Global Airlines - Not A Fair Playing Ground, But Necessary

US Airlines are known for attacking foreign long-haul carriers, often attributing their success solely to the government subsidies that these carriers receive. Please answer the following questions:

1) Describe the US-UAE Open Skies Agreement. List and describe two long-haul carriers that are a part of this agreement that also receive government subsidies.

Open Skies agreements are bilateral agreements that the U.S. Government negotiates with other countries (and in this case the UAE) to provide rights for (typically foreign) airlines to offer air transportation services such as international passenger and cargo services (U.S. Department of State 2017). The overall goal of these Open Skies agreements are to promote consumerism, competition, and growth of both the air transportation industry and the U.S. economy. Currently, experts estimate that Open Skies agreements will increase the annual economic consumer gains by approximately $4 billion, which is a substantial increase and will only benefit the U.S. economy (U.S. Department of State 2017). This promotion and stimulation of the industry (and economy) is facilitated through the expansion of international passenger and cargo flights by eliminating the concept of governmental control in commercial airline decisions. These decisions made by the commercial airlines are focused around routes, capacity, and pricing. Thus, the reason why the commercial airlines want to remove the notion of governmental control in their decision-making process is so that they (the commercial airlines) can provide more affordable, passenger friendly and convenient, and efficient/effective air transport services to the traveling public. Consequently, (without government control), the promotion of increased travel and trade, high-quality job creation, and economic growth will transpire, ergo industry- and U.S. economy wide stimulation will occur. From a general perspective, Open Skies agreements serve many purposes that benefit the U.S. in terms of finances and safety. Specifically, these agreements assist in the expansion of cooperative marketing opportunities between airlines, aid in the liberalization of charter regulations, improve flexibility for airlines operations, and ensure both governments (e.g. the U.S. and UAE) commit and maintain to a high level of safety and security to sustain the air transport continuity (U.S. Department of State 2017).

Open Skies agreements have been in existence since 1992, and has grown significantly since then; currently, the U.S. has Open Skies agreements with 120 foreign partners. More recently, the U.S. finalized agreements with several counties such as Ukraine, Serbia, Cote d’ Ivoire, the Kingdom of the Netherlands, and several other countries (U.S. Department of State 2017). Additionally, the U.S. finalized a modernized air transport agreement with Mexico, of which seems to be a promising feat and will potentially provide both an economic and working relationship benefit for the counties involved (i.e. U.S. and Mexico).

Traditionally, the U.S. Open Skies agreements have been directly correlated and/or associated with the concept of airline globalization, and for good reason. These agreements, at their essence, provide maximum operational flexibility for all airlines involved (U.S. Department of State 2017). Therefore, by allowing the involved airlines unlimited access to each other’s markets, which includes providing services to intermediate locations, airline globalization and foreign relations are enhanced because of this notion of ‘route flexibility’ that is created by the agreements. However, these bilateral Open Skies agreements are not the only ‘contracts’ the U.S. has established. The U.S. established and negotiated two multilateral agreements, one in 2001, and the other in 2007. The Multilateral Agreement on the Liberalization of International Air Transportation (MALIAT) occurred in 2001, and was formed with New Zealand, Singapore, Brunei, Chile, Samoa, Tonga, and Mongolia (U.S. Department of State 2017). The second multilateral agreement occurred in 2007, and is known as the Air Transport Agreement with the European Community. This agreement consists of negotiations between the U.S. and the European Community, including its 27 member states.

The US-UAE Open Skies Agreement is one that is causing a tremendous amount of controversy within the aviation industry, especially the commercial facet. The primary companies spearheading the US-UAE agreement are Delta Air Lines, United, and American, who are also known as the ‘Big 3’. The United Arab Emirates, or UAE, is a Constitutional Federation composed of seven emirates, which are as follows: Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah, and Fujairah (UAE Government 2017). The US-UAE Open Skies Agreement is essentially a bilateral contract between the U.S. and the seven emirates previously mentioned. This agreement between these two governments allows their respective air carriers to travel in/through and provide air carrier services within each other’s country with no specified limit. Essentially, the US-UAE Open Skies agreement grants the U.S. unlimited access and the right to fly in/through, establish routes, and service the traveling public community within the seven emirates composing the UAE, and allows the three major UAE airlines to do the same in the U.S. The fact that the three major UAE airlines, namely Emirates, Etihad Airlines and Qatar Airways are given unlimited access in terms of ‘route freedom’ within the U.S. and are subsidized for it, is the primary reason why U.S carriers such as Delta Air Lines are opposing the Open Skies agreements.

Two long-haul carriers that are a part of the US-UAE Open Skies agreement and receive government subsidies are Emirates and Qatar Airways. As mentioned previously, because of the US-UAE agreement, long-haul carriers like Emirates and Qatar can fly into the U.S. and service the traveling public as much as they want as well as receive government subsidies for doing so, which has imposed an unfair advantage on U.S. carriers. For instance, because of the US-UAE agreement, Emirates can fly/service nine U.S. cities from its hub located in Dubai, while Delta Air Lines and United each only have one (daily) flight to Dubai and none to Abu Dhabi (Mouawad 2015). It is this significantly large 9:1 ratio that has U.S. carriers like Delta Air Lines and United extremely upset and leading the charge against the Open Skies agreement because of the disadvantage U.S. carriers are facing, primarily manifesting in the forms of financial decline and increased competition. According to Mouawad (2015), the first Open-Skies agreements formed between the U.S. and the UAE occurred in 1999. In 2014, the U.S. established a customs and immigration pre-clearance facility in the Abu Dhabi airport. The establishment of a customs facility enables passengers flying into the U.S. to clear immigration prior to the flight (Mouawad 2015). This decision to create a customs and pre-screening facility did not sit well with U.S. carriers, and is yet another reason for their opposition. Their frustration however, is warranted because the new facility essentially allows passengers to ‘circumvent’ TSA and/or other security protocol, which notably reduces the security and safety of the air carriers, airport personnel, and traveling public.

The first of the two long-haul carriers that are currently a part of the US-UAE Open-Skies agreement and receiving a government subsidy is Emirates. According to Culp (2016), Emirates Airlines is an airline that is (now) entirely owned and operated by the Government of Dubai, provides commercial passenger service, is based out of Dubai, and has been in existence since 1985. Emirates Airlines currently provides air transport services to numerous cities on six continents and offers nonstop flights from Dubai to several U.S. cities such as New York, Houston, Los Angeles, and San Francisco. To facilitate and accommodate the needs of its consumer base, Emirates Airlines uses a fleet composed of the Boeing 777, Airbus A330, and Airbus A340 (Culp 2016). The other, long-haul carrier that is currently a part of the US-UAE Open-Skies agreement and receives a government subsidy is Qatar Airways. Established in 1997, Qatar Airways is the national carrier for the State of Qatar in addition to being one of the fastest growing airlines operating one the youngest fleets in the world (Qatar Airways 2017). Qatar Airways provides air carrier services to over 150 destinations, some of which include South Asia, South America, and the Asian Pacific. To date, Qatar Airways fulfills its duties as an air carrier (both passenger and cargo) via operation of 194 total aircraft, 109 of which being Airbus aircraft, while the remaining 85 aircraft are Boeing. This number however, does not include the airlines 11 Bombardier and Gulfstream aircraft utilized for corporate purposes only (Qatar Airways 2017). With that many aircraft and destinations, a substantial number of employees are necessary to ensure smooth operations, of which Qatar Airways employs more than 44,000 employees (worldwide), 30,000 being airline personnel.

2) Do any long-haul US carriers receive subsidies or have received subsidies in the past? If so, which airlines? Why?

I do not believe that there are any current long-haul U.S. carriers receiving government subsidies, however the same cannot be said for those in the past. When the concept of commercial aviation first transpired, it was in the form of ‘air mail’. The Airmail, or Kelly Act of 1925, authorized the United States Postal Service (USPS) to contract air mail routes (CAM routes) to private airlines in order to deliver the mail (Leff 2016). The airlines were paid based off how much mail (in terms of weight) they could carry, which led to said airlines mailing object such as bricks, in efforts to increase their revenues. The most notable airlines that were awarded the initial CAM route contracts from the Airmail Act of 1925, were American Airways (later American Airlines) and United Aircraft (later United Airlines). After the Air Mail Act of 1930, and the subsequent ‘Spoils Conference’, the Postmaster General consolidated the various CAM routes and awarded the routes to only three carriers, which significantly reduced the competition. The airlines that were awarded the routes were as follows: United Airlines (northern route), Transcontinental and Western Air (TWA; mid-US route), and American Airways (later American Airlines; southern route) (AvStop.com 2017). Furthermore, according to Leff (2016), American Airlines received governmental support (i.e. a subsidy) from the Roosevelt Administration’s Reconstruction Finance Corporation during its first major aircraft order. Therefore, two of the three long-haul U.S. carriers, namely United and American Airlines were essentially born and nurtured from varying government subsidies during the 1930’s for operating the CAM routes and delivering mail (which at first was based on weight, then later, volume). The operation of the CAM routes back in the thirties by United and American airlines during their infancy denotes the origins of ‘commercial aviation’ as we know it today.

3) Another complaint is that long-haul foreign carriers have made aircraft purchases at "below market interest rates" that are unavailable to US carriers. How is this possible? Please discuss the Export-Import Bank.

Long-haul foreign carriers are able to make aircraft purchases at "below market interest rates" that are unavailable to U.S. carriers because of how the Export-Import Bank of the United States is set up regarding the exclusive allocation of ‘special interest rates’ to foreign carriers. The Export-Import Bank of the United States, or EXIM, is an independent, self-sustaining agency with an 82-year record of supporting American jobs via financing the export of U.S. goods and services (Export-Import Bank of the United States 2016). It is because of the policies and procedures governing the EXIM bank that foreign-owned carriers are able to purchase aircraft at rates that are significantly below the market interest rate (i.e. the rate U.S. carriers must pay). Specifically, the attainment of such low interest rates by foreign-carriers is made possible through the new aviation large aircraft policy. This policy enables EXIM to finance the export of U.S. produced goods (e.g. aircraft) and services for aftermarket (i.e. post-manufacturing) use on foreign-manufactured large aircraft for U.S. exporters of all sizes (Export-Import Bank of the United States 2016). In addition to receiving low market interest rates, foreign-owned carriers, especially those in the Gulf regions, do not pay taxes at all, as opposed to U.S. air carriers who pay relatively high tax rates (Harress 2013). Thus, because of EXIM policies, there are low rate interest loans that are only available to foreign-owned airlines, which U.S. carriers do not think is fair since they are not only required to pay a high tax rate (while foreign-carriers are not taxed), but they are also only eligible for the (relatively high) ‘market rate’ interest loans.

4) Are there any current issues with Norwegian International Airlines and the Open Skies Agreement?

Norwegian Air Shuttle (the parent company of Norwegian International Airlines) faced a tremendous amount of opposition from U.S. air carriers and their respective lobby groups during their request to expand low-cost flight from Europe and Asia (Mouawad 2015). Their appeal to the U.S. Department of State to be granted an Open Skies agreement received a considerable amount of pushback and negativity from U.S. carriers, primarily the ‘big 3’ (e.g. Delta Air Lines, United, and American), so much in fact that their application was delayed. Initially, Norwegian International Airlines applied to the U.S. Department of State for an Open Skies agreement in December 2013, as its parent company, Norwegian Air Shuttle (a low-cost carrier) already established several routes at U.S. airports (Jansen 2016). Typically, when a foreign-carrier applies for an agreement, the process is rather fastidious, but requires nothing out of the ordinary. However, in the case of Norwegian International Airlines (i.e. Norwegian Air Shuttle), this process was not seamless and was delayed by accusations from the ‘big 3’, who claimed the Norwegian airline was attempting to bypass labor and safety laws (Jansen 2016). According to Jansen (2016), this attempted ‘bypass’ would be accomplished by Norwegian International Airlines having their headquarters in Ireland and hiring Asian employees at a below-market wage. With such strong claims and detailed plans made by the big 3, the U.S. Department of State had no choice but to delay the agreement until the claims could be investigated and a conclusion reached. Obviously, if the U.S. were to disregard such a claim regarding a foreign-carrier, the integrity and reputation of the department would be damaged significantly, potentially causing any current (or future) Open Skies agreements to be suspended (or prevented). However, after thorough investigation and review of both Norwegian International Airlines policy/plan and the U.S. agreement, the U.S. Department of State concluded they had no reason to reject the application as the concerns regarding the hiring/employment practices were adequately addressed and no laws were being broken. Albeit Delta Air Lines, United, and American were strongly against and opposed Norwegian International Airlines application for an agreement, there efforts were to no avail.

5) Finally, critically analyzing the above information, do you feel that the global "playing field" of long-haul carriers is fair?

After critically analyzing the information above in conjunction with the numerous sources I conferred while conducting my research, I do not feel as if the global ‘playing field’ of long-haul carriers is fair. However, albeit I do not believe it is fair, I do believe it is necessary in stimulating (and improving) our economy.

Being able to purchase a wide-body aircraft at a ‘discounted’ price with no taxes is already unfair, but manageable/tolerable (by U.S. carriers). However, the fact that foreign carriers are doing so at an alarming rate to take advantage of the unlimited access to service the U.S. market is absurd. Subsequently, purchasing several aircraft at a time to increase the number of flights diminishes (or dilutes) the competition by beating U.S. carriers (air fares), thus placing said carriers (e.g. Delta Air Lines, United, and American) at a severe disadvantage via unfair competition. This dilution of competition is illustrated by a ratio I mentioned in an earlier response, specifically regarding the number of flights Emirates operates to that of Delta Air Lines and United. Emirates currently provides air service to nine U.S. cities from its hub located in Dubai, while Delta Air Lines and United each only have one (daily) flight to Dubai and none to Abu Dhabi. This 9:1 ratio denotes only one aspect of the unfair (competition) advantage foreign-carriers impose on U.S. carriers, ergo why I strongly believe the global ‘playing field’ is imbalanced.

The fact foreign-carriers are not taxed, but U.S. carriers are (at a high rate) is another unfair advantage imposed against U.S. carriers. This fact, in conjunction with ‘special interest rate loans’ (via EXIM) only applicable to foreign-owned carriers are primary reasons as to why the ‘playing field’ is tilted in favor of foreign-carriers. Therefore, to balance the ‘playing field’, I believe the tax rates accessed to U.S. carriers should be revised (slightly) or foreign-carriers should be taxed at least half of the current U.S. air carrier tax rate. Additionally, the policies governing the EXIM bank should be amended to allow U.S. carriers to be eligible for interest rate loans somewhat akin to those of foreign carriers. I realize the prescribed actions above may not transpire and/or solve anything, but they are more so a sign of good faith, demonstrate a willingness to resolve conflict and ease tensions, as well as denote an understanding of the sentiments expressed by both parties.

As I mentioned earlier, certain aspects of this ‘playing field’ are necessary as the US-UAE Open Skies agreement have promoted consumerism, competition, and (economic and aviation industry) growth. That said, this agreement may be one of the instance where U.S. carriers are forced to take the good with the bad and the ugly.

Enjoy!

References

AvStop.Com. (2017). The Airmail Act of 1930. Aviation Online Magazine. Retrieved from http://avstop.com/history/needregulations/act1930.htm

Culp, B. (2016). Information about Emirates Airline. USA Today. Retrieved from http://traveltips.usatoday.com/information-emirates-airline-21521.html

Export-Import Bank of the United States. (2016). The aviation exports policy. Export-Import Bank of the United States. Retrieved from http://www.exim.gov/policies/aviation-exports

Export-Import Bank of the United States. (2016). The facts about EXIM Bank. Export-Import Bank of the United States. Retrieved from http://www.exim.gov/about/facts-about-ex-im-bank

Harress, C. (2013). Why does Washington favor foreign airlines over US carriers? Low-interest-rate loans available only to non-US airlines hurt US carriers. IBTimes. Retrieved from http://www.ibtimes.com/why-does-washington-favor-foreign-airlines-over-us-carriers-low-interest-rate-loans-1474416

Jansen, B. (2016). DOT approves contested Norwegian Air flights. USA Today. Retrieved from http://www.usatoday.com/story/travel/flights/todayinthesky/2016/12/02/dot-approves-contested-norwegian-air-flights/94838292/

Leff, G. (2016). Total loss for heavily subsidized US airlines against the big Gulf carriers. View From The Wing. Retrieved from http://viewfromthewing.boardingarea.com/2016/07/26/us-airlines-lose-case-against-gulf-carriers/

Mouawad, J. (2015). Open-skies agreements challenged. The New York Times. Retrieved from https://www.nytimes.com/2015/02/07/business/us-airlines-challenge-open-skies-agreements.html?_r=0

Qatar Airways. (2017). Qatar Airways fact sheet. Qatar Airways Media Release. Retrieved from https://www.qatarairways.com/iwov-resources/temp-docs/press-kit/Qatar%20Airways%20Factsheet%20-%20English.pdf

UAE Government. (2017). Seven Emirates. The Official Portal of the UAE Government. Retrieved from http://government.ae/en/seven-emirates

U.S. Department of State. (2017). Open skies agreements. Promoting Global Travel and Transportation. Retrieved from https://www.state.gov/e/eb/tra/ata/

U.S. Department of State. (2017). Open skies partnerships: expanding the benefits of freer commercial aviation. Bureau of Economic and Business Affairs. Retrieved from https://www.state.gov/e/eb/rls/fs/2017/267131.htm