Airline Standoff Will Determine the Future of Open Skies

As Persian Gulf airlines Etihad, Emirates and Qatar have disrupted the stronghold U.S. giants Delta, United and American airlines have traditionally enjoyed over the skies, tensions between carriers now vying for supremacy in the world of air travel have risen.

Open skies agreements, long heralded as a way to proliferate air travel while driving down the price for consumers, have taken center stage in this feud. The American legacy carriers that once pushed for open skies agreements now want to revise them to restrict the ability of Persian Gulf carriers to operate within the United States. The big three cite an unfair competitive advantage for the Gulf airlines due to the billions of dollars these airlines receive in subsidies from their own governments.

We’ll get into the nuts and bolts of open skies and what their future looks like, but first, a bit of background.

What are Open Skies Agreements?

Open skies agreements are bilateral agreements between two nations or group of nations, such as the EU, that allow airlines from each territory to fly between any point in the other territory and its own.

These agreements have given U.S. air carriers the freedom to expand into markets around the world without having to be concerned with government regulation in regards to route choices, flight capacity and pricing. They’ve been recognized for increasing air travel options and providing, as the U.S. Department of State puts it, “more affordable, convenient and efficient air service for consumers.”

Consumer advocates stand in stark contrast to the big three as more competition means cheaper airfares.

According to a study from The Brookings Institution, American travelers save an average of $4 billion per year due to open skies agreements. That number could grow to another $4 billion per year if the U.S. reaches more agreements with countries that have high volumes of U.S. international passenger traffic, namely China.

History of Open Skies

Open skies agreements came about in the 1990s and 2000s following the signing of the first open skies agreement between the United States and the Netherlands in 1992. Since then, the U.S. has signed open skies deals with more than 120 foreign partners and has used the agreements to spread an American brand of air travel around the globe. In particular, the U.S. agreement with the European Union is said to have created the biggest international air travel market on the planet.

Open skies with the EU was finalized and signed in 2007 and went into effect in the years that followed. Others, such as the 2015 ASEAN Open Skies agreement have followed, each granting “freedoms of the air” to aviation companies operating in these geographic locales.

But after decades of advocating open skies agreements, U.S. airlines are suddenly changing their tune as they face stiffer competition from budget airlines such as Norwegian and, most notably, the Persian Gulf airlines.

The Current Open Skies Feud

At the heart of the current push to renegotiate open skies agreements with Gulf carriers is the government subsidies that airlines such as Qatar and Etihad receive. Primarily, these airlines have created competitive issues to U.S. carrier partners in Europe. But what they’ve seen has led to a reaction from the heads of United, Delta and American airlines based on creating what they refer to as “fair skies.”

Emirates airline denies that it receives any government subsidies and in defending itself has called into question the ability of U.S. carriers to point a finger at foreign airlines receiving subsidies. Many foreign airlines receive subsidies and in fact, as some critics of the big three domestic air carriers say, U.S. carriers received a form of subsidies themselves in the past in the form of government bailouts and Chapter 11 bankruptcy protections.

“I think both parties have a point and the arguable issue is how you define the government subsidies,” R. Tolga Turgut, an assistant professor at the College of Aeronautics at Florida Tech said. “It is a fact that the U.S. carriers have been going through a long consolidation phase in order to survive through the last decade. Today, we have only three major legacy carriers remaining. But if they had not been given the opportunity of Chapter 11 bankruptcy, we probably would have no U.S. registered legacy carrier left in the market. Gulf carriers, on the other hand, are state owned, and that is a different dynamic than being owned by the public and having shares traded on the stock market.”

The U.S. companies are not presenting issues with other subsidized airlines, some of which they have a vested interest in. For example, Delta is partnered with China Eastern and China Southern, which in 2014 received $865 million worth of subsidies from the Chinese government according to Forbes. United partner Air China received $162 million and American Airlines partner Hainan Airlines received $82 million.

These airlines, however, are not threatening the big three’s bottom line, and therefore are not a cause for concern.

“U.S. carriers do not offer any non-stop flights to U.S. airports from [Gulf hubs]; however, they do offer connected flights via European hubs and make significant revenues,” Turgut said. “President Obama’s administration did not agree with the claim of U.S. carriers but President Trump’s administration may be more favorable to their claim and attempt to find a middle ground.”

The Trump administration does not necessarily have to revisit open skies agreements to benefit American carriers while causing Gulf carriers headaches, however.

“We should note that the so-called ‘travel ban’ has reduced the load factors of many airlines, especially those based in Middle East and Eastern Europe,” Turgut said. “Furthermore, the recently imposed laptop ban in the cabin from 10 airports will have negative effects for the Gulf carriers. These bans, without a doubt, will provide advantages to U.S. legacy carriers. One can easily suspect that these actions may function as disguised government subsidies as well. These kinds of bans always help U.S. carriers economically more than the other air carriers serving traffic to U.S. from those parts of the world.”

Competition Means Money and Jobs for U.S. companies

One major problem with the big three’s argument comes in the form of their claims that the Gulf airlines, with their vastly different labor standards, present a threat to American jobs. The response to that has been for executives, such as Etihad chairman Sheikh Ahmed bin Saeed Al Maktoum, to point out how many American jobs their airlines are actually propping up.

He told CNN Money in 2017 that Etihad carries around 4,000 travelers into the U.S. each day, and has invested $140 billion that has supported more than a million jobs.

What he’s referring to is not simply American-based Etihad employees, but aircraft manufacturers and maintenance providers as well. For example, the CNN article pointed to numbers that show Emirates alone has ordered 346 Boeing aircraft worth $140 billion since 1991. Those include aircraft maintenance deals with General Electric.

“Those Gulf carriers contribute to bring the airfares down for the passengers and they are also good customers of Boeing, thus contributing to U.S. employment numbers immensely,” Turgut said. “Considering all aspects economically and politically I do not think it is easy to alter or amend the open skies agreement for national protectionism and continue to claim to be the leader of capitalism, meaning letting the free enterprise work.”

Etihad estimated that they supported more than 100,000 American jobs and added $10 billion to the U.S. economy in 2016 alone. The company also denied claims that they run in an unfair fashion and volunteered to open their books to the U.S. government.

Boeing is just one major player in U.S. aviation that supports open skies and in many ways, allowing the expansion of Gulf carriers’ routes. Large tourism destinations tend to work hard at attracting foreign airlines rather than fight them. Orlando and Las Vegas are two examples of airports that support a large number of jobs and benefit from the arrival of Gulf air carriers to their runways.

Connectivity Clouds the Issue

Another stumbling block to pulling back on open skies is the financial interconnectivity the airline industry. For example, Qatar Airways is now 10% owner of British Airways, which purchased Irish airline Aer Lingus in 2015 and is partnered with American Airlines. The CEO of Qatar sits on the board of London’s Heathrow airport.

Emirates are partnered with U.S. carriers Jetblue and Alaska Air. Delta is a business partner of Italy’s Alitalia, which benefits from investment from Etihad Airways. Essentially, this web of interconnected investment and business interest undermines the notion of limiting open skies agreements.

“You cannot defend globalization of the economy in every platform and then start complaining about it when it does not work in your favor,” Turgut said. “Other U.S. registered carriers such as JetBlue, Hawaiian, Atlas Air and FedEx are opposing the lobbying efforts of the U.S. big three airlines. The reason for that is they have different forms of cooperation with the Gulf carriers.”

It’s comforting for consumers to believe that it’s unlikely for anyone to seriously challenge open skies agreements, and it’s hard to imagine them going anywhere given the power of their proponents. As noted by Turgut, FedEx is a supporter of open skies agreements and a powerful lobbyist. It relies on open skies to manage its global network and one of its major hubs can be found in Dubai.

But Turgut cautions that the future of open skies may be more tumultuous than one would expect.

“Unfortunately, the world is headed in a less globalized direction due to a rising national protectionism rhetoric by an increasing number of political leaders,” Turgut said. “It will probably cause lighter versions of open skies in the near future. I think Gulf carriers are aware of this: that is why they have been looking for ways to maintain their U.S. market presence by either investing in airlines in Europe or negotiating 5th freedom rights with other states.

“Emirates have been flying non-stop from Milan to JFK since 2013 and will soon begin operating flights directly from Athens to Newark. I think these kinds of strategic moves by Gulf carriers have really concerned U.S. carriers. They are able to fly directly from Italy and Greece due to 5th freedom rights provided by those countries because both of them lack a strong national legacy carrier.”

The benefits of open skies likely still outweigh the risks, even for the U.S. carriers supposedly being threatened by Gulf carrier expansion. For this reason, U.S. carriers have attempted to reposition their argument and frame the issue as a question of fair trade practices. The regulatory bodies that oversee trade have no previous history or investment in open skies and are simply looking at the practices of the parties involved rather than the principles of the system in which they operate.

Do U.S. Carriers Have a Case?

Actually, yes.

Issues the U.S. carriers are looking to raise include the lack of labor standards in Gulf carriers’ home nations, the way in which the Gulf’s big three are expanding, where they are getting their money from and notably, direct conflicts of interest on airport boards and regulatory agencies.

For example, Emirates CEO Sheikh Ahmed bin Saeed Al Maktoum also serves as the Chairman of Dubai airports, President of the Dubai Civil Aviation Authority and President of dnata, an air services provider of in-flight catering, cargo handling and other services.

There is no equivalent in U.S. aviation for a single individual overseeing the Federal Aviation Authority, a major airline and the companies that provide the services it uses to make its offerings possible.

Additionally, the Gulf carriers spend billions of dollars on fuel, as any airline does. But in their case, those fuel expenses are often paid by governments who profit from the oil industries that call their nations home.

Given the fact that trade, which is perhaps President Trump’s most hardline protectionist issue, is becoming the topic at hand, the burden of proving to be beneficial to the American consumer has now shifted to the Gulf carriers and their partners. The legacy carriers know it and have no intention of letting the issue go.

As Delta Airlines CEO Ed Bastian told Bloomberg News in May of 2016 when looking at both Trump and then presidential hopeful Bernie Sanders’ campaigns: “In a future administration, candidly, this argument sells even stronger. With the rhetoric that’s going on about trade and the U.S. having been taken advantage of, I think there is a much bigger ear there than ever before. And we’re not going to stop.”

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