As the US-Gulf airline dispute loses momentum with the American government, the big Middle East aeropolitical debate will now shift across the Atlantic to Europe, where the European Commission has a mandate to try to negotiate an open skies agreement with Qatar and the United Arab Emirates, as well as other countries/blocs, including Turkey and ASEAN.
Qatar Airways CEO H.E. Akbar Al Baker gave a keynote presentation at the recent CAPA-ACTE Global Aviation Summit in Amsterdam and addressed the subject of the EU mandate. Mr Al Baker called for unquestionable third and fourth freedom liberalisation and eventual fifth freedom liberalisation. The devil as always is in the detail; the non-EU airlines in the negotiations are sceptical about how the EU will define a "fair competition" clause, and whether it will be left abstract enough that "fair competition" could potentially be used against airlines in a way they have not envisaged. The Brexit referendum could result in the EU negotiating side losing the UK, whose liberal views have balanced those of the more protectionist France and Germany.
Mr Al Baker wants to lead the charge on defining "fair competition", and warned the conference that Qatar Airways and peers must be accepted as mainstream. He said: "The European aviation community...is not a closed club. New members are joining all the time and keeping the progress moving forward".
Qatar CEO Al Baker calls for 3rd/4th and 5th freedom liberalisation
Mr Al Baker addressed the CAPA-ACTE Global Aviation Summit in Amsterdam on the subject of liberalisation. The State of Qatar enjoys open skies with the United States – one of the few major markets where Qatar has a liberalised agreement.
Whereas the major US airlines and labour groups were calling for a check on open skies access, European governments have been (somewhat) able to limit the growth of Gulf airlines by restricting traffic rights, and not expanding bilaterally agreed levels.
Qatar Airways CEO Akbar Al Baker addresses the CAPA-ACTE Global Aviation Summit in Amsterdam: 27-Oct-2016
Mr Al Baker made clear that liberalisation was the objective: "Our goal is very simple, to gradually and surely open the skies between the remaining restrictive European markets and my country, Qatar". Mr Al Baker explained that his framework for liberalisation was first removing restrictions on flights to/from Qatar and then being allowed beyond rights: "Markets should be open to each other at least for third and fourth freedom rights, with eventual fifth freedom flying rights granted".
Calling for unlimited third and fourth freedom rights is controversial for most European airlines – but not necessarily airports, especially those in secondary markets that do not see strong nonstop connectivity from their national airline. Unlimited fifth freedom rights is a proposition that European airlines (and their North American partners) probably cannot fully comprehend.
It was Emirates' entry on the fifth freedom Milan Malpensa-New York JFK route that galvanised major US airlines to complain about Gulf airlines. (This was not the first Gulf airline fifth freedom from Europe to North America – Emirates used to operate from Hamburg to New York; Qatar had flights too – but it attracted more attention.)
Delta vice president of revenue Glen Hauenstein has observed that Emirates' new Milan-JFK service is “kind of ground zero on fifth freedoms, and we have to stay vigilant to get fair skies, not open skies”.
State of Qatar was the first to agree to EU open skies mandate
The EU has mandates to negotiate open skies with states, including the UAE, Qatar, Turkey and the ASEAN bloc. The UAE and Qatar, home to the three Gulf network airlines, are expected to produce the most contentious negotiations. Mr Al Baker noted that Qatar was the first country to agree to this latest round of talks, and framework discussions were held between the EU and Qatar in Sep-2016.
The UAE and Qatar negotiations (done individually with the EU) are expected to be the most contentious because of the degree of growth potential that airlines from those countries have in Europe. Mr Al Baker voiced scepticism at how the EU's talks are faring with countries home to fast-growing airlines that pose a potential threat to European airlines – but benefit to Europe at large. At the other end of the scale, ASEAN is expected to be relatively uncontroversial.
Mr Al Baker's reference that Qatar was the first country to sign up for the talks is of note. Qatar was the first to do so, and not the UAE – which has two superconnector airlines and might have been thought of as a more pressing candidate to agree to the talks. A CAPA report has previously explored some of the dynamics in the UAE:
The UAE itself appears divided: Emirates, the most commercially-oriented of the Gulf airlines, is unlikely to be willing to accept any condition on growth. Emirates and other airlines fear that the conditions will be ambiguous, and thus a liability for when a protectionist state wants to stop Gulf airline growth. Emirates, largely by virtue of being the first Gulf network airline, has the largest European presence. It is content with its size to some degree, and does not regard incremental growth opportunities from EU open skies as being worthwhile if it comes at the expense of potentially jeopardising its entire network by agreeing to vague clauses.
Emirates president Tim Clark told Reuters in Jul-2016: "It is in the view of Emirates that we have more in the current agreements than we anticipate the mandate giving us...but we have a very high bar, and I guess the government and the airlines would be interested to know how the mandate would improve that."
Etihad, however, has reason to be more agreeable to change, to allow it to secure the future of its investments in EU airlines. Etihad has routinely had conflicts over its investment in airberlin, which competes in Lufthansa's backyard. Etihad also has a major presence in Europe via Alitalia, but it is more difficult for Air France and Lufthansa to take issue with this investment.
The negotiations are also complex because of issues on the European side. There are questions about whether the talks are genuinely motivated, or merely designed to draw out the discussion. The latter scenario brings benefits to airlines seeking to protect "their" markets, because while the EU talks are under way EU member states cannot negotiate individual air service agreements. This effectively puts a freeze on air service agreement expansion until the talks conclude.
The UK has been a liberalising voice and counterweight to France and Germany. The UK's possible exit from the EU following the Brexit referendum may mean that Gulf airlines lose a liberalising ally on the European side, and that France and Germany's views will dominate over smaller European countries that may favour liberalisation.
Qatar Airways Chief Executive Akbar Al Baker: 27-Oct-2016
EU-Gulf open skies negotiations rest on the meaning of 'fair competition'
If the EU-Gulf talks are genuinely aimed at a more liberal environment, the central element of debate will be over the phrase "fair competition", which would permit open skies - but only if it is fair competition. There are two essential matters about the phrase "fair competition" in liberalisation agreements.
First is the definition: the framework of "fair competition" will likely be subject to intense debate as the sides take a different view on what "fair competition" is, and how to evaluate it.
The complexity of this was seen in the US-Gulf spat where the US side, taking up the charges, levied allegations of subsidies that Gulf airlines refuted – either because they did not exist, or because they were not subsidies but structural advantages.
One advantage was airport charges. They are lower in the Gulf than in the US but benefit any airline using that airport, and in some instances are comparable with, or higher than, charges at airports more frequently visited by US airlines – such as in Asia. The Gulf airlines not only refuted the subsidy allegations but moreover pointed out advantages and effective subsidies that US airlines receive. This debate over what a subsidy is and is not gives rise to the saying "my advantage is your subsidy, your subsidy is my advantage".
In a European context Air France and Lufthansa, which have restrictive labour groups, may argue the more flexible policies and lack of unions in the Gulf constitute unfair competition. As CAPA has observed previously, this logic is akin to bringing every operator down to the lowest common denominator, rather than allowing efficient business models to succeed.
"Fair competition" may have to be defined in extreme detail. Yet it is difficult to see both sides coming to terms about this as each side refuses a definition that their competitor is willing to agree to. Major European airlines such as Air France and Lufthansa do not want Gulf airlines to have uninhibited access to Europe based on their current operating models. For Air France and Lufthansa any fair competition definition would be shaped in a way to restrict growth, or make Gulf airlines inefficient.
One of nine tasks in Air France-KLM's new management plan "Trust Together" calls for the group to place significant emphasis on lobbying at the European level "to establish equitable competition with the Gulf State and low-cost carriers".
Gulf airlines are interested in genuine open skies, in fact, just as KLM and the Dutch government were when they perfected the sixth freedom model in the 1970s.
But the Gulf airlines but would not agree to a "fair competition" definition that precludes growth or forces them to make cost-ineffective changes to their business model. In the case of Emirates, which already has very generous European access with some exceptions – France, a cap on the number of German cities – the additional access to be gained under a potential EU open skies deal would not be worth the changes necessary to abide by a fair competition definition that is acceptable to Air France and Lufthansa.
The second big problem about "fair competition" is that meaning can be in the eyes of the beholder. There is concern that after the signing of an agreement the "fair competition" definition would be reinterpreted. Exactly as American/European airlines have done about technical terms relating to US-Gulf open skies, or a clause about labour in EU-US open skies that has been employed as the main argument to stop Norwegian Air International from receiving a US operating licence. So even if the talks are genuine and a definition on "fair competition" can be agreed, there is concern it could later be used against Gulf airlines.
Mr Al Baker noted the contentions about needing to define fair competition: "I expect we will spend quite a bit of time exploring the meaning of the European Commission's list of terms regarding 'fair competition'. We want to make sure that it is not biased and it's not cornering the competition from my region".
Mr Al Baker offered his own interpretation of fair competition: "We approach the principal of fair competition very simply: fair access to markets, competing for market share based on products and services of what the customer wants and is willing to purchase".
As happens in a good debate, Gulf airlines in their aeropolitical dealings have defended themselves while also turning the tables and noting the irony and contradiction of the accusations often put against them. Mr Al Baker did exactly this, briefly reflecting on the irony of Gulf states and others having to subscribe to "fair competition" from European airlines that have not followed it themselves: "Europe is home to some of the world's oldest and most respected airlines with a history of competing fiercely, and not always aligned with the spread of fair competition".
The debate around defining fair competition is similar to the US-Gulf dispute about a "level playing field". As CAPA has previously explained:
The White Paper seeks a fair marketplace, a “level playing field”. Such a simple concept as “fair” should seemingly be open to objective analysis. But far from it; fairness is highly subjective; and its definition changes.
In the network of bilateral air services agreements – where “open skies” is a relatively recent development – the original use of “fair” was originally contained in the template wording that required giving all airlines a “fair and equal opportunity to operate”. This was the original “level playing field” that has since proved so elusive to pin down.
What that effectively did was to handicap the more powerful airlines. Obviously, in this reading, it was considered “unfair” for the relatively massive US airlines, made powerful by access to a large home travelling market, to go head to head with a small airline from Ireland or the Netherlands, or Australia, or even the UK. The fear was US airlines would quickly have prevailed all over the world, just as so many other brands have succeeded in unregulated markets.
The turning point in aviation regulation has been the ascendance of consumer interests. Gradually, as consumers started to gain relevance in government thinking around the world, the US began to persuade its aviation partners – with a combination of carrot and stick - to change the phrase to “fair and equal opportunity to compete”, meaning that the size handicap was gradually removed. Now the US airlines received the opportunity to compete “fairly”, while still holding the key to their domestic market.
Seeking to make Qatar Airways part of the Establishment
The EU's open skies negotiations with Gulf and other states will likely be quiet and behind closed doors – far from the atmosphere of the very public Gulf-US spat.
Yet Mr Al Baker is eyeing a public role by taking an active position against perceived bias in the "fair competition" definition. Mr Al Baker remarked: "I look forward to this experiment with the EU comprehensive agreement and to play my part in shaping the innovation of negotiating global competition". Mr Al Baker and a number of others from the Qatar side and UAE will certainly ensure control over any wavering fair competition meaning.
Emirates, Etihad and Qatar annual ASKs: 2006-2016F
EU open skies is perhaps most important to Qatar Airways, which has accelerated growth to close the gap between itself and Emirates. As CAPA noted in research earlier in 2016: Qatar already serves more destinations than Emirates and in 2016 is due to add more net ASKs than Emirates.
Qatar has more to gain from the EU talks. Emirates is comfortable with its existing position in Europe; Etihad has always intended to be smaller than Emirates and Qatar, although it is looking to safeguard its investment in European airlines.
Emirates, Etihad and Qatar annual ASK increase: 2006-2016F
The wider issue is that of Gulf airlines being accepted into the establishment rather than being seen as outsiders that need to be controlled and ideally – restricted or stopped. Previous network traffic disruptors from Icelandair to KLM to Singapore Airlines are now well part of the aviation order. In his concluding remarks Mr Al Baker notes how aviation has changed again.
"The European aviation community is rightfully honoured for contributing enormously to our shared history and to the way forward. This is not a closed club. New members are joining all the time and keeping the progress moving forward. One of the best hallmarks of an industry is that we embrace progress. Aviation plays one of the most important economic activities in the countries where we operate into", Mr Al Baker notes, making a call for national interest in European states to be put ahead of that of the national carrier.