Subsidies

Open Skies and Closed Markets

U.S. carriers complain of "unfair competition" from state-subsidized Persian Gulf airlines.

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|||Emirates Plane Photo from Maarten Visser and Wikimedia Foundation

Major U.S. flag air carriers United, Delta, and American Airlines (a.k.a. the US3) are asking: If a state props up a foreign firm, should our government, as redress, prop up domestic brands?

Where the free market is concerned, two wrongs do not make a right, and the answer is no.

Early this month, Emirates Airlines began service from Orlando to Asia, drawing attention to an ongoing international trade dispute between the US3 and their gilded, Gulf-based competitors Emirates, Etihad, and Qatar Airways (a.k.a. the ME3).

The US3 accuse the governments of the United Arab Emirates (UAE) and Qatar of subsidizing the ME3 to the tune of $42 billion. Such a subsidy would be a violation of those countries' market liberalization agreements with the United States, known as the "Open Skies" policy. 

According to the Partnership for Open & Fair Skies, a coalition of the US3 and labor organizations representing airline pilots, teamsters, flight attendants, and communications workers, the Gulf state subsidies distort the global air travel market and amount to "unfair competition." The Partnership argues:

The massive government subsidies provided to Qatar, Etihad and Emirates are not only a clear violation of Open Skies policy, but they also pose a direct threat to the U.S. airline industry and thousands of American jobs. These state-owned carriers are using their huge, artificial advantage to rapidly expand their fleets and take over international routes, unfairly capturing U.S. airline market share and shifting U.S. aviation jobs overseas.

Airline industry analyst Vinay Bhaskara of Airways News told Business Insider that the dispute really heated up when Emirates opened up service between the U.S. and Europe in 2013, at which point the US3 grew concerned that the ME3 were undercutting them on lucrative transatlantic flights. 

To address their grievances, the US3 are waging a public relations and lobbying campaign to get the U.S. State Department to open trade talks with the UAE and Qatar. A slideshow available on the Partnership's website states:

The Obama Administration must take action to address this unfair competition.

The agreements with Qatar and the UAE should be reopened and modified to address the flow of subsidized capacity to the United States.

According to Business Insider, however, the Partnership maintains that "they're not seeking a renegotiation of the agreement. Instead they say the subsidies violate the Open Skies policy and they want the U.S. to open up 'consultations' with the Arab governments over the issue."

If the UAE and Qatar are found to have violated the Open Skies agreements, whose definitions of subsidies are apparently vague, it will be up to American diplomats to determine appropriate countermeasures, per the terms of the agreements. Denying the ME3 access to American markets merely to suppress competition against U.S. carriers, however, would further distort the free market, not correct it—to the detriment of American consumers.

In his acclaimed PBS series Free to Choose, which directly addressed the issue of companies seeking retaliatory government intervention in the name of "fairer competition," Milton Friedman actually used the airline industry as an example. He argued that if other states want to waste their taxpayers' money to make goods and services cheaper for American consumers, we should let them. History suggests they won't be able to sustain that strategy, and our own companies will become even more competitive in the long run. He stated:

When anyone complains of an unfair competition, consumers beware. That is really a cry for special privilege, always at the expense of the consumer. What we need in this country is free comeptition. As consumers buying in an international market, the more unfair the compeition the better. That means lower prices and better quality for us. If foreign governments want to use their taxpayer's money to sell people in the United States goods below cost, why should we complain? Their own taxpayers will complain soon enough, and it will not last for very long. History provides lots of evidence on what happens when government protected industries compete with industries who have to operate in an open and free market. It's almost always the government protected industries that come out second best. Ask Sir Freddie Laker, the Englishman who introduced low cost air traffic across the Atlantic, who were his chief competitors? They were all government protected, government financed, government regulated airlines. He came out very well, made a mint of money, and you and I have gotten cheaper travel accross the Atlantic.

If you're still tempted to believe state-subsidized companies can prevail in the long run, consider the last time you drove a Trabant, or were eager to board a Tupolev 154

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  1. I’m with Uncle Milt. It seems a lot cheaper and easier to let the US airlines go out of business and let the subsidized airlines from other countries pick up the slack on global flights.

    1. Yep, if the royal house of Saudi wants to cover my first-class seat, who am I to turn it down?

    2. Oh, and there could be few better candidates for bankruptcy than United. EVERY person working for them seems to have been doing so since the neolithic, and man, are they tired of dealing with the public!
      I presume the union means they can’t be fired, so close the shop.

      1. I presume the union means they can’t be fired

        My MIL was (technically still is) a flight attendant. She has been on “medical leave” for the last 15 years but Delta can’t do anything about it.

      2. American is pretty fucking awful too. Their mechanics unbolted rows of seats at the JFK facilty to get management’s attention. They belong in jail.

      3. Explains why I never see hot flight attendants except on the foreign carriers.

        1. This phenomenon permeates far more than the airlines. It’s a strong reason why I live in Asia.

    3. This. So much this. And no one every seems to understand it.

      “Those damned Japanese car companies get subsidies so they can sell their cars here cheaper!”

      “OK, and?”

      “Well, that’s bad!”

      “It’s bad that the Japanese government is sending Japanese tax dollars to US households?”

      “YES!”

      *facepalm*

      1. Yeah, but see after they drive out all the American car companies they can raise the price as high as they want and there will be nothing we can do about it! We will have forgotten the secret recipe for building cars and will be at the mercy of the Yellow Peril.

      2. Unless they’re giving using your money through US Govt foreign aid, loans, grants, etc to subsidize them.

        Then yea… I guess we’ll just wait around until they give us our money back and destroy competition.

  2. If you’re still tempted to believe state-subsidized companies can prevail in the long run, consider the last time you drove a Trabant,

    Uhh, everyone driving a GM vehicle?

    1. Or a Chrysler. Or sort-of a Ford.

  3. I flew in a Cubana Tu-154. Lets just say the FAA/NTSB would not have approved of it’s condition.

    1. How tanked up was the pilot?

      1. Probably no more so than the rest of us.

        1. It’s better that way.

      2. Less than the plane?

  4. “If you’re still tempted to believe state-subsidized companies can prevail in the long run, consider the last time you drove a Trabant, or were eager to board a Tupolev 154.”

    while that’s a cute trope, it’s largely untrue.

    driven a GM lately? flown on a boeing? an airbus?

    i am not arguing that such subsides are good and that industry could not do as well or most likely better without them, but they have existed for a generation (at least).

    so long as the spigot remains open, such subsidy sucks can endure for a long, long time.

    ask the american farmer, the king of subsidy slurping…

    1. Just to be fair, American farmers as familiar with the govt teat as they are, aren’t a patch on French farmers.

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