How the US Airlines Will Lose and Save Face in Their Complaints Against Emirates, Etihad, and Qatar

American Airlines, the world’s largest airline and one of the most profitable, has been lobbying hard for subsidies while publicly complaining that they shouldn’t have to compete against Emirates, Etihad, and Qatar.

Ironically American partners with Etihad and Qatar; Qatar is the largest single owner of IAG, the parent company of British Airways and Iberia with which American shares revenue across the Atlantic; American’s first major aircraft order was backed by the Reconstruction Finance Corporation; merger partner US Airways offloaded its pension obligations on the federal Pension Benefit Guaranty Corporation; and American Airlines CEO Doug Parker personally lobbied for American West’s cash injections from the Air Transportation Stabilization Board.

Qatar Airbus A380 Business Class Bar

The charge against the Gulf carriers — which compete head-to-head with US airlines on almost zero routes — was originally led by Delta, which owns a stake in the most subsidized Chinese airline (China Eastern) and which partners with state-subsidized Gulf carrier Saudia (which is introducing first class suites).

Delta’s CEO has since been retired, so the airline has gone from claiming the issue is about 9/11 (when the government of Delta partner Saudia may have actually been complicit in 9/11) to whining about an event in an Atlanta theater.

While it became clear that the case made against the Gulf carriers was itself a fraud (which isn’t to say there haven’t been subsidies), that the US airlines have themselves been massively subsidized, and that it was a case of selective outrage (not complaining about other state-subsidized partners, including ones part-owned by US airlines), the cry over the Big 3 Gulf carriers somewhat subsided.

Emirates Airbus A380 Shower

The Justice Department weighed in that the 3 US airlines don’t have a legal case.

In February I wrote that the big US airlines wouldn’t get their way with the government opening formal consultations with the governments of the UAE and Qatar. Instead, I suggested that “[t]he US carriers could still eke out a face save” because “[t]hey still have powerful friends.”

Etihad A380 First Apartments

And it looks like that’s what’s happening, according to Politico. (HT: @off2paradise)

[M]ajor players in the aviation industry say the State Department has secretly decided its path forward in the showdown between the “big three” and the Middle Eastern carriers they’re accusing of anti-competitive practices. And the State Department has confirmed for us that Catherine Novelli, undersecretary for economic growth, met Friday with “a number of U.S. carriers and labor representatives to discuss Middle East aviation issues.”

…Obama administration will not formally open consultations on Open Skies agreements with Qatar and the UAE or freeze flights — the two big wish-list items for the accusing airlines: Delta, American and United. Instead, State Department officials have picked a much more mellow approach, deciding to talk through the issues with the two countries this summer (rumor has it that a spate of diplomatic meetings is slated for July).

Delta, United, and American can now save face by “cheering the decision to move forward with informal negotiations” even though they don’t get anything that they’ve asked which because their requests are silly and harmful to US consumers.

US airline employment is at a seven year high even as the Gulf carriers expand their presence in US markets. Alaska and JetBlue are growing as a result of their partnerships with Emirates. And the growth of Gulf carriers has meant more jobs in travel and tourism, and in aircraft manufacturing, as well as trade.

As the most profitable airlines in the world, the complaints of unfairness from American Airlines and Delta ring hollow. Delta’s CEO was explicit that they’re asking for fewer flights and higher fares to consumers.

Of course American’s profit was goosed in the fourth quarter by “a $3 billion special credit stemming from a change in its tax valuation allowance.” Though obligations are shed in bankruptcy, tax loss carry forwards are not. But it’s the Gulf carriers that are subsidized, as though the answer to that question matters and the US government should undercut US interests because of arguably bad policies pursued by much smaller countries a world away.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. And for the non-Pravda version of what’s going on in this dispute, you can read this story:

    I personally have no idea what the Obama administration will do. I think the President’s economic and foreign policy decisions tend to be misguided, so I certainly wouldn’t count on him to do “the right thing.”

    But the next President may have to address this problem. The simplest solution is that the Gulf carriers run out of money. Everyone who spends billions foolishly runs out of money. Eventually.

    But trying to equate what’s going on with the Gulf airlines with whatever “subsidies” US or other foreign airlines have received is nuts. This is something the world has never seen before. It’s impossible for private enterprise to compete with government-owned enterprises that have a multi-billion blank check to spend whatever they want, profits be damned. The US airlines are largely shielded from the problem due to geography. But that doesn’t make what’s going on here right — even if some US companies (the hotels, Boeing) make lots of money from the Gulf airlines’ subsidized flights. And even if Gary gets to enjoy nice first-class flights that he doesn’t pay for.

  2. Take off the blinders, @iahphx. There’s literally nothing in your link that contradicts my post.

    “But trying to equate what’s going on with the Gulf airlines with whatever “subsidies” US or other foreign airlines have received is nuts.”

    No, it’s not. I’m no fan of subsidies, but what US airlines received in their infancy goes far beyond what the Gulf carriers have received and US airlines continue to receive huge subsidies. I’ve documented those extensively. The US government was the single largest source of direct revenue [not indirect subsidy] for all the airlines in the 20s and 30s. The government’s Civil Aeronautics Board set prices to ensure profits through the late 1970s. American’s first large aircraft order was backed by the federal government. A condition of peace with Japan was special rights for US airlines to fly beyond Tokyo. US airlines received billion dollar bailouts of their pension obligations, and though they offloaded obligations in bankruptcy they kept tax losses so that their massive profits in recent years went untaxed.

    The whole subsidy debate though is silly, as though one side is subsidized while the other is not, as though US airlines care about sudsidies and not simply shutting off competition so they can extract more revenue from US consumers.

    “It’s impossible for private enterprise to compete with government-owned enterprises that have a multi-billion blank check to spend whatever they want, profits be damned.”

    US airlines are earning the bulk of world airline profits — billions of dollars per fiscal quarter, and nearly half the airline profits in the world. To read your comments you’d think they were somehow suffering.

    And contending that the Gulf carriers do not respond to economics is silly, Emirates actually makes money and Etihad makes a little even if Etihad’s decisions are driven as much by economic development goals for Abu Dhabi as for immediate profits (Google, by the way, in its prospectus for its initial public offering said it would pursue goals besides pure profits). Qatar is a different matter.

    Emirates draws down capacity in markets that are weak. Etihad has cut back on liquor. It’s devalued its frequent flyer program and imposed redemption surcharges.

    You’re making claims about their behavior which simply don’t align with the facts.

    Even if the Gulf carriers are subsidized and US airlines aren’t (which is silly), there’s no violation of US Open Skies treaties. And it’s a pure money grab by the major US airlines, in the words of Delta’s last CEO the goal is to limit flight options and raise prices. That’s not a goal the US government should share, raping its consumers for the special benefit of airlines which are already hugely profitable.

  3. The US airlines have found another $7 BILLION that went to Qatar in 2014 alone. Yup, nothing to see here. 🙂

    It’s ironic that, due the cozy relationships among the Kingdoms, Dubai can’t criticize their neighbors for being even more foolish than they are. There is, after all, the possibility that there could be a profitable global carrier in the Middle East. And with Turkish now in trouble, Emirates MIGHT eventually be a real business (especially if Airbus shuts down A380 production and they have to buy rational aircraft). But with endless expansion, a tepid global economy, a weak Middle East economy due to cheaper oil, a terror risk, unfavorable exchange rates and foreign competitors clamoring for relief, this is just a train wreck that’s going to be interesting to watch. Take those free flights while you can.

    And, btw, Gary, you don’t help your case when you talk about “subsidies” from the ’20s! Are you sure the Wright Brothers weren’t also “subsidized”?

  4. @iahphx the point about subsidies from the 1930s is that at least there’s a coherent argument for protectionism for “infant industries.” I don’t think it’s a good argument, but people make it. Etihad was founded in 2003. (Qatar was founded in 1993, its subsidies were well known in 2001 when the US entered into Open Skies.)

    There’s no coherent argument why the US airlines should be receiving massive subsidies into the 2000s.

    United, Delta, and American earn more profits than any other airlines in the world. They’re each generating billions of dollars per quarter. While OpenSkies is crucial to smaller competitors like Alaska and JetBlue and to FedEx.

    Why do you want to screw consumers by throwing the weight of the federal government on the side of the big US airlines, when there’s not even a basis in law? This is whining about ‘unfairness’ by the biggest bullies on the block, going to the teacher to take consumers lunch money. Don’t be fooled.

  5. And of course @iahphx let’s not forget what topped Jeff Smisek as CEO of United. Tell me again that the major US airlines aren’t cronyists begging for government favors?

  6. @Gary — EVERY company wants something from the government. It would be crazy not to ask. Our country helps all our companies (well, I’m not sure about coal!). But our country doesn’t go into the airline business with a blank check. You know that. You can’t have Open Skies when private enterprise is competing against gov’t owned entities spending billions. What will happen is obvious: there are now no US airline flights to the Emirates and Qatar, and there are dozens of such flights operated by the subsidized Middle East airlines. That alone wouldn’t be that problematic (if you want to pay people to fly to Abu Dhabi, go ahead, I guess), but they’re now distorting the entire global airline industry.

    If Dubai decided instead that they wanted to flood the world with $10,000 luxury cars, would you tell Ford and GM (and the European and Japanese luxury car markers) to just keep quiet? After all, the US helped its auto industry during the 2008 financial crisis — and they got to build thousands of tanks for the government in WW II! And everyone would love a luxury car that somebody else paid for. But you and I both know that still wouldn’t be right.

  7. Ironic that you hold up the US auto industry as bastions of free enterprise in need of protection given the bailouts 2008 – 2010 (“You wouldn’t buy our shitty cars but we’ll take your money anyway”).

    It’s crazy that you’re dismissive of airline industry cronyism as “all businesses get stuff from governments so why not ask” when what the airlines are asking for is intervention — NOT based in law (there’s no legal prohibition on even what the US airlines accuse the Gulf carriers of in the Open Skies agreement) — on the basis that they’re not subsidized and their competition is.

    When the US carriers are much larger. And much more profitable. And historically have had very little overlap in routes.

    In any case you’ve got your facts wrong about the ‘blank check’ that the UAE supposedly cuts, considering the new airport taxes being imposed on connecting flights through Dubai.

    If you wanted to say, “No subsidies for US airlines and we should negotiate similar language into Open Skies treaties for competitor airlines” I’d actually still disagree with you, we shouldn’t turn down subsidized goods. But you’d at least have an argument that would persuade most non-economists.

  8. By far the greatest subsidizers of the major US carriers have been their shareholders, banks and suppliers, not to mention their employees. Yes, in the early decades of civil aviation, the industry relied on post office contracts and monopoly routes to build their networks. But that was also part of a process of nation-building and linking a vast geography just as the railways were favoured a century earlier.

    That pales with the start up capital and on-going forms of Islamic financing the Gulf airlines have received, in addition to the massive terminals those governments have built primarily for them. There was no “nation building” or domestic need in those countries just an objective to dominate world air travel in a short time frame. One can see by the Turkish government investment in TK (and ground facilities) that it has the same aspirations. And now Iran wants in on this game…how else can one explain the huge orders for Airbus and Boeing jets for such a tiny country?

    The (now three) US major airlines have only just started to make significant profits in the past two or three years, following a rationalization of the industry long over due. There have been very few profitable years for those airlines over their histories as the industry is so capital intensive until recently when leasing became the norm over owning their fleets. This debate will go on, but the major object lesson that should be learned about unlimited market access by Gulf carriers can be seen in Australia and the impact it had on Qantas, which finally had to submit by partnering with EK (most certainly arranged by an embarrassed Australian government that realized it had given the shop away with its Open Skies policy).

  9. Etihad’s morals and ethics are in the gutter. I hope the US Government punts them from USA altogether. They have recently been stealing from their customers, not honouring fares when ticketed and being abusive. Give me AA, UA or DL. They treat Westerners and their cattle like they treat their people, no right. As for the treatment of women, don’t even let me go there.

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