, trying to see who has a better case. I intend to publish an analysis of what I find in the coming week. I also intend to be more prolific with my writing here (inshallah).



