Dispatch from the battle lines over Globalization: US Airlines take on the Middle East Carriers

Dubai International Airport. CC image from Raihan S.R. Bakhsh

Dubai International Airport. CC image from Raihan S.R. Bakhsh

There’s a fight brewing amongst big international airlines. The old guys are complaining that the new kids aren’t playing by the same rules; the new kids argue that the old guys need to step up their game. The dispute represents a fascinating window into a very public battle over globalization. What are the rules, and who gets to make them?

A coalition of the three major American airlines (American/US Airways, United, and Delta) combined with many of the unions that represent their employees are putting on a full-court press (complete with ads in DC’s Metro), arguing that the Big Three carriers in the Middle East (Emirates, Qatar, and Etihad – often abbreviated as the ME3) are undermining the principles of free and fair competition with subsidies that distort the market. The Gulf air carriers are pushing back against the accusations, arguing they provide a superior product at a lower cost. Vox has a brief article that summarizes the arguments for both sides.

The US carriers outline billions in subsidies to these carriers. They include everything from subsidized development of the region’s massive airports to interest-free loans and infusions of capital from the ruling families – who also own the airlines themselves.  The alleged subsidies support Qatar and Etihad to a greater degree than Emirates (the paper alleges that Qatar and Etihad would not be viable commercial businesses without their subsidies; not so for Emirates). You can find the white paper and presentation here.

ME3subsidies

Summary of the subsidies alleged by the US carriers. Image from the Americans for Fair Skies presentation.

Central to the debate are the United States’ Open Skies treaties with Qatar and the United Arab Emirates. Open Skies treaties deregulate the routes and destinations for international air travel between the two signatories. The US State Department prioritized signing Open Skies agreements since signing the first such agreement between the US and the Netherlands in 1992 (see the full list of agreements here, as well as the text of a sample agreement).

There is an inherent asymmetry in any Open Skies agreement between the United States and Qatar or the UAE; due to the small size of those countries, the agreements only add two or three destinations worth serving for US airlines (indeed, there are only two scheduled flights to Qatar or the UAE from US-based carriers – Delta flies ATL-DXB and United flies IAD-DXB). Gulf airlines, however, earn rights to fly to a wide array of American cities.

Part of the success of the Gulf carriers is due to the geographic advantage of the Middle East hubs. Dubai has long served as a stopover point for refueling along the Kangaroo Route. Now, carriers like Emirates use Dubai as centrally located hub to efficiently connect air traffic between Europe, Africa, India, and Southeast Asia.

However, there’s more to the rise of the Gulf carriers than advantageous geography. For these Gulf states (often, effectively, city-states), focusing on aviation is a deliberate economic development strategy. When you’re talking about state-owned businesses, how do you differentiate between the viability of the various airlines as businesses from the state’s explicit policy of aviation-focused economic development? In their white paper, the US carriers make the case that Open Skies agreements assumed that an open market would provide a superior business model to state-owned airlines (and there is a long history around the world of poorly run state-owned airlines) and that competition would bring this truth to light. However, with the rise of State Capitalism, the US carriers argue, it’s not clear that assumption can be trusted.

It’s the next step in the idea of developing around the aerotropolis. Instead of building your economy around an airport, why not build it around an airline? Dubai’s success in developing their middle-eastern metropolis around a global aviation hub inspired Qatar and Abu Dhabi to do the same – a strategy that not only required the airport, but the airline to feed it.

The Gulf carriers aren’t just looking to their Middle East hub airports, either. Emirates took advantage of struggling Alitalia to earn a fifth-freedom route from Milan to JFK. Emirates makes no secret of their ambitions to offer service around the globe via some key fifth-freedom routes:

President Tim Clark has revealed the first details of what looks like the next step in Emirates’ march to become a truly global powerhouse. On the sidelines of last week’s International Air Transport Association (IATA) annual general meeting in Cape Town, the airline outlined plans to set up a major transpacific operation. Its aircraft would be flying through intermediate points in Asia to destinations in North America. What is making the threat even more serious for Asian and U.S. airlines is that Emirates has another 67 Airbus A380s on firm order, which—like its large incoming fleet of Boeing 777-300ERs—has the range capability to fly from many points in Asia to cities far beyond the U.S. West Coast.

Emirates can choose from several geographic points that offer the necessary aeropolitical framework. The United Arab Emirates (UAE) has an open skies agreement with the U.S. “It allows us to take passengers on a fifth-freedom basis from the West Coast and central points in the U.S. to points in Asia,” Clark says. In Asia, there are open skies agreements with Thailand and Singapore. Emirates also has similar rights for some destinations in Japan.

Bold added. This is the root of the entire debate: a battle over the details of a global aeropolitical framework. A battle over the rules.

When it comes to Emirates, their Dubai hub isn’t the concern from the US carriers. The real concern is these aspirations to cover the globe with fifth-freedom traffic. Delta claims that the ME3’s cheap connections in Dubai make it difficult to serve India directly from the US (and presents strong competition for the European joint venture partners if connecting to India in Europe). Flying to US cities from Europe or Asia directly (e.g. the current New York-Milan service, if expanded to other airports) threatens to undermine direct service to Europe; additional fifth-freedom routes across the Pacific could do the same. Brett Snyder notes the concern about hurting the overall network:

If the Middle East carriers skim the international markets with the most traffic, then the US carriers will have to cut back service. When international flights get cut, the whole network becomes vulnerable. The end result is probably less service for smaller and mid-tier cities. It’s just the way the network effect works.

While the American carriers are asking the US Government to revisit these agreements, the Feds must balance other US interests in the region beyond air travel. Qatar and the UAE host a number of US military facilities. The US has a large trade surplus with both nations, partly due to companies like Boeing selling lots of widebody airliners to the Gulf Carriers. American cargo airlines like FedEx take advantage of Open Skies in a similar fashion to the Gulf carriers, facilitating global cargo movement. In other words, it’s not clear the US carriers have a sympathetic ear from the Federal government.

The PR campaign from the US carriers is an attempt to change policy by influencing public opinion, but it will be an uphill climb with the general public. Counter-arguments from the Gulf carriers ask why the American carriers are afraid of competition. US airlines aren’t exactly earning lots of sympathy from the public.

The PR battle is also getting nasty: Qatar Airways’ CEO accuses Delta of flying “crap” planes without a hint of irony: it’s not hard to buy nice, new aircraft when you can fall back on massive capital infusions (as alleged in the white paper) to buy those expensive aircraft. Lufthansa’s CEO, facing a strike from his unionized pilots, joked that he should hire Qatar’s CEO as his union advisor (unions being illegal in Qatar and the UAE). And while customers might like the product and the price point offered by the Gulf carriers, it’s not clear than anyone in the US would be willing to accept the trade-offs that make that product possible.

The white paper notes that the subsidies documented meet the World Trade Organization definition. However, even though both Qatar and the UAE are part of the WTO, aviation isn’t a core part of the WTO’s agreements.

If aviation were a part of the WTO, there would be a specific process to raise and resolve disputes. In other trade areas, the WTO can authorize the use of ‘counterveiling measures’ against subsidies and dumping, such as tariffs or restrictions on trade volume. But here, there aren’t any specific rules governing aviation – hence the PR campaign.

In essence, this is a battle over the rules. If the story of the aerotropolis is the story of globalization, is this a tide that lifts all boats? Or is it a race to the bottom? Competition is good, but what if the basis for that competition is based on the rules governing labor markets in Qatar or the UAE? Will the fight over the rules of the game lead to improvements in working conditions for migrant labor in the middle east? While the US airlines are certainly acting in their own self-interest, is this battle similar to the public scrutiny over Qatar’s labor practices in advance of hosting the 2022 World Cup? Could this battle over the rules not only find room for fair competition, but also leverage an improved quality of life elsewhere in the world?

Or is all of that wishful thinking?

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