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President Donald Trump.
Got your attention?
For the past eight months a reality TV star, businessman, celebrity, whatever other word you want to use, has been leading the race for the presidential nomination of one of the two major parties in the United States. There is a lot to be alarmed and surprised about. But as I thought about this post, while watching another in an endless series of interviews, debates, town hall meetings with the candidates, I started thinking about…Open Skies. Seriously.
Trump has spoken a lot of words in this campaign. And a huge (his favorite word) percentage of them have been about international trade deals. About how the United States is getting ripped off by China, Japan, Mexico, you name it. Indeed, this is his major global organizing principle. It permeates everything he talks about. Why does he want Japan and South Korea and Saudi Arabia to have nuclear weapons (he has said this by the way, or at least said he’d be good with it)? Because they beat us at trade, have a bunch of our money, and can afford it, while we can’t afford to help them so much any more. Why does he want to re-negotiate NATO (yes, he’s said this too)? Same reason. In fact, just before I hit the send button on this piece he said that he was basically going to invoice NATO members he does not feel spend enough on defense. He believes the United States has been taken advantage of, we have been losing economically, that it is because we have had weak leaders, and he will change all of that. It is his organizing principle and he fits his views on any number of international issues into it.
Clinton and Sanders Don’t Like Trade Either
Donald Trump isn’t the only one. A candidate on the Democratic side, Bernie Sanders (a self proclaimed Democratic Socialist, believe it or not) has talked almost as much about unfair deals, poorly implemented. He has even started to pull Hillary Clinton in his direction on some of those issues.
So, you would think, given the rhetoric of many U.S. airlines about the supposedly unfair deals between our country and Qatar and the United Arab Emirates (or to be more precise, the unfair way in which some U.S. airlines say those countries are implementing them), that Trump would be all over this; saying it is an example of American fecklessness. This issue seems to be teed up for Trump, and for Sanders as well.
Indeed, Trump often talks about the airports in Dubai and Doha and compares them unfavorably to those in the United States (something he has in common with U.S. Vice President Joe Biden). You might recall that U.S. airlines often like to point to the level of investment in those very airports as evidence of unfair trading practices.
So, how much do you think Trump talks about this? Well, the next time he talks about it will be the first time, to my knowledge. If the situation was even a fraction as bad as some U.S. airlines like to claim, he would be all over this. And remember, this is a guy who does not normally have much nice to say about Muslims and Muslim countries either. Again, this seems perfectly teed up for him. But…..silence.
Anti Open Skies Issue has No Political Traction in U.S.
Why is that? In retrospect, it is one of the most surprising things about this presidential campaign, and it has been a campaign long on surprises. Add to this that Trump once owned an airline and was part of the industry. It’s just kind of incredible to me.
Maybe the reason is this: there is so little to the argument some U.S. airlines are making that not even Donald Trump will join in!
At this point it is useful to recall some things I said in an earlier post about this. I first wrote about this topic in April, 2015, Open Skies: What U.S. Airlines Really Want. I pointed out then that when the airlines were using this issue largely to position themselves to gain advantage in legislative and regulatory fights, their campaign made some sense. And I think they may have gotten someplace. But, as I wrote in July, 2015, Open Skies: An Update they started to take themselves way too seriously, started to believe their own propaganda, forgot the larger context in which U.S. relations with these countries exist (Iran, terrorism, ISIS, etc.) and they also made it personal. Well, maybe that last one would not have scared away Donald Trump. But they have so over-played their hand that they are not taken seriously any more, even by Donald Trump.
Sure, they maintain a twitter account and, I guess, a Facebook page (I’m not on Facebook). But the major aviation legislation for the year has been introduced in both houses of the U.S. Congress with nary a mention. No one seems to be paying attention. The airlines pushing this are getting nowhere fast. They can’t even get Donald Trump interested!
What I do sometimes hear these days is U.S. airlines using the subsidy issue; not as a way to get new routes, or lower government taxes, or a better regulatory outcome; but as a way of explaining to their customers why their own service is so much poorer than that offered by the Gulf carriers (or by other foreign carriers, for that matter). We don’t get billions in government aid, they say. So we can’t have nice lounges and spacious comfortable cabins, or high end food and beverage. Don’t get me wrong, U.S. airlines are actually making some strides in these areas, including in their airport lounges (though some of that is from competition by the likes of American Express which has opened Centurion lounges in several major airports. It is a terrific product, by the way). But their product remain inferior to that of many international carriers, especially in the Gulf and in Asia.
In retrospect, it is almost funny that so many were so concerned a year or so ago about how this debate might turn out. I suppose there may still be some life in the argument, and no one pushing it has done anything close to surrendering. But for those who worried that the United States was in danger of overturning the entire international aviation regime, and setting back a quarter century of aviation liberalization; well you don’t have to worry about that so much any more.
In April 2015, I wrote about the fight brewing in the U.S. between the three major international air carriers (American, Delta and United) and the three Gulf carriers (Qatar, Emirates and Etihad).
My thesis was that this was part of a strategy to get better treatment from the U.S. government in a variety of areas, and to attain a favorable outcome during consideration in the US Congress of legislation to reauthorize the Federal Aviation Administration (the legislation includes many of the taxes and fees airlines and their passengers must pay). While there were some wild statements from both sides, I believed this was a more limited strategy. And if you read, for example, the speech given by Airlines for America CEO Nick Calio at the International Aviation Club in Washington last Fall, there is much evidence for that.
What Has Happened Since?
In my view, the US airlines have taken a strategy that was plausible and pretty well considered and made a hash of it. They began to believe their own rhetoric, a cardinal sin of such campaigns. The fact that several major European carriers joined in just spooled them up further. They made new enemies along the way including the cargo carriers and some of the other passenger carriers and they even questioned the motives and integrity of some of the individuals involved (another cardinal sin, don’t make new enemies along the way and don’t make it personal). They also failed to understand that in the rapidly changing Middle East, their issues would pale in comparison to Iran and ISIS (as Benjamin Disraeli once said, “a leader must know himself and the times in which he lives.” (The airlines made the cardinal sin of forgetting this).
The more attention they got, the more they overplayed their hand. And now, with the Justice Department opening an investigation into their pricing and capacity practices, the going has gotten a whole lot harder. (Though I am not sure how much there is to these allegations).
The US airlines were, in fact, gaining some traction with their arguments. As a tactic in an overall strategy to get what they saw as better treatment from the government and Congress, their plan was starting to work.
But just as it was starting to work, they overplayed their hand and committed three cardinal sins of such campaigns. They:
- Began to believe their own rhetoric.
- Made it personal and started to make enemies.
- Forgot the larger context.
It is not too late for them to realize this and change tactics.
But there is little in the history of such fights to lead me to believe this will happen.
Today, we welcome Nadine Itani, a new guest contributor who writes an opinion post about open skies.
Gulf carriers, such as Emirates Airline, Etihad Airways, and Qatar Airways, have expanded enormously and have established an intense global competitive network. These carriers’ future growth prospects depend on their ability to gain access to markets in Europe and America. Existing bilateral air agreements and the US incumbent carriers lobby hamper the Gulf carriers' expansion plans through restricting market access.
US Carriers to US Government: Reform Open Skies
Competition between Gulf carriers and the ageing big international US carriers has broken out in the open again in recent months, with US carriers filing a claim to the US administration that the Gulf airlines are not playing fair and are endangering US air carriers’ sustainability and threatening US aviation employment opportunities.
In March of this year, the three major US carriers American Airlines, Delta Air Lines and United Airlines made public the document that supposedly claims their Gulf competitors are operating successfully due to more than $40 billion subsidies from their governments.
Related article by Greg Principato: Open Skies: What U.S. Airlines Really Want
The big three US carriers confirm that they support “open skies” but they simply believe that the competition with Gulf carriers is not being “fair”.
A Compelling Argument?
Reading between the lines of the US carrier CEOs press conference reveals the real incentive behind this peculiar campaign. When the three biggest international US carriers unite and get the support of their union groups, then one should look up for the true story.
First, protecting jobs is a sound case to defend, but isn’t it the same as competition, and shall be defended reasonably through a solid argument?
Second, why did the US carriers spend too much time (2 years) to produce the document that contains the super “breakthrough” financial data of the Gulf carriers? Unfair competition is a crucial accusation, when a party owns evidence against its rivals; it shall be promptly taken to court. And, if the findings were so harmful, why was this report not announced publicly earlier, instead of exchanging confidential papers around the White House and US Government agencies?
Third is on the perspective of subsidy. It is generally known that subsidy is a sum of money granted by the state to help an industry or business keeps the price of a commodity or service low. The problem is that what US carriers fight against under the name of subsidies is being practiced in the US under Chapter 11. Chapter 11 is a “one of a kind” exit plan that allows US airlines passing through critical financial situations to hold off its credit payments, get rid of debts and embark in a restructuring process. International observers define Chapter 11 as a subsidy, while US carriers insist that it is not. As a personal opinion, how you explain subsidy is insignificant, and allowing it when it suits the US context while suing international competitors for it is a huge sin. If Chapter 11 and antitrust immunity systems are not to be considered facilitating any form of subsidy, then what explains the huge investments of American Airlines (the world’s largest carrier) in new fleet and products while the carrier has just came out fresh of “bankruptcy protection”.
Gulf Carriers Defend Position
We are not here to take down other airlines, and Emirates contributes to the U.S. economy, through the aircraft orders.
The Big 3 US carriers may first want to check their own balance sheets. Since 2006, they transferred billions of dollars of pension liabilities directly to US government while leaving creditors holding the bag for billions more through multiple bankruptcies. They received billions in cash payments and guaranteed loans in a direct government bailout while enjoying the advantages of antitrust immunity to fix transatlantic fares with their European partners.
As Tim Clark promised a “robust, fact based, point-by-point rebuttal” of the charges, he delivered on 30 June in Washington, a hard-hitting document to answer the claims laid against his airline (and against Etihad Airways and Qatar Airways) by the US carriers. The document – entitled “Emirates’ response to claims raised about state-owned airlines in Qatar and the United Arab Emirates” – runs to nearly 400 pages and it has been prepared by an in-house team at Emirates led by Clark himself and advised by lawyers, financial consultants and industry experts.
Until today, US airlines don’t seem to have a compelling case, and it is unclear whether their claims are real about subsidies threatening their ability to compete vigorously and fairly on the international stage.
US airlines should simply “stop complaining and start competing!”
More Related Articles Rebuttal of the Emirates to US accusations Emirates’ response to US open skies claims – allegation by allegation Emirates CEO Tim Clark Blasts Big Three U.S. Airlines, Especially Delta -- Since 'Delta is Delta' Competition from Middle Eastern carriers may mean lower fares to Europe, Middle East
Image credit: Vitor Azevedo
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The Beginning: Open Skies, An American Initiative
In 1992, Jeff Shane (currently General Counsel at the International Air Transport Association and then a senior official in the United States Department of Transportation) negotiated the first “open skies” agreement with The Netherlands. As odd as it may seem now, the reaction to this development (after people asked “what is open skies?”) was largely negative.
Why, many people, including many airline executives, asked would we sign such an agreement with a place like that. “We have literally dozens of cities one might fly into in the United States,” (never mind that international traffic was then heavily concentrated in just a few gateways), people said. “There is really only one city in The Netherlands anyone in the U.S. would want to fly to. This agreement seems terribly unbalanced, a giveaway.” This is the sort of thing that was heard over and over in those days.
What the critics didn't fully understand at first was that the U.S. government had a strategy in mind. The critics did not understand that this was but the first is a series of agreements to be negotiated across the globe as part of an effort to blow open a highly restricted international aviation market. And that, if the United States was successful, then surely others would follow resulting in a new era of global choice and competition for travelers and shippers.
In the years since, the United States has negotiated 111 such agreements, with nations large and small. The U.S. has been open to signing agreements with nearly any willing partner. One aviation industry insider even joked that if the Pope had a plane, the U.S. would negotiate open skies with the Vatican.
In time, more liberal agreements were being negotiated around the world by all sorts of countries. When something like open skies wasn't available, countries were still willing to liberalize their markets to some extent (as happened with the 1998 U.S. - Japan agreement, a development I participated in as an industry representative and which resulted in a nearly 40% increase in the size of the U.S. - Japan market).
In the United States, this policy has been hugely successful, helping bring international service to a growing number of American cities and, through the power of imitation, has resulted in a global air transportation system more liberal than any dared imagine a generation ago. NO ONE truly wants to squander these gains. Even the carriers pushing the open skies with the Gulf carriers the loudest.
Obviously, some nations, and some airlines, have made better use of this new regime than others; that is the nature of the beast. The United States has greatly expanded service to and from a number of countries, and many American cities that did not previously have international service were able to get it. The airport community in particular played a huge role in promoting these developments (airlines promoted them when a particular airline wanted to get into a certain country, or expand its offerings, while other airlines would oppose certain agreements if they weren't interested or, more likely, if they had a nice little monopoly under the old regime and wanted to keep it. In which case, they accused the U.S. government of giving away the store. A bit more history to keep in mind).
In 1993, the National Commission to Ensure a Strong Competitive Airline Industry, which was made up of key aviation, business, government and labor leaders essentially endorsed the open skies approach in its report (Disclosure: I served as Executive Director and wrote the report). This report became the basis for the official U.S. government aviation policy that was developed in the time after that report. (Given my role on the commission, I unofficially consulted with the government while the policy was being formed). This seemed to put an end to the debate over whether open skies was a good idea.
US Airlines Were For Open Skies Before They Were Against Open Skies
The three largest U.S. airlines: Delta, United and American, have launched a campaign to reassess the open skies arrangements with Qatar and the United Arab Emirates. Qatar Airways, Etihad and Emirates have become so successful as international carriers, being held up as models of service and style; that they are now seen as threats to the U.S. airlines. To make matters more interesting, these airlines have consciously set themselves up to operate a global hub and spoke system, similar to that pioneered by U.S. airlines in our domestic market after reauthorization, but with a worldwide reach.
More to the point, they are also a convenient (and politically potent) way for U.S. carriers to argue that U.S. government policy puts our carriers at a disadvantage they cannot overcome. They argue that Qatar and the United Arab Emirates are supportive of their carriers in a way the U.S. government is not, and that this will cost U.S. jobs and the place of our carriers in global education. At one time, the argument made by U.S. airline executives was that the U.S. government should do the same for them. Indeed, I have even heard executives from U.S. airlines state that they wish their government would support them the way the governments in Qatar and the UAE support their airlines. Finally having concluded that this argument was not going to gain traction, the airline executives are now arguing that open skies with Qatar and the UAE gives their carriers an unfair advantage. They have even commissioned a slick and lengthy “White Paper” on the subject; full of footnotes and soundbites. And, even after having to retreat over impolitic comments by the CEO of Delta, they seem to have a little bit of momentum. So, it is important to understand what they are doing, and what they hope to accomplish.
What's in the Open Skies White Paper, What's Not and Why
First of all, as already mentioned, the White Paper is slick and well put together. It is written by smart and credible people. It is very careful in what it alleges, and in what it doesn’t. It hits certain key points, while ignoring others. You might get the impression reading it that the three airlines are only ordering Airbus planes, for example, the word Boeing doesn't seem to appear. The paper never really comes out and says the three airlines and two countries are violating the open skies agreement, because they are not.
Any industry figure who wanted to pick it apart could do so. The paper alleges the two governments subsidize their airlines because they do not charge enough for their airports. As a former President of Airports Council International – North America (ACI-NA), that one nearly made me fall off my chair. Airlines are always complaining that airports need to charge less and less; the amount can never be low enough. And in the United States, last time I calculated it, airlines pay less than a third of the capital and operating costs of airports. No matter, where you stand depends on where you sit, as they say, and the argument that Gulf region airlines do not pay “enough” for airport infrastructure is strongly made. There is even a complaint that the airports in Doha, Dubai and Abu Dhabi do not charge connecting passengers their equivalent of what we in the U.S. call a passenger facility charge, or PFC. Never mind that then PFC equivalent in those airports is about $20 US (in the United States it is capped at $4.50) and that almost no airports in Canada (as one example) charge connecting passengers the equivalent fee.
There is no mention of the fact that many U.S. open skies agreements around the world resulted in about the most uncompetitive thing you can think of: anti-trust immunity for major carriers from each country, arrangements that all three of the major U.S. international carriers benefit from.
There is no mention of the system of government grants and tax breaks, at the federal, state and local levels that benefit U.S. airlines, their passengers and the airports they serve.
There is no mention of U.S. bankruptcy laws, which most in the world including in Europe view as a form of state aid, and through the use of which all three major U.S. international carriers have shed billions of costs and obligations and without which none of them would have survived.
There is no mention of developments in China, for example. According to The Economist the Chinese are building an airport and surrounding aerotropolis from scratch in an inland provincial capital called Zhengzhou, with ambitions that this airport will have five runways and handle 70 million passengers (equivalent to Heathrow today) by 2030. Clearly, not all of those 70 million people are going to/from Zhengzhou and the planned airport will serve as an Asian hub for Chinese carriers. Granted we do not have an “open skies” agreement with China, but the principle still holds. Yet, China is a lucrative future market for our carriers and there will be little or no appetite for upsetting that apple cart.
In other words, this very clever paper, while quite well done and persuasive to the inexperienced eye, has a fair number of holes in it. This fact has caused some to sputter, and some to reach for a strong drink. Blood pressures are on the rise. It is even being pointed out that Qatar and the UAE are important factors in U.S. policy on such key issues as ISIS, Iran and Yemen; so there seems little chance the administration will poke its fingers in the figurative eyes of these countries right now. So I think it is important to understand why this effort is being undertaken.
For the sake of balance and full disclosure we have added information from those who put the white paper together in the accompanying box.
Who is the US Open Skies White Paper For?
To begin, it is important to understand the audience for this white paper, and this campaign. It is not aviation experts. The audience is not an academic one, this is not an academic paper. The audience is editorial writers and reporters. It is public officials and their staffs. It is the 2016 political campaign already beginning in earnest in the United States. If you think the audience is an expert one, you will think the paper is not up to standard. If you understand the audience is a political one, you will see that it is quite clever.
Remember what I said earlier. The argument about the Gulf carriers has been made by U.S. airlines and their labor groups for some time now. They understand that these carriers have an effective business strategy, and that they cannot match the level of service and, frankly, elegance, offered by these carriers. The argument used to be that these carriers are fortunate to have governments who understand that their airlines are a national asset and act accordingly, and that the U.S. government ought to emulate them. As this effort to change U.S. government policy did not work, the argument is now being turned around to say that these two nations are behaving unfairly, depriving U.S. carriers of opportunities and U.S. workers of jobs, and so the U.S. government needs to change its policy to account for that.
While I am certain that news of the U.S. government renouncing these agreements would be greeted joyfully in the boardrooms of Delta, United and American; and that news of a request for re-negotiation or even consultation would be most welcome; I think the real goal is to influence the FAA Reauthorization legislation that will be considered by Congress this year (there is a deadline of 30 September to reauthorize the agency, including the taxes and fees that fund it and the aviation system in this country). U.S. airlines have pointed out, with some reason to be fair, that the current system of a dozen and a half taxes and fees that fund the system is not terribly efficient, is more costly than it needs to be, and should be modernized. And if the system were modernized, we could have a more efficient system that would cost the airlines less. As a secondary strategy, I also believe U.S. airlines are using this campaign as a way of explaining why they could never offer service as pleasant and luxurious as the Gulf carriers – it simply costs too much. The message here is that such service is simply not possible in a fair and open economic environment.
Still, in my mind, the main element of their strategy is to influence the debate over the FAA authorization legislation and to gain sympathy for the argument that U.S. government policy leaves U.S. airlines at a competitive disadvantage in the world, and that our policies and laws must change. The strategy is largely about obtaining a more favorable regime of aviation taxes and fees (as is the U.S. airline strategy toward the future of the air traffic control system in this country, but that is a subject for another time).
Is US Open Skies Policy in Danger?
As written earlier, the deadline for this legislation is 30 September of 2015. But it is important to recall that last time around the law was finally reauthorized four and a half years after the initial deadline, and after 23 temporary extensions. My somewhat educated guess is that we will need an extension or two before a final law is passed, quite likely lasting well into 2016. So be prepared for more white papers, television commercials, overheated rhetoric and political pressure on the issue of U.S. open skies policy. By the time the law is fully reauthorized, we will have had our fill of all that. The airlines either will, or will not, get some traction on their taxes and fees argument (I predict they will get some traction but not as much as they would like). They may or may not get something in the legislation calling for consultations or re-negotiation with Qatar and the UAE "I predict consultations. Already the U.S. Departments of Transportation, State and Commerce have opened a file on the matter and requested industry and public comment".
But U.S. open skies policy will remain intact.