February 6 - Gulf Carrier Derangement Syndrome!


INDUSTRY ANALYSIS

By Kevin Mitchell


As Air Italy’s Fortunes Plummet, The Big Three’s Anti-Air Italy Hysteria Soars

 

Air Italy announced it is slashing flights and Delta Air Lines, American Airlines and United Airlines (Big Three) “cheered” by ratcheting up their “sky is falling” anti-Air Italy hysteria at the exact same time.    

Welcome to the irrational world of the Big Three’s obsession with the Gulf Carriers – Emirates Airline, Etihad Airways and Qatar Airways. That, in combination with their fixation to protect the cash cow US-Europe market – where the Big Three, together with their antitrust-immunized foreign carrier alliance and joint venture partners, control nearly 90 percent of the traffic – is a toxic cocktail that has resulted in logic-defying priorities and behavior. Let’s call it the Gulf Carrier Derangement Syndrome!

Last year American Airlines was forced to abandon non-stop flying from its Chicago hub to Beijing and Shanghai. The culprit was subsidy-fueled, cutthroat pricing by heavily subsidized Chinese carriers. Did American’s CEO Doug Parker cry bloody murder? Did Mr. Parker demand action by the Trump Administration, pushing on an already open door given the Administration’s tough stand on market-distorting behavior by the Government of China? Not a word. Instead, Mr. Parker met with the Trump Administration to complain about small Air Italy and his oneworld alliance partner, Qatar Airways.

What about heavily subsidized Air India’s rapid expansion in the non-stop US-India market where it now serves five US cities? The Big Three complain ad nauseam that they have been forced to largely abandon non-stop US-India flying as a result of state-funded unfair competition. It sure sounds like the Big Three should be complaining about Air India and the $9 billion in state subsidies it has received since 2013, which is fueling that non-stop US-India growth, right? Again, the Big Three say nothing. Bizarrely, instead the Big Three rant about connecting service by Gulf Carriers blaming that service for this US absence, as they turn a blind eye to the only truly heavily subsidized competitor - Air India - that actually competes head-to-head in the non-stop US-India market.

The Gulf Carrier Derangement Syndrome manifested itself again last week. After less than two months of flying, Air Italy abruptly announced that it is ending its three-day-per-week Milan-Delhi and Milan-Mumbai flights. Air Italy also is shuttering its Milan-Bangkok flight. Obviously, the gravitational pull of the marketplace is clashing with Air Italy’s lofty aspirations. As for the possibility that Air Italy might successfully turn Milan into a super-connector hub for US-India and US-Southeast Asia passengers, that seems to have vaporized. At the same time, the failure of these connecting flights beyond Milan calls into question whether there will be enough Milan-only bound passengers to support Air Italy’s current and planned US flights.

How did the Big Three respond to this news? Did they applaud the marketplace verdict about Air Italy’s connecting service plans and breathe a competitive sigh of relief? No, they did the exact opposite. They reacted as though Air Italy announced it is tripling its India and Thailand flying in furtherance of establishing a Milan super-connector hub.

The Big Three CEOs last week fired off a letter to Secretary of State Pompeo and Secretary of Transportation Chao urging the Trump Administration to abandon longstanding Open Skies policy because tiny Air Italy apparently poses some sort of existential threat to them. Air Italy is slashing flights. Yet, the carrier poses an existential threat to the Big Three who are projected to collectively earn some $17 billion in profits in 2019 alone, and pay no federal income tax on them. Really? As of June 2018 the Big Three had 3,064 aircraft in service. Air Italy aspires to have 50 aircraft by 2022. Profound over-the-top anti-consumer protectionism!

The BTC explanation and analysis is that their hysteria has nothing to do with Air Italy connections beyond Milan. It is all about protecting the lucrative and insufficiently competitive US-Europe market. As the Big Three see it, Air Italy is just the latest carrier with the audacity to try to bring new and much-needed competitive choice to “their” US-Europe market.

First, there was Norwegian Air International and Norwegian Air UK. Give consumers in non-Big Three hub cities a low-cost competitive alternative for US-Europe flying? Heresy! The Big Three launched a failed multi-million dollar campaign to block approval of their foreign air carrier approvals.

Then there was Emirates having the gall to exercise Fifth Freedom rights to fill service voids in the US-Europe market by flying New York JFK-Milan-Dubai and Newark-Athens-Dubai. Never mind that for five years United ignored the Greek American community’s urgings that it launch year-round Greater New York/Athens non-stop service and that Emirates listened while United offered nothing more than a cold shoulder. Also ignore the fact that both Delta and United operate Fifth Freedom flights in the Asia-Pacific region. Nevertheless, the Big Three claim such flights, based on rights clearly guaranteed by the US-UAE Open Skies agreement, are not permitted. In point of fact, Fifth Freedom rights are included in all 126 US Open Skies agreements.

Even a mere report that the First Mayor of Hamburg, Germany recently visited Emirates’ headquarters to urge it to consider a Dubai-Hamburg-New York JFK flight caused an over-the-top, Pavlovian response. The Big Three’s representative, the Partnership for Open and Fair Skies, was frothing at the mouth. How dare Hamburg travelers prefer a non-stop New York JFK flight. They should be satisfied with less convenient one-stop flights offered by the Big Three’s joint venture partners, flights that financially benefit the Big Three through pooled revenue sharing. Outrageously, what nerve Emirates had to welcome the Mayor who was serving his constituents well by seeking to expand their Hamburg-New York air travel options.  

Now Air Italy, a carrier that the EU concluded is majority owned, and effectively controlled by a European citizen, as required, has the temerity to offer a handful of US-Europe flights and announce plans to start a couple of more in 2019. The Big Three see a competition-killing imperative to stop this incursion into “their” market. “Their” Milan passengers must not be given additional competitive choice.

To add a very large exclamation point to their anti-competitive motive, the Big Three are demanding Air Italy’s US flights be stopped immediately, and that the Trump Administration take the unprecedented, destructive step of breaching the US-Qatar Open Skies agreement if they are not.

When you look at the evolution of arguments that the Big Three have concocted as to why these Air Italy flights should be stopped, it is readily apparent that the Big Three have no credible or valid legal basis for their demand.

They first argued Air Italy’s US-Milan flights were impermissible Fifth Freedom operations that violated the January 2018 US-Qatar Understandings and a side letter thereto. However, it soon became obvious that was a silly and unsupportable argument with no basis in fact or law. Both the State Department and Department of Transportation have repeatedly made crystal clear that these Understandings and the side letter did not modify, limit or restrict any US-Qatar Open Skies rights, including core Fifth Freedom rights. Importantly, even if that were not the case, the US-Milan flights are not Fifth Freedom operations because they do not involve flying to a third country.    

Then, seeing their fabricated Fifth Freedom argument go poof, in the letter to Secretaries Pompeo and Chao, the Big Three offered another equally flawed and fictitious legal theory. Now, they contend that the US-Milan flights are Seventh Freedom operations in violation of the US-Qatar Open Skies agreement. However, the only way that could be possible is if Qatar Airways-owned and controlled Air Italy, and the EU has concluded that is not the case.

It is telling, and frankly insulting, that the Big Three continue to solely focus on the Trump Administration in hopes that their political muscle in Washington and pandering rhetoric will convince it to ignore the facts and law. The proper forum for their complaint about Air Italy’s US-Europe flights is Brussels. This is an EU citizenship question.

If the Big Three firmly believe that the EU wrongly concluded that Air Italy is an EU citizen with full rights to fly from Milan to any US city under the historic US-EU Open Skies agreement, then they should petition the EU to reevaluate that determination. If the EU agrees with the Big Three, and reverses its prior decision, then Air Italy would have no US-EU Open Skies flying rights. If however, as the Big Three no doubt fear, the EU reconfirms its prior decision that Air Italy is in full compliance with EU law, then that will fatally undercut its protectionist rants about Air Italy.

Secretaries Pompeo and Chao should tell the Big Three that if they don’t have the courage in mind to properly raise their Air Italy concerns with the EU, then they should not waste the Trump Administration’s time. I think everyone is getting sick of the Big Three’s incessant flare-ups of the Gulf Carrier Derangement Syndrome.

I know I am.

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