November 20 - Delta Urges Congress To Violate US International Aviation Legal Obligations 


Business Travel Coalition

INDUSTRY ANALYSIS


Delta Urges Congress To Violate US International Aviation Legal Obligations While Also Admitting Its Open Skies Job Loss Claim Is False

By Kevin Mitchell 

Last week was a busy one for Ed Bastian, CEO of Delta Air Lines (Delta). Mr. Bastian showed he can multi-task making news both in Detroit and Washington. 

In a speech to the Detroit Economic Club, Mr. Bastian contradicted Delta’s longstanding claim that competition with Emirates Airline, Etihad Airways and Qatar Airways (Gulf Carriers) has cost Delta jobs, and will continue to do so. Mr. Bastian boasted that Delta plans to hire 25,000 workers over the next five years. 

So much for Delta’s political talking points about massive job losses, repeated ad nauseum to pander to President Trump. Just imagine how many additional US jobs Delta would create beyond that 25,000 if it didn’t outsource its international flying and crew jobs to foreign airline alliance and joint venture partners like Air France, KLM, Virgin Atlantic Aeromexico and Korean Airlines! 

Mr. Bastian’s truthful admission that Delta is in a massive hiring cycle - despite Gulf Carrier competition - comes as no surprise to people following the Open Skies debate. There are two pillars to Delta’s anti-Gulf Carrier campaign: first, Delta alleges that it is suffering commercial harm due to Gulf Carrier competition and second, it claims that it is being forced to forgo hiring as a result. However, Delta’s President Glen Hauenstein already admitted to Wall Street analysts in an earnings call that its claim of commercial harm is false. It, therefore, should surprise no one that Mr. Bastian has now admitted that the other pillar of its anti-Open Skies campaign - US job losses - is also untrue. 

In Washington, working with Georgia Senator Johnny Isakson, Mr. Bastian helped sneak a provision into the Senate tax reform bill that, if enacted into law, would put the US in violation of its international legal obligations to at least a half-dozen countries in bilateral tax reciprocity agreements and directly contradict long-standing principles endorsed unanimously by the US and other countries in the International Civil Aviation Organization (ICAO). Specifically, the Bastian/Isakson provision would violate the US obligation and commitment to provide income tax exemption reciprocity to foreign carriers that fly to the US. Doing so in the blatantly discriminatory manner of the Bastian/Isakson provision could also result in the US violating its bilateral Open Skies agreements.   

Mr. Bastian’s all-too-clever attempt to gouge foreign competitors is terrible public policy that would create a precedent putting US companies doing business abroad at significant risk. Specifically, by using the tax code, and recognition of income for tax purpose, as a government-sponsored competitive weapon, the Bastian/Isakson provision would create a very slippery slope. The most likely target for retaliation would be US world-leading all-cargo airlines; however, that precedent could be applied to US companies in many industry sectors. Indeed, in the many countries in which US passenger airlines dominate the market, what’s there to stop those governments from shaking down Delta and others for a tax revenue windfall?

So what is the Bastian/Isakson provision and what does it do? Politico, which first exposed it, described it as a special interest “pork” provision. The unmistakably targeted provision would selectively nullify longstanding reciprocal tax exemptions for commercial aviation-related income earned in the US. For instance, US carriers are not subject to British taxation for income derived on flights to and from the UK. On a reciprocal basis, UK carriers are similarly exempt from taxation of income from their US flights. That is long established US tax policy consistent with unanimously adopted ICAO principles.

However, the Bastian/Isakson provision would arbitrarily and selectively nullify exemptions for countries that have bilateral tax exemption agreements rather than a full-fledged tax convention and to which US passenger airlines fly fewer than two times a week. As Politico and Reuters both noted, it appears to have been tailored just to harm the Gulf Carriers. Nevertheless, the provision would bludgeon airlines in other countries as well. 

In fact, it would nullify the current reciprocal tax exemption of at least 13 airlines from 12 jurisdictions (10 countries and two territories). Among those countries subject to the sweeping impact are some of the most important US geopolitical allies - Saudi Arabia and Jordan, not to mention the UAE and Qatar. Whether Mr. Bastian realized that his provision would tax his SkyTeam alliance partner, Saudi Arabian Airlines, is unclear.

When Reuters asked Senator Isakson staff to explain the reasoning behind the provision, the response is a window into how Delta lobbying never allows facts to get in the way of its advocacy. Congressional staff responded that it was retaliation against the UAE and Qatar for “choos[ing] not to open their markets to U.S. companies.” 

It’s sad that Senator Isakson’s office swallowed Delta’s claim that those markets are closed to US carriers without checking the facts. Had they done so and asked UPS - another important Georgia constituent - they would have learned that UPS, like every US cargo and passenger airline, has full Open Skies rights to fly to and beyond the UAE and Qatar. UPS currently flies to Dubai.

Had Senator Isakson asked the US State or Transportation Departments he would have been told that Delta has full Open Skies rights to freely fly to and beyond the UAE and Qatar, and it could indeed operate a hub in either country if it wanted to aggregate traffic for India service. Instead, Delta has chosen to outsource its Middle East and India flying to its European airline partners.

It is ironic in the extreme that Delta is so concerned about ensuring that competitors pay US federal income tax. Delta does not pay US federal income tax on its record-setting profits. Instead, it continues to rely on past losses – net operating loss carryforwards (NOLs) – to shield its income from US federal taxation. Delta is concerned about everyone paying their fair shares of federal taxes!? Everyone but Delta that is. 

Former Delta CEO Richard Anderson hinted that the airline is devising a scheme to offshore its future profits to a lower tax haven when its NOLs are exhausted. As a published report in 2015 put it, based on a research note by investment firm Wolfe Research, “Delta Air Lines is weighing the creation of subsidiary companies overseas as a tax abatement strategy in advance of becoming a full cash taxpayer in 2018.” In other words, an overseas tax dodge. 

So, the Bastian-Isakson provision represents and/or would be (1) bad public policy, (2) advocated by a company that doesn’t currently pay federal income tax and is reported to be hypocritically devising a scheme to offshore its future profits to continue avoiding US federal income taxes, (3) based on the false premise the UAE and Qatar air service markets are closed, (4) putting the US in violation of international aviation and tax obligations harming important allies and trading partners and (5) setting a dangerous precedent for US companies doing business abroad by saying that it is okay to use the tax code and nullification of reciprocal tax exemptions as a competitive weapon. Mr. Bastian was busy. 

Sadly. Delta senior management and its Board of Directors do not care about any of the serious concerns that the Bastian/Isakson provision raises. They are blinded by a manic obsession to harm Gulf Carriers at any cost. What’s in the best interest of the US? Irrelevant. What’s in the best interest of the US airline industry and other American companies that do business overseas? Not important. What’s in the best interests of consumers? Seriously!? 

All that is antithetical to the Delta ethos. All that matters is Delta - and Delta wants to stick it to the Gulf Carriers in anyway it can.    

It is past time for the Trump Administration and Congress to tell Delta enough is enough. The US should not breach its bilateral tax reciprocity agreements and ICAO and Open Skies obligations; anger a dozen countries; and set a dangerous precedent that could harm US companies doing business overseas simply to appease Delta, which believes it has a score to settle with Gulf Carrier competitors. 

Delta should use its record-setting profits to compete in the marketplace and not be allowed to use the Trump Administration and Congress as anti-consumer co-conspirators.

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