Urgent Action: Gulf Carrier Subsidies Need to Be Addressed Now

By: Rob Britton

Earlier this week, the U.S. government closed the public docket on the dispute over the abuse of two Open Skies agreements; the procedure invited Americans to submit comments about the massive subsidies to three Gulf carriers, state-owned Qatar Airways, Etihad Airways, and Emirates. Initial results suggest that about two-thirds of the comments – from members of Congress, local mayors and local business leaders, U.S. airline employees, and individuals from across the country – urged the U.S. government to act now to protect American airline jobs. And a new research report highlights the urgent need for the action that so many have called for.

The airline industry, like others, has an ecosystem of experts, and at the top of that food chain is MIT Professor William Swelbar. Bill has an unmatched combination of deep professional experience within airlines (he paid for college as a flight attendant) and data-driven academic rigor. When he writes about aviation, people who truly know the business pay attention. Recently, he released a paper detailing how massive subsidies provided to Emirates, Etihad, and Qatar Airways, are harming airline service to and from small and medium-sized communities. The paper is entitled “Violations of ‘Fair and Equal’ Open Skies Agreements Threaten Large and Small American Communities and their Access to the Global Air Transportation Network,” and his compelling analysis highlights how important it is for our government to act now.

Prof. Swelbar opens with two foundational arguments. First, every one of the U.S. government’s 117 Open Skies agreements, including those with the United Arab Emirates and Qatar, has a provision mandating “fair and equal opportunity to compete,” which means if an airline wants unrestricted access to the huge U.S. market, it cannot be subsidized as their three clearly are – proven subsidies and other unfair benefits totaling $42 billion in the last 10 years alone. Second, established economic theory tells us what we would expect to see in unbalanced, subsidized markets, and the U.S.-Gulf (and beyond) market exhibits four telltale signs:

  1. Huge capacity increases, greater than growth in demand
  2. Decreases in local and connecting passengers on U.S. airlines and their European alliance partners (for example, United and Lufthansa)
  3. Traffic shifting from these services to subsidized Gulf carriers
  4. As a result of the above, drops in U.S. and alliance capacity in much of the world beyond the Atlantic

Swelbar succinctly explains network economics, in this case the flow of passengers from the U.S. to Dubai, Abu Dhabi, and Doha, the vast majority of whom connect to flights bound for points beyond. For example, only 6% of Qatar’s U.S. traffic is bound for its home, Doha, while 67% is headed to 11 cities in India. The paper then thoroughly dismantles the falsehood the Gulf carriers and their allies repeatedly advance, that these three airlines are serving destinations U.S. airlines don’t want to serve. For instance, Emirates claims that they “carry travelers from the U.S to 56 destinations . . . which are not served by any American carrier.” But the facts are otherwise: of the 178 cities the three Gulf carriers together serve, 175 of them (98%) are served by one or more of the three airline alliances to which American, Delta, and United belong. Indeed, United’s Star Alliance alone covers 172 of the 178. So much for “don’t want to serve”!

Professor Swelbar quickly bats down another oft-touted Gulf carrier argument, that they’re growing the market. He writes, “The math is clear. Subsidized Gulf carrier service threatens the viability of nonstop flights with greater economic impact than the Gulf carriers themselves could ever hope to provide.”

Continuing the discussion of network, Swelbar then explains, with customary clarity and brevity, the threat to small and medium U.S. cities: “Domestic flights to smaller airports rely on international traffic to justify their profitability and their existence.” And, parsing the traffic data, he has uncovered a new danger: it turns out that when Gulf carriers enter a new U.S. market, their subsidized low prices incent customers in nearby cities to drive to these new nonstop services, rather than begin their journey at their home airport. Since 2012, U.S. airlines have added capacity at Austin, Texas, and Richmond, Virginia, but traffic from these points to the Middle East and South Asia have declined 20% and 33% respectively, as travelers have opted to drive the 214 miles to DFW Airport, Texas, or 121 miles to Washington Dulles.

Swelbar next turns to a danger he describes as “perhaps even more worrisome,” one often overlooked in the Gulf-carrier debate: the Open Skies agreements permit Emirates, Etihad, and Qatar to carry passengers, without limits, on “Fifth Freedom” services, flights to or from a city not in the U.S. nor their home countries, as long as the flight begins or ends in either of the two countries. For example, for almost two years Emirates has flown New York-Milan (the flight goes on to Dubai). Fifth Freedom flights are an anachronism, dinosaurs with wings that date to a time when airplane range was limited, fuel stops were needed, and airlines could not economically operate without the right to carry “local” customers between countries. But since Emirates flies three times daily from New York to Dubai, it’s pretty clear they don’t need to land in Italy for gas. Their one daily Milan flight is likely just the start; they have the right to fly L.A.-London, Chicago-Paris, and so on, threatening the viability of U.S. service on these routes – and they could do this across the Pacific, too, say, San Francisco-Tokyo-(Abu Dhabi).* Of course, as above, these flights would also endanger service to and from smaller and mid-size communities, because those long nonstops depend on connecting passengers from places like Omaha, Birmingham, and Syracuse. It is an integrated grid – we’re all in this together.

Lastly, Professor Swelbar reminds us throughout the study that things will only get worse, given the expansion plans – and aircraft orders – of all three. The capacity dumping by Emirates, Etihad, and Qatar has rapidly accelerated in the past 18 months. In a single day, Qatar announced new service to three more cities, Boston, Atlanta, and Los Angeles. Although we lump them together, each airline is racing against the other two, and each has wheelbarrows of state-provided cash to advance their economic development goals.

Our government needs to heed this threat to the U.S. airline grid, to domestic economic objectives, and to good-paying U.S. jobs. As someone who worked in the U.S. airline business for 25 years, I know firsthand that American, Delta, and United can compete, but not on a playing field rigged by limitless resources. The American people have weighed in and the docket is closed – the U.S. government must act before the consequences become irreversibly dire.

* The exercise of Fifth Freedom rights also requires the consent of the third country, for example, Japan in the case of San Francisco-Abu Dhabi flights.

Originally published on The Huffington Post: http://www.huffingtonpost.com/rob-britton/urgent-action-gulf-carrie_b_7935388.html?utm_hp_ref=business&ir=Business?view=print&comm_ref=false