January 8 - The Great Un-American Commercial Harm Hoax


INDUSTRY ANALYSIS


The Great Un-American Commercial Harm Hoax

The Best of Financial Times for Delta, American, United

 

By Kevin Mitchell

When Delta Air Lines, American Airlines and United Airlines (Big Three) are not touting their record-setting profits to Wall Street, they are incessantly whining to the Trump Administration about having to compete with Emirates Airlines, Etihad Airways and Qatar Airways (Gulf Carriers). So how is it possible that the Big Three simultaneously are banking record-breaking profits but yet are allegedly suffering commercial harm from Gulf Carrier competition? It isn’t possible; it defies common sense and financial accounting records. The Big Three’s allegation of commercial harm is a total hoax.

In fact, most US corporations would be envious of the Big Three with good reason. The Big Three pay no federal income tax, or tax on billions of dollars they collect nickeling and diming passengers with ancillary fees. Massive domestic consolidation has eliminated virtually all meaningful competition in thousands of US city-pair markets creating monopoly power and significant risk to consumers from tacitly or explicitly coordinated profit-maximizing behavior.

What’s more, antitrust immunity allows the Big Three and their foreign alliance and JV partners to fix prices and control capacity to ensure that such market power and pricing levels are maintained in key international markets.

Given that, it is hardly surprising that since January 2015 - when the Big Three first demanded that the US Government freeze Gulf Carriers’ US flying rights - that the Big Three have generated an astounding $38.5 billion in profit (to climb higher when Q4, 2017 results are reported). So, $38.5 billion in Big Three profits despite purported massive commercial harm inflicted by Gulf Carriers with virtually no route overlaps – what a sham!

Other US corporations no doubt wish they had this many non-market-based artificial advantages. Yet, you don’t see or even imagine them, banging on the White House doors whining and pleading for protection from successful competitors.

For instance, few US corporations are as fortunate as the Big Three to pay no federal income tax on record-breaking profits. In its recent statement to employees announcing it will give some $130 million of its expected windfall from the new tax law to its employees in the form of bonuses, American conceded “the company does not yet pay cash taxes due to our enormous losses in the past.”

In other words, like Delta and United, it relies on Net Operating Loss (NOL) carry-forwards to shield its historic profits from federal income tax. An October 3, 2016 Atlanta Journal-Constitution article noted that, “Delta makes billions of dollars in profits, but does not pay federal income tax because of ‘net operating loss carry-forwards.’”

That article added, “Delta doesn’t expect to begin paying cash federal income taxes until 2018.” But, at its December 2017 Investors Day event, Delta told Wall Street analysts that the new tax law may permit it to avoid paying federal income tax for an additional two years until 2020 - “immediate expensing of capital investments could extend NOLs into 2020.”

The Big Three’s tax-free ride is not limited to federal income tax. According to a July 2017 study by IdeaWorks, in 2016 the Big Three together collected a whopping $16.3 billion in ancillary fee revenue. Unlike fare-related revenue that is subject to Airport and Airways Trust Fund-related taxes and fees, ancillary fee revenue is duty-free. I wonder why the Big Three focus on increasing ancillary fees rather than fares!?

In addition to these huge tax advantages, dramatic consolidation of the domestic commercial aviation market has endowed the Big Three with historic political, economic and market power – and, unfortunately, attendant corporate hubris.

Along with Southwest Airlines, they control about 80 percent of domestic passenger seats. Southwest just agreed to pay $15 million to settle a class action lawsuit alleging it and the Big Three illegally colluded on capacity levels, i.e. “capacity discipline,” to increase fares and reduce consumer choice. The Big Three remain defiant. However, Southwest’s pledge of “extensive cooperation,” which accompanied its $15 million settlement, sounds ominous for the Big Three.

Then there is the market-distorting artificial competitive advantage that the Big Three have in international markets. Government-granted antitrust immunity (ATI) shields the Big Three and their alliance and Joint Venture partners from meaningful competition oversight and activities that would otherwise be illegal.

ATI permits the Big Three and their foreign partners to jointly agree on and fix prices, schedules, seat capacity and customer-facing policies to ensure windfall profits. How great an advantage is that? In the US-Europe market alone the Big Three oligopoly, and their foreign partners, with whom they have ATI, control more than 80 percent of the passenger seats. In other words, the US-Europe market is manipulated by, for and among airlines that used to compete with one another for customers.

As the facts clearly show, this is hardly the time to be shedding crocodile tears for the Big Three. Save those tears for consumers who are increasingly harmed by the Big Three as a result of their historic market power shorn up by previously unimaginable political and economic supremacy.

As for the three-year old monetarily expensive political campaign against Open Skies and the Gulf Carriers, enough is enough. It is a scam. Delta, American and United’s record-setting profits should tell the Trump Administration all it needs to know about the Big Three’s patently false claim about suffering commercial harm due to Gulf Carrier competition.

It is time for the Trump Administration - as no doubt the President would do personally - to call BS on the Big Three’s political hoax, and importantly, to encourage them to fix their losing attitudes and failing products and cease embarrassing our great country with manifestly un-American whining in the face of successful customer-centered competitors.

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