Gulf-EU open skies: US dispute, fifth freedom and EU negotiations
After a global wave of political conservatism and growing interest in aviation protectionism, is open skies dead? CAPA's Airline Leader summit on 17 and 18 May 2018 in Dublin will host an evening dinner debate on the outlook of open skies in Europe.
The EC is undertaking contentious negotiations with countries that include the UAE and Qatar. Antagonism towards these aviation hubs has occurred at the same time as European airlines' American counterparts have also taken aim at the Gulf hubs.
Yet in 2018 the State of Qatar has reached an agreement with the US to end the debate.
Might this signal Qatar and the EU will also reach an agreement? The US was mostly concerned about fifth freedom, while the EU is focused on the more abstract term of "fair competition". New EU law includes mention of fair competition and generating EU airline jobs. But to the advantage of foreign airlines, the law also mandates the EC to be aware of the overall benefit aviation brings to everyday consumers.
- The US-Qatar agreement focused on the issue of fifth freedom flights, which Qatar Airways does not operate.
- The EU-Qatar debate is more complex, as Gulf airlines are larger competitors to European airlines and the focus is on "fair competition".
- European airlines have more nuanced concerns about Gulf airlines, including issues beyond subsidies.
- Qatar Airways' investment strategy, including its stake in IAG, is changing the dynamics of European aviation relations with Qatar.
- The UK's Brexit vote and potential exit from EU aviation matters complicates its involvement in aeropolitical discussions.
- The US has not reached an agreement with the UAE, which has more complex negotiations due to the presence of Emirates and Etihad.
Summary
- Qatar was largely able to reach an agreement with the US because US airlines' greatest concern is about fifth freedom flights. Qatar Airways does not operate fifth freedom flights.
- A UAE-US agreement has a different context, since Emirates operates two fifth freedom flights to the US and has spoken of flying more fifth freedom routes.
- Qatar/UAE-EU agreements are more difficult because Gulf airlines are larger and more direct competitors, and the agreements focused on abstract terms like "fair competition".
- New EC rules focus on the creation of EU airline jobs, but also mandate attention to the benefit aviation brings to "everyday citizens".
US-Qatar agreement was easy to win, due to agreement on fifth freedom
In the agreement the US reached with the State of Qatar, Qatar Airways undertook to have more financial transparency, as well as reiterating that it did not plan to operate fifth freedom flights.
This modifies the existing air services agreement between the two countries. Fifth freedom is enshrined in the US-Qatar and US-UAE open skies agreements. It was fifth freedom that ignited US airline concern about Gulf airlines serving the US. Although US airlines created a campaign focusing on Gulf airlines overall, it was fear of fifth freedom that received disproportionate attention and was seemingly the underlying reason for much of the noise.
In 2014 Delta Air Lines executive Glen Hauenstein said about Emirates' Milan-New York fifth freedom service: "This is kind of ground zero on fifth freedoms, and we have to stay vigilant to get fair skies, not open skies".
In 2016 American Airlines CEO Doug Parker said: "Our biggest concern is flights outside the Gulf, flights from outside the gulf region to the US".
Qatar Airways briefly operated a Doha-Geneva-Newark service, mostly before Qatar had suitable long range aircraft. As Qatar Airways does not operate fifth freedom flights to the US, and globally has a limited fifth freedom network, agreeing not to operate fifth freedom flights is a small concession - if a concession at all. Whether this was a case of paranoia on the part of the US Big 3 and their pilots unions will probably never be tested, but wider thinking is that fifth freedom operations were always going to be at best a modest part of any airline's strategy.
EU-Qatar debate is more complex: what constitutes fair competition
The debate in Europe with Gulf airlines is more complex at a strategic and aeropolitical level.
Strategically, Gulf airlines are much bigger competitors to European airlines than Gulf airlines are to US airlines. Gulf airlines in the US are linking the US with markets - UAE, India, Pakistan, Nepal, Bangladesh - that US airlines have mostly ignored. Many of the markets are ignored or ill-served by US airlines' partners.
In Europe, Gulf airlines link the region with South Asia, East Asia, Australia/New Zealand and Africa - all parts of the world where European airlines are relevant to varying degrees (on their own, or through partners).
Gulf airlines' European sixth freedom traffic presents a much higher competitive threat to European airlines than the impact of Gulf airlines' US sixth freedom traffic on US airlines.
European airlines have more nuanced concerns
European airlines protesting the presence of Gulf airlines however will not allow the matter to rest merely for a promise not to operate fifth freedom flights.
At the aeropolitical level, since the strategic stakes are higher, European airlines - and sometimes their government representatives - craft wider arguments against Gulf airlines. The centre of this argument is that airlines from around the world should compete with "fair competition".
The phrase "fair competition" implies Gulf airlines have unfair advantages far wider than mere subsidies. This makes the term more fluid than a debate focused on subsidies.
Yet "fair competition" implies Gulf airlines should be "corrected" to European "standards" - which include for example constraints caused by lack of airport capacity at peak times. It is hardly arguable in today's world that Gulf airlines should be handicapped and dragged down for inefficiencies in Europe, such as labour challenges at Air France and Lufthansa, the two biggest opponents of Gulf airlines.
The problem with "fair competition" is in defining it. Gulf airlines fear that if they agree to a "fair competition" clause, the abstract nature of the term will allow European airlines to define it selectively, and request corrective measures.
As long as there are extremely high entry (=tariff) barriers to operating internationally, the term "fair" is hardly a logical one.
Qatar Airways is becoming a new concern for its investment strategy
The EU talks involving Qatar and the UAE are wider in scope and potential ramification, since Qatar and the UAE need more market access in the tightly held European markets, whereas the US was always most unlikely to roll back open skies agreements.
European aviation's relations with the State of Qatar are changing due to the astute strategy of Qatar Airways. Qatar has invested in Italy's Meridiana and is transforming the airline, including by rebranding it to Air Italy and leasing aircraft to it (a course of action similar to what Etihad did).
Qatar's stake in IAG has remained at approximately 20% since talks started, but Qatar's overall global weight has increased by deepening its partnership with IAG. Although British Airways may be IAG's flagship unit and post-Brexit will not be an EU airline, Qatar Airways also works with the IAG's Spanish units Iberia and Vueling.
Outside Europe, Qatar Airways has invested in Cathay Pacific and LATAM.
With Brexit comes the loss of a reasonable UK voice in aeropolitical discussions
In the US talks with Qatar there has been an American side composed of multiple departments but, in theory, presenting a united single country view.
The EU side is more complex because of the number of countries involved, and the wide spectrum of views. Critical to maintaining balance is the more liberal-minded UK, which has historically sought to offset the more conservatively oriented France and Germany. The UK's Brexit vote, and apparently likely exit from all EU aviation matters, complicates the UK's involvement. Even while the Brexit discussions continue, the UK's influence is inevitably waning.
Ultimately, Qatar, the UAE and Turkey are losing a friendly voice in the loss of the UK.
See related report: Brexit follow-up Part 3: Gulf airlines, Turkish lose UK ally in M/E talks as protectionism spreads
US has not reached an agreement with the UAE
In Qatar's agreement with the US the question was asked when the UAE might also reach closure with the US. Most noted that the UAE agreement would likely be more complex, since the biggest change in the Qatar-US agreement was Qatar promising not to fly fifth freedom routes.
Yet Emirates flies two prominent fifth freedom routes: the now long-standing Dubai-Milan Malpensa-New York JFK service (which has significantly grown the market), and the more recent Dubai-Athens-Newark. Globally, Emirates has a far wider fifth freedom network than Qatar Airways, but fifth freedom is becoming less significant to Emirates.
However, fifth freedom operations are not the only major difference between Qatar and the UAE and their talks with the US. The UAE comes to discussions with the US on a more complex platform.
Whereas the State of Qatar only represents Qatar Airways, the UAE has two locally based airlines serving the US: Emirates and Etihad. The UAE has two further airlines - Air Arabia and flydubai - that serve Europe. Air Arabia has JV units outside the UAE that serve Europe (such as Air Arabia Maroc).
Emirates Airline is much larger than Etihad globally and in the specific markets of the US and EU. But Etihad is owned by the emirati capital, Abu Dhabi, which could mean that Etihad pulled more weight in discussions.
Etihad's position has changed significantly over the past year: it was previously thought that Etihad would need EU-UAE discussions to safeguard - or at least accommodate - Etihad's investments in EU airlines.
But for Etihad there has since been a drastic reduction in its EU investments: airberlin exited the market, Alitalia declared bankruptcy, and Etihad sold its stake in Switzerland's Etihad Regional.
Etihad's only remaining European investment is in Air Serbia. Serbia is not a member of the EU but is in the accession process.
Outlook: EC's rules open the door for consumer benefit from Gulf airlines
Europe's protectionist forces behind the policy changes may be pleased with revised legislation that now includes terms and concepts such as "fair competition" and preserving jobs in EU airlines.
Yet the revised text also includes wider commentary and mentions the positive impact of aviation to all of EU life. To most ordinary mortals some of the wording changes must seem exotic at best, but for example "connectivity' is code for ensuring that the interests Europe's hub airlines are not eroded - whether or not this will greatly influence outcome of applying the mix of criteria.
Revised EC text: Jan-2018
It is true that an EU flight will generally create more jobs than a flight from a foreign airline. For example, Air France will generate more European jobs on a Paris-Dubai flight than an Emirates Paris-Dubai flight will create.
Yet lost in the protectionist argument is that European airlines will never fly as extensively as Gulf airlines. Protectionists will say this is due to unfair practices they seek to correct, but there is no acknowledgement of differences in geography and hub prowess. The US airlines have effectively conceded that they will never offer a network from the US to the parts of the world that Gulf airlines connect.
The EU is now tasked with promoting jobs at EU airlines, but it also must balance the interests of the wider union. And for the EU on the whole - the "everyday lives...connectivity and mobility for businesses and citizens alike" mentioned in the text - what matters when it comes to airlines is choice and volume, not the flag.
CAPA Airline Leader Summit - 17 & 18 May 2018, Dublin
CAPA's Airline Leader Summit on 17 and 18 May 2018 in Dublin explores matters facing European as well as global aviation. CAPA's Exclusive CEO Dinner debate on 17-May-2018 gathers senior industry participants to address the question: Is Open Skies Closed for Business?