Transportation Systems Casebook/Gulf carriers vs. U.S. big three carriers and open skies

Summary
The top three U.S. Airlines; American, United, and Delta have accused the Gulf Carriers, Etihad, Emirates, Qatar Airlines of unfair competition by utilizing state subsidies to take business from lucrative routes traditionally held by the top three U.S. carriers. The U.S. carriers have asked the U.S. Departments of Transportation, Commerce, and State to open talks under the Open Skies Agreement with the governments who own or fund the airlines, and to cap the service in the U.S. at the current level while discussions are underway. We present the case study to examine the dispute and analyze whether it is a case of unfair competition or an attempt at protectionism.

List of Main Actors
U.S. Big Three: The three largest American flight carriers: American Airlines, United Airlines, and Delta Airlines, who claimed that the following three Gulf carriers benefitted from over 40 billion dollars in subsidies over the past two decades. , violating the Open Skies agreement.

Gulf Carriers: State-owned flight carriers Emirates Airline, Etihad Airways, and Qatar Airways, accused of receiving over 40 billion dollars in subsidies by their governments.

U.S. Government Agencies: The United States Departments of Commerce, Transportation and State, with the support of the American Congress, who are reviewing the complaints made by the Big Three toward the gulf carriers.

Qatar: Government that fully owns Qatar Airways.

United Arab Emirates: Middle-eastern government that owns Emirates Airline and Etihad Airways

Stakeholders: American companies Fedex, UPS, Boeing, and American airline companies Jet Blue Airways, Atlas Air Worldwide, and Hawaiian Airlines, who did not support the claims raised by U.S. Big Three.

ICAO: The International Civil Aviation Organization, which is part of the UN, regulates air transit, and can be called in to arbitrate disputes between two countries.

Timeline of Key Events
Jan-Feb, 2015: The U.S. Big Three, formed by American Airlines, Delta Airlines, and United Airlines, made their claim to the Obama administration, expressing their wish to revisit the open skies agreement, due to unfair competition created by over 40 billion in subsidies.

April 10, 2015: The Departments of State, Commerce and Transportation announced that they had started reviewing the claims that the three middle-eastern state-owned carriers were being subsidized.

April 30, 2015: The U.S. Congress issued a letter to the Department of State and the Department of Transportation, asking for action to be taken and information to be gathered about the claims made by the U.S. Big Three

May 5, 2015" The Department of Commerce issued a notice to all stakeholders, and set a submission deadline for August 3rd, 2015, to gather information and opinions about the claims made by the U.S. Big Three. The Department created three dockets for the submission of information, which can be accessed by the public at www.regulations.gov: • DOT-OST-2015-0082 • DOS-2015-0016 • DOC-2015-0001. (On the search line, insert the code of each docket to see information.)

June 2, 2015: Etihad Airways published their rebuttal to the claims of subsidies.

June 29, 2015: Emirates Airline published their rebuttal to the claims of subsidies.

July 30, 2015: Qatar Airways published their rebuttal to the claims of subsidies.

August 3, 2015 The CEOs from Fedex, Atlas Air Worldwide, JetBlue Airways and Hawaiian Airlines publish their rebuttal to The Departments of Commerce, State and Transportation.

August 3, 2015: Deadline for submissions to the Department of Commerce dockets.

August 24, 2015 Deadline for submission of additional materials commenting on information to the dockets.

Maps
Etihad Airways routes map

American Airlines and Emirates Airline routes map

Delta Airlines and Emirates Airline routes map

United Airlines and Emirates Airline routes map

Qatar Airways routes map

Policy Issues
The Chicago Convention on International Civil Aviation (ICAO). The ICAO, part of the United Nations, has 191 signatory parties and is the international body that regulates international air transport. Beginning with the first convention in 1944 and continuing until today the ICAO puts out standards and rules that are to be followed by members states. The convention establishes open travel in member’s air space, designated flight paths, rights to use of public airports, and so on. .

Open Skies Agreements Further policies regarding international air travel are set up in bilateral open skies agreements between countries. A policy of open air transport between countries is the dominant trend in global aviation today. The United States currently has over one hundred such bilateral agreements. Furthermore, the United States has a multilateral agreement with the European Union regarding air travel. . The United States has Open Skies Agreements with Qatar and the United Arab Emirates, signed in 2001 and 2002 respectively. Given the current dispute between the US Big Three and Gulf Carriers, there are few particularly relevant terms of the agreement that are important to the discussion.

Article 3 Designation and Authorization “Each Party shall have the right to designate as many airlines as it wishes to conduct international air transport…”. Article 3 gives the signatory states the right to allow or deny the establishment of an airline in their country. There is no limit to the amount of airlines that can be designated by a country. Given the amount of physical capital needed to operate an airline, the number of companies are limited due to economies of scale.

Article 11 Fair Competition “Each Party shall allow each designated airline to determine the frequency and capacity of the international air transportation it offers based upon commercial consideration in the marketplace.” This allows airlines to make decisions about their business based on what is best for their company. This removes the role of the government in being able to limit the amount of flights and passengers coming into a given airport. In essence this creates a global free market on air transportation. Choice is given to the airlines to decide where to set up their hubs and which airports they will provide service to. Frequency and capacity are determined by the demand for service between two points.

Article 12 Pricing Section 1: “Each Party shall allow prices for air transportation to be established by each designated airline based upon commercial considerations in the marketplace. Intervention of Parties is limited to: a. prevention of unreasonably discriminatory prices or practices b. protection of customers from prices that are unreasonably high or restrictive due to abuse of a dominant position; and c. protection of airlines from prices that are artificially low do to direct or indirect government subsidy or support. Article 12 establishes a free market economy where prices are determined by supply and demand. It removes any right by the government to set price floors or ceilings. Furthermore, part c. prohibits the government from interfering to protect airlines that are based in their country by providing direct or indirect support. The American Big Three claim that the United Arab Emirates and Qatar are providing subsidies to airlines in their country. As a result the gulf carriers are able to provide better service at a lower price. When put in a global context government interference on behalf of an airline would give that airline and unfair advantage relative to other airlines.

Article 14 Settlement of Disputes This section allows for a tribunal of three arbitrators to be established in order to hear complaints between the two parties. Each Party is allowed the selection of one arbitrator, the third being selected by the two appointed arbitrators. The decision of the tribunal must be given full effect once a decision is made.

Article 15 Termination Either Party may terminate the agreement at any time.

The termination allows for the government that is Party to the agreement take action to end the agreement if the situation proves necessary. Disputes have been accounted for in open skies agreements and measures have been put in place to allow for a resolution to be reached without the involvement of government. Open Skies Agreements have been put in place to reduce the amount of government regulation and interference in the operations of air transport service. The agreements allow for decision to be made by the air transportation providers. Also, they simplify a complicated process of international traffic by providing a common framework to operate within. Open Skies has led to market liberalization and has had positive benefits to the market.

Liberalization of the Air Transport Market The effect of Open Skies Agreements are the liberalization of the air transportation market. Numerous studies have been conducted over the past 20 years to analyze the effect of an open air transport market. Liberalization of air travel between countries has proven to increase the amount of flights offered, decrease that cost per passenger, and increase jobs. Air travel is big business with 52% of tourist traveling by air, in 2014 airlines transported and estimated 3 billion passengers. One of the fastest emerging markets is the Middle East which has positioned itself as a global passenger and cargo hub. The Air Transport Action Group estimates that the Middle East market will have the most regional air traffic growth over the next 20 years. Growth is projected at 6.3% annually compared to 3% annual growth for North America. To put that into a larger context the Middle East currently accounts for 4.8% of global passenger traffic comparted to 27.1% accounted for by North America.. A report published by InterVistas in June of 2015 found a 16% increase of air traffic due to market liberalization. This 2015 report was an update to a report published in 2006 which came to the same conclusion, 16% increase in traffic. . The report also indicates that numerous other studies conducted between 1990 and 2015 have come to a similar conclusion, 18-75% increase in air traffic, varying based on time and place. Studies conducted during that time also indicate that market liberalization results in a 10 - 40% reduction in airfares for passengers.

Narrative of the case
During the past decade flights from the U.S. to UAE and Dubai went from one flight a day to 25 non-stop flights to the Middle East operated by Emirates, Qatar and Etihad. The Gulf carriers say that their growth is fueled by demand and offering a better product. However, the U.S. airlines say that the Gulf carriers are receiving funding from their governments and are engaging in unfair competition and are flooding the markets with a product which is only possible with government funding. The U.S. airlines are seeking federal government intervention.

Law

The U.S. has entered agreements with over 100 countries called Open Skies Agreements which are designed to increase market access and eliminate governmental interference in market decisions such as pricing, capacity and routes. The agreement provides that “each Party shall allow a fair and equal opportunity for the airlines of both Parties to compete in providing the international air transportation.”

Routes

The Gulf Carriers are linking passengers from the U.S., Europe, and South America with parts of the world such the Gulf region, Asia, Australia, New Zealand and Africa.

Gulf Carriers Expansion

Since 2008 the Gulf carriers have significantly increased flights and their share of the passenger bookings for many popular international routes such as Dallas to India, Boston to Nepal, Chicago to South Africa and India, and Washington to Bangkok. The largest increase or market share is on the Dallas to India route with an increase from 11.3% in 2008 to 86.9% in 2014. Likewise, as the Gulf carriers market share increases it is causing a resulting decrease in market share for the U.S. carriers. The market share for the Gulf carriers is expected to have annual growth of 11% through 2020, while the U.S. carriers are expected to have only 2% annual growth. Product

According to a recent study the Gulf carriers entry into the U.S. markets has resulted in gains for consumers by pushing fares down. But the Gulf carriers don’t just offer a cheaper product, they also offer a better product if it is measured in new planes and updated interiors. The Gulf carriers offer new planes and luxury services such Boeing 787 Dreamliners, Airbus A380s with first class suites with showers, and many other luxury accommodations. However, the Gulf carriers have also won passengers with excellent service and polite workers.

Open Skies
Open Skies Agreements are the basis for liberalized air transportation. They have been carefully negotiated between the United States and other Parties. The resolution of this complaint may have repercussions on other agreements.

Competition
The question to be addressed is whether the accusations against Gulf carriers of unfair competition are accurate or whether the U.S. airlines are engaging in protectionism? According to Rob Britton an airline industry expert with Georgetown University, “the Gulf carriers are not growing the market-they are diverting traffic from U.S. airlines and their European allies by violating Open Skies policies.” However, according to an article in the Washington Post the Gulf carriers deny this and take the position that “…passengers had benefited from more competition, better service and lower fares. They denied receiving unfair subsidies and said attempts to review the agreements amounted to protectionist measures by United States carriers.”

Protectionism
Allegations of unfair competition toward the three gulf carriers Etihad, Emirates and Qatar are not uncommon. In Europe, protectionist measures have been taken due to an "unleveled playing field." However, the main cause for that is the location of the Gulf carrier's home bases that enable them to develop long-haul hourglass hubs and to benefit from technological economies of scale of a modern long-haul wide-body fleet. The main argument used by American companies other than the Big Three is that the involvement of American government will not look good in the eyes of foreign governments and companies. Messing with the Open Skies agreements will cause more problems than solve them, and protectionism from the American government is not the answer, according, for example, to Fedex, Hawaiian, JetBlue, and Atlas Air

Conclusions
After strong pressure from the U.S. Big Three, the American government took measures to become knowledgeable about stakeholders opinions on the case. Taking action without understanding all the facts and opinions from the different parties involved could have led to disastrous effects on the economy and on international transportation. Open Skies Agreements are the foundation for market liberalization in air transport. Since market liberalization, the industry has witnessed increased traffic, cheaper flights for the consumer, and more jobs being created, directly related to the airline industry. The reviewing of the submissions by the stakeholders to the Department of Commerce will dictate as to what public policy the American government will pursue. The decision is still pending, and is one that can deeply affect the international aviation industry.

Additional Readings
Big 3 vs Gulf carriers - Forbes

Clash: Gulf carriers vs US carriers - Gulf Business

Major US Airlines push back against expansion of Gulf carriers

Protectionism

The Economic Impacts of Air Liberalization