The Battle Lines in Open Skies

By:

Wing of an Airplane.

In January 2015, the newly formed Partnership for Fair and Open Skies (“Partnership”) released a white paper condemning three major Gulf carriers – Emirates, Etihad, and Qatar (“Gulf Carriers”) – for receiving massive, anticompetitive subsidies from the governments of Qatar and the United Arab Emirates. The Partnership consists of American Airlines, Delta Air Lines, and United Airlines, along with several unions. Together, they argue that the Gulf Carriers are violating the spirit of the Open Skies agreements that the United States has signed with the U.A.E. and Qatar, specifically pointing to the fair competition clauses contained in the agreements. In the past year, the Partnership has lobbied the U.S. Departments of State, Commerce, and Transportation (“the Agencies”), to put a freeze on all new routes that the Gulf Carriers have planned and to begin consultations with the U.A.E. and Qatar on Open Skies agreements. In response, the Agencies opened dockets on the issue. When they closed at the end of August, the dockets had received over 5,000 comments from interested citizens and organizations.

Open Skies and International Aviation

Open Skies agreements are “form” agreements that the U.S. has signed with more than 100 countries over the past twenty years. According to the State Department website, “Open Skies agreements have vastly expanded international passenger and cargo flights to and from the United States, promoting increased travel and trade, enhancing productivity, and spurring high-quality job opportunities and economic growth.” The agreements do this by “eliminating government interference in the commercial decisions of air carriers about routes, capacity, and pricing, freeing carriers to provide more affordable, convenient, and efficient air service for consumers.”

Underlying the “Open Skies” initiative is an internationally recognized framework of “freedoms of the air” that standardizes the system of commercial aviation rights for entering and landing in another country’s airspace. Though there are nine conceptual freedoms, only the first five have ever been recognized in international treaties. U.S. Open Skies agreements include the valuable fifth freedom, which allows a plane to fly from Country A to Country B, change cargo and passengers, and continue to Country C. This vastly expands the geographic and economic market that airlines can compete in globally by providing “beyond” rights to fly between two countries that are not the home country of the airline. The State Department highlights the value of this framework stating that, “[b]y allowing air carriers unlimited market access to our partners’ markets and the right to fly to all intermediate and beyond points, Open Skies agreements provide maximum operational flexibility for airline alliances.”

The Partnership’s Allegations

The Partnership’s two-year investigation found that $42 billion in quantifiable subsidies and other unfair benefits were given to the Gulf Carriers from their respective governments in the last ten years. The subsidies include, but are not limited to, government loans and shareholder advances with no repayment obligations, tax exemptions, alcohol monopoly rights, and investment by the governments in extravagant airport infrastructure. Without subsidies, the Partnership claims that all three airlines are not commercially viable. According to a fifty-five-page white paper released by the Partnership, the Open Skies agreements with the United Arab Emirates and Qatar are one-sided, providing more benefits to foreign airlines than American carriers. They argue that many of these destinations in the Middle East, Africa, and Asia do not have a significant number of passengers originating and terminating their journeys there, making it inefficient for American airlines to set up direct routes to those locations. In addition, the Gulf Carriers benefit from lax labor standards, including the inability of workers to unionize. Because of the support provided by the governments, the Partnership alleges that the Gulf Carriers have near-immunity from bankruptcy. Insulated from the consequences of poor business decisions, the Gulf Carriers are expanding rapidly. Despite lagging demand, Gulf Carriers are flooding the market with an increased supply of seats to various destinations. The Partnership states emphatically that the government subsidies provided to the Gulf Carriers allow them to use anticompetitive methods to draw away passengers from American carriers, infringing on their market share unfairly.

Consequently, the Partnership makes dire predictions about how the Open Skies agreements will continue to affect the American market. American carriers will soon have to start cutting international flights, since they are not able to attract customers or match the amenities and low-cost combination of Gulf Carriers. Each international round-trip flight that is cut will cause a loss of over 800 U.S. jobs. In addition, the U.S. domestic air travel market depends on revenues from these international flights to remain viable. The Partnership claims that it is only financially feasible for U.S. carriers to service smaller and more remote towns and airports when local passengers connect on the same airline to an international flight. Forcing U.S. carriers to reduce, terminate, or forego services on international routes will reduce the number of passengers using American carriers’ domestic flights to connect to and from international flights with the same carrier, which is how those domestic routes remain profitable. A reduction in international service will negatively impact the size and scope of domestic networks. This may mean the loss of service to smaller communities. All of this adds up to lost jobs. Pilots, flight attendants, airport workers, tour guides, taxi drivers, and small business owners all depend on connectivity for their livelihood. In addition, once passengers have lost the U.S. options and the Gulf Carriers have pushed out most of the competition, the Partnership warns that the Gulf Carriers’ prices will increase and passengers will be left with less choice—a dangerously suboptimal outcome.

The Gulf Carriers’ Response

In response to the Partnership’s allegations, the Gulf Carriers commissioned various reports by third-party experts and posted comments to the Agencies’ docket. They denounce the Partnership’s investigation as a flawed attempt to impede competition. The Gulf Carriers claim that their success can be attributed to competitive pricing, superior service and the availability of convenient routes to underserved markets. Emirates and Etihad both explicitly deny receiving any subsidies or special privileges. The Group Chief Executive of Qatar Airways, Mr. Akbar Al Baker, also denied this at a press conference in Washington, DC.

The Emirates response pointed out three blatant errors in the Partnership’s white paper. First, the data used by the white paper is incorrect and incomplete. It misrepresents the Gulf Carriers’ and their governments’ financial decisions. Second, the legal arguments made by the Partnership depend on WTO rulings. These rulings do not apply to the aviation industry. The Gulf Carriers also accuse the Partnership of twisting statutory language. Third, the Open Skies agreements only discuss government subsidies in so far as they give rise to anticompetitive fares. The Gulf Carriers argue that their pricing is competitive and that the Partnership provides no evidence that the alleged unfair competition actually affects fares.

In addition, the Gulf Carriers state that matters such as the availability of subsidies for airlines, tax policies, and labor policies, are matters of domestic policy. These fall outside the ambit of the Open Skies agreements as long as everyone is given a fair opportunity to compete. They allege that American, Delta, and United themselves benefit from U.S. Chapter 11 bankruptcy laws that entitle them to massive debt write-offs in the process of restructuring. Including several restructurings, American carriers have benefitted from $70 billion in government subsidies over the past fifteen years. In addition, U.S. airlines benefit from international routes to Europe that are exclusive and have anti-trust immunity. This allows American carriers to set monopoly prices. In all, the Gulf Carriers argue that the Partnership is exaggerating the extent of the financial impact on American airlines. Indeed, American, Delta, and United have made record profits in recent months. Further, the Gulf Carriers claim that the Partnership’s argument is built on false premises in its allegations. Subsidizing airport infrastructure has never been considered an airline subsidy. More fundamentally, air passengers are not property, and neither is market share; new companies do not have to bring their own new customers into the market to be considered fair competition.

The Gulf Carriers argue that they provide other benefits to the U.S. The UAE is a top import destination for the U.S. and an important defense partner in a volatile region. The Gulf Carriers bring many passengers to the U.S. who then connect to flights operated by domestic carriers. They also provide more routes to more cities within countries in Asia and Africa, helping travelers in the U.S. and abroad get to where they want to go with fewer connecting flights and faster travel times. This allows for more international business and tourism. The added travel and tourism generates more jobs in the travel industry and helps immigrant populations in the U.S. maintain close ties to their countries of origin.

In a fascinating turn of events, U.S. cargo carriers such as FedEx have joined the Gulf Carriers in criticizing the Partnership’s lobbying efforts. FedEx has been particularly vocal about how it benefits from and depends on the fifth freedom rights in Open Skies agreements to operate its worldwide cargo network. The company states that it provides jobs to more Americans directly and indirectly than American passenger airlines. In addition, their network is far larger than that of any of the American passenger airlines, which have not taken advantage of the fifth freedom in the same way. Rather than flying the routes themselves, American, Delta, and United prefer to provide their passengers with international travel options through code-sharing agreements with international joint venture partners.

The Law

Whether these alleged subsidies contravene the Open Skies agreements is a novel question of law, as Open Skies agreements have not been challenged in this way before. Though there are possible legal routes available for the Partnership to pursue their claims in court, it is likely that they chose to go through the political process for strategic reasons.

Open Skies agreements between the U.S. and the UAE and the U.S. and Qatar both contain express language allowing defensive government action in the “protection of airlines from prices that are artificially low due to direct or indirect governmental subsidy or support.” This clause has been removed from the standard Open Skies agreement. There is also a general fair competition clause stating that, “Each Party shall allow a fair and equal opportunity for the airlines of both Parties to compete in providing the international air transportation governed by this Agreement.” However, the focus of the agreements is ensuring competitive pricing and fair treatment of airlines at the airports of both parties. There is no language advocating for labor rights or standards of any kind. The rights of the parties to take unilateral action are reserved for special situations and consultations are required barring extreme circumstances. The agreements specifically state that the right to “revoke, suspend, limit, or impose conditions on the operating authorizations or technical permissions of an airline” can be used “only after consultation with the other Party.” This means the Partnership’s request to freeze new routes by the Gulf Carriers may contravene the agreements if done before consulting with the U.A.E. and Qatar.

The Department of Transportation’s statutory mandate contains language supporting domestic airlines (“strengthening the competitive position of air carriers to at least ensure equality with foreign air carriers, including the attainment of the opportunity for air carriers to maintain and increase their profitability in foreign air transportation”), but it also contains strong language encouraging “reliance on competitive market forces and on actual and potential competition” and the “availability of a variety of adequate, economic, efficient, and low-priced services” for the public. Airlines are explicitly excluded from coverage under the General Agreement on Trade in Services, a treaty of the World Trade Organization, other than a few minor exceptions.

What’s Next?

The Agencies (State, Commerce, and Transportation) are currently reviewing the filings, and a final resolution has yet to be revealed. There have already been some new developments since the start of the review process. Delta announced in October that it is reducing international flights by three percent, partly due to anticompetitive behavior by Gulf Carriers. Meanwhile, the Department of Justice (DOJ) has raised antitrust concerns about the Partnership’s demands prohibiting competition between international airlines and U.S. airlines on international routes. The DOJ is separately pursuing an investigation into United, American, and Delta (the major airlines represented in the Partnership) to determine if the three major airlines have generally been colluding to increase their profits.

The Partnership’s initiative has gained the attention of many senators, congressmen, mayors, councilmen, and state legislators across the country. Many unions, business groups in less populated areas, and small and midsized airports have expressed concern about job losses and loss of connectivity for smaller markets. At the same time, many immigrant communities, the hospitality and travel industries, cargo carriers, and even some American passenger airlines such as Jet Blue have weighed in on the side of Gulf carriers. Both sides have commissioned outside reports and publicized reams of data on how they help the U.S. economy and how the disposition of this debate would affect the global airline industry.

Despite heated tempers, extensive arguments, and impressive mobilization on both sides of the debate, it is unlikely that the U.S. government will take any serious action. Primarily, the national security concerns that arise from antagonizing the U.A.E. and Qatar are serious, as both countries are strong allies in an extremely turbulent region. The airline industry in these countries is central to their long-term development plans, and government officials are very invested in the success of the aviation industry. It would be poor foreign policy to risk damaging these positive relationships at a time when the Middle East is in the throes of a growing crisis with ISIS. In addition, opening consultations on the Open Skies agreements or taking unilateral action to punish these airlines could weaken the existing international aviation framework and increase uncertainty and fears among other countries and international airlines in dealing with the U.S., regardless of the final resolution. Undoubtedly, this episode has significantly altered the discourse about government subsidies in the global aviation industry.

Sachs 8_Small B symbol_end last sent