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Not-So-Friendly Skies

Sep 17, 2015
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SMITH BRAIN TRUST — American, Delta and United are going to legal war against the Gulf Carriers — Emirates, Etihad and Qatar Airways. They want the Gulf carriers' access to U.S. airports to be limited, because, they say, those carriers are state-supported and therefore have an unfair advantage in competition.  

Under an arrangement known as "open skies," airlines of many nations can freely compete on international routes, so long as they don't receive subsidies. But the U.S. airlines say that the Gulf carriers have gotten $42 billion in state aid since 2004, a claim the Gulf carriers deny. U.S. regulators are now sorting through the claims and counter claims.

Gulf carriers first entered the U.S. market only in 2004, but they're growing fast, doubling their passenger numbers from 2008 to 2013. Martin Dresner, a Smith School professor, along with colleagues from the University of Arkansas, Northeastern University and Loyola University of Maryland, has found that entry into U.S. markets by Gulf carriers has resulted in a significant increase in passenger volume on routes to the Middle East.  Since most of these passengers are just passing through the Middle East cities to final destinations in South and East Asia, Africa and elsewhere, competition from the Gulf carriers has affected U.S. carrier traffic to these onward destinations as well.

As a result, Dresner and his colleagues have calculated a small but statisticaly significant reduction in fares and passenger volume for U.S. carriers on the international routes affected by Gulf carrier entry. A 10 percent increase in seats offered by the Gulf airlines resulted in less than a 1 percent decrease in passengers and fares on affected U.S. carrier international routes. (Airlines' interests aside, the lower costs are good for customers.) In contrast, some European carriers have seen their market share on some routes drop by a third after Gulf carrier entry.

Without having seen their fully financial statements — which the Gulf airlines have not released — Dresner supposes that the Gulf carriers "probably do get some benefits from the government, either directly or indirectly. The governments, for example, may subsidize their debt."

But then, he adds, U.S. carriers arguably get low-level subsidies, too.  There was some support during the financial crisis, for instance. "And every time an airline goes bankrupt the debt is written off through the Chapter 11 provision," he says. "Carriers from other countries think that that's a form of subsidy. Certainly our carriers have gone bankrupt often enough." Airports are all publicly owned, as well, and some offer incentives to specific U.S. carriers. 

But Dresner says the main advantage of Gulf carriers is not subsides but location: midway between Europe and Asia, and near fuel sources. (The vast majority of passengers on Gulf carrier flights are using the Gulf as a hub, not a destination.)

The current "open skies" regime evolved progressively after the deregulation of the late 1970s. First came "liberal bilateral" agreements with specific countries, which opened routes to and from the U.S. to U.S. and foreign carriers. Open-skies agreements further liberalized the system, allowing unfettered competition on routes beyond the U.S. and foreign countries.  These route rights were especially valuable to FedEx and UPS, allowing them to open freight hubs in foreign countries. Flights originating and terminating within the U.S., are still restricted to U.S. airlines.  

Canada has taken a much harsher stance against the Gulf carriers, permitting a handful of flights a week into and out of the country, leading to diplomatic tension between Canada and the United Arab Emirates.

Dresner wonders whether the backlash to winning the legal fight against the Middle East carriers would be costly. "Our carriers have been very successful in competing against carriers from other countries," he says. "If we start restricting 'open skies,' a lot of countries are going to jump on the bandwagon to try to get a higher share of international travel for their carriers. U.S. carriers have picked on Qatar and Etihad, but other countries may come back to renegotiate with us. And we may not be so happy about the results of those negotiations."

U.S. companies are hardly presenting a united front in this fight: FedEx, for instance, doesn't want to tinker with a system that lets it operate its worldwide network of freight hubs.  JetBlue's CEO has also spoken out against the campaign by the legacy carriers.

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