Open Skies: What U.S. Airlines Really Want

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.

Until now.

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.

Qatar Airways U.S. Route Map

Etihad Route Map

Emirates U.S. Route Map

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.

Image credits:  Qatar Airways route map via Qatar Airways website, Etihad route map via Etihad website, Emirates route map via Emirates website