The trade dispute that some call the biggest in history continues to simmer. For over two years, American, Delta and United Airlines have claimed that their competitors in the Gulf — Emirates, Etihad and Qatar Airways — are receiving billions of dollars in government subsidies, violating the spirit of bilateral air service agreements.
These agreements — commonly known as Open Skies — are essentially free-trade pacts. They give foreign airlines (mostly) unfettered access to local markets. The Open Skies agreement between the United States and Qatar allows Qatar Airways to fly from its home base in Doha to any American airport when it wants, as much as it wants. American carriers in turn, are free to do the same.
There are some strings attached though. Under Open Skies, foreign carriers are banned from ferrying travelers domestically. This means Qatar Airways cannot pick up paying passengers in Dallas and fly them to New York, even if the airplane is continuing on to Doha. American carriers cannot do the same in Qatar.
Foreign ownership of airlines is also limited. In the United States for example, at least 75 percent of local carriers’ voting interests must be owned or controlled by American citizens. The same restriction applies to two-thirds of the airline’s board of directors and managing officers, and the president.
Airlines are fighting over what counts as a subsidy
The Open Skies dispute centers around what counts as a subsidy. Open Skies agreements are supposed to prevent government subsidies. While foreign carriers operating under Open Skies can largely fly as they please, their pricing faces scrutiny. Fares that are “artificially low” because of government subsidies — direct or indirect — are explicitly prohibited.
That’s because such pricing distorts the competitive landscape. Otherwise viable businesses — for fear of being undercut — cannot price their product high enough to cover costs and eventually go under. And consumers are left with fewer choices.
Big U.S. carriers point to the fact that their Gulf competitors are fully state-owned. But does state ownership alone mean state-subsidized? The likes of Etihad have also received billions of dollars from their government to set up shop. But should this be considered a subsidy if the government expects a positive return on its expenditure? Gulf airlines say no.
U.S. carriers, in contrast, are private enterprises. They use their own capital to run operations. However, these carriers also receive economic relief from states. Delta Air Lines for example, has been exempt from paying taxes on jet fuel for over a decade. And U.S. airlines have collectively secured tax breaks worth billions of dollars from state and local governments. Should these be considered subsidies? U.S. carriers say no.
But subsidies may not directly affect prices
Subsidies however, aren’t the whole story. A violation of the Open Skies pact requires that “artificially low prices” be offered as a direct result of subsidies. On this point, there is less clarity.
On the one hand, passenger allegiances have changed since certain Open Skies agreements were signed. This is especially true in the burgeoning U.S.-India market, where Gulf carrier bookings have skyrocketed and American carrier bookings have plummeted.
But the reason for this change is unclear. Gulf carriers say it’s because of their onboard service. U.S. airlines say it’s because of “subsidized flying.” So far, there is little hard data to support either position.
Without good data, arguments over Open Skies are likely to continue. Under the Trump administration, it is possible that these disagreements will become further politicized. Unlike traditional trade issues, Open Skies issues are primarily dealt with through bilateral treaties, without any extensive international framework for adjudicating disputes.
However, the Trump administration’s stance may be complicated by the fact that some smaller U.S. airlines have operating alliances with Gulf carriers. JetBlue for example, is focused on serving domestic markets and does not have to worry about international competition. Instead, it relies on Emirates to “feed” its domestic network with overseas passengers. Smaller carriers like JetBlue also worry about the growing domestic clout of big U.S. airlines like Delta, American and United. Gulf carriers may also, in the months ahead, want to use Open Skies agreements to a larger extent to make up revenue lost due to regional politics.