Eno Transportation Weekly
Ensure Fair and Free Competition Under All of Our Open Skies Agreements
August 9, 2017
Fair and free trade is a cornerstone of our great country and essential to ensuring American economic strength and growth. When I served as President Reagan’s Secretary of Transportation, he recognized that fact, and we enacted policies that helped American businesses thrive and create new jobs. We set in motion policies that helped grow the U.S. aviation industry to the strong, international competitor it is today.
Since 1992, the United States has entered bilateral Open Skies trade agreements with 121 countries to foster airline industry growth and enable passengers to fly from the United States to nearly anywhere around the world. These agreements are negotiated by the U.S. Department of Transportation and the State Department, and allow airlines to open routes between the United States and these countries effectively without limitations and excessive government constraints.
Open Skies policy was designed to ensure “that competition is fair and the playing field is level by eliminating marketplace distortions, such as government subsidies.” The bilateral treaties were put in place to create an open marketplace where airlines could freely and fairly compete for travelers’ business on their products’ merits, free of market distortions. Successful Open Skies agreements benefit U.S. airlines, their employees and, most importantly, American travelers.
However, two of these 121 agreements are not working as intended: those with the United Arab Emirates (UAE) and Qatar.
These two countries are heavily subsidizing their state-owned airlines – Emirates, Etihad Airways and Qatar Airways – with over $50 billion since 2004. This government interference violates their agreements with the United States and means that the three Gulf airlines are not subject to the same market forces as fairly-competing U.S. carriers. This uneven playing field poses a significant threat to the U.S. aviation industry and more than 1.2 million American jobs, according to leading aviation economists.
These massive government subsidies have enabled the Gulf carriers to expand at an unsustainable rate that would otherwise be impossible. In the last two years (excluding recent Gulf carrier cuts due to the travel ban), the Gulf carriers have added or announced plans to increase their flights into the U.S. by approximately 50 percent. Many of these routes are unprofitable and stimulate little to no consumer demand. This ultimately forces rule-abiding competitors off of routes with devastating results: every time a U.S. airline cedes a route to a heavily-subsidized Gulf carrier, an estimated 1,500 American jobs are lost.
Until our government takes action, the Gulf airlines will continue to put U.S. jobs at risk. The U.S. aviation industry operates on a hub-and-spoke system in which passengers fly from small cities to hub cities to board other flights, often onto international flights, causing U.S. carriers to cut some of their international routes in the face of subsidized Gulf carrier competition. Ultimately, less international service means fewer passengers to feed the spoke routes, forcing U.S. carriers to reassess the profitability of these smaller, more local routes. If routes to these communities are shut down, small and medium sized communities will lose their vital air services – and the jobs that come with it.
The subsidies are key to the Gulf carriers’ very survival. Forensic accountants recently revealed that Etihad Airways received $1.7 billion in new subsidies from the UAE government in 2015, yet still suffered over $2 billion in operating losses. The airline itself announced that it suffered a $1.87 billion loss in 2016. It was also recently revealed that Qatar Airways received nearly $500 million in government subsidies during FY2017 and had an operating loss of $703 million. Without these subsidies, Gulf carriers would be forced to operate like other profit-minded businesses, and their current business practices would prove unsustainable.
Other countries recognize the harm that this causes to their domestic aviation markets. The European Union recently announced rules to guarantee foreign airlines are engaging in fair competitive practices. Canada, Japan and Germany have taken similar actions by limiting the number of cities that the Gulf state carriers can fly to within their borders. It is long past time for the U.S. government to do the same and enforce our Open Skies agreements with the UAE and Qatar.
Open Skies agreements have been very beneficial to U.S. airlines and their passengers. But as long as two countries continue to flout them, U.S. airlines will not be able to compete fairly. Enforcing these agreements is critical to the continuing health of our airline industry.
For an opposing view, see this op-ed from Rui Neiva, Eno Center aviation policy analyst.
James H. Burnley IV served as the 9th U.S. Secretary of Transportation under President Ronald Reagan from 1987 to 1989. He is a partner at Venable LLP and an adviser to American Airlines. He is also the Chairman of Eno’s Board of Directors.