GOVERNMENT SUPPORT TO THE AIRLINE INDUSTRY IS COMMON
Protectionism is the “Mother of all Subsidies”
U.S. legacy airline CEOs are urging the U.S. Government to implement an immediate freeze on further expansion of flights to the U.S. by Gulf carriers and to request formal consultations to renegotiate the United Arab Emirates and Qatar Open Skies agreements with the purpose of introducing a cap on flights to the U.S. It has been reported that if Qatar and the United Arab Emirates are unwilling to renegotiate, these U.S. airline CEOs would have the U.S. Government terminate the two agreements and introduce a rule that the Gulf carriers may increase flights to the U.S. only if a U.S. carrier wishes to increase or introduce operations to their territory. U.S. airlines claim in a 55-page white paper that the Gulf carriers were subsidized by their governments over ten years in the amount of $42 billion dollars.
Recently Business Travel Coalition (BTC) came upon a reference to a 1999 Congressional Research Services (CRS) report. The CRS is a public policy research arm of the United States Congress. BTC began an online search and found a 2009 WikiLeaks release of the full report (http://btcnews.co/1J0kHR0). The CRS report conservatively found that between 1918 and 1998 the U.S. Government spent $155 billion dollars in support of aviation activities.
The report is factual from an unbiased, credible and highly respected institution; the $155 billion dollars is not in question. The irrefutable and germane point of the CRS report is that countries around the world have invested substantial resources to establish their commercial aviation industries and, in doing so, they follow the best-practice model of the U.S. What’s more, 59 percent of U.S. airlines’ alliance partners are state owned and supported.
The home countries of the Gulf carriers, like the U.S. and many other countries, recognize the importance of a vibrant aviation sector and have invested resources in top-notch airports and aviation infrastructure and provided start-up funding to their airlines, much as the U.S. did with mail contracts and other support during the infancy of commercial aviation. Moreover, the three CEOs cannot prove commercial harm, let alone offer a rationale to challenge Open Skies agreements based upon gulf carriers’ alleged “market-distorting” advantages. U.S. carriers have very little head-to-head competition with the Gulf carriers so that those carriers are in no position to divert substantial amounts of traffic from U.S. airlines. The truth is that at least two U.S. airlines are attacking the Gulf carriers to prop up their European airline alliance partners.
In a report published on April 10, 2015 entitled “Gulf airlines under fire. Aside from the rhetoric and dust flying, what’s the underlying agenda?” (http://btcnews.co/1HnTs4D) the highly respected CAPA concluded: “It is these European partners – at least Lufthansa and Air France (IAG’s British Airways and Iberia are not complaining) - whose shared interests the 55-page white paper looks to protect.”
CAPA continues: “For Delta in particular there is very little potential for direct overlap with the Gulf carriers. The vast majority of Delta’s international capacity is either in Europe (mostly within the protected metal-neutral JVs), within the Americas and to and from northeast Asia. None of these markets is directly open to any serious threat from Gulf carrier services, aside from the European airlines' sixth freedom flows.”
American consumers of air travel and U.S. policy makers will not view protecting the profits of these European flag carriers as an appropriate goal for U.S. policy – especially when it means sacrificing the best interests of American fliers, American communities, the American travel and tourism industry and American companies such as cargo carriers and shippers.
One especially spurious claim is that the $155 billion dollars in U.S. Government support of its airline industry is irrelevant because it does not account for some $250 billion dollars collected over time by the airlines and remitted to the Airport and Airway Trust Fund. The truth is that U.S. airlines do not pay federal excise taxes. Passengers pay them and the airlines merely act as a pass-through collection agent for the U.S. Government. The key question is: do airlines show trust fund liabilities on their financial books? They do not.
Every country has its unique collection of direct and indirect subsidies and structural advantages. The U.S. is no different. American carriers benefit from general revenues from the U.S. Treasury that flow into the airport and airway trust fund and avoid ticket taxes on billions of dollars in revenues through ancillary fees and carrier-imposed charges. Moreover, U.S. carriers can reduce - and indeed have reduced - expenses on a massive scale in bankruptcy proceedings, shifting pension liabilities to the Pension Benefit Guaranty Corporation. Indeed, were airlines not able to shed billions of dollars in debt and financial obligations during bankruptcy proceedings, that are not available to airlines of most other countries, it is likely that they would not have survived in their current forms. In point of fact, these carriers leveraged the unique structural advantage that the U.S. bankruptcy option represents to emerge as the world’s largest, most powerful and most profitable airlines.
Significantly, the industry has been consolidated to the very dominant Big 3 mega airlines and they operate in and from the largest aviation market in the world. The United States is the most important and stable country on the planet and a country whose greenback serves as the world’s reserve currency. The list goes on and on and U.S. airlines have logically and deftly leveraged all these powerful advantages. However, in this instance, asking the government to protect them from foreign carrier new entrants would help only Delta, American and United, the three most profitable airlines in the world, at the expense of the traveling public and commercial shippers. Protecting U.S. airlines from competition would, of course, result in the “Mother of all Subsidies” as fares and ancillary fees would artificially climb.
This debate is not about the U.S. versus the Gulf carriers. The compelling interests of other U.S. stakeholders who support vigorous airline competition are in play including consumers, U.S. airports and communities (that have suffered greatly reduced air services as a consequence of airline mergers) and corporations that now pay more for commercial air services because of those mergers. Stakeholders who would be damaged if this gambit succeeded also include cargo carriers and their customers, airplane manufacturers and their suppliers and other carriers that challenge the BIG 3’s hegemony over the U.S. skies such as JetBlue and Alaska Airlines.
Robust foreign carrier new entry is the central antidote to antitrust immunized global alliances. The tightly coordinated efforts of the Big 3 to block foreign carrier new entry should trigger an in-depth U.S. Department of Transportation review of the appropriateness of such grants of immunity.