US-Gulf airline conflict: peace with (almost) honour

Summary

• Delta says the integrity of open skies remains intact as Qatar has agreed to a "pause" in fifth freedom flying.
• Fedex says that the pause is tricky, given that Qatar Airways doesn't engage in fifth freedom operations.
• Now that an agreement has been reached with the UAE, is the debate really put to rest?

Delta claimed victory with the Qatar deal and stresses 'the sky has not fallen'

To recap briefly, as part of a broader agreement reached by the government of Qatar and the US in early 2018, the Qatari government agreed that Qatar Airways would release audited financial statements within a year, would become more transparent regarding transactions with other state-owned enterprises, and would guarantee that the airline had no plans to introduce fifth freedom flights.

Given that was the first movement on the debate since American, Delta and United launched their campaign in 2015 alleging that Emirates, Etihad and Qatar were being illegally subsidised, the Big 3 apparently believe they have scored an important victory.

Speaking at the recent 2018 CAPA Americas Summit in Houston, Texas, Delta managing director of Government Affairs Robert Letteney said that the agreement with Qatar was "great news" that the US government was addressing the issue, clearly leaving open skies intact, and in fact: "The sky has not fallen".

Mr Letteney said he believed the agreement accomplished three key things.

Firstly, the government recognised that subsidies absolutely have an impact on a fair and equal opportunity to compete, "which is part of open skies". Secondly, as part of Qatar's pledge for more transparency, the agreement ensures that transactions with state-owned enterprises are supposed to be made on commercial terms.

And thirdly, he believed, it has accomplished a "pause in fifth freedom flying, which is what we had been asking for until subsidies are addressed", he stated.

Future of open skies agreements at the CAPA Americas Summit

FedEx: you cannot pause something that is not being done

It is true that the agreement reached between Qatar and the US shows that open skies agreements do not appear to be in jeopardy, but as FedEx managing director of regulatory affairs Nancy Sparks stated at the CAPA Summit, there is a problem with use of the word "pause" in fifth freedom operations. "In the Qatar situation there were no fifth freedom flights being operated, so you cannot pause something that is not being done."

Qatar Airways briefly operated a Doha-Geneva-Newark service largely before the airline had suitable long range aircraft. Therefore, the "pause" in fifth freedom operations was a small concession - if a concession at all.

See related report: Gulf-EU open skies: US dispute, fifth freedom and EU negotiations

Ms Sparks remarked that "the tricky part" was Emirates' fifth freedom flying. The airline's launch of Dubai-Milan-New York JFK in late 2013 was a major factor in the Big 3 launching their subsidy campaign. Delta has stated that that service was "ground zero" on fifth freedoms, noting "we have to stay vigilant to get fair skies, not open skies". Since that time, Emirates has launched fifth freedom service on a Dubai-Athens-Newark pairing, which has raised concerns by United.

This attitude towards fifth freedom flying is not necessarily consistent. United's Star Alliance partner Air China recently inaugurated fifth freedom service from Houston to Panama City with the flight originating in Beijing. JetBlue, a vocal opponent of the Big 3's subsidy campaign, highlighted United's criticism of Emirates for the launch of Athens-Newark, which United does not serve year-round, while remaining silent on state owned and subsidised Air China's fifth freedom flights.

See related report: Airline traffic rights: JetBlue targets United over Star partner Air China's fifth freedom plan

The Qatar-US agreement, and the later agreement with the UAE, may quell the fifth freedom debate for now, but the larger issue of what constitutes a subsidy is far from resolved.

(Note: As recalled at CAPA's Airline Leader Summit in Dublin on 17-May-2018, there is a particular irony in the Big 3's argument over fifth freedom rights. When the original open skies agreements were being negotiated between the US and the UAE and Qatar, neither Gulf country had an independent functioning international airline, although each wished to keep the avenue open for the future. The US insisted however on the two countries accepting fifth freedom operations - leaving the way open for US airlines to occupy the partial vacuum that existed. It was only the insistence of the US government that caused fifth freedom rights to be included.)

After initial confusion, the deal with UAE complements Qatar's agreement

Following interpretations of the agreement reached with Qatar offered by Delta and FedEx, the US and UAE brokered a deal in early May-2018 that is broadly similar in structure to the pact with Qatar. However, there was initial confusion over the content of US agreement with the UAE.

Assistant to US President Donald Trump and director of the White House Trade Council Peter Navarro initially stated that the UAE had committed to "freeze" fifth freedom flights for passenger airlines only. Those comments clearly ran counter to a side letter negotiated in the agreement that emphasises no changes to the US-UAE open skies agreement were made, and Emirates and Etihad, like Qatar, confirmed they have no current plans to expand fifth freedom operations to the US. Eventually, the White House issued language that mirrored the contents of the agreement.

But, in the context of what has been largely a public relations exercise, it was important that the news which most people would read was Mr Navarro's statement, rather than a dry - but accurate - clarification from the bureaucracy. The reality is that the terms of the existing bilateral persist - and that includes the right to operate fifth freedom services.

Emirates and Etihad have committed to more financial transparency, even as it was acknowledged in the latest negotiations that Emirates had actually been transparent in its reporting for many years. Etihad has committed to publish financial statements once its restructuring is complete.

Both sides claim victory as Aeromexico axes Barcelona plans, citing subsidies

Both sides in the Gulf subsidy debate have claimed victory, with American, Delta and United (through their lobbying group the Partnership for Fair and Open Skies) heaping praise on the Trump Administration for reaching an agreement that protects jobs and upholds US trade deals against unfair foreign business practices.

Whether or not the semantics of a freeze versus a pause in fifth freedom flying have been ironed out, what exactly has changed in the open skies agreements with Qatar and the UAE, and what is the duration - or real meaning - of that "pause"?

Etihad is currently not in a position to contemplate fifth freedom flying, and that has never been a real focus for the Big 3. Emirates is opting to turn its attention to other regions for fifth freedom operations; the airline recently gained approval for fifth freedom flights to Mexico City from Spain. That prompted Mexico's flag carrier and Delta JV partner Aeromexico to announce they would abandon plans to relaunch service from Mexico City to Barcelona. Aeromexico was funding the service to Barcelona by paring down flights to Shanghai due to unfavourable slot times.

Perhaps with some prompting from its JV partner, Aeromexico explained that it was cancelling planned service to Barcelona due to "said airline" enjoying subsidies and benefits from its government, "which constitute an unfair competition against the rest of the airlines in the industry". Delta, which has been one of the most vocal critics of Gulf airline subsidies, has a 49% stake in Aeromexico, and the two airlines operate a US transborder immunised joint venture.

The US had to navigate larger issues in negotiations with the UAE and Qatar

The Big 3's subsidy campaign has always placed the US government in a delicate situation. Indeed, as a summary of the recent US-UAE negotiations stated: "The delegations further recognised that the UAE is the largest importer of US goods in the Arab world, the largest international buyer of US commercial aircraft, host to over 1,500 American firms and a significant source of foreign direct investment into the United States, supporting the growth of both economies".

Data from CAPA's fleet database show that Boeing represents 61% of Emirates' aircraft in service and 77% of the airline's jets on order. For Etihad, the US airframer represents 60% of its aircraft in service and 53% of its orders.

During the latest negotiations, the US and UAE also acknowledged their long-standing collaboration in working to defeat ISIS and Al Qaeda and securing the region. The US also had to navigate the open skies negotiations in a manner to ensure that Boeing's interest and greater geopolitical ties remain intact, not to mention the integrity of FedEx's Dubai hub.

During the past year the UAE, Bahrain, Egypt and Saudi Arabia have imposed embargoes on Qatar, after accusing the country of supporting terrorism. Perhaps now, more than ever, Qatar needs US support, and the agreement to concede to accepting something that was currently not occurring was an obvious accommodation to make.

The remaining burning question: whether the subsidy debate has been permanently laid to rest.

Now that airlines from the UAE and Qatar have essentially agreed to a pause in fifth freedom flying, is the subsidy debate really over, or has each side taken its own 'pause' while claiming victory in the process?

The positive outcome from those negotiations is that the integrity of open skies agreements remains intact, despite the anti-open skies ripples the campaign created around the world. However, the declarations of victory could be somewhat premature. Once the Gulf airlines resume their growth to the US, the subsidy issue could well raise its very ugly head once again.