US Big 3 vs Gulf 3 a year on: open skies, playing fields and policy: CAPA Airlines in Transition


It is more than a year since Delta, United and American Airlines published their 'White Paper' alleging state subsidies to Emirates, Qatar Airways and Etihad. CAPA's Airlines in Transition (AIT) event in Dublin assembled a panel of senior industry figures moderated by John Byerly, a former Deputy Assistant Secretary for Transportation at the US State Department, to review the arguments.

The US big three claimed that subsidies to the Gulf three distorted the market. They called on the US government to open consultations under the relevant bilateral air services agreements and, in the meantime, to freeze new passenger services. A ponderous bureaucratic process to examine whether action should be taken is still under way. European airlines have also been dragged into the debate.

At the same time, the Gulf airlines have continued to add and announce new routes to the US. Ultimately, the US big three's aims contemplate the termination, or modification, of the relevant 'open skies' bilaterals, which allow the Gulf airlines unlimited capacity on routes to the US (the bilaterals reciprocally offer the same to the US airlines). From airlines faced with unexpectedly effective competition this cynical approach was little more than an attempt to further distort an already protective bilateral system.

  • The US big three airlines (Delta, United, and American Airlines) have accused Emirates, Qatar Airways, and Etihad of receiving state subsidies, distorting the market.
  • The US big three have called on the US government to freeze new passenger services and review the open skies agreements with the Gulf airlines.
  • The European Union has taken a more liberal approach to aviation, negotiating bilaterals with non-EU countries on behalf of all member states.
  • Not all US airlines support the big three's stance, with JetBlue, Hawaiian, Atlas, and FedEx opposing their position.
  • European airlines are divided on the issue, with Air France-KLM and Lufthansa supporting the US big three, while IAG denounces their anti-Gulf rhetoric.
  • The dispute raises questions about the future of the open skies concept and whether a multilateral framework, such as the World Trade Organisation, would be more suitable for market liberalisation.

See related report: Gulf airlines under fire. Aside from the rhetoric and dust flying, what's the underlying agenda?

Open skies liberalisation has been patchy, in spite of benefits

The majority of participants in the global aviation sector agree that liberalised market access and free competition provide benefits to the consumer, in terms of growing the market, increasing choice and connectivity, and lowering prices.

Nevertheless, progress towards market liberalisation has been patchy, and has reached different stages in different parts of the world. The internal market within the European Union and the other signatory nations to the European Common Aviation Area is the only fully liberalised international aviation market.

However, led by the US open skies policy that started in the 1990s, there has been a considerable reduction in the restrictions on market access, capacity and fares in many other international markets. These adjustments are typically effected on a bilateral basis.

This has prompted bilateral air services agreements between nations to evolve to a point where there is free competition for routes, at least where there is an open skies-style bilateral and with respect to the airlines of either party to the agreement.

These liberalised bilateral agreements stop short of a truly free market as they continue to place restrictions on ownership and control, typically confining access on international routes to airlines from the respective nations. Perhaps the term 'more open skies' would better convey the relativity of the concept than the absolutism of 'open skies'.

The European Union has taken the concept further by negotiating bilaterals with non-EU countries on behalf of all member states. It is now planning to go further still by potentially negotiating with blocs of nations outside the EU, starting with ASEAN (Association of South East Asian Nations).

Daniel Roeska, VP Business Development at Lufthansa, holds the view that there is further scope for the bilateral system to develop in this way. Speaking at AIT, he envisaged scenarios that would "bunch countries together and mandate them to negotiate".

Of course, there are also still plenty of bilaterals around the world that continue to control capacity, to designate which airlines can operate and even to regulate prices, but the trend of the past two decades has been towards liberalisation.

Forced review of open skies; not everyone agrees

If the US were to take dramatic action as a result of pressure from the big three, such as withdrawing from its bilateral open skies agreements with the United Arab Emirates and Qatar, this could cast a dark shadow over the entire open skies movement.

Not all US airlines have sided with big three on this issue. Led by JetBlue, Hawaiian, Atlas and FedEx, a significant group has opposed their stance. This may have been instrumental in preventing the US big three from achieving an immediate victory, by pointing to the possible impact on open skies more widely.

It is also relevant to note that the US big three have not been able to demonstrate that they have been damaged by the alleged subsidies to the Gulf three. Nevertheless, the attack on the Gulf three, and on the bilateral agreements under which they operate to the US, risks undermining the whole approach to open skies.

JetBlue's Senior VP Government Affairs & Associate General Counsel, Robert Land, said at AIT, "if you accept this issue, what about other open skies?"

The open skies concept has well served the interests of those US airlines now seeking to squeeze it. Their action has caused the US to review the entire concept.

See related report: US attack on Gulf airlines may prove a tragic miscalculation by Delta & partners as Mexico rebels

The US big three are not alone; Europe's big three are divided over the Gulf issue

The position of the US big three has received backing from two of Europe's big three airline groups, namely Air France-KLM and Lufthansa. They are also lobbying regulators at the national and EU level to restrict competition.

Their hubs are more exposed to Gulf competition on routes connecting the US and Asia Pacific or Middle East than are the operations of the US big three. Notably, however, Europe's other large legacy group, IAG, has publicly denounced the anti-Gulf rhetoric of the US big three.

See related reports:

The hand of the anti-Gulf lobby is visible in the new EU Aviation Strategy's promise to "consider measures to address unfair practices from third countries and third country operators".

See related report: New EU Aviation Strategy avoids key issues as Asia Pacific and Middle East claim the future

Seeking the right framework, but it might not be WTO

The spread of the open skies concept across the world, and its occasional embrace of groups of nations as if they were one have led to questioning about whether a web of bilateral agreements remains the right framework for bringing about even greater liberalisation.

Speaking at AIT, Daniel Roeska, VP Business Development at Lufthansa, agreed that consumer choice was key. "We need global open skies," he said, "but we need to figure out how to get there".

For other global industries, the multilateral World Trade Organisation (WTO) regulates international trade between participating nations. Aviation is currently not treated by the WTO (although there are provisions to include aviation at some point in the future). Broadly speaking it is based on free trade principles, or at least on principles of open and fair competition, and it also includes a dispute resolution process.

However, as a result of difficulties in reaching agreement over agricultural subsidies the WTO has lost some momentum, and this has led to an increase in bilateral free trade agreements in recent years.

Moreover, the issue of national sovereignty remains an important concern for many governments and this is an obstacle to any attempts to move aviation towards a global multilateral framework for market liberalisation. Abdul Wahab Teffaha, Secretary General of the Arab Air Carriers Organisation (AACO), said at AIT that "issues of fair competition and level playing fields need to be decided between sovereign states".

Europe must not lose its way on the path to further liberalisation

For European Union countries, the EU has effectively assumed the role of the sovereign state for many bilateral air services agreements. Each time the EU signs a new bilateral with an open skies-style approach it advances the liberalisation of aviation markets more rapidly than was the situation where each member state only had its own bilaterals.

Because of this, and the EU's experience with the internal market, it is still a leader in aviation liberalisation. However, more recently, the raising of protectionist voices in Europe has slowed the EU's momentum in advancing its liberal credentials.

It has a difficult task in balancing the views and needs of the various industry participants and its member states, but Europe must not lose its way on the path to further liberalisation.

Europe's airports are more united than its airlines in supporting the open skies approach. Airports benefit from the additional traffic volume, regardless of which competing airline brings it to them.

Their representative body is ACI Europe, whose Director General Olivier Jankovec, said at ATI, "We need to get open skies quickly if we are to maintain relevance, as Europe, in aviation. There is more to gain as Europe to liberalise with emerging markets, before emerging markets start liberalising with each other."

"A level playing field is in the eye of the beholder"

At the heart of the dispute is the question of what constitutes a level playing field. The anti-liberalisation agenda always includes a plea for this even, metaphorical, idyllic green lawn. However, as AACO's Mr Teffaha said at AIT, "a level playing field is in the eye of the beholder".

Related to this is the question of whether or not there has ever been a level playing field. An obvious example of an inherent competitive imbalance between airlines, and one that has always been there, is geography.

Geography can give a natural advantage, as a result of there being a large domestic market, or from the suitability of the nation's hubs for connecting third markets. As Mr Jankovec said, "Geography is the biggest cause of an unlevel playing field, but regulators can't intervene there."

The development of the Gulf hubs has been based on their airlines' networks taking sixth freedom connecting traffic to/from an increasingly large number of global destinations. They are not the first airlines having a small, or having no, domestic market to base their network growth on sixth freedom traffic.

"KLM did it with 747s from the Netherlands," said Zhihang Chi, VP & GM North America at Air China. He added that Air China had benefited over the past 10 years form a more liberal US-China bilateral. This had taken Air China's weekly flights to the US from 16 in 2004 to approximately 75 now.

Dr Chi noted that Air China was mostly a bystander in the debate between the Gulf three and the US big three, but added, "we don't want constraints and restrictions on further growth."

Any reversal of the open skies agenda that might result from changes to the US-Qatar and/or US-UAE bilaterals could certainly have repercussions for other agreements. China's strong government support for aviation infrastructure arguably creates another imbalance in another playing field.

It is worth considering whether China's fast growing international airlines could become the next targets for the US big three's protectionist weaponry.

Gulf airlines are not the only beneficiaries of state funds

The role of state subsidy to airlines is also central to the dispute. However, the definition of a subsidy can be (and frequently is) re-interpreted to suit the complainant. The Gulf airlines have received funds from their governments, but so have the vast majority of national airlines across the globe.

Sometimes these funds have been classed as investments, sometimes as subsidies, and sometimes the distinction has not been clear, in fact. Nevertheless, the only things that have made the Gulf airlines different in this respect have been the rapidity and success of their strategic development.

US legacy airlines have evolved differently from the larger legacy airlines in many other countries in that they have not been through a phase of state ownership, but their national regulatory framework has given them vital financial aid through the Chapter 11 bankruptcy process, for example.

All airlines need start-up capital, and often further investment at other stages of their development. Another question is whether the US big three are saying that no government should be allowed to invest in a national airline.

Transport provides wider economic benefits

Moreover, most countries, even the US, provide surface transport infrastructure and operation that is to a greater or lesser extent funded from the public purse, whether at a national or municipal level.

This is because transport provides wider economic benefits (or externalities, to use a term favoured by economists) than those accruing solely to the transport operator and its direct investors.

This applies to aviation as it does to other modes of transport. Nobody argues that public funding of infrastructure more broadly should be banned. Only (some) airlines try to use this argument, but even then they mainly use it as a weapon against another airline that poses an uncomfortable competitive threat.

Gulf states have enhanced their geographic advantage with supportive aviation policies

Nevertheless, this is not just about government funding. It is also a matter of government policies towards aviation, which can have a significant impact on the industry, regardless of funding.

In the Gulf, government policies help aviation in many ways, including those relating to surface infrastructure provision and demand stimulation through taxation policy. The Gulf states have overcome their lack of significant domestic aviation markets and relatively weak links with the rest of the world in the past.

They have achieved this by exploiting the advantage afforded by geographic location and enhancing this with supportive aviation policies. Strategic vision from their airline executives in developing a new version of the old sixth freedom model has also been important.

By contrast, European and US authorities have reversed the process. The absence of suitable aviation infrastructure and the sometimes punitive nature of economic and fiscal regimes towards aviation (particularly in Europe) have eroded the "natural advantages" of large domestic markets and strong historic, cultural and trading links with other parts of the world.

JetBlue's Mr Land believes that the US industry should focus its lobbying energies on calling for more supportive and integrative strategies from its government. "The US needs a national airline policy," he said.

Mr Jankovec summed up the contrasting attitude of European governments and regulators by comparison with that of governments in the Gulf. "Europe doesn't have aviation policies to recognise the positive externalities of aviation", he said.

European and US aviation must make a better case

These points were well made, but aviation in the US and Europe cannot put all the blame on governments and regulators. It is also necessary for the industry to be more forceful in explaining why policies must be more supportive.

"We have done a terrible job in explaining the value of air travel to our governments," admitted Lufthansa's Mr Roeska.

This must change. Only then will governments in Europe and the US wholly embrace a more supportive approach to aviation policy. This would help to focus their airlines on fighting Gulf competition through their own product and efficiency improvements, rather than through seeking to use the bilateral system to raise protectionist barriers.

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