The U.S. airline industry was born in subsidy from the post office and American Airlines received a federal loan to pay for its first big aircraft order. The U.S. airline industry has more government involvement than most countries — the U.S. model where airports are owned and run by government agencies, and air traffic control is managed by the government is unusual.
Big U.S. airlines like Delta, American, and United have all benefited from major government subsidies, like moving pension obligations off their books and onto the federal Pension Benefit Guaranty Corporation in bankruptcy while retaining tax loss carry forwards so that they wouldn’t have to pay taxes once they started earning profits.
United Airlines even lost their last CEO to a federal investigation over bribing a government official for favorable action at their Newark hub.
And yet the CEOs of American, Delta, and United — ostensibly competitors — came together to publish a USA Today op-ed arguing that the Trump administration should take steps to keep Air Italy from flying to the U.S. because of subsidies from Qatar.
- This is an airline with 15 planes and only 4 routes to the U.S.
- No U.S. airline even serves two of those routes, Los Angeles – Milan and San Francisco – Milan
The U.S. carriers believe passenger business belongs to them by right. They want higher fares and fewer choices for customers.
Delta of course partners with — and even shares revenue with — Air Italy’s major competitor, Alitalia, so naturally they want the government to shut down their biggest competition. United and American do fly to Milan, but mostly seem to be playing Delta’s greater fool in this chase.
What’s so remarkable about the joint op-ed though is that every single paragraph is misleading. Here are the heads of the big 3 U.S. airlines:
For decades, the U.S. aviation industry has served as an economic engine in every state, creating jobs for millions of Americans and building business opportunities across a wide range of industries. We’re proud that the three airlines we lead are an integral part of this story.
But in recent years, two foreign countries have thrown a wrench into this engine.
US airline employment is at a peak, and the country has reached the longest period of uninterrupted economic expansion in its history, so suggesting that Emirates, Etihad, and Qatar Airways have ‘thrown a monkey wrench’ in the economic engine of every state is on its face absurd — leaving aside that all three airlines have more Boeing aircraft on order than Delta (which prefers Europe’s Airbus and has zero).
Meanwhile Delta, United, and American (US Airways) have all shed pension obligations to their workers in bankruptcy.
For over a decade, the United Arab Emirates and Qatar have violated trade agreements with the United States by funneling over $50 billion in subsidies into their government-owned airlines — Emirates, Etihad Airways and Qatar Airways.
The $50 billion claim comes from a white paper funded by United, Delta, and American that played fast and loose, fabricating quotes to mean the opposite of what was claimed.
Meanwhile U.S. airlines have received more subsidies than Gulf carriers. It’s not apples-to-apples but the idea that one side is subsidized and the other isn’t is just absurd.
Delta, for instance, owns a stake in China Eastern which is the most subsidized Chinese airline. They have a lock on using government-owned slots and gates at New York LaGuardia and JFK as well as other airports and protection from foreign competition on U.S. domestic routes. Delta’s oil refinery in Pennsylvania is subsidized.
It takes a special kind of chutzpah for American Airlines CEO Doug Parker — who cites securing government subsidies for America West as a turning point in his career and linchpin of his legacy to make these claims.
Doug Parker testifying on the need for subsidies to the US airline industry in 2001
These state subsidies are destabilizing the global airline industry and threatening to undermine our nation’s entire system of trade enforcement. Left unchecked, they send a signal that other countries can ignore our trade deals and trample upon our workers without consequences.
This is a claim without a warrant, and indeed airline subsidies date back over 90 years, how can it be just now that subsidies create these issues?
In the early days of US civil aviation the largest airline customer was the federal government in the form of the US Postal Service.
The 1925 Kelly Act authorized the Postal Service to contract with private airlines to carry the mail. That led to airlines received most of their revenue carrying mail. Often priced to the customer by the piece regardless of weight, with the government charged for weight, airlines were known to mail bricks and other large objects to themselves in other cities to pump up their revenue.
The 1930 Air Mail Act changed how mail was priced and gave broad contracting powers to the Postmaster General. The Postmaster used this power to consolidate contracts under three major airlines, forcing many airlines out of business. This came to fruition out of a 1930 meeting that became known as the ‘Spoils Conference’.
The government had dictated which airlines would survive and prosper, and awarded contracts to airlines that hadn’t been the lowest bidder.
Thankfully, last year President Donald Trump negotiated new agreements designed to end these trade violations, mandate financial transparency and restore fair competition. But before the ink was even dry, these countries that are meant to be our partners were looking for loopholes.
Qatar, Emirates, and Etihad had every legal right to fly between Europe and the U.S. under treaties between the US and UAE and US and Qatar. Indeed, there’s nothing in those Open Skies agreements that prohibit subsidies and it’s a deliberate obfuscation to suggest otherwise.
However to put the issue that US airlines were complaining about to bed they committed,
- To publish transparent financial statements (Emirates already did this)
- That they didn’t currently have plans to add new routes between the US and Europe
At the time I wrote that this was silly. Published financials? That was a way for US airlines to declare victory without costing the Gulf carriers anything. The Obama administration refused to act on the US carriers’ complaints, and this was all they could get.
There wasn’t even a promise not to add new transatlantic routes, just a claim that there weren’t plans at that moment in time to do so — despite their legal right to do so under treaty.
At the time of the agreement I pointed out that Etihad was retrenching its route network and Qatar Airways had no need to fly ‘fifth freedom’ routes between Europe and the U.S. They stopped doing so a decade ago once they obtained aircraft capable of flying non-stop between the U.S. and Doha. Plus,
- They’re the largest owner of IAG, parent company of British Airways, Iberia, and Aer Lingus. Indeed their roughly 20% stake pockets profits from the joint venture BA and Iberia have sharing money with American on transatlantic routes.
- They already were taking a 49% stake in Air Italy and plans for Air Italy were well known.
Qatar is perhaps most blatantly disrespecting its January 2018 agreement. The country pledged that its airline would not launch any flights directly between the United States and Europe. It quickly shrugged off the commitment by investing in a failing regional Italian airline and rebranding it as Air Italy, which is now being used as a proxy for new subsidy-backed routes between the U.S. and Italy.
Qatar pledged they had no plans to fly fifth freedom routes at the time of the agreement even though the US-Qatar Open Skies treaty allowed them to do so. Their plans, however, for investing in Air Italy were well enough known that I covered them here on this blog and pointed it out when the agreement was made. It was no secret and part of the public dialogue. It’s utterly disingenuous to claim to be ‘shocked’ now.
To be clear, U.S. airlines are not opposed to competition. We compete each day for the business of millions of travelers, whether our rivals are large, small, private or government-owned. But what’s happening with the Qatar and UAE airlines is not fair competition.
Here they admit that they compete with (and indeed partner with and codeshare with) government-owned and subsidized airlines all over the world — whether it’s Saudia, Air India, or China Eastern.
But wait — why are we talking about the “UAE airlines” again? Etihad has reduced its US flying and operates no routes between the US and Europe. Emirates is consistently profitable on its own merits and hasn’t added fifth freedom routes.
Parker, Bastian and Munoz are conflating their argument here, which was just that Qatar:
- Has the right to fly between the US and Europe
- But agreed not to (really, they just said they had no current plans to) because Parker, Bastian, and Munoz wouldn’t stop complaining
- Is breaking its agreement because they own 49% of a European airline that flies between the U.S. and Europe
That has nothing at all to do with “UAE Airlines.” Nor does it have anything to do with the reality of the airline industry. Delta owns 49% of Virgin Atlantic, and together with stakes from Air France KLM and China Eastern (which Delta owns a piece of) it has supermajority control. It owns large stakes in Aeromexico, Gol, and others.
Subsidies allow these carriers to fly money-losing flights in a way no rational commercial airline could afford. It is an advantage that no airline — no matter how big — can reasonably overcome. Ultimately, it’s U.S. airline workers who pay the price.
If nothing else, American, Delta, and United are experts on money losing flights. That’s why Warren Buffet famously said “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”
According to American Airlines executives they may have lost $100 million just flying between Chicago and China and their financials show that even today they lose money flying and all of their profit comes from selling frequent flyer miles to banks.
The money losing flights by Gulf carriers bring travelers to the U.S. who spend money. The Gulf carriers buy Boeing planes. And free and open skies allows Fedex to operate a hub in Dubai.
Meanwhile the European Union has warned of a trade war if the U.S. acts against its treaty commitments by limiting the ability of Air Italy to fly between Italy and America.
President Trump campaigned on a platform of defending American workers from bad deals and unfair trade practices. By violating their Open Skies agreements, Qatar and the UAE are putting over 1.2 million American jobs in jeopardy. It isn’t just the hard-working pilots, flight attendants and ground crews whose livelihoods are at risk; it is everyone who depends on the economic engine that the aviation industry creates for our country.
Now we’re once again conflating. There’s no violation of Open Skies agreements. That much has been shown. The current claim is that Qatar violates its agreement not to exercise its rights under the Open Skies treaty the U.S. signed with its country.
And it’s limiting flights that hurts the economy and jobs. It’s trade wars — with Europe over Air Italy, with the UAE potentially retaliating against Feedex — that hurts jobs. It’s driving up the cost of flights for U.S. consumers, transferring wealth from U.S. passengers to big airline shareholders that’s bad for the economy.
If the U.S. airlines are concerned for U.S. workers why not cover the pensions they walked away from instead of buying back shares?
An economic analysis we submitted to the government shows that for every long-haul international route a U.S. carrier loses or forgoes due to subsidized Gulf carrier expansion,1,500 American jobs are lost.
The math in this self-serving analysis doesn’t add up. Delta has fewer than 90,000 employees yet flies to 60 countries and has more than 60 international destinations. If Delta dropped all of its international routes, would they really have negative employees while still operating their full domestic route network?
Obviously each international route then, if the analysis has any meaning, includes jobs from tourism and at airports — which are equally supported by Air Italy’s flying. And maybe even better supported by an Emirates Boeing 777 than a Delta Airbus A330?
Meanwhile American Airlines is in a vicious contract dispute with its mechanics precisely because it proposes to offshore maintenance work.
It also raises questions about how the United States should deal with partners that openly undermine trade agreements. In any business, you wouldn’t stand by and do nothing while the other side refuses to comply.
It’s Delta, American and United that are asking the U.S. government to renege on its Open Skies treaties — with the UAE, Qatar, and the EU.
In light of actions by Qatar and the UAE over the past year, the Trump administration likely now sees that they have no intention of complying with their longstanding Open Skies agreements or last year’s deals.
Wait a minute, we know that the claim against Qatar that Air Italy is doing something untoward is bogus, but we’re reaching the end of the op-ed and they still haven’t even told us what the United Arab Emirates has supposedly done over the past year. I’ve quoted every word in the piece, and nothing.
Aside from Qatar’s blatant actions regarding Air Italy, we’re also seeing obvious inaction on the part of both countries when it comes to financial transparency. In fact, the Gulf carriers are less transparent today than before the UAE and Qatar signed their respective agreements.
Ok, finally an argument of substance. Except their support for the indirect suggestion that Emirates, Etihad, and Qatar aren’t holding up their end of the bargain in terms of financial transparency is a 2015 Wall Street Journal article which talks about the same debunked white paper the airlines commissioned themselves and offers nothing at all about activities over the past year.
Failure to enforce these agreements sends a message to other countries that they can take advantage of the United States without consequences. That can’t be our position. If Qatar and the UAE aren’t willing to uphold their side of the deals, the United States should consider removing itself from these two Open Skies treaties altogether.
Now they’re begging the question. They haven’t shown any violation of a trade agreement, and repeating it lots of times isn’t an argument.
- They still haven’t even told us why they think the UAE hasn’t lived up to its ‘side of the deal’
- There wasn’t even two sides here, the UAE agreed that it had no current intention to add flights that it had every right under the U.S. agreement to add.
- And neither Emirates nor Etihad have done so, indeed UAE airlines fly fewer flights to the U.S. than before this brouhaha started.
This administration knows a trade violation when it sees one. The United States must act decisively to hold Qatar and the UAE accountable. Failure to do so would reward bad behavior and signal to other countries that they too are free to exploit American workers. That is a dangerous precedent that our airline workers and our country cannot afford.
Hold them accountable how and for what, exactly? If Parker, Bastiat and Munoz are going to go through the trouble of spending millions on this campaign and coordinating an op-ed I’d at least expect something less mealy mouthed. The concluding paragraph doesn’t even say what their ask is here, they’d rather do that in smoked-filled back rooms with their lobbyists, where U.S. consumers won’t see their pockets getting picked.
There is one thing in the op-ed that’s true at least: the byline, “Doug Parker is the CEO of American Airlines. Ed Bastian is the CEO of Delta Air Lines. Oscar Munoz is the CEO of United Airlines.”