The Open Skies Agreements "are bilateral agreements that the U.S. government negotiates with other countries to provide rights for airlines to offer international passenger and cargo services" (Bureau of Public Affairs 2016). The Open Skies Agreement is a government hands-off policy in that it does away with government interference about airline routes and pricing. Beneath all this, one fundamental rule within the Open Skies Agreement is the airline must be self sufficient and must not receive government subsidies. The Open Skies Agreement, makes airline routes more flexible (Bureau of Public Affairs 2016). According to the Bureau of Public Affairs, the agreements allows for an estimated sixteen percent increase in air traffic, resulting in nine millions jobs being supported (2016). As far as U.S. routes, the Open Skies Agreement expanded direct route international flights to other U.S. cities like Detroit, Las Vegas, Memphis, Minneapolis, Orland and Portland (Bureau of Public Affairs 2016). Two foreign long haul carriers that are apart of the Open Skies Agreement and have received government subsidies are Qatar Airways and Emirates Airline (PR Newswire 2015). According to PR Newswire, Qatar airways has confirmed that it received land from the government worth $452 million for office and residential space (2015). While Emirates has taken part in fuel hedging and its parent company (Investment Corporation of Dubai) assumed the costs (PR Newswire 2015). Fuel hedging is buying large amounts of fuel at a time when the prices are low. This is a gamble as prices could rise and the airline will make money or the fuel prices could get even lower and the airline or fuel hedger would lose money (Global Risk Management n.d.). The conflict arose in 2009 when Emirates Airlines made a bad call on fuel Hedging and they lost a lot of money (Kane 2015). The Investment Corporation of Dubai had to bail the company out. The major U.S. airlines (Delta Air Lines, United Airlines and American Airlines) have said that the bailout was a form of government subsidy which goes against the rules in the Open Skies Agreement. In addition, the United Arab Emirates payed $7.8 billion to build a huge terminal for Emirates Airline use (PR Newswire). Some would say this was a government subsidy which also broke the Open Skies Agreements.
Emirates Airline has responded to the U.S. carriers claims regarding the fuel hedging. The president of Emirates Airline, Tim Clark stated, "All cash losses incurred by Emirates as a result of its fuel trades in place 2008-2009 were settled in full from the airline's own cash reserves and were not paid for by the government of Dubai (Kane 2015)." Tim Clark of Emirates Airline has also stated that U.S. carriers are just trying to maintain their market share (Kane 2015). This brings me to the next point: Have the three major U.S. carriers received government subsidies? The short answer to this question is yes. The air mail act of 1925 provided subsidies that helped lead to innovation and creation of many of the domestic routes that would be flown (McGee 2015). Another example of a government subsidy given to US airlines is the Fly America Act of 1974 (McGee 2015). Under this act federal agencies are required to use US carriers for transportation (McGee 2015). In addition, the Essential Air Service program is an example where US carriers fly routes that service the rural communities (McGee 2015). These routes are essential to the communities however, and because they are to rural areas, the airline could lose money as it is not a popular route. The government subsidizes these flights making these routes possible and airlines won't lose money (US DOT n.d.). However, according to Bill McGee, "Throughout the country, taxpayers have supported billions in airline infrastructure over the decades (2015)." An example of this is seen with the reveal of a plan to rebuild the LaGuardia airport which will cost $4 billion dollars. Half of this price will be paid by the government and the other half through private funding (Hajela 2015). One could argue that this project is not considered a government subsidy for the US carriers. However, this terminal will help US carriers which is why Delta Air Lines is a partner for the new terminal (Hajela 2015). Depending on how you look at it, most airlines receive some type of subsidy from the government. In my opinion, the reason for all this debate is the terms of not being government subsidized may be to vague. To clear this heated debate up I think there should be a more clear definition of what a subsidy is and what is not allowed. Both the three major U.S. carriers and Gulf carriers are pointing their fingers at each other saying the other has/had government subsidies.
The government subsidy debate isn't the only issue the major three US carriers have a problem with in the foreign air carriers. The US carriers believe that foreign carriers have the ability to purchase new jet aircraft at lower interest rates than the US carriers with the Export-Import Bank (Simon 2014). According the Export-Import Banks website, their overall mission is to support American jobs by "facilitating the export of US goods and services (EXIM n.d.)." However, the air carriers say the lower interest rates allow foreign air carriers to update their fleet much faster by buying new aircraft at these lower interest rates while the US carriers have higher rates (Simon 2014). Delta has estimated that the Export-Import Bank has cost the airlines $684 million a year and impacted 7500 jobs (Lee 2015). The Export-Import Bank's charter was blocked on June 30, 2015, (Rogers 2015). The closing of this bank significantly hurts the aircraft manufacturer Boeing because the bank backed loans on aircraft airlines were buying. Without the Export-Import Bank, the airlines will be forced to go to Airbus. Boeing helps secure 1.5 million American jobs (Crawford 2015). An option for Boeing to stay competitive would be to move to Canada where a government-backed bank can guarantee loans (Crawford 2015).
Overall, I don't think the global playing field is fair for long haul carriers. I don't think fairness will ever be the same because there are so many variables that effect business in the airlines. That being said the governments between two countries are always going to be different in some kind of way and thus effect subsidies. I think the idea of "no-government subsidies" is very vague. How does one define what a subsidy is and if it's compliant with the Open Skies Agreement? As far as the Export-Import Bank goes, I think that the bank is critical for companies like Boeing. Without it, I fear their competition with Airbus will be hurt. The loss of American jobs if Boeing left the US would be disastrous. It is very evident that there is strong competition between US carriers and the Gulf carriers. This competition I suspect will only continue to get stronger.
References:
Bureau of Public Affairs. (2016, September 16). Open Skies Partnerships: Expanding the Benefits of Freer Commercial Aviation. Retrieved November 04, 2016, from http://www.state.gov/r/pa/pl/262022.htm
Crawford, J. (2015, October 26). Boeing CEO: Losing Export-Import Bank "means loss of jobs" Retrieved November 04, 2016, from http://www.cbsnews.com/news/boeing-ceo-losing-export-import-bank-means-loss-of-jobs/
EXIM. (n.d.). About Us. Retrieved November 4, 2016, from http://www.exim.gov/about
Global Risk Management. (n.d.). Hedging your fuel risk exposure. Retrieved November 04, 2016, from http://www.global-riskmanagement.com/en/why-protect/fuel-risk-exposure/hedging-fuel-risk
Hajela, D. (2015, July 28). New York reveals $4 billion plan for a new LaGuardia airport. Retrieved November 4, 2016, from http://www.usatoday.com/story/todayinthesky/2015/07/27/new-york-gov-cuomo-announces-new-laguardia-airport/30751423/
Kane, F. (2015, March 18). Emirates Airline president denies US rivals’ charges of government bailout over fuel losses | The National. Retrieved November 04, 2016, from http://www.thenational.ae/business/aviation/emirates-airline-president-denies-us-rivals-charges-of-government-bailout-over-fuel-losses
Lee, M. Y. (2015, April 10). Does the Export-Import Bank ‘prop’ foreign corporations to compete unfairly with the U.S.? Retrieved November 04, 2016, from https://www.washingtonpost.com/news/fact-checker/wp/2015/04/10/does-the-export-import-bank-prop-foreign-corporations-to-compete-unfairly-with-the-u-s/
McGee, B. (2015, September 02). How much do taxpayers support airlines? Retrieved November 04, 2016, from http://www.usatoday.com/story/travel/columnist/mcgee/2015/09/02/how-much-do-taxpayers-support-airlines/71568226/
PR Newswire. (2015, August 27). Emirates Confirms Billions in Government Subsidy for Airport Terminal. Retrieved November 4, 2016, from http://www.prnewswire.com/news-releases/emirates-confirms-billions-in-government-subsidy-for-airport-terminal-300134208.html
Rogers, K. (2015, June 29). Entrepreneurs await fate of Ex-Im Bank. Retrieved November 04, 2016, from http://www.cnbc.com/2015/06/29/entrepreneuers-who-do-biz-overseas-await-ex-im-banks-future.html
Simon, M. (2014, August 8). The Ex-Im Bank is hurting my business. Retrieved November 04, 2016, from http://www.chicagobusiness.com/article/20140808/OPINION/140809833/the-ex-im-bank-is-hurting-my-business
U.S. DOT. (n.d.). Essential Air Service. Retrieved November 04, 2016, from https://www.transportation.gov/policy/aviation-policy/small-community-rural-air-service/essential-air-service
Having the Export-Import Bank remain in operation may have impacted 7500 airline jobs, but it did help Boeing secure 1.5 million. The fact that Congress blocked the charter, it amazes me that those politicians are still in office. They are essentially saying that they don't really care if Boeing has to layoff millions and move to Canada to stay competitive. France has their own export credit agency that helps Airbus secure foreign sales. If the ExIm Bank does not remain in operation, then the only winner would be foreign based companies.
ReplyDeleteGreat detail! When the ICD assumed the losses on fuel futures It seems that it was similar to the bailouts that occurred post 9-11. I question how an oil producing member nation of OPEC is ever wron on their fuel hedging. OPEC commonly manipulates the market and I would never imagine that a gulf nation would be incorrect on fuel hedges. I assumed that at the very least emirates would have insider info. The idea of fuel losses sounds very suspicious to me.
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