April 19 - Why The Big 3 Failed To Stifle Gulf Carrier Competition

Why The Big Three’s Lavish Spending

To Stifle Gulf Carrier Competition Has Failed Spectacularly

According to recently released Internal Revenue Service filings, in 2015 alone, Delta Air Lines, American Airlines and United Airlines (Big Three), and their union partners, funneled more than $10 million to their anti-Open Skies lobbying groups. Their Partnership for Open and Fair Skies – spent $6.1 million.  Another group, Americans for Fair Skies, spent $3.2 million. These are just two expensive examples. Trying to sully Open Skies’ stellar reputation and indisputable success isn’t easy and doesn’t come cheap.

As eye-popping as these numbers are, they pale in comparison to the likely total cost of this campaign seeking to rewrite U.S. international aviation policy to suit the Big Three’s parochial commercial aspirations at the expense of consumers. That total does not include the Big Three’s lavish spending on lobbyists, public relations firms and lawyers, not to mention in-house executive time and resources.  When tallied together, the Big Three’s anti-Open Skies campaign likely is the most expensive lobbying effort in U.S. aviation history. We are talking a lot of baggage fees!

In Washington where money often speaks loudly, how have the Big Three managed to fail so spectacularly despite this record-setting spending? The bottom line is that the Big Three’s clear motivation to stifle competition is so obvious, troubling and un-American it has trumped their massive spending. What is the evidence of this?

First, the Big Three all but admitted to the U.S. Department of Transportation (DOT) that no section of the Open Skies agreements has been violated despite their soaring political rhetoric to the contrary. In written questions DOT sent to the Big Three in 2015, the agency asked them to identify what specific sections of the U.S.-UAE and U.S.-Qatar Open Skies agreements allegedly have been violated. A softball question, right? 

Tellingly, they could not answer it. Instead, they responded “[t]he United States does not need to allege a violation of a specific provision of the bilateral agreements in order to seek redress.” In other words, no specific sections have been violated, but ignore that and protect us from competition nevertheless. The word “subsidy” does appear once in the pricing article of the agreements. However, the Big Three never claimed a violation of that article, nor did they even provide the U.S. Government with solid data attempting to show alleged subsidies have resulted in below cost pricing. Why? Obviously because they know they cannot prove a pricing violation. 

Second, Glen Hauenstein, the President of Delta Air Lines, publicly admitted that his airline has not suffered commercial harm due to Gulf carrier competition. In a July 15, 2015 earnings call, then EVP and Chief Revenue Officer, Hauenstein was asked by a Deutsche Bank analyst “are you seeing some displacement of that traffic to competitors such as Emirates or Etihad or Qatar as they continue to add more and more seats into the marketplace? And I’m looking more like U.S. into India, Middle East, Africa because there is a decent amount of flow traffic between you and your partners.” Hauenstein’s clear and unequivocal response – “we are not.” 

Should we trust the political sound bites the Big Three and their lobbyists spew or what Delta Air Lines’ then EVP and Chief Revenue Officer, and now its President, admitted on an earnings call when he had a legal duty to be truthful and candid? The answer is obvious.

Hauenstein’s admission of no commercial harm does shine a bright light on a mystery. Why have the Big Three failed to file an International Air Transportation Fair Competitive Practices Act (“IATFCPA”) complaint with DOT given that is the long-recognized action U.S. carriers have taken in matters such as this? As Hauenstein conceded, they cannot make a showing of commercial harm and a fact-based IATFCPA complaint would fail as a result. Accordingly, the Big Three have mounted a political campaign fueled by extravagant spending and based on political muscle rather than one relying on the well-established IATFCPA legal framework and its rigorous fact-based analysis.

Finally, Doug Parker, the CEO of American Airlines, admitted that the campaign has nothing to do with alleged subsidies and they have no interest in remedies such as greater financial transparency. Rather, all the huffing and puffing about subsidies is a subterfuge as the Big Three’s real end game is to limit competition. In a September 2016 interview Parker conceded what many already suspected – ‘[o]ur biggest concern is flights outside the Gulf, flights from outside the gulf region to the U.S.”  In other words, the Big Three’s goal is to fundamentally and negatively rewrite U.S. Open Skies policy to their commercial advantage by preventing Gulf carriers from operating Fifth Freedom flights between the U.S. and Europe.*

If there is any doubt the Big Three are singularly focused on eliminating U.S.-Europe competition by targeting Open Skies rights, look no further than United Airlines’ apoplectic reaction to Emirates Airline’s newly launched Newark-Athens-Dubai daily year-round flight. For five years the Newark-Athens market has lacked year-round non-stop service even though the Greater New York area has a substantial Greek American community. Despite urging by this community, United Airlines repeatedly refused to increase its seasonal service to year-round. Yet, the airline’s management has cried bloody murder in the media because Emirates Airline seized an opportunity it ignored. United Airlines and its unions rallied employees and their families to protest at Newark airport the day of Emirates Airline’s inaugural flight.   

Protecting the U.S.-Europe market is paramount for the Big Three. Along with their foreign alliance and JV partners, they control more than 80 percent of the seats on the North Atlantic. With a blank check of antitrust immunity freeing them from any meaningful competition oversight, the oligopoly sets prices and coordinates capacity and schedules to the detriment of consumers. The last thing they want are independent competitors that respond to consumer demand, not the dictates of alliance management. For all the bluster, that is the “threat” fueling the Big Three’s campaign – fear of greater U.S.-Europe competition, and fear that the Gulf carriers may offer consumers a competitive alternative to the transatlantic stranglehold the Big Three steadfastly protect. 

As the Big Three apparently see it, they have no alternative other than exorbitant lobbying spending to try to convince the Trump Administration to stifle Gulf carrier competition. They have demonstrated that neither the law nor the facts support their claim, and they also have revealed that their objective is to rewrite Open Skies policy to their commercial advantage even though they claim that is not so. However, there is an alternative the Trump Administration should recommend they instead take - spend those tens of millions of shareholder dollars to improve their product so they can beat the competition in the marketplace, not seek protection from it in the halls of government. 

*A Fifth Freedom allows a carrier to transport revenue traffic from its home country to a second country and onto a third country. There are a total of nine Freedoms enumerated in the Manual on the Regulation of International Air Transport published by the International Civil Aviation Organization.

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