The Business Travel Coalition’s Kevin Mitchell apparently sent out an email criticizing Delta’s call for protectionism against Emirates, Etihad, and Qatar. And Delta sent out an email attacking back.
There are a lot of vested interests in this debate and each side tries to advance its commercial case, including by hiring experts to represent them in the court of public opinion. There are also facts.
Copyright: idealphotographer
I was sickened to read Delta’s response to an admitted partisan on this issue, however, because it was so disingenuous. Nearly every word of their email warps the space-time continuum of truth.
- Delta begins by noting “Kevin represents and is being paid handsomely by companies that benefit from the subsidies” but aren’t themselves transparent about the people featured as
independent experts’ in their video who are themselves paid handsomely by companies that stand to benefit from protectionism.Take, for instance, former Transportation Secretary James Burnley whose bio notes his role as outside legislative counsel to American Airlines.
For avoidance of doubt I have never been paid by Emirates, Etihad, or Qatar and have never done any consulting work on the issue of US Open Skies treaties. Nor to the best of my knowledge have I ever met Kevin Mitchell.
- Delta claims that when Mitchell points out the Open Skies treaties do not prohibit subsidies (because they only mention the word subsidies once and don’t prohibit them, and even contemplate traffic rights for airlines owned entirely by governments), he’s “parsing words” and notes that the treaties seek a “fair and equal opportunity to compete in the international market.”
That’s Delta parsing words, or rather taking them out of context, because the fair and equal opportunity to compete that the treaties provide for is that government shouldn’t do anything to stand in the way of the preferred service airlines from either country wish to offer.
Delta, in calling for limits on air service by Emirates, Qatar, and Etihad, is calling for an end to the “fair and equal opportunity” that the treaties seek to provide.
- Delta claims that Gulf carriers are ‘dumping’ capacity “at prices that are too low to allow economical services.” But major US airlines have always responded to upstart competitors by dumping capacity into markets where to entrants seek to compete. They lower prices. And they use their sales agreements and frequent flyer programs to drive competitors out of the market.
These same US airlines have successfully argued for a standard that it isn’t ‘dumping’ if the carrier could make money filling all its seats at the prices offered. Anything other than that is business judgment.
And the major US airlines have exercised poor business judgment, offering uneconomical services, for the majority of their existence — Delta has lost as much as $9 billion in a single year. Still the idea that Gulf carriers offer fares lower that US airlines is strange (are these US airline fares from U.S. airlines artificially low?), yet rebound to the benefit of consumers in any case.
- Delta claims that the Gulf carriers “are breaching their obligation under Article 11 of the agreements to allow U.S. airlines a ‘fair and equal opportunity’ to compete.” However article 11 doesn’t mention subsidies at all.
Article 11 requires that,
neither Party shall unilaterally limit the volume of traffic, frequency or regularity of service, or the aircraft type or types operated by the designated airlines of the other Party, except as may be required for customs, technical, operational, or environmental reasons under uniform conditions consistent with Article 15 of the Convention.
If the US were to act on Delta’s complaint they would be abrogating not enforcing the treaty. Delta gives away the entire game, though, when they don’t even claim the Gulf carriers violate the only treaty article that mentions subsidies.
- I nearly spit out my coffee when Delta claims not to be asking the government to impose a freeze on flights by Emirates, Etihad, and Qatar to the U.S. in spite of their rights under the ratified treaty, because Delta is merely asking for a voluntary freeze — a voluntary freeze under threat by the U.S. government.
- Delta claims that if the US limited flights otherwise allowed under these Open Skies treaties, we shouldn’t expect retaliation, and Fedex could continue operating its Dubai hub — but that “[t]he impact of unfair Gulf carrier competition on the cargo sector is not our concern” in any case. This is about Delta’s interests only, not national interests.
- Bizarrely, Delta claims it “strongly supports the U.S. Government’s open skies policy” but then explains what it supports are the things that benefit Delta like allowing for anti-trust immunized joint ventures which reduce competition.
The idea that their position helps consumers is laughable when they’ve said what they want is “new rules on price-lowering.”
So much for Delta “reach[ing] out directly to set the record straight.”
It’s not the first time on this issue that Delta should be ashamed of themselves. Nor is it the second time either. In fact they’ve already had their three strikes.
Good grief! Delta wouldn’t know the truth if it sat on its lap and called it daddy. Next thing you know Delta will be colluding with the Russians. I hear they can run a very good internet disinformation campaign.
Delta should be careful not being found guilty of slander. I suggest Mr. Mitchells retain a lawyer with extensive experience with libel cases.
“Fair and equal opportunity” would be if both sets of companies received $50b from their governments over the past 10 years that doesn’t need to be paid back. Counting the number of times the word subsidy appears in the agreement is just playing word games because the core premise is weak.
It’s not dumping if a privately funded company sets low prices for a time to compete with new entrants, because if it does it too long, it will go bankrupt. That is just a competitive pricing strategy. Dumping is when $50b of government money that does not have to be paid back, is used as a weapon to inflict losses on competitors. If you think that fits into the definition of fair and equal opportunity, I don’t know what else to say.
Either we need to grant Delta and their buddies all of their wishes, or we need to nationalize the commercial airline industry and match the spending of the gulf governments dollar for dollar. It is no fair letting a government compete with a privately funded company. It is like letting Shaq dunk on a 5 year old.
Why are you worried at all about Delta? They’re the most profitable airline, US airlines together are earning the bulk of the world’s profits, and employment is peaking. Why would you subsidize or protect them?
Subsidizing them means redistributing income from the median taxpaying household to the most profitable airline and its shareholders. That just doesn’t make sense.
And the claim about $50 billion in subsidies, well if you apply the craptastic standards of the white paper that concocted that figure, US airlines are far more subsidized. That white paper by the way fabricated evidence, and the airlines were caught, but they keep repeating the number enough so that people assume it must be true.
I really don’t care about Delta, honestly. I hate the crap they pull as much as the next guy. But, I am just a lifelong economist and I really believe you are missing the big picture here and do not appreciate the magnitude of the numbers.
Have you looked at how many planes the Mideast carriers have on order? The market value of the planes they haven’t even received yet is over $100 billion. Do you know what the market cap of all 3 of the U.S. carriers is? Less than $80 billion combined. It is obvious what is happening. The mideast carriers want to take over aviation and they will if we allow them to pour oil money into bankrupting our companies. It is a virtual certainty they will go bankrupt without intervention. The numbers are too gigantic.
All of the tit for tat and back and forth about these minute details about subsidies of the past and routes and today’s profitability is a complete waste of time to even talk about. The ME3 will bankrupt US airlines without a doubt if something is not done. I’m not sure how much louder they can scream this message before anyone hears them. I know their tactics are distasteful to you, but what else are they going to do but make their case as strenuously as possible? They are desperate. They know what is coming, they know it is the knockout punch and nobody seems to care.
Do you know it wouldn’t even be possible for US carriers to raise anywhere near the $100b it would take to match the orders of the ME3? I’d hang myself if had to be the bookrunner on that roadshow trying to convince institutional investors why they should more than double their investment in an industry worth $80b in market cap and is about to be swamped with overcapacity. My word.
And by the by, Boeing’s been saying the middle east carriers will invest $730 Billion in new planes over the next 20 years. That could just be exaggeration to get their own investors excited, but if it is anywhere near that amount the US carriers are done and gone.
@Rob
It is completely impossible for the ME3 to bankrupt the US airlines, because they cannot fly domestic routes in the US. Understand that the major investors (who not only understand markets, but are willing to put their money where their opinions are) have Delta stock at an all time high. They don’t seem worried at all. It is unreal that a company making record profits whose stock is at an all time high can manage to play the victim.
@Doug
I get that the stocks are at highs now and so are earnings. But to then extend that as evidence there is nothing to worry about is a false hypothesis. In my opinion, the stocks are at all time highs for 3 reasons. 1)Earnings are strong (now) thanks to low oil prices, 2) Expectations of tax cuts and economic stimulus are great for early/mid-cycle cyclicals like Airline stocks and 3) You are right, investors aren’t worried about the ME3…but it’s because they expect Trump to shut down the shenanigans. I would also just point out, all of the US Airlines all hit all time highs before each of the last 3 times they went bankrupt too. So, let’s not get too cute with what we think the stock price tells us about how much we should worry about profits when an industry is smothered in an avalanche of overcapacity.
Surprisingly, one of the blogger on boardingarea support and advocated that US3’s (including Delta) claim to be true and have merit. Even go far to say that ME3 have received subsidies and US3 is treated unfair, based on written agreement. Tough he later admit that he holds no legal degree or knowledge and experience in legal matters. Maybe its just a clickbait, a cheap one at that…
@Rob
Focusing on the stock price ignores the bigger point, which is that the ME3 cannot enter the domestic market. The overwhelming majority of commercial airline traffic is domestic, and the US carriers are protected from any foreign competition there. For that reason the ME3 CANNOT put the US carriers out of business.
@Doug.
Yeah, sorry, I ignored that argument the first time around because halving the addressable market for a capital intensive industry will absolutely bankrupt every company.
@Rob if you are “a lifelong economist” you would know there is literally no economic theory that supports protecting mature profitable industries.
@Rob — The ME3 cannot bankrupt the US airlines under current law, even if the Gulf nations were to continue to pour tens of billions of dollars in additional subsidies into their airlines. To bankrupt the US airlines, they would have to be able to fly USA domestic routes, and the odds they will be allowed to do that are near zero. They could do additional damage to the USA airlines if they exercised their additional (and completely absurd) “fifth freedom” rights to carry passengers between the USA and Europe. That seems unlikely to me, as I don’t see how spending billions on that increases the glory of their kingdoms very much. I also think that move WOULD prompt the US gov’t to get off its butt and do something about this silliness.
There’s no point in arguing with Gary on this issue. He won’t change his mind, regardless of the facts. He will continue to demagogue the issues. I do think it’s worthwhile to occasionally post notes here in the hope that more fair-minded Americans can discover for themselves the real facts and see why it’s wrong for the US gov’t to allow the multi-multi-billion dollar subsidized Middle East airlines to offer unlimited flights to the USA. While these flights won’t bankrupt the US airlines, they do hurt their investors and employees (a big issue), and do limit the service that can be provided through the US airlines’ domestic network (a smaller issue, at least for the moment). As Americans, most of us believe in fairness, and it’s not hard to understand why private US companies should not have to compete with massively subsidized foreign companies, even if it prevents Gary and other bloggers from flying for free in over-the-top (subsidized) premium cabins.
BTW, Gary, if you were truly “sickened” by Delta’s more-than-reasonable letter, you have a reality problem. Delta was merely advocating its position — and doing a good job of it, I would note. Are you also “sickened” when you read op-ed pieces in the NY Times or WSJ that you disagree with? That’s pretty much all Delta was doing here. Honestly, I think Delta should have gone after Kevin a little harder. To my knowledge (and please correct me if you have other genuine information), the fancy-sounding “Business Travel Coalition” is a one-man operation: Kevin Mitchell. He has been paid big bucks by the Middle East airlines and related Middle East government-owned businesses, so he can pretend to represent some sort of broader-based movement. His other “members” are the US companies that benefit from the subsidized flights: in-bound travel companies and the small US airlines who pick up the Middle East pax when they arrive in the USA. I’d call Kevin’s business a “front.” What would you call it?
Mitchell isn’t a fully independent voice. Delta is obviously a self-serving one, and presenting ex-government officials on their payroll and American’s as though they were independent voices.
Regardless of what you think US policy OUGHT to be, the thing is that what Mitchell wrote is largely TRUE and Delta’s ‘setting the record straight’ is mostly lies. The disingenuousness is what’s so tough to swallow.
And that doesn’t make it like a major newspaper op-ed, those generally have higher standards [having written them myself, I have to document and prove each claim I make before editors will sign off]. Op-eds are advocacy pieces, they aren’t always good, but the Delta letter wouldn’t pass muster at the Journal.
@Gary
There most certainly is an economic theory that supports protecting mature profitable businesses from government spending, it is called “crowding out” effect.
@iahphx
I agree mostly, but would have to disagree that domestic routes would be enough to keep a heavily capital intensive industry afloat when it has been built out to meet the demand of a global market. Either extremely expensive assets will sit underutilized and not earning enough to support the cost of the capital tied up in them, or they would be repurposed to fly domestic routes and flood their only remaining domestic market with overcapacity and plummeting prices. And while that might sound good for the consumer…that would only be for a transition period while they are going bankrupt.
That Delta advocates in the interest of Delta shouldn’t be a surprise or a problem. That they couch it as being in the interests of the U.S. is much more debatable.
Those massive ME3 orders from Boeing are creating tens of thousands of American jobs. Those routes they fly out of the U.S. require plenty of American staff to service.
While some of what the ME3 do is in competition with the “race to the bottom” U.S. carriers who show their true colors with the pathetic service they offer on the domestic routes where they have inadequate competition, a lot of it doesn’t. The ME3 serve many destinations that the U.S. carriers don’t and wouldn’t serve.
Can I ask why the US3 were allowed to declare bankrupcy, shed their debts and their pensions and continue to operate? In the majority of the world, a bankrupt airline gets shut down (See Swiss, Ansett). If the US3 continue to claim the ME3 profits are underpinned by their respective governments, how can it not be said the same for the US3? And should other countries start asking why US airlines can be “subsidised through bankruptcy” and to block new flights due to an “uneven playing field”?
@Rob no, nothing in trade theory supports this at all.
@DaveS
You are correct. We would essentially be yielding the commercial aviation industry, but gaining Aerospace engineering business as a country via Boeing selling the airplanes to the countries flooding the commercial aviation market with overcapacity. I bet we could also sell a lot of weapons to North Korea if we wanted to. But the question remains, is that really something we want to do as a country?
@JohnS
When a U.S. airline goes bankrupt…that is it. Game over. Equity holder are wiped out same as anywhere else. What is confusing you is that there are actual buyers willing to step up to bankruptcy court and make a bid for the remaining assets of the defunct company. where that may not be the case in foreign examples because in many of those the reasons for bankruptcy of the predecessor are government interference issues that nobody else wants to mess with themselves. Folks buying assets from a US bankruptcy or liquidation have leverage because the debt holders of the defunct company are trying to salvage as many cents on the dollar as they can get. There is no “subsidy through bankruptcy” the buyer of the defunct assets is taking risk for the discount they receive.
Y’all are making this way too hard. The economic theory that delta fears is competition because competition limits profits. That’s economics 101. Delta and the US Big3 have created an effective oligopoly that gives them much greater control over domestic capacity, price and other factors. This has been extremely profitable for them.
It cannot be argued that airline executive IQs suddenly increased. The difference is industry structure changed, and the amount of competition decreased. Delta knows that if it can find ways to limit competition in international markets as well, it will be able to increase profits even more. Having no shame, delta and the Big3 wrap themselves in the American flag, obfuscate, and create false narratives solely in the pursuit of the interests of shareholders and executives. The goal is to have Americans pay more so they can make more. Plain and simple.
But delta cannot come clean about it. Instead it wants us to believe that delta is entitled to exorbitant profits worldwide, and that other airlines can be successful against it only when they cheat or have unfair advantages. Delta argues, in effect, that it is entitled to every advantage that our system bestows on it but the “advantages,” if any, of others must be removed so delta can maintain its rightful place of power and privilege. Hmmm.