The Tilted Playing Field in International Airline Competition​

By: Rob Britton
In recent years, three Gulf-based airlines — Emirates, Etihad, and Qatar Airways — have expanded into the U.S. market at a rate that far exceeds growth in the market. They have done so in violation of Open Skies agreements and with massive backing from their governments. Fortunately, the men and women of the U.S. airline industry are fighting back, urging fair competition.

A recent opinion piece under this masthead, “Airlines Squabble Over ‘Open Skies’ Treaties,” argues that “airlines are a systemically critical part of our economy.” I wholeheartedly agree. According to the industry group Airlines for America, the U.S. airline industry drives nearly $1.5 trillion in U.S. economic activity while directly and indirectly supporting more than 11 million jobs. But the author of the piece, Richard Finger, clearly hasn’t spent much time studying airlines, or the facts surrounding the expansion of these Gulf carriers. As someone who has worked in and observed the industry for over 40 years, I am eager to set the record straight.

Airlines play a huge role in the economic success and development in all 50 states, which is precisely why Mr. Finger should understand that ensuring free and fair competition with Emirates, Etihad, and Qatar Airways is so important. These Gulf carriers have received more than $42 billion in subsidies and other unfair benefits from their governments in a clear violation of U.S. Open Skies policy. They are using these advantages to expand rapidly and flood the U.S. marketplace – threatening American companies and jobs.

All 112 Open Skies aviation agreements (not treaties, as Mr. Finger calls them, because unlike treaties they do not require Senate ratification) signed by the United States have been built upon on a key tenet of U.S. international aviation policy: to “Ensure that competition is fair and the playing field is level by eliminating marketplace distortions, such as government subsidies.” If a country wants open access to the U.S. marketplace, the largest in the world, they cannot massively subsidize their airlines. Unfortunately, this is exactly what the UAE and Qatar have done and continue to do. Even as I write this, Etihad has announced plans for a second daily (494- seat) A380 from New York to Abu Dhabi.

Mr. Finger attempts to characterize UAE and Qatari support for their airlines as “amorphous,” but a recent report specifically identifies the nature of the subsidies and other unfair benefits. This report was the result of two years of work — work made more difficult by the fact that none of these three airlines release financial statements that would meet U.S. standards of completeness and transparency.

After examining the extensive nature of governmental support the Gulf carriers enjoy, it is just plain wrong to claim, as Mr. Finger does, that U.S. carriers receive comparable benefits. First, the Chapter 11 process is not, as he says, “synonymous with subsidy.” It is a restructuring supervised by an independent judiciary. The process does not involve taxpayer money. Furthermore, under established international trade law, Chapter 11 reorganizations are not considered subsidies. And many other countries have similar procedures in place.

A second, related point: taxpayers are not liable for any restructuring of airline pension plans in bankruptcy. Mr. Finger equates the Pension Benefit Guarantee Corporation (PBGC) with American taxpayers, but that agency neither receives taxpayer funds nor is backed by the “full faith and credit” protection of the U.S. Government. According to the PBGC website, it “collects insurance premiums from employers that sponsor insured pension plans, earns money from investments and receives funds from pension plans it takes over.” In fact, in most legacy airline bankruptcies since 2001, the PBGC has actively protected creditors’ rights against debtor air carriers and acted vigorously to minimize its liabilities. For example the PBGC prevailed in the American Airlines case, convincing the bankruptcy court to prevent American Airlines from terminating its pilots’ pension plan and to impose liens on $91 million in American’s foreign assets to secure a potential PBGC liability.

Bankruptcy reorganization has been painful for legacy airline employees, retirees, and creditors, but it has yielded many positive results. Carriers emerged stronger and more competitive, most employees still have their jobs and the entire economy has benefited from unprecedented stability. Given the pivotal importance of airlines to the nation, we all gain from an airline industry that no longer wobbles. This process, however, has been difficult for U.S. airlines, and contrasts starkly with the billions of government dollars the Gulf carriers have received in interest-free loans, equity infusions and more.

Third, Mr. Finger calls provisions of the Air Transportation Safety and System Stabilization Act, passed 11 days after the attacks of September 11, 2001, a “bailout.” I was working at American Airlines on 9/11, and we sure didn’t see it that way. In providing $5 billion in grants and enabling $10 billion in loan guarantees, lawmakers were simply responding to the potential economic damage of a severely weakened domestic industry after an unprecedented disaster. The act provided $860 million to American in 2001-02. When you consider that in late 2001 and early 2002 American often lost $15-20 million in a single day, that welcome support would only fund six to eight weeks of losses (net losses for American’s parent company in 2001-02 totaled $5.3 billion). It’s important to distinguish between modest, one-time emergency support following a catastrophic attack on the U.S. and the ongoing, “business as usual” subsidies the UAE and Qatar provide to their three mega-carriers, on demand, with blank checks.

Fourth, Mr. Finger criticizes tax-exempt bonds issued that enable airlines to modernize their terminals. As joint public/private facilities, airports are complex entities, and most observers – and certainly travelers – appreciate modern and efficient facilities. And, fundamentally, the funds come from debt that airlines must repay. In contrast, the UAE and Qatari governments are spending billions of dollars to expand their airports at no cost to the Gulf carriers. Qatar recently completed the $17 billion Hamad International Airport to facilitate Qatar Airways’ expansion, for example. Dubai is spending $7.8 billion to expand capacity at Dubai International Airport and Abu Dhabi is expected to complete a $6.8 billion expansion of its airport this year.

Finally, I would like to close with a personal comment: as a longtime airline employee, I object to Mr. Finger’s inflammatory rhetoric targeting my former employers and coworkers. His piece is peppered with righteous indignation: “As a taxpayer it is unfair, at every economic hiccup, to shower this industry with gratuitous taxpayer dollars,” he writes. He describes U.S. companies as “whiny” and characterizes my colleagues in the business as “spoiled children.” The hundreds of thousands of men and women working in the U.S. airline industry deserve to be treated with more respect. We are simply seeking the opportunity to compete on a level playing field — to bring people together safely, reliably, and at a fair price.

Rob Britton has worked in and near the airline industry since 1984, and specializes in researching and explaining this complex and changing business to varied audiences. He is an adjunct professor at the McDonough School of Business at Georgetown University, and an annual guest lecturer at 25 business schools worldwide, including Kellogg, Wharton, and London Business School. You can reach Rob at [email protected] or on Twitter at @PlanelySpeaking

americans4fairskies2015The Tilted Playing Field in International Airline Competition​