There’s an ongoing spat between United, Delta, and American Airlines on the one hand and Etihad, Emirates, and Qatar on the other.
The former US airlines don’t believe they should have to compete against the large aggressive Gulf carriers which they claim are substantially subsidized by their governments. They don’t think consumers should reap the connectivity advantages, service advantages, or low prices that their prices bring.
They released a report purporting to do the math on subsidies to the big Gulf carriers. I was not impressed.
And I believe that the US airlines can and should compete successfully without government protectionism.
A pretty big piece of research dropped that ought to play a signficant role in the debate – detailing just how subsidized the US airlines have been. While they’re throwing potshots at their competitors, they remain silent on the government benefits they received in their own startup eras and far beyond.
The US Airline Industry Has Been Excessively Subsidized
I’ve written in the past about subsidies that the US airline industry received.
For instance, the very start of the industry in the US was shaped by (corrupt) postal service contracts. The Postmaster General effectively dictated which airlines succeeded and which ones failed.
The very first large aircraft order by American Airlines was subsidized by the Reconstruction Financial Corporation. It was hardly a coincidence that future Democratic administration Secretary of Commerce C.R. Smith, then chairman of American Airlines, was best man in FDR’s son’s wedding.
Delta Airlines and United both have their substantial Tokyo operations as a result of the spoils of World War II.
In recent times airlines received big fuel tax breaks, and Delta has an oil refinery in Pennsylvania that received nine-figure tax breaks.
US Airlines Don’t Complain About Their Other Subsidized Partners
Delta is considering a hub operation in Shanghai the same way they operate at significant levels in Amsterdam. They have friendly relationships with Skyteam partners China Southern and Shanghai-based China Eastern. Both of these airlines were formed by the Chinese government, using government funds to acquire aircraft and develop operations. And they remain heavily promoted by and beholden to the state which continues to be a major investor.
American’s flight attendants may criticize Nicole Kidman for her relationship with Etihad, but they don’t really criticize their own employer’s codeshares with the airline — or Qatar’s membership in oneworld.
Delta may call out the Gulf carriers and try to tie them to 9/11, but they partner in SkyTeam with government-supported Saudia — a government that at some level was actually complicit in 9/11.
They call out the Middle East carriers because they’re fierce competitors and growing in US markets, though they really do not today compete head to head on many routes. There’s a fear that they could grow their transatlantic business (like Emirates’ New York JFK – Milan route).
They want government protection from competition, not “a level playing field.” You don’t hear the US carriers criticizing the subsidies of their other partners — or the ones they receive.
US Airlines Have Received More Subsidies than Middle East Carriers: Congressional Budget Office
In 1999 the Congressional Research Service put out a paper (.pdf, archived at Wikileaks) detailing government subsidies for US airlines.
Between 1918 and 1998 the federal government spend $150 billion in support of aviation.
In the 1940s and 1950s subsidies to US airlines were a huge political issue for the railroads.
The Civil Aeronautics Board set airfares and granted route authorities to maintain high prices and guarantee airline profits. It was only in 1976 and 1977 that they ‘experimented’ with price competition, allowing Texas International for instance to cut prices on intra-Texas routes and compete against then intra-state startup Southwest.
The US government has long promoted air service to remote communities. Local air service subsidies totaled nearly $2 billion dollars between 1954 and 1983. This doesn’t include the post-deregulation “Essential Air Service” program. Between 1958 and 1967 the US government guaranteed about a billion dollars in aircraft purchases by US airlines (nearly 20% of which defaulted).
To get to the $155 billion total, you include capital expenditures on airports and air traffic control. But remember that the US airlines are criticizing not just direct support of the big 3 Gulf carriers, but also the subsidies to their capital operations in the UAE and Qatar as well. That’s not how it’s usually portrayed but it’s part of how they get to the figure.
It’s not 100% apples to apples but this doesn’t include subsidies to US airlines over the past 20 years, structural subsidies (such as resulting from military conquest), or fuel tax rebates. Attributing $155 billion to US airlines through 1998 may not be the right exact number, we can debate methodology, but at the point that the US airlines stretch to attribute $40 billion to the Gulf carriers this is not an unreasonable comparison.
(HT: US Travel Association)
We can all talk about the amount of subsidies, but the real issue in my mind is that these airlines are owned and operated as an arm of these governments as state owned enterprises.
For the record have the same problem with Air India, and the Chinese airlines
The ME 3 have the vast resources of their respective governments at their disposal because they are owned by them. Where are the capitalists around here.
I would also venture to guess that plenty of money has flowed from the powerful government elite of those countries into the pockets of some pretty unsavory characters who would love to do harm to the United States.
Gary, this is exactly what I have been saying about the US3. They are crying boo-hoo when they have:
1 – Filed bankruptcy, a good method to bust union contracts,
2 – Received tax credits,
3 -Allowed to merge eliminating U.S. competition and
4 – Oil prices have declined by more that 50% and airfares haven’t dropped at all so they are pocketing all that cash.
The US3 should stop crying and start competing. What more do those bloodsuckers want?
@ Steve Case:
Easy:
1. No unions
2. More tax credits.
3. Monopolies/Oligopolies by route
4. More cash
let’s not forget the $15 billion, yes billion with a capital B that Congress handed out a week after 9/11.
How soon they forget!
It seems to be to be a very unreasonable comparison. It’s one thing to get subsidies in the form of airport capital expenditures, etc. It’s quite another to be owned and operated by a government that pretty much guarantees you will not fail under nearly any circumstance.
Allow US airlines to enslave foreign laborers for pennies. We’d have better lounges and on-board services.
@Keith
US airlines are already enslaving their American laborers. Look at the salary flight attendants and even pilots are making. Not any better than Norwegian and others if you take into account local living cost.
How funny. So these out-of-control American CEO’s mouthing off about how unfair life is and this. WTF! So typical American. And it took a travel blogger. I’d fire the lot of them and their old and overweight, lazy flight crews. Throw the baby out with the bath water and start again Delta, United and American. you bloody frauds.
Irrespective of who’s dick is bigger and who’s mouth isn’t, I will buy the the best service, the best product and the best safety. EY, EK and QR win all categories hands down and until the Yanks start playing in the grown-ups arena and stop whining I will continue to do so. I don’t give a flying f… who funds them.
Three words: Fly America Act. The U.S. airlines reap huge revenues from bloated fairs offered to captive government customers. United’s operation at Dulles is a great example of that — do the bare minimum with crap facilities, planes, and staff, as government employees are barred from flying the better foreign airline on a given route.
I can tell you one thing the Middle Eastern airlines don’t have — unions.
If it weren’t so obvious that other countries do it better, I might not even comment.
In many ways I’ve never understood “aviation’. It’s another form of transportation but yet never feels that it should have to compete on just about any basis, nor does it feel obliged to provide it’s consumers (at least here in the US) a superior product. In fact, US based companies no longer seem to want to have to prove themselves in direct competition, opting for protectionism wherever it may be found.
Only having flown several another countries regional service recently, I can only testify to what I’ve seen with my own eyes. Their planes and equipment are nicer and their crew members more interested in the consumer. ( These would be considered comparable first world countries, not the oddball I struck oil in my backyard billionaire scenario which by the way explains a great deal of TEXAS)
Take that in whatever direction you’d like regarding this issue.
@Russ how about the US government dropping nuclear bombs on Japan and giving Delta Air Lines (then Northwest Orient) a hub in Tokyo?
Subsidies or not, I look at the service. US carrier have always scored low on my list for in-flight service as well as counter/phone customer support. My experience with Emirates and Etihad has been superior … and though I flew coach on them, I felt like their in-flight service was far better than business/first on many US carriers.
that’s my $0.02
Khaled
@Marcus: It’s not just aviation. It seems like any large company in the USA doesn’t give a rat’s rectum about customers these days. Shareholders over all. If you have any question about this, give your local cable TV company a call and see how that works out for you
You raise some great points Gary which I often think the US carriers are blind to. They often like to paint a tale of woe and yet are ardent protectors of their territory rather than a truly competitive market.
The open skies agreement has seen changes over time and now I heard that the Atlanta to Manchester route will be flown by Virgin Atlantic rather than Delta. In many respects I welcome this change because the ground and on board service you get from European and Asian carriers consistently exceeds the low, give you nothing approach of many of the US carriers.