September 26 -  Defeat for the US-EU Airline Market Protectionists


INDUSTRY ANALYSIS

Like clockwork, without fail on each quarterly earnings call senior executives from Delta Air Lines, American Airlines and United Airlines (Big Three) boast to Wall Street analysts about the strength of the lucrative US-Europe market. Their message is the same: record profits in the Atlantic and nothing but green skies – sorry, I meant blue skies – ahead.

These upbeat comments are predictable. After all, the Big Three and their European alliance and joint venture partners control over 80 percent of the seats offered in the US-Europe market. Due to rampant grants of antitrust immunity, they can fix prices, limit capacity and coordinate schedules with no meaningful competition oversight. Market power at that profit-maximizing level doesn’t come easy or occur overnight. It has taken time, many ill-advised grants of antitrust immunity and heavy-handed tactics by the Big Three to gain this anti-consumer stranglehold.

That effort has been rewarded. US-Europe has become a cash cow market where the Big Three literally print money each quarter off the backs of passengers who lack sufficient competitive choice.

Against this backdrop, several airlines have had the audacity to try to competitively enter “their” US-Europe market potentially upsetting this cozy and lucrative arrangement. What oligopoly rolls out the red carpet for new entrant competitors? None that I am aware of, and certainly not the Big Three.

First, there was Norwegian Air International and Norwegian UK Limited. Even though a fundamental goal of the historic US-EU Open Skies agreement was to usher in an era of innovative new entrants like Norwegian, the Big Three, and their labor unions, were taken aback by the brazenness of these low-cost operators seeking to enter “their” market. What gall! The Big Three and their labor unions coalesced with the battle cry “protect our oligopoly at all cost.” They tried, unsuccessfully, first in the halls of the U.S. Department of Transportation (DOT) and Congress, and then in federal court.

Next, Emirates Airline, an awarding winning carrier renowned for its customer service, had the temerity to exercise its Fifth Freedom rights guaranteed by the US-UAE Open Skies agreement to first offer New York JFK-Milan-Dubai service, and later add a Newark-Athens-Dubai flight. It is fine for other foreign carriers like Singapore Airlines and Ethiopian Airlines to operate transatlantic Fifth Freedom flights. After all, they are members of the Big Three’s alliance club. Emirates, however, is an independent non-aligned carrier. It is not affiliated with the Big Three cabal. 

No problem for the Big Three that every US Open Skies agreement, more than 120 in all, have Fifth Freedom rights as a core element. No problem that Delta and United continue to exercise Fifth Freedom rights themselves in the Asia-Pacific market. However, with a straight face, the Big Three argued UAE and Qatar Fifth Freedom rights were unfair and demanded they be frozen thereby gutting those Open Skies agreements.

While the Big Three didn’t like the idea of Norwegian challenging them for cost-conscious passengers, they went apoplectic at the prospect of competing against Emirates in “their” US-Europe market. The cry to “protect the oligopoly at all cost” took on an even greater sense of urgency. To hear the Big Three and their labor unions tell it, it was a life or death struggle. In a slick video, Ed Bastian, the CEO of Delta, shamelessly told his employees that their jobs and the livelihood of their families was at risk as he implored them to fight on against the great invaders from the Gulf region. Around the same time, in a fleeting moment of candor, Mr. Bastian truthfully admitted to the Detroit Economic Club that, in fact, Delta was on a hiring spree expecting to add 25,000 employees over the next five years alone. 

The Big Three and their labor unions lost that battle too. Longstanding Open Skies policy won, the oligopoly failed. Good public policy and facts prevailed, bluff and bluster did not. Consumers and competitive choice were the big winners.

Despite these high profile and very expensive setbacks, cognizant of the continuing need to “protect the US-Europe oligopoly market at all cost,” airline labor, led by the Air Line Pilots Association (ALPA), most recently waged a failed legislative battle to hobble new entry to the US by international carriers. Having failed to stop Norwegian under longstanding law and regulatory practice at DOT and after a stinging rejection of their position by the District of Columbia Court of Appeals, ALPA’s Plan B was to hoodwink Congress into rewriting the law to stifle new entry. Never mind US international obligations like the US-EU Open Skies agreement that would be breached. ALPA is a key stakeholder in the Big Three’s windfall US-Europe profits – in theory, higher profits and higher wages go hand-in-hand – that must be protected.

ALPA won the first round succeeding in having insidious language, Section 530, included in the House-passed version of the FAA reauthorization bill. However, in the end, the House-Senate compromise FAA reauthorization bill rejected anti-consumer Section 530. Everyone who isn’t a financial stakeholder in the US-Europe oligopoly, and does not benefit from fleecing passengers in that market, agreed Section 530 was terrible public policy that deserved to be stopped. 

Warning Congress against enacting Section 530, EU Transport Commissioner Violeta Bulc wrote Congressional leaders it “could jeopardize the significant benefits” of the US-EU Open Skies agreement and “risks having significant ramifications for this (the US-EU) longstanding and mutually beneficial aviation partnership.” The Trump Administration, in a letter to Congress, expressed similar “significant concerns” warning that it would “potentially frustrate US implementation of international air service agreements, and likely risk harmful retaliatory actions by foreign countries.”  

An impressive coalition of US and international stakeholders worked tirelessly to defeat Section 530. It included the International Air Transport Association, the US Travel Association, the Cargo Airline Association, the National Association of Manufacturers, Airbus, FedEx, UPS, JetBlue, Airports Council International – North America, Orlando International Airport and Memphis International. 

It is important to not view in isolation the Section 530 battle as well as the attacks on Norwegian and the UAE and Qatar Open Skies agreements. They are part of a very troubling anti-consumer pattern. The Big Three and their labor unions are waging war against new competitive choice in “their” US-Europe oligopoly market. Make no mistake about it, when it comes to limiting consumer choice in the US-Europe market, they have long knives and a huge financial incentive to use them. 

Three resounding defeats have not dissuaded the US-Europe protectionists. They already have a new target in their crosshairs, Air Italy, and its mere handful of flights from Milan to New York JFK and Miami.

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