The Gulf Carrier Dispute: U.S. Carriers Notch A Nice Win

By Rob Britton
Adjunct Professor, McDonough School of Business at Georgetown University

News that the U.S. Department of State will hold talks next month with the United Arab Emirates and Qatar is, to this longtime observer of U.S. international aviation, a significant victory for American Airlines, Delta Air Lines, and United Airlines. For almost 18 months, these three airlines and their union partners have worked hard to spread the clear evidence that the three airlines from these small nations, Emirates, Etihad Airways, and Qatar Airways, have been — and continue to be — receiving billions of dollars of cash from their government owners, distorting competition worldwide.

Secretary of State John Kerry and senior officials at the State Department understand that the two Gulf nations are massively subsidizing their carriers with billions of dollars in cash, in violation of U.S. Open Skies agreements. And now State is trying to work out a remedy.

Not surprisingly, the media and many in Washington are mischaracterizing this milestone as a “loss” for the U.S. airlines. On the contrary, it is a serious setback for the Gulf carriers and their government owners.

The State Department could easily have declined to take any action at all. Instead, it confirmed the evidence collected by American, Delta, United and seven labor unions, proof gathered in a painstaking, multi-year investigation. Why was such a lengthy and painstaking investigation required? Because neither the UAE nor Qatar require the kind of honest and transparent reporting of financial data that we take for granted in the U.S. Furthermore, it has been reported that the U.S. delegation is headed by Undersecretary of State Catherine Novelli, who is highly experienced with trade issues from both private sector and government perspectives (she was formerly a senior executive with Apple and a former assistant U.S. Trade Representative). Indeed, Ms. Novelli’s bio notes that one of her duties is to “address global challenges in a transparent, rules-based, and sustainable system.” She is precisely the sort of person who has looked carefully at the evidence and will recommend appropriate action.

The fact is, this issue will take time and diplomacy to work out a solution. These nations are determined to use their significant financial resources to undermine the global aviation business, even if it requires taking massive losses on flights that make no rational, economic sense. Using $42 billion in subsidies and other unfair benefits, such as abusive labor practices, they are undermining American jobs.

The same thing is happening in Europe. In June, the EU transport commissioner called for renegotiation of the terms under which the subsidized Gulf carriers enjoy broad access to European markets. Within the last year, the governments of France, Germany and the Netherlands have all instituted freezes on new Gulf carrier flights to their countries because of the harm from the massive subsidies.

It’s great news that the U.S. government is finally recognizing the severe economic damage that the Gulf carriers are inflicting on our nation. And it’s even better news that our government officials have decided to vigorously enforce the rules and level the playing field for hundreds of thousands of American workers in the U.S. aviation industry.

americans4fairskies2015The Gulf Carrier Dispute: U.S. Carriers Notch A Nice Win
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Three Big U.S. Airlines Allege Additional State Subsidies to Qatar Airways

Days after the U.S. government said it intends to hold “informal” discussions with two Persian Gulf governments over a trade dispute brought by three big U.S. airlines, the U.S. carriers said they have uncovered evidence that the government of Qatar provided additional subsidies to Qatar Airways.

Qatar Airways has vehemently denied receiving subsidies and posted rebuttals on U.S. regulatory dockets. On Wednesday, Doha-based Qatar Airways wasn’t immediately available for comment, nor was the Qatar Embassy in Washington. Its U.A.E.-based rivals, Etihad Airways and Emirates Airline also have denied being subsidized.

American Airlines Group Inc., Delta Air Lines Inc. and United Continental Holdings Inc., 18 months ago said they had documented $42 million in subsidies and unfair benefits given to three big Gulf carriers since 2004 by their state owners. The three U.S. companies lodged a trade complaint with their government, asking it to modify liberal air treaties with Qatar and the U.A.E., and to freeze additional flights to the U.S. by the three fast-growing Gulf carriers.

Last week, the U.S. State Department told the U.S. carriers and their labor-union allies that it remains committed to its “open skies” aviation policy, under which liberal air treaties are struck to boost passenger choice and help the broader economy through increased travel, trade and job growth. But the government, saying it takes seriously the competition claims raised by some U.S. carriers, said it plans to hold “informal, technical discussions” in July with the U.A.E. and Qatar.

On Wednesday, the big U.S. airlines said their forensic investigators had found further evidence of trade-distorting state aid, based on financial statements Qatar Airways filed with a corporate registry office in Singapore. Those documents, the U.S. side alleges, indicated that Qatar Airways received more than $7 billion in aid in the fiscal year ended in March 2015, and has commitments from its government for a further $3.7 billion in subsidies.

Law firm Wilmer Cutler Pickering Hale and Dorr LLP, which is representing the big U.S. carriers, found the new evidence in the spring, according to Partnership for Open & Fair Skies, the lobby of the three U.S. carriers and their labor allies. The lawyers found that the Qatar government transferred 72 planes, cash and other assets with a value of $5 billion to the airline and injected $2.2 billion in cash. Furthermore, the government authorized an additional $3.7 billion, the Wilmer Hale report said.

Another group of U.S. airlines that opposes the position of American, Delta and United was invited to meet State Department officials on Wednesday about the trade dispute. The group, which includes FedEx Corp., Alaska Airlines Group Inc., JetBlue Airways Corp. and Hawaiian Holdings Inc., has expressed concern from the outset of this fight that rolling back liberal air treaties could cause economic damage and possible retaliation.

The State Department Wednesday confirmed that it met with representatives of the U.S. airlines, travel, tourism and cargo industries, as part of its regular contact with stakeholders interested in Middle Eastern aviation issues. As for the new allegations involving Qatar, the department said it is “carefully and thoroughly reviewing the claims by some U.S. carriers that the Gulf carriers are benefiting from government subsidies that are distorting the market.”

Originally Published on The Wall Street Journal.

americans4fairskies2015Three Big U.S. Airlines Allege Additional State Subsidies to Qatar Airways
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Why Are US Legacy Carriers So Worried About Air Serbia’s New York Flight?

Balkan airline Air Serbia made an historic flight last Thursday, flying from Belgrade to New York JFK. The reason this flight belongs in the history books is that it marked the first direct flight between the two cities on a local carrier in more than two decades.

Air Serbia and the Belgrade route are, in and of themselves, not cause for concern for U.S. legacy carriers. This is a small market and a small airline.

So why does this flight have American, Delta and United so worried?

The flight means that the powerful Gulf carriers have found another way to penetrate the U.S. market. One of Air Serbia’s main owners is Abu Dhabi-based Etihad, who, along with Emirates and Qatar, has its sights set on the American market.

Covering the world with proxy airlines

Etihad bought a 49 percent stake in former Serbian carrier JAT as it was teetering on the edge of bankruptcy. It then rebranded the airline as Air Serbia and has been growing it ever since. Most of Air Serbia’s routes are in Europe and to the Middle East, but the foray into the transatlantic market shows that Etihad is also willing to compete using what are basically proxy airlines to get a bigger share of the lucrative intercontinental market.

Etihad has minority ownership in several major airlines including Alitalia, Virgin Australia and Air Berlin. It has a financial stake in these carriers, but it is also heavily involved in their branding and operations. For example, Etihad provided staff and ground crews in the United States to service the Air Serbia flight. And the pilots for the flight trained with Alitalia, which also has a close relationship with Etihad. The Airbus A330 used for the intercontinental trip was leased from Indian carrier Jet Airways, which is also partially owned by Etihad.

Etihad is reportedly trying to create uniform technology and airplane layouts across all its partners so that all crews can receive the same training and airplanes can be shifted between partners depending on demand.

No grounds for complaint

U.S. carriers have long complained that Gulf airlines like Etihad get unfair subsidies from their oil-rich governments. They contend that this extra funding goes against current air travel agreements that call for fair competition.

It will be more difficult for them to complain about Air Serbia, which is essentially a flag carrier, flying to New York from its own capital city. Etihad is certainly exerting control over Air Serbia, but on paper it remains a minority partner.

A Serbian brand

And Serbia isn’t hesitating to take advantage of this new partnership to put itself on the map. The country’s Prime Minister, Aleksandar Vucic, said that the flight was a major step for his country.

“This is the first flight operated by a Serbian carrier to the United States since 1992, and it shows the huge steps we have taken to develop our economy and reposition our country and capital Belgrade on the world map. Re-establishing this air bridge will give an enormous push to the flow of tourism and trade between Serbia, the wider Balkans region and the United States…”

So one of Etihad’s closest partners has landed in the United States, further extending the Gulf carrier’s reach (by proxy), and there is really no way that U.S. carriers can complain without also criticizing Serbia.

Originally Published on Travel Pulse.

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