Big U.S. Airlines Fault Persian Gulf Carriers: Three U.S. Airline CEOs Say State-Owned Gulf Carriers Are Distorting Air Transportation

By Susan Carey

Susan.Carey@wsj.com
(with contributions by Rory Jones)

(Wall Street Journal)- The chief executives of the three largest U.S. airlines said they are pressing the government to modify or—lacking substantive remedies—annul air treaties with two Persian Gulf nations. The CEOs cited what they claim are subsidies and government industrial policies that favor three of the Gulf region’s fast-growing carriers, distorting global air transportation.

The heads of American Airlines Group Inc., United Continental Holdings Inc. and Delta Air Lines Inc. said in a joint interview Thursday that the three state-owned Gulf airlines have received $42.3 billion in “quantifiable” subsidies since 2004, accompanied by other benefits including breaks on local airport infrastructure and services, exemptions from corporate taxes and advantages from “opaque” related-party transactions.

The U.S. executives said the policies are giving a big leg up to Emirates Airline, Etihad Airways and Qatar Airways, helping them expand globally by stimulating low-fare traffic through their hubs. More recently, the three Gulf carriers have targeted growth to U.S. airports, where they can fly freely and set prices without restriction due to “open skies” treaties between the U.S. and the United Arab Emirates and Qatar.

The routes from the Gulf region to the U.S. haven’t produced a meaningful increase in passenger traffic, the U.S. carriers said in a 55-page briefing paper being circulated to officials of the departments of Transportation, State and Commerce, among others. Instead, the new routes “serve to displace the market share of U.S. airlines and to shift good aviation jobs overseas.”

The three Gulf carriers have boosted the number of daily seats between their hubs and the U.S. by 11,000 since 2008, the document says. But the number of daily bookings between those airports and the U.S., in both directions, which were 2,500 a day in 2008, were up just 85 a day by 2014. The bulk of the U.S. passengers using the Gulf carriers are traveling beyond Dubai, Doha or Abu Dhabi to destinations such as India and Southeast Asia.

And that hits the U.S. airlines and their Asian and European partners right where it hurts. Doug Parker , American’s chief executive, said his team wants to begin flights to India. But the routes won’t justify themselves, he said, because the fares are so low. And Richard Anderson , Delta’s CEO, said his airline is leaving the Indian market altogether for the same reason.

Kevin Mitchell of OpenSkies.travel, a grouping of tourism and airline interests, wrote to the three U.S. departments last week, expressing “deep concerns” about the U.S. airline CEOs’ lobbying efforts. He said that after the mergers of six U.S. carriers into three and a situation where the top four airlines control 80% of the U.S. market, “some…shamelessly seek to close off U.S. markets to competition from foreign carriers.”

In a recent interview, Emirates President Tim Clark said the U.S. airlines’ claims are “outrageous, unsubstantiated [and] incorrect.” He said that his company isn’t dumping capacity or selling below cost and is profitable on every route it operates from the U.S. “Tell us where the subsidies are,” he added. Etihad and Qatar declined to comment.

Emirates, now the No. 1 international airline by capacity, said it files public financial statements annually that are audited by PricewaterhouseCoopers. Etihad and Qatar have repeatedly denied they are subsidized.

U.S. carriers have been worried about the Gulf carriers since at least 2012, concerned about losing some of their most lucrative international passengers and alarmed by their rivals’ big buildup of U.S. routes. In 2013, United, Delta, the U.S. trade association Airlines for America, and the largest U.S. pilot union, Air Line Pilots Association, International launched legal and political challenges, and Delta suggested that the U.S. revisit some of its air treaties.

But this latest effort by the U.S. airlines is the loudest and most direct response to what they see as a growing threat.

Jeff Smisek, United’s CEO, said the three Gulf carriers “are not normal airlines. They’re arms of the state.” The premise of open-skies treaties, of which the U.S. has signed more than 110 since 1992, is that airlines on both sides receive access, but on a level playing field and free of subsidies, he said.

European airlines have already been devastated by the Gulf airlines’ rapid growth into their natural markets, said American’s Mr. Parker. “We don’t want to see it get to the point [in the U.S.] where it is in Europe.”

Richard Anderson, Delta’s CEO, said that the airlines’ efforts are like those of steelmakers or agricultural firms trying to stop imports of deeply subsidized products, and that the airlines’ problem demands a “tried-and-true” trade-policy remedy.

The three U.S. CEOs said they met last week with representatives of the Departments of Transportation, State and Commerce, the Office of the U.S. Trade Representative and others. The DOT said it is carefully reviewing the U.S. claims and is closely coordinating with its governmental partners. “However, no decisions have been made,” said a spokeswoman, noting that the DOT is committed to the ‘open skies.’ The other agencies couldn’t immediately be reached for comment.

United’s Mr. Smisek said it has taken a couple of years for the three U.S. airlines to “scour the planet” with forensic accounting to document the three Gulf airlines’ financial records. The U.S. carriers say they identified breaks including free land, forgiven hedging contracts and nonunion rules that help the foreign airlines keep costs down, surmount big accumulated losses and still order huge numbers of new widebody jetliners.

The information in the briefing paper “is new…and compelling and clearly shows there has been subsidization of these carriers,” said American’s Mr. Parker.

He added that American won’t terminate its several-year-old code-sharing agreement with Etihad, which helps American passengers get to destinations the U.S. airline doesn’t serve. But American, as a company that needs to cover its cost of capital, wants to compete fairly, he said.

The carriers hope to persuade the U.S. to enter “consultations” with the Gulf countries and negotiate new rules. Barring that, they would like the U.S. to freeze the Gulf airlines’ expansion into the U.S.

In the absence of new accords, they would like want to see the air treaties terminated with the requisite year’s notice, the briefing paper said, even though the U.S. airlines fundamentally favor open skies agreements.

Originally published on WSJ.com: Big U.S. Airlines Fault Persian Gulf Carriers: Three U.S. Airline CEOs Say State-Owned Gulf Carriers Are Distorting Air Transportation