August 3 - The Big Three’s Carl Sandburg Strategy: Myths and Facts


Editor’s Note: This analysis may be posted to social media accounts and republished in print and digital publications without prior permission.  


INDUSTRY ANALYSIS

By Kevin Mitchell 

In their ranting campaign to eliminate competitive choice offered by Emirates Airline, Etihad Airways and Qatar Airways (“Gulf Carriers”), Delta Air Lines, American Airlines and United Airlines (“Big Three”) have deployed a Carl Sandburg strategy.  Sandburg memorably advised:

“If the facts are against you, argue the law. If the law is against you, argue the facts. If the law and the facts are against you, pound the table and yell like hell.”           

To win support the Big Three have resorted to the inside the Beltway trick of repeating the same misinformation over-and-over in the hope that repetition will convince people fiction is fact. Of course, if the Big Three’s case is as legally clear-cut and factually irrefutable as they claim, 2 ½ years ago they would have filed an International Air Transportation Fair Competitive Practices Act (“IATFCPA”) complaint with the US Department of Transportation (“DOT”). For over four decades, US airlines - including the Big Three - have relied on IATFCPA complaints and DOT when they believed actions by foreign carriers or countries unfairly caused them competitive harm.

If the law and facts are as clear cut as the Big Three contend, such a slam dunk IATFCPA filing would have saved the Big Three’s shareholders tens of millions dollars and ensured that DOT took appropriate action if warranted in 2015 given the six-month statutory clock. Of course, the reason the Big Three are afraid to file an IATFCPA complaint at DOT is that they know their fictitious case is an air ball, not a slam dunk, and they have instead deployed the Sandburg strategy of pounding the table and yelling at the top of their lungs.

Here are some of the myths the Big Three are spreading and the facts.

MYTH: The US-UAE and US-Qatar Open Skies agreements expressly prohibit government subsidies.

FACT: That is false. The US Government chose not to prohibit state aid or subsidy in Open Skies agreements because it was conscious that over the years US carriers have received large amounts of state aid and continue to do. Indeed, after 9/11, Air France, Delta Air Lines’ partner, complained that US airlines received competition distorting state aid. The word “subsidy” appears once in both the US-UAE and US-Qatar Open Skies agreements. It is in Article 12, Pricing, and it is not a prohibition. Rather, it authorizes a process for government action only if “direct or indirect governmental subsidy or support” resulted in “prices that are artificially low.” The Big Three have steadfastly refused to pursue an Article 12 complaint and to produce the evidence – the “facts” – that the agreement requires.

MYTH: The Gulf Carriers are price dumping in the US market to steal market share from the Big Three.

FACT: In July 2015 the US Government sent written questions to the Big Three. One of them specifically asked which provisions of the US-UAE and US-Qatar Open Skies agreements purportedly were being violated. The Big Three refused to answer and did not even try. As noted, the Big Three have refused to pursue a pricing complaint under Article 12 and they have failed to show a loss of market share, principally because the Gulf Carriers serve markets that the Big Three have chosen to ignore.

MYTH: The Big Three are not seeking to alter the terms of the existing US-UAE and US-Qatar Open Skies agreements. They merely seek enforcement of existing provisions.

FACT: The Big Three have repeatedly called for a freeze on all UAE and Qatar Open Skies rights. That would breach both agreements. As reported by The Street last September, American Airlines CEO Doug Parker in a press briefing stated that, “Our biggest concern is flights outside the Gulf, flights from outside the Gulf region to the US.” 

Indeed, as The Street headlined, “For American, Delta and United, the bottom line in the dispute with the big three Gulf carriers is an end to 'fifth freedom' Europe-U.S. flying.” The truth is that the Big Three would not have spent tens of millions of dollars in their campaign against the Gulf Carriers if the goal was simply to eliminate the two (2) daily Fifth Freedom(*) flights that the Gulf Carriers, collectively, operate to the US. 

Significantly, when asked during an October 13, 2016 earnings call if eliminating Fifth Freedom flights by Gulf carriers was Delta’s endgame, Delta’s CEO Ed Bastian replied, “freezing and/or eliminating fifths would be a great start.” In other words, a "great start" to a total freeze on Gulf carrier flights and a "great start" in shifting US policy away from Open Skies and toward the "fair skies" model of government-managed trade that Delta clearly favors.

MYTH: There are no potential adverse repercussions for the US and our companies and employees if the US Government does as the Big Three ask and eliminates Fifth Freedom rights.

FACT: Fifth freedoms are an essential element of Open Skies as defined by DOT in 1992 and are included, without restriction, in each and every US Open Skies agreement. The US would surrender its global leadership in international aviation policy and raise doubts about its trustworthiness to honor agreements if it started eliminating core elements of Open Skies as the Big Three propose. Equally important, the US’s world leading all-cargo airlines like FedEx, UPS and Atlas Air rely on Fifth Freedom rights to build and support their global networks which are the envy of the global air cargo industry. Without Fifth Freedom rights those global networks would crumble.

A decision by the US Government to renege on our Fifth Freedom commitments in the US-UAE and US-Qatar Open Skies agreements would send an ominous invitation to countries around the world to similarly reject the Fifth Freedom rights of FedEx, UPS, Atlas Air Cargo and other US all-cargo carriers, harming the largest employers in the aviation industry with hundreds of thousands employees and the countless shippers that depend on their global networks over which billions of dollars of American products flow. The potential adverse economic impact for the US economy would be enormous.

MYTH: Gulf Carrier competition already is unfairly causing competitive harm to the Big Three and this will intensify and hurt travelers, especially in smaller markets.

FACT: The Big Three continue to report record-setting profits with combined net profits for 2015 and 2016 totaling $28.8 billion. Their CEOs continue to tell Wall Street analysts how bullish they are on future profitability. Simply put, this is the best of financial times for the Big Three and there is not one iota of evidence to support their Chicken Little screams that the sky will fall unless Gulf Carrier competition is blocked. In a July 15, 2015 Q2 earnings call, Glen Hauenstein, now the President of Delta and its EVP and Chief Revenue Officer at the time, was asked by a Deutsche Bank analyst if Delta was experiencing any loss of traffic or commercial harm due to Gulf Carrier competition. Delta’s Hauenstein replied unequivocally “we are not.”

Given increasing concentration in air service markets led by the Big Three oligopoly, now more than ever travelers need greater competitive choice. The Big Three’s campaign is aimed at reducing competitive choice and bolstering their already massive profits. That is the great risk for consumers in the Open Skies debate. As to small city markets, Gulf Carriers serve them too via code-share relationships with US partner airlines including JetBlue Airways and Alaska Airlines. It is the height of arrogance for the Big Three to argue that only they can provide service in smaller markets. Interestingly, that’s what the big incumbents did when Southwest Airlines entered the scene several decades ago.           

Next time the Big Three tell you how clear-cut their case is against Open Skies and the Gulf Carriers, ask them why they are relying on the Carl Sandburg strategy rather than filing an IATFCPA complaint with DOT. I think we all know the answer.

(*) A Fifth Freedom allows a carrier to transport revenue traffic from its home country to a second country and onto a third country.

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Mitchell is founder of Business Travel Coalition and OpenSkies.travel. 

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