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Eno Transportation Weekly

Open Skies, Subsidies, and the Need for Transparency

August 9, 2017

Open Skies agreements are treaties between two countries to allow unlimited air service between them. Since the United States’ first accord was signed with the Netherlands in 1992 more than 100 bilateral agreements have been executed with a few more in the works today. Open Skies is generally considered to a successful contributor to the global aviation industry’s rapid growth.

Today, Open Skies is very much front-and-center because of a thorny controversy about subsidies, fairness, and competition. Three big U.S. airlines (American, Delta, and United, known collectively as US3) are upset about alleged violations in the Open Skies agreements with Qatar and the United Arab Emirates. The US3’s concern is that the three primary airlines operating in these countries (Qatar, Etihad, and Emirates known collectively as ME3) receive heavy governmental subsidies, creating a situation of unfair competition. The US3 are calling for the agreements with these countries to be revised.

At issue are the provisions in the agreements intended to allow a “fair and equal opportunity” for airlines in both countries to compete. In this case, government involvement should be limited to “protection of airlines from prices that are artificially low due to direct or indirect governmental subsidy or support.” The US3 claim that the ME3 are in violation of the agreement because they have received $52 billion in direct subsidies from their governments since 2004.

The intense focus on the ME3 implies that these countries are unique in terms of government intervention in aviation. In reality, aviation has long been prone to government intervention. Being such an important and charismatic part of a country’s economy, national governments always used them to project power abroad—an aircraft painted in national colors arriving at a major airport is one of the best ways to show that the country matters internationally.

This is true in the United States as well. Besides the direct $15 billion bailout the airlines received after the 9/11 attacks, U.S. airlines receive government support in indirect ways. For example, bonds issued by state or municipal-owned airport authorities are tax free. So when an airline invests in an airport (building a new terminal, for example), they always let the airport authority issue the bonds so they have better financing conditions than if they went to the market themselves. Chapter 11 bankruptcy laws could also be considered to be a subsidy since they allow airlines to restructure their debts or even offload responsibilities for their pension liabilities.

U.S. airlines are also protected by the government in their “joint ventures” and alliances with foreign airlines. While airlines normally cannot coordinate prices or flight schedules with other airlines, they are able to do so through joint ventures. All US3 has these joint ventures, and Delta recently moved to create a “super joint venture” with several European partners in Italy, France, the Netherlands, and the UK.

These partnerships occasionally result in the US3 formally aligning with government-owned—and heavily subsidized—airlines. For example, Delta claimed they would fly to India (where they have not flown since 2009) if not for the unfair competition by the ME3. Left out of the complaint is Air India, the Indian government-owned carrier that flies to the United States and was bailed out by its government well after the Open Skies agreement was signed. United is part of the same Star Alliance as Air India along with South African Airways, which recently received a bailout by its government owner. U.S. airlines also partner with other government-owned airlines such as Delta’s arrangements with Saudia and Chinese Eastern.

But two wrongs don’t make a right and perhaps the US3 is correct and we should re-negotiate the Open Skies agreements. Doing so may result in the negotiation of dozens of other agreements if the same criteria are applied. Nevertheless, it is hard to imagine that many countries (including the United States) will agree to rigid restrictions on government involvement.

What can be done to strengthen these agreements is for all parties—including the United States—to demand more transparency about the aviation industry in each country. That would include a serious assessment of the amount and type of subsidies that are available to the aviation industry. That way the public and the policy makers can know about the status of the industry without having to resort to data published by interested parties.

For an opposing view, see this op-ed from James Burnley, former Secretary of Transportation and chairman of the Eno Center Board of Directors.

Rui Neiva is a policy analyst at the Eno Center for Transportation. He holds a Ph.D. in Public Policy from George Mason University. He has published in a number of peer-reviewed journals, including the Journal of Transport, Economics and Policy, the Journal of Air Transport Management, the International Journal of Transport Economics, and Applied Economics Letters. His book “Institutional Reform of Air Navigation Service Providers: A Historical and Economic Perspective” was released in late 2015 by Edward Elgar Publishing.