December 20 - Taking hypocrisy to soaring heights!


INDUSTRY ANALYSIS

By Kevin Mitchell


Are American, Delta and United Seeking To Block British Airways Flights To The US?

Taking hypocrisy to soaring heights!

As the Business Insider recently put it, “[t]he nastiest feud in the airline industry is back.” After their failed 3-1/2 year, $50 million lobbying campaign against Open Skies and much-needed competitive choice for consumers by Emirates Airline, Etihad Airways and Qatar Airways (Gulf Carriers), American Airlines, Delta Air Lines and United Airlines (Big Three) are seeking to take a second protectionist bite at the Open Skies apple.

Specifically, the Big Three are vocally objecting to investment by Qatar Airways in Air Italy, a carrier whose website indicates it has a whopping total of eight widebody aircraft capable of US-Europe flying as of the end of 2018. The Big Three allege Qatar Airways is state subsidized. Therefore, they contend, the government of Qatar subsidizes any investment it makes in other airlines. Thus, that investment taints the recipient airline with government of Qatar subsidy transforming it into a Qatar state-funded unfair competitor that must be blocked from serving the US-Europe market or anywhere it competes with the Big Three.

It is reported that Qatar Airways paid $41.6 million dollars for its 49 percent stake in Air Italy. If this investment presents an existential threat to the US-Europe competitive balance as the Big Three assert, a threat so great that their CEOs met with US Secretary of State Mike Pompeo earlier this year to seek his high-level intervention, then one can only imagine how fearful the Big Three must be about Qatar Airways’ over $2 billion – 50 times larger – investment in the International Airline Group (IAG). After all, IAG has four airlines – British Airways, Aer Lingus, Iberia and LEVEL – that serve the US-Europe market. This summer, as the Big Three’s argument goes, these IAG Qatar state-funded and, a s such, tainted airlines operated 71 daily US-Europe roundtrip flights serving 27 US airports. In stark contrast, puny Air Italy operated two daily Milan-US flights to two US airports.

So, applying the Big Three’s “logic,” British Airways’ US flights are unfair Qatar-subsidized services that should be blocked. The same for US flights by other IAG Group carriers, as well as those operated by Latam Airlines, a key head-to-head competitor of American in the US-Latin America market, given Qatar Airways’ approximately $600 million investment in that airline. And then there is Cathay Pacific, an Asia-Pacific competitor of United, which, the argument goes, is tainted by a $662 million Qatar investment subsidy.

However, the Big Three have not branded British Airways, Latam Airlines or Cathay Pacific as unfair competitors enriched with Qatar subsidized investment to the tune of over $3 billion. Apparently, that investment is not Qatar state-funded, market-distorting nor unfair. Their only beef is with Qatar Airways’ $41.6 million investment in Air Italy, which is miniscule in comparison.

Ridiculous on its face? Of course. How can Qatar Airways’ investment only in Air Italy allegedly be evil and indelibly tainted by state-funding but its investments in other airlines – more than 75 times larger – be commercial, and therefore, completely acceptable to the Big Three? What soaring hypocrisy!

The fact is the Big Three have never worried about the intellectual integrity, consistency or accuracy of any protectionist arguments they have made against Open Skies and competitive choice. They are not starting now. Facts and truthfulness are inconvenient. If you are looking for a universally applied principle look elsewhere. This is the realm of selective indignation where outrage correlates with perceived competitive threat. The Big Three believe if they say something often and loudly enough, fiction will transform into fact. Arrogantly, they also believe policymakers and the public are too lazy to fact-check, and not nearly as smart as they are and thus incapable of piercing their cleverly formulated fictitious advocacy.

This is on full display in the Big Three’s salvos against Air Italy. They are trying to contrive a Fifth Freedom issue where there is none. They argue an “agreement” is being “violated” where, in fact, there is no agreement and no violation. Let’s focus sunlight on their most recent apocalyptic outrage and watch it melt away.

Doug Parker, American’s CEO, fired the first shot against his oneworld partner, Qatar Airways, and the government of Qatar accusing it of “cheating” in a September speech to an industry summit in Washington, DC. His fellow oligopoly CEOs have been in perfect unison singing from the same lobbying-scripted song sheet. Ed Bastian, Delta’s CEO, recently told attendees at its investment forum “Qatar is cheating through Air Italy.” Not to be left behind, Oscar Munoz, United’s CEO, recently labeled Air Italy “the Italian version of Qatar” adding its expansion is “an-in-your face to our administration on agreements that have been reached.”

So, exactly what “agreements” are they referring to? Earlier this year the US signed “Understandings” with Qatar and a “Record of Discussion” with the United Arab Emirates (UAE). In both cases, the State Department was crystal clear the underlying controlling government agreements remained the US-Qatar Open Skies and US-UAE Open Skies agreements, respectively. The Big Three demanded formal bilateral consultations but both the Obama and Trump Administrations resoundingly rejected those demands. Similarly, they demanded both Open Skies agreements be torn up and renegotiated. Again, both Administrations rejected that approach. Instead, there were informal technical discussions, which are memorialized in “Understandings” in the case of Qatar, and a “Record of Discussion” in the case of the UAE. 

Is this just semantic hairsplitting? Not at all. The State Department went to great lengths to make absolutely clear that these were not formal bilateral consultations and that they did not culminate in an “agreement” that in any way supersedes, modifies, limits or restricts rights in the underlying US-Qatar and US-UAE Open Skies agreements. The Big Three know this. Nevertheless, for their advocacy, they think it sounds more compelling and official to brand these informal technical understandings as “agreements” to inflate their perceived significance (and to feed their trade-cheating narrative to attempt to pander to the Trump Administration).  

So, how is Qatar Airways “cheating” or “violating” the understandings reached with the government of Qatar earlier this year? Let’s be clear, despite all the Big Three’s huffing, puffing and spinning to the contrary, Air Italy does not present a Fifth Freedom issue under the US-Qatar Open Skies agreement and understandings thereto. Air Italy is operating Third and Fourth Freedom flights(1) that either are permitted or not by the US-EU Open Skies agreement. If Air Italy is a carrier effectively controlled by an EU citizen, as EU law requires, and as Brussels’ authorities have previously concluded is the case, then Air Italy is entitled by the US-EU Open Skies agreement to operate US-Europe flights. If, however, the EU reevaluates that earlier determination and concludes Air Italy is impermissibly controlled by Qatar Airwa ys, as the Big Three claim, then Air Italy has no US-EU Open Skies rights to operate the flights in controversy.

The key points: This is a US-EU Open Skies issue, not a US-Qatar Open Skies question. Air Italy is operating Third and Fourth Freedom flights governed by the former, not Fifth Freedom flights pursuant to the latter. And, the appropriate forum to evaluate the concern the Big Three have raised about Air Italy is Brussels, not Washington.

So, let me ask again – where’s the “cheating” on the US-Qatar understandings? And, where’s the “violation” of those understandings? The Big Three’s failure to vocally and visibly prosecute their complaint in Brussels as a US-EU Open Skies violation speaks volumes about what they regard to be the likelihood of prevailing there on the fact-based merits.

According to the International Air Transport Association, of its nearly 300 member airlines, from 120 countries, the US Big Three account for more than half of the airline industry’s worldwide net profits. In 2018 they are forecast to reap $14.7 billion in net profits, and this is expected to surge to $16.6 billion next year. Remember, because of the structural advantage of Net Operating Loss carry-forwards permitted by the US Tax Code, the Big Three pay no federal cash income tax on these huge profits. So, are they really afraid of fledgling Air Italy and the existential threat they claim it presents? Of course not.

Instead, they are attempting to use Air Italy as a stalking horse to reopen their failed political campaign against Open Skies and consumer choice. It is as transparently protectionist and disingenuous as their first attempt was. It is time for policymakers and the media to ask the Big Three CEOs, and their board members, tough and pointed questions about their second assault on the US’s longstanding Open Skies policy, and watch them whither.

(1) The Third Freedom is the right to carry passengers or cargo from one's own country to another. The right to carry passengers or cargo from another country to one's own is the Fourth Freedom. Third and Fourth Freedom rights are almost always granted simultaneously in bilateral agreements between countries.

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

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