An Emirates 777-31H/ER sits in a delivery stall at the Boeing Facility at Paine Field. Photo  - Bernie Leighton | AirlineReporter

An Emirates 777-31H/ER sits in a delivery stall at the Boeing Paine Field – Photo – Bernie Leighton | AirlineReporter

It’s that time again. Time for me to give you some of my personal thoughts on a topic. Some might call it a rant.

You know the time when an American aviation lobby group decides that there’s just too much competition in the world? Not only is it the “Big Three” themselves, but also an aviation lobbying group backed by them. Combined, these companies and interest groups can bring a lot more lobbying firepower to the table.

Their argument, as is everyone’s against someone who does business differently than them, is the old fallacy of “if their costs are lower than ours, it must be the result of either unfair trade practices or shady accounting.”

This time, the argument is about how Gulf airlines Emirates, Etihad, and Qatar Airways may have received launch subsidies. Indeed, the argument goes further and states that they are continuing to receive subsidies to fuel their current expansion and operation.

Aerial photo of Etihad Airways' first 787-9 at Paine Field - Photo: Bernie Leighton

Despite paying for their own pre-clearance facility in Abu Dhabi, Etihad Airways is under fire from American lobbyists – Photo: Bernie Leighton | AirlineReporter.

The upset parties have gone as far as to hire forensic accountants (ignoring the fact that all of the Gulf Cooperation Council [GCC] airlines employ major, accredited auditing firms for their investor relations and accounting purposes), and while the actual report has not yet been released, the allegation is almost identical to the one that keeps Emirates and Etihad at a depressing thrice-weekly each into one Canadian airport. Allegedly, Emirates has received an eye-bulging $40 billion in subsidies and benefits from the government of the United Arab Emirates and the city-state of Dubai.

Because of this, the U.S. airlines and their lobbying group are asking the government for (yet undisclosed) limits on select routings to the United States. Apparently, the status quo (let alone further liberalization) will result in competition being undermined.

There are situations where competition can be undermined, yes. There are situations where, for instance, you can allow multiple companies to merge into three giant companies that operate in a de-facto oligopo… Wait a second, that’s American aviation!

From what I can tell, Emirates has never received forty billion dollars in anything from anyone (except maybe customer revenue). Emirates, yes, was started with ten million dollars in state funds… in 1985. Yes, they gave them another $88 million dollars to get some 727s and build facilities. Guess what? The state has been repaid almost 286 times over.

American Airlines Boeing 777-300ER at a cloudy JFK.

American Airlines Boeing 777-300ER at a cloudy JFK

How many times have U.S. carriers been given billions in tax breaks? I can think of some right after 9/11. Airlines in America also are routinely given incentives on their state taxes. Why is it okay for American airlines to be subsidized? If you are going to argue that subsidies distort competition, also take a look at how advantageous U.S. bankruptcy laws are compared to the rest of the world!

They go on to argue that the Gulf carriers benefit, unfairly of course, from lower staff costs. Which, when most of these executives were not working in aviation, was their exact rationale for outsourcing manufacturing and customer service jobs.

Time to take this argument a few steps wider. We’ve got a world now where free trade is king.

Right now, in the dead of winter, I am eating fruit grown in Central America, and typing on an Apple assembled in Shenzen, China. I fly around on an aircraft with components made in a number of countries.

None of these things fall under any tariffs any longer. Clearly, the loss of American jobs in this situation was outweighed by the public good of both lower costs, increased corporate profits, and overall economic efficiency.

Are airlines, then, a business, or a public good?

An Emirates Airbus A380 at the new concourse in Dubai.

An Emirates Airbus A380 at the new concourse in Dubai – Photo: David Parker Brown | AirlineReporter

There are some blurred lines on that front in this country. The Essential Air Service program and the Civil Reserve Air Fleet come to mind.

That’s a fault of the government. Blur the lines, you get ambiguity – ambiguity can easily be exploited. You can earn a profit providing a public good (for example, the SMRT corporation that runs all the public transport in Singapore) but the goals are vastly different from that of an American public corporation.

What is the duty of a publicly-held company, again? Say it with me now kids: maximize shareholder return!

The two can meet, yes. But you should never conflate arguments. Either you are in it to win it, and will fight to win and die trying, or you exist to fill a need that cannot be easily met by truly unrestricted free enterprise.

Let’s look at airlines. It’s such a hard space to classify, especially because of the high barriers to entry. How much does it cost to do a tech startup? $10 to register a domain name and untold, unaccounted dollars in unpaid labor thereafter? How much does it cost to start an airline? You need at least tens of millions of dollars locked down before a lessor is even going to talk to you. That, by definition, is a big barrier to entry.

A classing United Airlines Boeing 747-400. Photo by Blaine Nickeson.

A United Boeing 747-400 at HKG – Photo: Blaine Nickeson | AirlineReporter

It becomes even more muddy, because not every country plays by the same rules. For instance, some countries start airlines to bolster tourism. In that regard, those countries see their airline as a public good. Do they disrupt a competitive environment? Maybe. Most of these airlines start because their airports lack the starpower (read high-yielding traffic) to get other airlines to frequent their shores.

Here’s the thing. American airlines are a business when it benefits them, but anything that undermines their profits is a destruction of public good.

Remember what I said earlier about how the goal of a public company is to maximize shareholder return? What is cheaper? Spending $2.5 million dollars to whine to the government that you can’t compete against foreign competition, or actually compete with them and make American airlines class-leading once more?

Not messy enough, right? What if you had legalized anti-trust immunity with foreign carries?

A Delta Airlines 747-400 - Photo: Jason Rabinowitz | AirlineReporter.com

Delta Air Lines Boeing 747-400

Again, how that is legal always seems a bit strange to me. I get that it allows for some corporate efficiencies, but it starts to create situations where a competitive peril for one airline on another continent can now have a direct impact on your bottom line. Which, of course, means that peril must be stamped out even harder!

Those “evil” Gulf carriers are offering a shorter (often one-stop option) to cities in India, the Middle East, Africa, and Southeast Asia. How dare customers have that option! They must either connect in London, Paris, Amsterdam, or Frankfurt! WE DEMAND IT. Why?  They’ll fly a sacred American airline or designated superior European airline across the Atlantic. That’s why.

This doesn’t sound like it’s going to have any sort of net-negative on the U.S. economy whatsoever. Does it? If we approach air travel from a “public good” perspective – that is, the largest possible public good one can generate from air travel – it’s actually one to the overall economy; not the airline. How, exactly, does the economy suffer if people are flying more than ever, but just choosing a different airline?

Now before you cut me off and say layoffs; if an airline’s entire business is predicated on funneling passengers to another airline to fly them to one corner of the world, your business model needed to either evolve a decade ago or your company was doomed to fail in an actual competitive marketplace anyway. Isn’t it better to let the severance payouts fly before the employees are left in the lurch waiting behind the other creditors in liquidation?

Air Canada enjoys legislatively enforced protection from competition. Yet no one complains about their unfair advantages. Photo - Bernie Leighton | AirlineReporter

Air Canada enjoys legislatively-enforced protection from competition. Yet no one complains about their unfair advantages.        Photo – Bernie Leighton | AirlineReporter

North of us, Air Canada managed to talk the Canadian government into thinking that things were even worse. Why, if the Gulf carriers got to fly where they wanted to in Canada, when they wanted to (even if the routes didn’t work out), routes to rural cities in Canada might become unsustainable. That logic actually works in Canada. But, if it were up to me, I would never let Canada dictate aviation policy.

If a route is so unprofitable, why fly it? Thankfully for us passengers, the Gulf Carriers have a trump card: Trade instruments.

What employs more people and is, as a whole, better for America competing as a “knowledge economy.” An easily replaceable airline, or Boeing?

Do only American airlines order Boeing aircraft? Far from it, in fact, because they are so fixated on ancillary sales models and consolidation, most of the Boeing order book is actually international. When it comes to the really high-margin aircraft, guess where the majority of the orders are?

A Qatar Airways 787 landing at London's Heathrow airport. Photo  - Bernie Leighton | AirlineReporter

A Qatar Airways 787 landing at London’s Heathrow Airport – Photo: Bernie Leighton | AirlineReporter

Akbar al Baker, head of Qatar Airways, is a genius and actually has the guts to stand up to people trying to restrain trade unfairly to protect local businesses. To paraphrase him, “if you don’t want us to fly there, we don’t need your aircraft.”

He’s right, too. It’s not like the Gulf carriers are buying all these planes to show off. Take away their ability to compete, take away your ability to correct trade deficits and get tax revenue. It gets worse.

Restrict access to airlines, restrict demand, knock-on economic effects. It’s farcical to assume that if the current American giants all went under that no one would rise from the ashes to replace them.

Singapore Airlines was started entirely by the Governments of Singapore and Malaysia as MSA. No one complains about them... except Canada. Photo - Bernie Leighton | AirlineReporter

Singapore Airlines was started entirely by the governments of Singapore and Malaysia as MSA. No one complains about them… except Canada – Photo – Bernie Leighton | AirlineReporter

A good example of where to properly place priorities in the access vs. local airlines argument is to look at Singapore. The government of Singapore considers Changi Airport dramatically more important to their economy than Singapore Airlines. If SQ were to go under, they would see it as a result of market forces and expect other airlines to adjust operations into their hub.

What has really happened here is that the Gulf carriers are disruptive. Like so many industries do when faced with a disruptive innovation, they cry to the government rather than adapting. Has that ever worked long-term?

Let’s see these arguments for what they are – a blatant appeal to emotion.

Since airlines are a business with a focus on making a profit, it is the government’s job to see that there is a competitive market place. The government, however, should have no interest in legislating profitability of both domestic and foreign corporations.

 

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CONTRIBUTOR – SEATTLE, WA. Bernie has traveled around the world to learn about, experience, and photograph different types of planes. He will go anywhere to fly on anything. He spent four years in Australia learning about how to run an airline, while putting his learning into practice by mileage running around the world. You can usually find Bernie in his natural habitat: an airport. Email: bernie@airlinereporter.com.

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14 Comments
Terry Kozma

Hello,

As an economist I understand your article completely. However you left out an important area. It is in the National Interest of the United States to have strong U.S. owned and operated carriers. The middle east is the center of great world political problems and it is not wise to let these carriers for what ever reason to put out national carriers in danger. Open skies to these areas is a bad idea.

Dr. Terry Kozma
Strongsville, Ohio

Darius D.

Dr. Kozma – yes there are parts of the Middle East that are unstable however, the UAE is one of the US’s most erstwhile allies in the region and whilst you talk about ‘putting US carriers in danger’ – please consider what the result would be if Qatar, Etihad and Emirates decided to load the Airbus order books rather than the Boeing ones. How many jobs would be put at risk then? How about hotels unfilled due to fewer international travellers from more points across the globe?

The sad situation seems to be that if open competition suits the US – they are all for it and game on. If someone comes along with a better product and better service that people start to use in large numbers, then heaven forbid they eat some of America’s lunch.

While I respect Dr. Kozma’s opinion, I disagree. Bernie hit it spot on that the big 3 are a business when convenient. They are making record profits and soaking money out of passenger’s long post 9/11 blues. Airfares are up, then tack on the baggage fees, etc. Nothing dropped off when travel rebounded. I spend a lot of money both personally and professionally each year for travel. I’ve held my Delta PM for close to 8 years and I’ll make it again this year. But I’ll tell you what, let Qatar or Emirates fly where I need to go in the US, I’ll dump my DL PM in a hot minute. In the event we ever needed airplanes for wartime needs etc., there are PLENTY mission ready planes sitting in the deserts of this great land. Open the skies and let the competition begin. 🙂

I think this is one of my favorite posts ever on this site. Well done, Bernie.

Something else about Terry’s stance … he’s again making the assumption that, if the Big 3 falter, nothing will rise to take their place. I wouldn’t bet on that (which Bernie also mentioned).

My opinion: The Big 3 like the status quo where they don’t have to up their game to earn your business. I welcome increased foreign competition – it will force some change. It would be really nice to have an American carrier be a first choice on an international trip for once instead of a last resort.

Roland van Rijn

For as long as our major airlines (Delta, American, and United) do a poor to mediocre job in customer and in-flight services, nickel and dime on just about everything starting with change fees to checked luggage, and fly around with outdated aircraft with old and antiquated entertainment services, they will loose every time against modern airlines, regardless of their region or nationality, who are willing to reinvent and upgrade themselves to stay competitive in a world marketplace where customers ultimately decide who they use. Customers will gladly pay more if the experience and brand warrants it.

With respect Dr Kozma, while it may be in the US interest to have strong US owned and operated carriers, how is the blatant demand for protectionism that the 3 big US carriers are arguing for creating strong carriers? The intent of Delta etc is to try to maintain the oligarchy that they have, rather than adapting and improving their products to compete with the ME3. Heavens forbid consumers are offered a better product choice!

To paraphrase Emirates’ CEO, the US Airlines should stop complaining and start competing – if they improve their products and passenger comfort then passengers wouldn’t consider jumping ship to the ME3.

I think the point that is being missed here is – We, the US, are giving tax breaks to the Gulf carriers to lure them into purchasing American made wide body aircraft (Boeing). Meanwhile – American carriers are not receving the same tax benefits to purchase the same aircraft. That, fundamentally, it not OK. Additionally, the US carriers are doing exactly what you all are accusing them of not doing. Delta and American are spending millions annually on improving the customer experience. In the meantime, they still have billions in debt to pay off as a result of 911 and the decline in the economy. So, while I see the points that are being made, I fundamentally disagree with them and think they are unfair. The American carriers are working their tails off to both improve the experience and pay down debt, in order to purchase aircraft that are twice as expensive for them than the gulf carriers.

At best, a good try with a lot of assertions, but basically you’ve got misleading half-truths.
1. “Lure” them into buying US aircraft? Emirates (EK) is the largest customer in the world of the Airbus A380, which it flies into LAX, ORD, and JFK. Sure, it buys Boeing aircraft too (creating thousands of US jobs), but EK is not dependent on the Ex-Im Bank for financing. If EK or Etihad (EY) or Qatar (QR) don’t buy US aircraft, they’ll buy Airbus. The European Bank for Reconstruction and Development is just like the Ex-Im Bank. they’ll offer subsidies to purchase Airbus aircraft. So the Gulf carriers (and Chinese and Australian and Ethiopian and others…) STILL end up with subsidized aircraft, and the U.S. loses jobs.
2. Everyone appreciates the issue of the “level playing field.” That’s what the debate ought to be about. US carriers have benefited plenty from different subsidies and breaks offered by federal, state, and local governments. Chapter 11 anyone? No other country in the world allows airlines to shed debt and pension obligations like US airlines are allowed to do.
3. You are simply wrong about “debt to pay off as a result of 911 and the decline in the economy.” First, all of the major US carriers declared bankruptcy following 9/11 and dumped all their debt. The debt that they hold now are obligations that they took on after bankruptcy. Airlines for America shows that they’ve paid off $10B of that debt in the last 2 years. And every airline in the world has suffered from the global financial downturn that started in 2007. Some also had the trouble of dealing with SARS and Ebola.
4. Improving passenger experience. Like reducing the seat pitch in coach? I’ll grant that the US carriers are finally buying and flying new aircraft. But AA is still flying MD-80s, and DL is flying MD-88s (it still has 113 of them). The manufacturing run on those aircraft was from 1979-1999. When you’re at the very bottom of First World airlines in terms of aircraft and passenger experience, you have nowhere to go but up.
5. “twice as expensive”. Not a chance.

Finally: if the US walks away from air service agreements that it signed with these countries, why wouldn’t every other country in the world with which we’ve signed one believe that we’d walk away if AA/DL/UA feel threatened? What is fundamentally different from the Gulf States and Singapore, Hong Kong, and the Netherlands? And why hasn’t DL complained about Saudi Arabian Airlines (oh….SkyTeam partner?) or Turkish?

Dhairya Yadav

Which tax breaks are you talking about? Seriously? And why would US Govt offer THEM Tax breaks? And which tax breaks (if any) would give them 50% discounts on aircraft orders?
I see no merit in your statement.

Dhairya Yadav

Awesome post.In India too Airlines like Jet Airways (Not now, now they are partner of Etihad) and Air India cries due to tough competition from QEE. They said that these carriers are doing unfair trade practices and blah blah. However, 9W and AI both forget how big lobbyist they are. In mid-90s , 9W and other private carriers lobbied heavily to restrict growth of new private carriers. The really stupid and non-sense rule was passed by Govt, called 5/20 rule. According to this rule, a airline has to be 5 years old and must have a minimum of 20 aircraft before getting permit for International Ops . This rule is a burden on Indian aviation and prevents growth even today. Luckily, the new Govt understand the stupidity of the rule, and has promised to abolish the rule . So, all is not lost for us.

Ken S.

You write: “Clearly, the loss of American jobs in this situation was outweighed by the public good of both lower costs, increased corporate profits, and overall economic efficiency.”

On what basis do you make that claim? It is certainly not clear to me – or, I would bet, to tens of millions of unemployed Americans. In fact, it is pretty clear to me that the opposite is true.

patrick

For the shareholders and investors

Nick A

When I read all the articles and news about open skies policy. We all are missing the main factor, which is “WHY” passengers prefer to travel on Gulf carriers. Fact is simple the price and convenience. When we look at the geographical location of Gulf carrier’s hub it is close to Indian Sub continent and their service is basically cater all kind of passengers. We must not forget to compare our service and prices with them. Second role is from the Government’s. Our governments should not allow more than a certain number of flights into our country, then comes to service and convenience offered by our carriers. Do they offer direct flight from North America to India, the answer is NO. Also our jobs are protected and unionized, while in Gulf I had an opportunity to speak to few people and the bottom line for their answer was that we work as a slave. Gulf carriers pay really well to their pilots but they have no job protection. As for their answer to buy Boeing or Airbus aircraft, well there is no third champion in the world who can make aircraft upto their standards so they have no option but to buy these two birds.

Bottom line, we need good analyst who can compare both operations top to bottom and bring all the facts on the table. No matter what North American and European carriers has to bring their standards upto Gulf Carriers so they can attract more customers and beat their prices.

Wido Weber

As a former Emirates pilot I am concerned that the current debate is missing a crucial point. The competition is indeed unfair when it comes to regulatory oversight and effective labour laws.
Emirates operates its long-haul fleet with unprecedented “crew productivity” at a crew factor near 7. That is impossible to match for any major Western airline. And it shouldn’t be possible. Well rested crews are the last line of defence when it comes to flight safety.
The issue reported in the WSJ on April 9, 2015 is still not rectified. I urge the FAA and EASA to work more closely with the GCAA to ensure a level playing field where it matters most to the traveling public: The well-being of the crews entrusted with hundreds of lives on every flight.

The crew factor is the number of pilot teams (1 Captain and 1 First Officer) per aircraft. Emirates presently operates about 250 aircraft with about 3,850 pilots, some of whom are in training, in mangement or on sick leave. That equates to a crew factor of just over 7 in an operation that needs a lot of crews due to its long haul and ultra long haul nature.
Major Western airlines need a crew factor of somewhere between 11 and 13 for the same kind of operations. So it is very easy to see that Emirates pilots work a lot more hours and get a lot less sleep than their peers. This is a ticking time bomb for flight safety and crew health.
It is only possible in the legal environment of the UAE. Labour Unions are forbidden. The chairman of Emirates Airline sits on the board of the GCAA – that’s the authority which regulates aviation in the UAE.
The outcome is obvious. For example even the blatant malpractice reported in the WSJ on April 9, 2015 continues as before. Only a single piece of paper evidence has been removed from the process to cover it up.
In my opinion Air Safety and Crew Health should be governed by an independent authority. If the UAE is unable to do so due to the nature of their legal system then it should be done for them. The FAA and EASA should demand a complete 12 month record of all pilot duties for any aircrew operating into their jurisdiction. The flight duty and rest periods should meet EASA or FAA standards. I am sure the passengers believe that kind of regulatory supervision already exists for the number one airline brand. It doesn’t today.

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