January 17 - A Blind Eye to Huge Chinese Airline Subsidies


INDUSTRY ANALYSIS

By Kevin Mitchell

 

US Airlines are so entangled with Chinese airlines – including giving them access to US taxpayer-funded Government passengers – that they ignore those airlines’ substantial state aid

When Qatar Airways recently announced it purchased a 5 percent stake in China Southern Airlines for more than $500 million dollars you would have expected fireworks from Delta Air Lines, American Airlines and United Airlines (Big Three). After all, the Big Three are up in arms about Qatar Airways’ $41.6 million – more than 12 times smaller – investment in fledging Air Italy.

However, when the Wall Street Journal (WSJ) asked Delta, American and the Big Three’s lobbying mouthpiece, the Partnership for Open and Fair Skies, to comment on that half billion dollar investment, there were no verbal fireworks or even sparks. In fact, according to the WSJ, all three said nothing. No comment. Crickets.

In a nutshell, this sums up the massive hypocrisy fueling the Big Three’s four-year-old political campaign against longstanding US Open Skies policy and the much-needed competitive choice Emirates Airline, Etihad Airways and Qatar Airways (Gulf Carriers) provide to passengers. Simply put, the Big Three have no principled position against state aid to foreign carriers. Rather, it is selective indignation to protect the highly lucrative US-Europe market the Big Three dominate. It reeks of hypocrisy.

Think about it, do you ever recall the Big Three urging the US Government to challenge the massive state subsidies Chinese airlines receive? How about howls from the Big Three that the $9 billion in state aid Air India has received since 2013 violates the US-India Open Skies agreement? What about Big Three outrage that South African Airways is at the state aid bailout trough on a seemingly annual basis? What about other state-owned carriers with whom the Big Three partner in the Star, oneworld and SkyTeam alliances? Not a peep.

If the Big Three genuinely believe state aid unfairly distorts competition, why don’t they urge the Trump Administration to more broadly consider the state subsidy issue with respect to all foreign carriers beginning with Chinese airlines? Similarly, why doesn’t the Administration on its own initiative begin a policy discussion on the broad issue of state aid to all foreign carriers that compete against US airlines rather than limiting that focus to just Qatar and the United Arab Emirates at the Big Three’s behest?

Don’t hold your breath that the Big Three will cry foul regarding Chinese airline subsidies. In fact, in 2015, Doug Parker, the CEO of American, feigned ignorance that Chinese airlines even receive state aid. Airlines operating in a Communist country with central economic planning and every aspect of their operation controlled by the state from aircraft purchases to fuel and Mr. Parker made this outlandish claim? Seeing is believing, and in this case, shaking your head and disbelieving he really said what he did.

In a January 23, 2015 interview with the South China Morning Post, the reporter noted the hypocrisy of American’s outrage about Gulf Carriers while Mr. Parker simultaneously was so accommodating and solicitous of subsidized Chinese airlines. Noting this neon flashing contradiction, she asked Mr. Parker to explain it. Mr. Parker’s response: “I don’t know if they (Chinese carriers) are subsidised or not.” The reporter was so shocked by Mr. Parker’s disingenuous answer that she noted in the article “China’s four listed state-owned airlines did not shy away from reporting receiving government grants of 6.98 billion yuan (HK$8.63 billion) in their annual reports for last year (2014).” Yet, Mr. Parker claimed to be unaware of Chinese airline subsidies!

It gets worse. In that same interview, Mr. Parker added that he was not “particularly alarmed” by the fact that Chinese carriers are overtaking US carriers in the transpacific market. For American shareholders and employees, history shows Mr. Parker’s view to be costly folly as last year heavily subsidized Chinese airlines forced American to abandon its Chicago-Beijing and Chicago-Shanghai flights.  

Vasu Raja, American's Vice President for Network and Route Planning, candidly admitted the two routes “have been a colossal loss maker for us.” Reuters noted that this “underscore[s] increasingly tough competition from state-backed Chinese rivals as they aggressively expand their fleets with cut-price tickets.” American’s Raja echoed that point adding “[t]he current fare environment severely limits our ability to successfully compete between Chicago and Beijing.” A case of competition-distorting Chinese carrier subsidies materially impacting a US carrier, right? Good to know that Mr. Parker wasn’t “particularly alarmed” in 2015. After waving the white flag of surrender in the Chicago-Beijing and Chicago-Shanghai markets, Mr. Parker should be alarmed. However, judging by his continued total silence, apparently, he is not.   

The fact is the Big Three are so entangled commercially with heavily subsidized Chinese airlines that you will never hear them complain about the vast amount of state subsidy showered on their Chinese partners. And, if the Trump Administration were to consider a state aid inquisition of Chinese carriers similar to the one focused solely on airlines from Qatar and the United Arab Emirates, at the Big Three’s urging, then the Big Three no doubt would oppose it. Why?

The Big Three are investors in heavily subsidized Chinese airlines. Like Qatar Airways, American also is a large shareholder in China Southern Airlines. In 2017, American purchased a $200 million stake in the subsidized airline. In 2015, Delta paid $450 million for a 3.55 percent stake in China Eastern, which is regarded to be China’s most heavily subsidized carrier. However, that doesn’t tell the full story of Delta’s indirect investment-related interlock with China Eastern. In 2017, China Eastern purchased a 10 percent stake in Air France-KLM, Delta’s most important partner.

Then there is the tangled web of commercial and marketing relationships between the Big Three and China’s subsidized airlines. United and Air China are Star Alliance partners with an extensive code-share relationship. Last November, American and China Southern announced they are “taking steps to strengthen their partnership with a significant expansion of codeshare cooperation.” While currently a member of Delta’s SkyTeam alliance, it is reported that China Southern is considering a switch to American’s oneworld alliance.

Heavily subsidized China Eastern is a member of Delta’s SkyTeam alliance. In Delta’s Q4 2016 earnings call, Glen Hauenstein, its President, told Wall Street analysts it was “deemphasize(ing) our (Fifth Freedom) hub in Tokyo and continu(ing) to build on our partner (China Eastern) hub in Shanghai.” As a result, Bangkok-bound Delta passengers who used to be flown to Delta’s Fifth Freedom hub at Tokyo Narita to continue their journey on US-crewed Delta aircraft now instead are being flown to Shanghai to be outsourced to Chinese-crewed China Eastern aircraft.

Delta, the most obsessed protectionist, also enables heavily subsidized Chinese airlines to carry US Government passengers and to participate in the Fly America program. US taxpayer-funded travelers flying on government business from the Washington, DC area to Guangzhou, China are required to fly Delta which was awarded the FY19 GSA city-pair contract. However, Delta does not fly to Guangzhou. Instead, it outsources US government travelers to partner China Southern for the final leg of their journey sharing US taxpayer-provided revenue with the Chinese carrier. US government passengers preferring to fly non-stop from the Greater New York City area to Shanghai are similarly outsourced by Delta to heavy subsidized China Eastern. Delta was awarded the FY19 GSA city-pair contract for the Greater New York City area to Shanghai but only its partner, China Eastern, flies non-stop.

There is nothing wrong with the Delta-China Southern and Delta-China Eastern partnerships participating in the Fly America program and being awarded GSA city-pair contracts. It complies with the Fly America statute and GSA rules, just the same as many partnerships with foreign carriers do such as American-Qatar Airways, United-Lufthansa and JetBlue-Emirates. Permitting foreign carriers to indirectly participate in Fly America through their US airline partners increases competitive choice for US government travelers. However, Delta’s partnerships underscore just how commercially entangled it is with heavily subsidized Chinese airlines, and why it is so hypocritically silent about those subsidies.

Next time you hear executives from the Big Three whine about Gulf Carriers, ask them why they are not similarly concerned about state aid to Chinese, Indian, South African and other state-owned foreign airlines. Be prepared for squirming and laughable responses such as Doug Parker’s claim that he didn’t know Chinese carriers are subsidized.

©2001 to 2018 Business Travel Coalition, Inc..