America's biggest airlines are accusing Persian Gulf carriers of cheating

Three of America's four largest airlines — American, United, and Delta — have teamed up with the labor unions representing their workers to form a coalition called Americans for Fair Skies, which is demanding US government action against three major airlines based in the Persian Gulf that are cheating on existing international agreements. Bill Shuster, the Republican chair of the House Transportation Committee, says the complaint has merit, and the Obama administration has agreed to review the matter.

The key complaint from the American airlines is that their three state-owned Gulf competitors — Emirates, Etihad, and Qatar — receive government subsidies that violate the terms of the existing Open Skies agreements between the US, the United Arab Emirates, and Qatar.

But the real stakes are less about legal details than about whom US transportation policy should favor: American aviation workers or American travelers. A crackdown on Gulf airlines could mean more jobs and higher pay for US-based aviation workers. But it could also mean higher prices and less choice for American international fliers, especially those bound for Asia.

Government subsidies for Gulf airlines may have violated an agreement

Since 2001, the US has had an agreement with the government of the United Arab Emirates giving UAE-based airlines (specifically Emirates and Etihad) access to American airports, and vice versa. We have a similar agreement with Qatar, home to Qatar Airways. One stipulation of these agreements is that governments on both sides pledge not to subsidize their airlines.

The goal of these Open Skies deals is to create a free, open, and undistorted market in international air travel with traffic between the US and Doha (or Abu Dhabi or Dubai), won by whichever airline does the best job of providing a compelling deal for passengers.

Delta, America, and United have alleged for some time that Emirates, Etihad, and Qatar are all breaking this agreement. In March, they made their complaint formal and detailed to Robert Wright of the Financial Times and US government officials their specific concerns based on what's known about Gulf airline finances:

Against Emirates

• Government assumption of $2.4 billion in fuel hedging costs
• $2.3 billion in artificially low airport charges at its Dubai hub
• $1.9 billion in low labor costs due to non-union labor

Against Etihad

• $6.3 billion in equity infusions from the emirate of Abu Dhabi, which owns the airline
• $4.6 billion in interest-free loans from Abu Dhabi
• $4.2 billion in unclearly specified "additional committed subsidies"

Against Qatar

• $7.7 billion in interest-free loans from the government of Qatar
• $6.8 billion in reduced interest costs due to sovereign guarantees for its borrowing

The Gulf airlines counter that equity investments are not subsidies, that cheap labor and cheap airport fees simply reflect a pro-business policy environment, and that discount loans are the equivalent of the airline industry bailout Congress approved in the wake of 9/11's disruption to the industry — financial assistance that arguably violated the terms of the Open Skies deal.

The Economist's Gulliver blog makes a game effort to adjudicate the claim, but the basic reality is that there is no agreed-upon legal standard the US airlines' complaint needs to make. This is not a case that falls under World Trade Organization jurisdiction. It's simply up to the American political process. If the US government wants to cancel the Open Skies agreement it can, and if it doesn't want to it doesn't have to.

Should the US government protect passengers or airlines?

The political decision American officials need to reach is whom US aviation policy should benefit: US-based airlines or international air travelers. The stakes in the dispute are high because over the past 10 to 15 years the Gulf-based airlines have grown enormously.

(Chart by Eshna Basu, data from IATA)

The real issue is not so much direct transportation between the US and the Gulf airlines' hubs, but rather the massive business all three airlines do in connecting Western travelers to Asia and vice versa.

In other words, will a traveler from DC to Shanghai switch planes in California or in the UAE?

Regardless of why the Gulf airlines have been so successful, their success has been a boon to long-haul air passengers and a disaster for competing airlines. This is true whether their market share has been gained through savvy marketing decisions or through under-the-table subsidies.

Cheaper long-haul flights to Asia primarily benefit more affluent people, whereas the US-based airline industry's workforce is solidly middle-class. So one can see this as a case for a crackdown. On the other hand, the growth of Gulf airlines has been excellent news for America's airplane manufacturing industry and for US tourism, so the ultimate distributive consequences of a crackdown are by no means clear.

A different agreement could let Gulf airlines reduce domestic airfare

The logic of Gulf airlines' side of the case could be taken even further. The current Open Skies deal gives the Gulf carriers the right to fly from an American city to Doha or Dubai, but not to Boston or Baltimore. Foreign-owned carriers flying domestic routes inside the United States is called cabotage, and it's generally not allowed in order to protect the American airline industry.

But with limited competition keeping airfares high despite falling oil costs, it might be beneficial to take some of that protection away. After successive waves of bankruptcies and mergers, America's domestic airlines have become very cautious about expansion in a way that restrains competition and keeps fares high. The Gulf airlines, whether subsidized or not, have a spirit of gung-ho expansion that suggests they'd like to fly just about anywhere they're allowed.

Right now, it isn't on the political agenda to take advantage of the Gulf's eagerness to increase routes in order to boost competition on US domestic routes, but it could be. For now, though, all the momentum seems to be on the other side.

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