Aerostates, Geopolitics and the interpretation of regulations

Last Sunday’s Washington Post featured an article covering the ongoing saga between the Big Three US-based network airlines (American, Delta, and United) and the Middle East Three (Emirates, Etihad, and Qatar) airlines over the rules for air travel and the role for government in regulating it, as well as funding it. The intersection of air travel, the shape of the global economy, and the challenge of defining the role of governments in a globalized economy.

Mark Gerchick summarizes the stakes:

This fight is not just about legacy companies trying to hold market share against entrepreneurial upstarts — a dynamic in aviation since the likes of People Express fought to wrest a slice of transatlantic travel from British Airways three decades ago. Today’s Persian Gulf challenge is more fundamental, a new business model that relies on three tectonic shifts in global aviation: a gulf-ward lurch in the world economy’s center of gravity; a dramatic loosening of trade restrictions on where, when and how the world’s airlines can fly; and the emergence of the “aerostate,” where world-class aviation is a critical economic engine deeply integrated with the state itself.

Global Governance and Aerostates:

Connectivity to the rest of the global economy is incredibly valuable; longer-range aircraft offer global reach.

While the shift of the global economic center of gravity is notable, the most interesting developments in this row concern geopolitics and global governance. Since last writing about this a year ago, there hasn’t been much regulatory action. The stakes are largely the same as laid out a year ago.

However, a few things have changed. While the US DOT hasn’t taken any action, both Delta and United cancelled their Dubai services. The service pattern is now entirely asymmetric – the ME3 serve thirteen destinations in the US, while American carriers serve none in Qatar or the UAE.

Dubai emerged as the archtype of the aerostate – where the lines between the airline business and government policy have blurred, even disappeared.

Ironically, the stated reason for United dropping their service between Washington Dulles and Dubai was the loss of the contract to carry US government employees and contractors, as required by the Fly America act. The winning bidder for the US government contract? Emirates, thanks to a JetBlue codeshare ensuring Fly America compliance.

Impacts of Regulatory Interpretation:

This case is an interesting example of the wide latitude for interpretation of broadly similar legislation. The intent of Fly America (and other rules like Buy America) is to keep US government spending with US-based businesses.

That winning contract will save those government employees a lot of money. The GSA’s interpretation of the Fly America rules is good for the government as a consumer – but at the cost of taking business away from a US-based airline in favor of a foreign one with an almost entirely domestic codeshare partner. In FY15, United Airlines’ contract with the GSA for IAD-DXB cost $979 per coach seat, and $7,114 per business class seat. Emirates/JetBlue won the FY16 contract with prices of $699 and $6,600, respectively. That’s a 28% savings for the government on the coach ticket.

Similar rules such as Buy America for transit projects include interpretation focused on ensuring taxpayer dollars are spent with US businesses. Unlike the Dulles-Dubai contract, where an American company offered the same product, many key transit projects rely on rolling stock that isn’t manufactured in the United States. Compliance therefore requires ‘final assembly’ at US factories, despite the bulk of the manufacturing taking place overseas.

This additional expense certainly creates some additional business, but does so at great expense – both by increasing the cost of rolling stock, but also by reducing the number of firms able to successfully win the contract and comply with the rules. It also makes the purchase of ‘off-the-shelf’ trainsets from foreign manufacturers effectively impossible. It also makes each railcar purchase a one-off design, complete with all of the associated development costs to de-bug and test a new design.

It’s worth considering how such similar laws can result in such divergent outcomes.

Leave a Reply

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>