Since Qatar, Emirates, and Etihad have deep rooted government ties, they receive significant financial assistance. Laing (2015) notes that since 2004, the three carriers have received well over $42 billion in government subsidies. For carriers in the United States, especially United, American, and Delta, these boosts are distorting fair competition guaranteed by the Open Skies Agreement, leaving them unable to compete in international markets (Lainge, 2015). Although major carriers in the United States do not enjoy such lavish government funding, many foreign airlines argue that the bankruptcy laws used by Delta, United, and American are in fact a form of subsidy (Zhang, 2015). Zhang (2015) notes that these bankruptcy laws have allowed many U.S. carriers to shed debt, expensive labor contracts, and save millions in the process. In order to further their position, foreign carriers point to the fact that the United States has spent over $155 billion from 1919 through 1988 in airline subsidies (Reed, 2015). Reed (2015) explains that most of this money was actually allocated to the Federal Aviation Administration; little was actually given directly to Delta, American, or United. Furthermore, these subsidies were not used as they are now with Etihad, Emirates, and Qatar. These carriers are using subsidies to buy the most advanced aircraft, build the largest and most lavish airports, and fill them with passengers by exploiting treaties from around the world (Reed, 2015). Reed notes that subsidies given to carriers in the United States were used instead to gradually build up the aviation infrastructure, providing incentive to grow commercial passenger operations.
Fueling debates of unfair competition is the Export-Import Bank. The bank allows foreign air carriers to purchase aircraft built in the United States, primarily from Boeing, with a guarantee that their interest rates will be low (Weisman & Lipton, 2015). Delta, American, and United claim that the guarantees provided by the bank allow foreign carriers to save a significant amount of money on aircraft purchases, allowing them to reduce fares on international routes. Airlines in the United States are unable to partake in the guarantees provided by the Export-Import Bank, which is why they claim foreign carriers have yet another unfair market advantage.
Overall, I think the long haul playing field for air carriers is not a fair one. The billions in subsidies enjoyed by Emirates, Etihad, and Qatar artificially increase overall performance and utility that American carriers are be unable to keep up with. Foreign carriers always have a cushion of subsidies to fall on during periods of economic recession. Delta, American, and United must put away billions, as they will have to fend for themselves during times of slow economic growth. Thus, as foreign carriers have greater cash flow, they are able to purchase the best aircraft on the market and offer the lowest fares in the industry. Meanwhile, American carriers are forced to compete with aging aircraft and very strict budgeting guidelines. The unfair loan guarantees provided with the Export-Import Bank only exacerbate the situation, allowing foreign carriers to purchase aircraft for less.
However, I also believe that American carriers are partially using foreign government subsidies as an excuse to reduce competition and continue making record profits. Many air carriers in the United States are extremely profitable; thus they can probably afford to start purchasing more aircraft, reducing fares, or increasing the passenger experience. Yes, they need to save so when the industry falls from peak to valley, they will survive. At the same time, if an airline is making record profit, they should be able to begin investing some of the money into their infrastructure to make themselves more competitive, especially against foreign carriers. I think that if Delta, United, American, and other major carriers in the United States continue making record profits, they will have the means to become more competitive in the current environment. In the end, until foreign carriers cease to accept government subsidies and the Export-Import Bank is abolished or changed, the playing field for long-haul international air carriage will continue to operate on an unfair basis.
References
Corporate profile. (n.d.). Retrieved from
http://www.etihad.com/en-us/about-us/corporate-profile/
Fast facts & figures [Infographic]. (2015, October). Retrieved
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His highness sheikh Ahmed bin Saeed Al Maktoum. (n.d.). Retrieved
from http://www.theemiratesgroup.com/english/our-company/leadership/hh-sheikh-ahmed-bin-saeed-al-maktoum.aspx
Laing, K. (2015, March 12). Airlines: Foreign subsidies are
destroying flight competition. Retrieved from
http://thehill.com/policy/transportation/235543-airlines-foreign-subsidies-destroying-flight-competition
Our company. (n.d.). Retrieved from
http://www.emirates.com/us/english/about/
The Qatar Airways story [Press release]. (2016, February 1).
Reed, T. (2015, April 14). U.S. airlines have paid the government
$250 billion -- amazingly, some claim they are subsidized. Retrieved from
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Weisman, J., & Lipton, E. (2015, April 6). Boeing and Delta
spend millions in fight over Export-Import Bank’s existence. Retrieved from
http://www.nytimes.com/2015/04/07/business/boeing-delta-air-lines-export-import-bank.html
Zhang, B. (2015, July 28). The Middle East's 3 best airlines have
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I would have to agree that there is some room for the U.S. carriers to reinvest some of their profits to become more competitive. However, while this may be feasible, the aviation industry is a variable one. The U.S. carriers do not have the safety net of government subsidies and must use their profits to create there own in case of an economic recession. Like you stated with this need for tighter budgeting, it creates an environment where they cannot match the level of free cash flow and new purchases that the Gulf carriers utilize.
ReplyDeleteI would have to agree that there is some room for the U.S. carriers to reinvest some of their profits to become more competitive. However, while this may be feasible, the aviation industry is a variable one. The U.S. carriers do not have the safety net of government subsidies and must use their profits to create there own in case of an economic recession. Like you stated with this need for tighter budgeting, it creates an environment where they cannot match the level of free cash flow and new purchases that the Gulf carriers utilize.
ReplyDeleteObviously it is unfair for the competition, but unfortunately there are not a very clear standard to set up whats fair and what unfair since all airlines actually somehow receives subsidies in different ways. Also, the story is not just as simple as battles between middle east carrier and U.S carriers. The huge order of wide body jets are supporting both Boeing and Airbus. Emeriates will be running 300, 777 aircrafts. As nearly half of the orders are came from them, imagine in economic wise, how much profit, GDP and job position are middle eastern carrier providing to U.S. It is the trade between both of countries economic. and the U.S carriers will alway be the victim of the trade。
ReplyDeleteI think you bring up a good argument for why you think the playing field is unfair. I agree that the foreign carriers that receive government subsidies don’t have to worry as much about money as do US carriers who have to do a lot of budgeting especially during slow economic times. They can use that money to buy new, nicer aircraft to expand their fleet which can be more attractive to customers especially since they provide cheaper flights. I also like how you brought up the part about the possibility of the US using this as an excuse to keep making high profits. I never really thought about this being a reason as to why it could be a possible issue. I do agree that if they are making a profit, they should be able to set aside some money to help improve their aircraft and their overall business. As Harry stated, it’s hard to determine what is fair and what is unfair, but there are some problems that need to be addressed.
ReplyDeleteThe Open Skies debate is certainly a deeper problem than we can see at first glance. With the governments of foreign carriers backing their carriers it gives an unfair advantage for them over U.S. carriers, but it is unclear whether or not great detail regarding this matter was actually placed in the Open Skies agreement.
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