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, butÂ 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.
The upset parties haveÂ 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.
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.Â 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 numberÂ 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?
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.
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?Â 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?
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 impactÂ 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? Â 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?Â 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?
North of us, Air Canada managed to talkÂ the Canadian government into thinking that things wereÂ 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.Â 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?Â Thankfully for us passengers, the Gulf Carriers have a trump card:Â 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?Â 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?
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 correctÂ 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.
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 interestÂ in legislating profitability of both domestic and foreign corporations.
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