David Cogswell | April 21, 2015 2:00 PM ET
Calling a Spade a Spade: US Vs. Gulf Airlines
The Big Three American airlines love terms like “free market” and “competition” as long as government policies are advantageous for their bottom lines, but when foreign competition threatens their profits, they prefer protectionism.
I’m referring to the recent efforts of the major U.S. airlines to get the U.S. government to step in to limit the expansion of the Gulf airlines: Qatar Airways, Etihad Airways and Emirates Airline.
To take their case to the U.S. government, the Big Three airlines, United, Delta and American, formed an association called the Partnership for Open and Fair Skies.
The group’s basic thesis is that the Gulf airlines have received subsidies from their governments, thereby undermining free competition. Of course, all airlines get government subsidies, including U.S. airlines. The Business Travel Coalition and The U.S. Travel Association recently pointed out that U.S. airlines received $155 billion in subsidies as they built themselves up in the 20th century.
The U.S. airline transportation system relies on a great deal of government support of different kinds, much of it barely visible, from bailouts after 9/11 to the massive capital investment required to build and maintain airports.
The U.S. airlines and their advocates say their subsidies are “old news,” but according to James Hogan, the CEO of Etihad, that’s exactly the point. The legacy carriers had plenty of subsidies to enable them to establish their present positions.
Any new startup, as Etihad was in 2003, has a lot of catching up to do to even get a foothold in a market dominated by giants with legacy positions going back decades.
“Etihad Airways has received investment from its shareholder, the Government of Abu Dhabi, in the form of equity capital and shareholder loans,” said Hogan recently. “We have always been clear about that.
“The shareholder knew those amounts would need to be significant. It was, after all, setting up a national airline in 2003, decades after most governments. It was investing in an incredibly capital-intensive industry, one which requires significant investment in the obvious items of aircraft and engines; but one which also requires heavy investment in the less obvious items: people, training, technology, a headquarters building – every single thing had to be started from scratch.
“To have any chance of success, Etihad Airways had to get to a size and scale that could compete against the networks of airlines that had not only been operating for years, but had benefited from decades of government investment and infrastructure support themselves.”
I’m not judging the American airlines for calling for protectionism and I’m not singling them out. Practically any corporation would do the same thing. Corporations are legally mandated to focus above all else on maximizing shareholder value.
They may talk in political terms, using glowing phrases like “free trade” and “competition,” to make their arguments attractive, but corporations are not ideological. They are profit-seeking entities. Whatever policies promote their profitability is what they will favor.
The economies of the developed countries of the world were built under protectionism, and there is little reason to expect developing countries today not to protect and nurture their own industries, as the U.S. did historically, and still does selectively, as in this case.
I’m just trying to cut through the use of blanket generalizations in pursuit of political advantage.
The airlines don’t care about free markets. They care about profits. It’s a battle for profits, mine versus yours, and it’s being played out on a political stage. But those ideological terms mean nothing in practical terms.
Ideologies are vast oversimplifications used to attract large numbers of people to a political cause. The generalizations are handy for uniting many people in a common effort, but they are not useful for understanding the practical issues of a dispute such as the current Open Skies dispute.
Terms like “free trade,” “free markets” and “open competition” are relative. As generalizations they are beautiful things and practically everyone loves them and believes in them. In practical terms, you will seek your own advantage, and that is as true of airlines as it is of any other corporation.
The U.S. market is now dominated by three major airlines, who have divvied up the country regionally through their hub system so that they barely compete with each other. Their interrelationships are more like “coexistence” or “passive cooperation” than competition.
They may not discuss their policies among themselves, but their policies are conveniently parallel.
They certainly don’t compete in terms of offering more attractive in-flight services to their customers. They are all in cost-cutting mode. They are not only cutting flights, they have cut services to the bare bones, charging separately for almost everything they used to include in the prices.
We deregulated the airline system to promote healthy competition in the marketplace and we ended up with three companies that offer essentially the same no-frills product. Our free market looks about as competitive and diverse as that of the Soviet Union.
In the international market, it’s a very different thing. Anyone who flies both internationally and domestically will see the stark contrast in services. In the international market, U.S. airlines have serious competition. And many of the international airlines beat the U.S. airlines hands down when it comes to service.
As a practical matter, if I am flying internationally I assume I will get better service on a foreign carrier than on a U.S. carrier. American carriers in the domestic market just don’t offer much service and they don’t compete on service. Service is not a big thing on their radar screens. By unspoken agreement they all maintain the same standard of service, which is bare bones.
They can’t get away with that in the international markets because there is real competition out there. They have gotten so comfortable with the control they have over the U.S. market, and with their cozy coexistence with the other majors, that it is jarring to them to meet real competition beyond American shores.
So now the American carriers want to change the rules of the game, redefine what is fair competition and what is not. The comparisons tend to be apples versus oranges because the legacy carriers have the huge advantages of their legacy positions, and the new carriers have tried to crunch half a century of growth into a decade.
Etihad was founded in 2003 and by 2014 had grown to serve 14.8 million passengers with a network of 111 destinations. To achieve that — for Etihad to claw its way into the airline industry and create a niche for itself — took a huge investment. Is it fair? It depends on who is talking.
In today’s globally connected world it is essential for any country to have reliable air service. They can’t leave themselves to the mercy of foreign carriers and international markets. Therefore many countries have government-owned national carriers, and wisely so. The UAE and Qatar have theirs, and they have done a magnificent job in building them.
Now the American airlines have banded together to oppose the rapid growth of the Gulf airlines, and their incursion into what the American carriers see as their turf. Who is right and who is wrong?
These are the kinds of questions that will have to be negotiated as we move into the future of “free trade.” But one of the first steps into that future is recognizing that “free trade,” like many other political expressions, does not mean just one thing. It means different things to different people, to different interests in different situations. It is not black and white.
When you hear TV news anchors discussing the latest “free trade” deal they make it sound simple, as if to oppose the deal means you don’t believe in free trade in principle and want to go back to the 19th century when countries were isolated from each other, before the international air routes and electronic media created the global reality we all live in now.
It’s not like that.
I don’t necessarily oppose protectionism in every instance. Every country must maintain an airline system. It’s a national security issue. It’s an economic necessity. If it takes protection from the government to ensure a healthy domestic airline system, so be it. But let’s call a spade a spade.
And the next time someone argues “free trade” let’s understand it as a relative term. Whose freedom? Who benefits?
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