December 6 - Can The Big Three Survive The Devastating Isakson Tax Scheme Loss?



Business Travel Coalition


INDUSTRY ANALYSIS


THE BIG THREE ANTI-OPEN SKIES CARTEL

Can It Survive The Devastating Isakson Tax Scheme Loss?


By Kevin Mitchell

After nearly three years and tens of millions of shareholder dollars spent on lobbying and propaganda, Delta Air Lines, American Airlines and United Airlines (Big Three) have nothing to show for their political campaign against longstanding US Open Skies policy and the much-needed competitive choice provided to consumers by Emirates Airline, Etihad Airways and Qatar Airways (Gulf Carriers).      

That nearly changed last week. Delta managed to sneak a special-interest, pork provision into the Finance Committee-approved version of the Senate tax reform bill. The provision, concocted by Delta and offered at its behest by Georgia home-state Senator Johnny Isakson, who had been misled to believe that US carriers are prohibited from flying to the targeted countries, would have put the US in breach of 14 reciprocal tax exemption agreements with countries ranging from the Middle East to Southeast Asia to the South Pacific to the Caribbean. However, Delta had its crosshairs squarely on just two countries – the United Arab Emirates and Qatar – whose tax agreements with the US would have been violated by the provision.  

The Isakson provision dramatically underscores Delta’s unhealthy obsession with exacting commercial harm on the Gulf Carriers at any cost – and without concern for collateral damage. The International Air Transport Association (IATA) whose members include Delta and some 274 other airlines chillingly warned: “if enacted, (the Isakson provision) would upend long-established U.S. policy and decades of international precedent on the taxation of international aviation - to the detriment of U.S. airlines, their customers, and global aviation generally."             

Did IATA’s dire warning cause Delta to rethink its reckless provision? Of course not. Indeed, Delta deployed its Washington anti-Open Skies lobbying organization, Americans for Fair Skies, to attack IATA and cavalierly dismiss its concerns.         

Thankfully, good public policy prevailed. The Isakson provision was roundly ridiculed, defeated and removed from the final Senate-passed bill. Appropriately, hometown newspaper The Atlanta Journal-Constitution described this as a “major blow to Delta Air Lines.”   

This will not likely be the end of the Isakson tax-scheme story. The fact that oligopoly partners American and United abandoned Delta on the tax plan raises the question about whether this development represents the beginning of the end of the Big Three’s anti-competition, anti-consumer and anti-Open Skies cartel.   

Why did American and United make such a choice? Only they can answer that question. However, we can speculate. 

As both have clearly shown in the anti-Open Skies campaign, like Delta, they are oligopolists who abhor competition, are dedicated to eliminating competitive choice for consumers and are willing to use heavy-handed tactics to frustrate new entry. Unlike Delta, though, they appear to at least have some self-imposed limits on the ends to which they are willing to go.        

American and United, like Delta, are members of IATA and they lead global airline alliances. Unlike Delta, though, it could be the case that their restraint indicates that they felt a sense of responsibility to IATA, fellow IATA members and their oneworld and Star alliance partners.              

All three carriers have international partners that would have been financially harmed by the Isakson play. For Delta, that warranted nothing more than a shrug of the shoulders. Could it be that the Isakson language, that would have breached the US-Saudi Arabia reciprocal income tax exemption agreement and, as such, harmed its SkyTeam partner Saudi Arabian Airlines, was completely irrelevant to Delta? Perhaps American and United had more concern about their alliance partners, Royal Jordanian, Malaysia Airlines and Ethiopian Airways - all of whom would have been financially injured by Delta’s cunning.            

Another potential explanation is that perhaps American and United realized that the Isakson provision was over-the-top hypocritical. Does Delta want a level playing field on federal taxation? Seriously!? Delta does not pay US income tax on its record-setting profits, and has not for years. Instead, Delta continues to avoid US federal income tax on its multi-billion profits by using Net Operating Loss (NOL) carryforwards to offset them. In other words, the US tax code allows it, and American and United alike to use past losses to mask current record profits for tax purposes. Delta’s former CEO Richard Anderson hinted that the airline is devising a scheme to off-shore its future profits to a lower tax haven when its NOLs are exhausted. In other words, an overseas tax dodge.          

And then there is the nickel and diming ancillary fee revenues passengers understandably despise. According to a report by the IdeaWorks Company, the top three airlines in the world in ancillary fees ranking for 2016 were United ($6B), Delta ($5B) and American ($5B). Unlike airfare, those fees are tax-free.              

It may have been a bridge too far for American and United to comfortably argue about a “level playing field” for taxation when they do not pay federal income tax and also benefit significantly from tax-free ancillary fee revenue. For Delta, there is no sense of embarrassment in making that argument. Do not cloud its narrative with facts. 

Will the failure of the Delta/Isakson tax plot cause an irreparable schism between the once cohesive oligopolists – the Big Three? Only time will tell. One thing is certain though - Delta is likely seething over this embarrassing legislative outcome and blaming its cartel partners. 

As we have often seen in the anti-Open Skies fight, Delta has a blame-someone-else culture. Highlighting this corporate characteristic, Delta President Glen Hauenstein told Wall Street analysts in a July 15, 2015 earnings call that the carrier had failed to recognize the enormous potential of the US-India market calling it “a missed opportunity.” Hauenstein candidly admitted that Gulf Carriers identified a commercial opportunity that Delta missed and the marketplace is rewarding them for having the vision Delta lacked.   

However, this straightforward admission has not stopped Delta from assigning blame to others for its US-India commercial disappointment. First, when fighting against reauthorization of the Export-Import Bank, it blamed the bank’s export credit financing of Air India’s Boeing 787s for its absence from the US-India market. Then, it unabashedly pivoted and blamed Gulf Carriers for its failure to recognize that emerging market. The plain truth, however, is that Delta decided to offshore its US-India flying to foreign alliance and joint venture partners who offer connecting service over European hubs, and to outsource those US jobs to foreign airline crews.         

Could the discovery and trouncing of the Delta/Isakson tax plot simply be a case of good public policy ascending in the US Senate over a special-interest provision - an effort that would have breached US international legal obligations, placed US companies at grave risk of financial retaliation, and harmed consumers? Most people following the industry would say yes. 

No doubt though, at Delta headquarters they are beside themselves and blaming American and United for failing to lobby shoulder-to-shoulder in support of the tax provision. One has to believe that a lasting and potentially fatal strain on the relationship of the cartel partners will have been created by Delta’s insipient anger.             

Perhaps though, it will be American and United, in clear-minded recognition of self-harm, who sever the blood pact against Gulf Carriers rather than Delta’s ire. 

For the first time in the 3-year campaign against the Gulf Carriers we have seen American and United think for themselves rather than following Delta like lemmings absorbing reputational damage at each step of the way. United represents “Exhibit A” in the case of self-inflicted global brand harm. 

Sadly, there was a time when United was admired as a world leader in international aviation liberalization. Now, thanks to following Delta’s ill-conceived, self-serving and mercantilist lead, that badge of honor has been replaced by a scarlet “P” for protectionism, which is not lost on airline industry observers  

Indeed, just yesterday in the Washington Examiner, esteemed academic Clifford Winston, a senior fellow in economic studies at the Brookings Institution, argues that carriers interested in taking action against the Gulf carriers are only concerned about their own well-being. “Let’s face it, the carriers are not interested in doing this to improve consumer welfare,” Winston said. “They want to improve their own welfare. Anything that they want is designed to help them. And what helps them? Less competition.”            

Hopefully, the Isakson misadventure represented an inflection point – an epiphany moment – where American and United finally realized nothing good has come out of marginalizing its customers and wasting three years and millions of dollars pandering to Delta’s anti-Gulf Carrier obsession; nothing ever will. 

Highly successful companies and industries over the long term always put their customers first. At this point in the war on Open Skies policy, American and United have embarrassingly experienced first hand that bad motives beget bad strategy, which beget bad results. 

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