March 26 -  Delta Air Lines Has a Thing for State-Owned Carriers


It now is circling failed state carrier Alitalia

With Delta Air Lines (Delta), it is essential to judge it by its actions, not listen to its words. Otherwise, you will be deceived into believing Delta has a principled position that state-owned carriers unfairly create competitive distortions in the marketplace. What Delta in fact has is a protectionist agenda, which animates its highly selective position on state aid to foreign airlines.

For over four years Delta has lavishly funded and led its oligopoly partners, American Airlines and United Airlines (Big Three), in their joint multi-million dollar protectionist lobbying campaign against Open Skies and badly needed competitive choice provided by Emirates Airline, Etihad Airways and Qatar Airways (Gulf Carriers). The Big Three self-servingly argue that Open Skies policy unfairly advantages state-owned airlines like the Gulf Carriers. Their CEOs recently sent a letter to Secretary of State Mike Pompeo and Secretary of Transportation Elaine Chao calling for the Trump Administration to breach its Open Skies agreement with Qatar. That echoed earlier calls by them for the U.S. to dishonor the US-UAE Open Skies agreement.

If you listen to Delta’s words alone, you would be perplexed by news reports that it is in talks to invest hundreds of millions of dollars to rescue Alitalia. After all, Alitalia has a long history of being propped up by massive infusions of state aid. Simply put, Alitalia is a financial zombie with few peers. Were it not for the billions of Euros the Government of Italy and others have wasted on fruitless attempts to reorganize it, the marketplace would have sealed Alitalia’s fate years ago.

However, Delta’s appetite to invest in Alitalia despite these massive state bailouts is fully consistent with its history of turning a blind eye to state aid whenever that serves its commercial interest. In 2013, the European Commission opened an investigation into whether Alitalia’s bailout by state-owned Poste Italiane, at the urging of the Italian Government, violated EU law prohibiting state aid. Two years later the EU concluded it did not. Nevertheless, did Delta suspend its code-share relationship with Alitalia during the pendency of that state aid investigation given the mere allegation was so repugnant to its principled position? No, it was business as usual for Delta. Nor did it call for Alitalia’s membership in the Delta-led SkyTeam alliance to be suspended. Did Delta, or the Big Three for that matter, once say Alitalia’s US-EU Open Skies rights should be abrogated or suspended? Not a peep.

Surely then, Delta must have been outraged when Etihad, a focus of its anti-Open Skies ire, emerged as Alitalia’s rescue investor in 2014. After all, according to Delta, Etihad receives billions of dollars in state aid. So, it follows that the more than a billion Euros that Etihad spent to rescue Alitalia must have been tainted money, right? Again, Delta said nothing. For Delta, it was business as usual. The Delta-Alitalia code-share relationship continued, as did Alitalia’s membership in the Delta-led SkyTeam alliance.  

Then there is the ongoing European Commission investigation, announced last April, into whether a new 900 million Euro bridge loan to Alitalia by the Italian Government violated Europe’s state aid rules. The headline of one April 27, 2018 newspaper article speculated “[s]tate aid probe could hinder Italy’s efforts to find buyer for Alitalia.” Who would want to invest in Alitalia with an open state aid investigation cloud hanging over its corporate head? Certainly not Delta, which proselytizes against state aid to foreign carriers, right? If news reports are accurate, that investigation is irrelevant to Delta’s commercial self-interest.

Judge Delta by its actions, not its rhetoric. The fact is Delta has a thing for state-owned and state-subsidized partner carriers. Of its SkyTeam alliance partners, 74 percent of them are fully- or partly state-owned.

Nothing more powerfully illustrates Delta’s hypocrisy about its condemnation of Gulf Carriers than Delta’s multi-million dollar investment in, and growing commercial relationship with, China Eastern Airlines. China Eastern is the most heavily subsidized airline. Yet, while railing against Gulf Carriers in 2015, Delta concurrently invested $450 million in China Eastern to acquire a 3.55 percent stake. Did Delta care Chinese Eastern is the most heavily state-enriched airline in a country that knows how to subsidize? Obviously not. Irrelevant. In fact, in 2017, Delta deepened financial ties with China Eastern joining it in jointly investing nearly $1 billion in Air France-KLM for 10 percent stakes respectively.

At the same time, Delta is growing its commercial relationship with heavily subsidized China Eastern. In Delta’s Q4 2016 earnings call, Glen Hauenstein, its President, told Wall Street analysts that 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 also makes it possible for heavily subsidized China Eastern to participate in the Fly America program flying US government employees and contractors. For instance, US government passengers preferring to fly non-stop from the Greater New York city area to Shanghai are 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.

So, next time you hear Delta whine about Gulf Carriers, ask why its indignation is so selective. Ask Delta how it squares its deep financial and commercial relationship with China Eastern with its incessant moans about Gulf Carriers. Also ask why it reportedly is so anxious to invest in state subsidy disaster Alitalia if, in principle, it is as strongly opposed to state aid as it claims to be. Don’t expect a compelling and defensible answer, there isn’t one.

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