Open Skies: Will Trump Take on Airline Treaty?
By George Hobica, USA TODAY | Mar. 07, 2017
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When airline CEOs visited the Oval Office in early February, they were bringing a message that theoretically would be music to the new president's ear: protecting American jobs and competitiveness by unwinding an unfair treaty. The treaty in question, Open Skies, loosened the restrictions on which airlines can fly to and from the United States and what routes they can ply.
The attending CEOs (including United's Oscar Munoz and Delta's Ed Bastian, but not American's Doug Parker) have long accused upstart Persian Gulf airlines (Emirates, Etihad and Qatar) and to an extent, Turkish Airlines, of dumping airline seats on the U.S. market in the same way U.S. Steel and Nucor have cried foul about the Chinese dumping rebar.
But it's not just the invaders from the Middle East: New and rapidly expanding ultra-low-cost airlines, such as Norwegian and WOW Air, also rankle some airline executives.
The legacy airlines claim that the Gulf carriers especially -- some of them at least partly owned by their respective countries and, the CEOs say, heavily subsidized to the tune of US$50 billion -- couldn't possibly be profitable without their unfair advantages. This, U.S. airlines claim, makes it impossible for them to compete profitably on a growing number of international routes.
Not Everyone Is on Board
And while it's not just the Big Three who are squealing -- Lufthansa, Air France and other foreign flag carriers have also fretted over the Gulf and Norwegian invasion -- not all U.S. airlines share their pain. Airlines that don't have a large international route system, such as JetBlue and Alaska, say they benefit as feeder airlines, carrying passengers to and from the Gulf carriers' U.S. gateways. JetBlue even has code share agreements with Emirates, and Qatar is a member of the OneWorld alliance, as is American.
The Gulf airlines counter that U. S. carriers also enjoy unfair advantages, with government bailouts arranged after 9/11, the debt forgiveness they've all enjoyed thanks to U.S. bankruptcy law, public financing of airports and other infrastructure, local incentives and subsidies to start or maintain service, and other benefits. Plus, they insist, they create hundreds of thousands of American jobs, both by hiring U.S. workers and buying U.S.-made aircraft and jet engines.
Lower Airfares for All, for Now
The only ones who are smiling are airline passengers, who are enjoying some of the lowest international airfares, even before adjusting for inflation, in decades or perhaps ever. That the Gulf carriers price their fares aggressively cannot be denied, and they've forced U.S. and European legacy competitors to respond in order to retain market share. Day after day in my perusal of our airfare alert site, Airfarewatchdog.com, I see absurdly low deals: an eye-popping US$398 round-trip from L.A. to Tokyo on Singapore Airlines, a US$500 round-trip from Philly to London on British Airways for peak July travel - a fare that a few years ago might have been US$1,800 or more.
And yet, those low fares may not last forever if aggressive Gulf carrier pricing forces airlines to abandon routes. Delta said it could no longer afford to fly non-stop from Atlanta to Dubai profitably, leaving the market entirely to Emirates, which is free now to raise fares on the service.
A Level Playing Field?
The U.S. carriers face some insurmountable challenges. Workforce costs, including benefits, and the less-restrictive labor laws they are governed by, allow the Gulf airlines to operate on a different playing field from their European and American competitors. Thanks in part to a younger workforce and the lack of unions, and less restrictive discrimination regulations, some non-U.S. airlines can hire younger flight attendants at lower pay scales and terminate them when they reach a certain age (or if they become pregnant). U.S. labor law prohibits such discrimination, so as older workers climb the pay scale year after year, the Big Three's profit margins are squeezed relative to certain competitors.
The Gulf carriers argue, somewhat convincingly in my opinion, that they are gaining market share because their product is so much better. True, they fly shiny new planes with pleasant cabin crew, but so do American, Delta and United now. On any given day, you can have a great experience on a new American 777-300ER to London or an unpleasant one on an Emirates or Etihad flight when something goes amiss.
After years of neglect, the Big U.S. Three and the Big European Three are paying attention to quality and service, installing fully lie-flat beds and consulting with celebrity chefs on their menus. For U.S. airlines, on-time performance is at a record high and lost bags and bumped passengers at record lows. Competition can be painful but in the end it benefits not just consumers but the airlines themselves, one could argue.
But will Delta and United (and presumably American, but not Southwest since it doesn't have a horse in this race) convince the new administration to restrict expansion of these foreign rivals? Despite Trump's professed antipathy to any treaty that gives a foreign entity an "unfair" advantage, it's unlikely. He's also anti-regulation. Like any protectionist measure, limiting Open Skies could backfire on the U.S. economy. Airfares might rise, costing consumers millions; the foreign airlines could retaliate by buying Airbus rather than Boeing, or Rolls Royce rather than Pratt and Whitney, costing U.S. jobs; and fewer foreign visitors coming to the U.S. on cheap fares would further harm a U.S. tourism economy already suffering from a strong dollar and geopolitical events.
This Too May Pass
Moreover, perhaps there's less to fear from these subsidized airlines, if that's what they prove to be, than is imagined. If indeed the Gulf airlines are propped up by their governments, and if overcapacity has forced them to dump seats to fill their Airbus behemoths, then their deep-pocketed patrons may not cover their losses forever, especially with oil revenues not what they once were. In addition, new longer-range aircraft like the Airbus A350LR are allowing more airlines to fly point-to-point routes non-stop, lessening one of the inarguable advantages of the Middle Eastern carriers, geography.
Singapore Airlines, for example, will restart non-stop service from New York and Los Angeles to Singapore next year with new longer-range, fuel-saving planes, giving its hub more one-stop connections on more routes and making it a viable competitor to the Gulf airlines on various routings.
But unlike Singapore's Changi Airport, the Gulf airlines' hubs are indeed in the "middle": they sprang up because some clever bloke figured out that, given the limits of existing aircraft range, he could span any two points on Earth with just one connection if that connection happened in Dubai, Abu Dhabi or Doha. But fliers actually prefer non-stops to connections, and the new longer-range planes that can bypass hubs may make the Persian Gulf hubs less essential.
And really, does the world need all three Gulf carriers? They all have a good product (essentially indistinguishable from each other if you ask me), but three? As they add planes (Emirates flies or has on order 142 Airbus A380s along with dozens of other models; smaller Qatar and Etihad are also adding capacity), we may see a glut of seats reminiscent of the U.S. airline industry after deregulation, with legislation that led to rapid expansion and an almost as rapid race to the bottom.
Like any growth spurt in a market crowded with competitors, and that is dealing with disruptive technology (in this case longer-range and more fuel-efficient aircraft that can fly profitably non-stop rather than hub-and-spoke), and facing relatively low barriers to entry, the one spawned by Open Skies could lead to the same unintended consequences that deregulation wrought: billions in losses, bankruptcies and consolidation that left American consumers with just four airlines controlling 80% of traffic.