ATW Editor's Blog

Another week in Washington and subsidies debate looks like a long one

by Karen Walker
May 17, 2015

In an interview with American Airlines chairman and CEO Doug Parker last week, I asked him whether he thought the Gulf carrier spat would be a long, drawn-out affair.

Here’s his answer, “We certainly hope it is not a long campaign because we don’t think there is any need for it to be. We have asked for [US] government consultations with the UAE and Qatar. We have provided evidence [of subsidies] that I think is a compelling case. I expect, I would hope, we will soon be having consultations and then I think this will go reasonably quickly. We need to sit down and figure this out. The US government has the information they need.”

I’m not convinced this issue can be dealt with quickly. You only have to look at events this past week in Washington DC to realize that the temperature is climbing.

On Friday, Parker and his two fellow CEOs in this campaign, Delta’s Richard Anderson and United’s Jeff Smisek, appeared together at the National Press Club to say they believed the US government would grant their request for government-to-government consultations on whether “fair-and-level” competition conditions of the Open Skies treaties with the UAE and Qatar are being adhered to. But if the government doesn’t act, Anderson said, “we have avenues through Congress.”

Neither route seems like a short one to me.

Earlier the same week, Etihad Airways released its counter-subsidy report, alleging that the three US carriers that began this fight have themselves benefited from $71.5 billion in funds (the majority of this being debt wiped out through Chapter 11 restructuring). Etihad chief counsel Jim Callaghan was in Washington to brief people on the report. And Qatar Airways Group CEO Akbar al Baker was also in town to make clear his view that Qatar is not subsidized and that it operates fully within the parameters of the air service agreement with the US.

Emirates, meanwhile, has published an entire journal to countering the allegations made by the US carriers.

Does any of this sound like a debate that’s about to fizzle out? I don’t think so and it will certainly be raised at the IATA AGM in Miami next month, even if IATA manages to keep it off the official agenda.

If anything, the debate is broadening: the three US carriers and labor groups have enlisted the support of several local counties and authorities – even getting the new Chicago Mayor to write to the Secretaries of Commerce, State and Transportation – who have been convinced this is a fight about the future of local air service and American jobs.

And now IAG CEO Willie Walsh has weighed in with a submission to the US government review in which he says the subsidy allegations in the US carriers’ white paper “do not withstand scrutiny”.

Here’s an extract from the IAG submission:

“IAG also has serious doubts about the way information is presented in the White Paper. It is heavily caveated due to difficulties in obtaining information. Yet, even where transparent accounts are available, many of the conclusions drawn appear inaccurate e.g. in relation to jet fuel subsidies or alleged fuel hedging support.

“Some of the arguments relating to IAG in the White Paper are inaccurate and misleading.

Even where independent studies are used to support arguments, the evidence is deliberately misquoted to distort its meaning so that unfavourable conclusions can be drawn (“US white paper on Gulf carriers distorts my academic report”, Frankie O’Connell, ATW 26 April 2015).

More generally, IAG believes that:

• Fuel subsidies to any of the Gulf carriers are non-existent. It is not credible to make allegations simply because the States concerned have large oil and gas reserves, especially when there is clear evidence that the carriers concerned have standard commercial contracts in place with well-established jet fuel suppliers.

• Alleged subsidies in the form of investments in airlines, where they have occurred, are no different from the many investments made by States in airlines across the world in the past, or by governments elsewhere in the world, about which there appears to be no concern whatsoever.

• State investment in airports infrastructure is not, and never has been, regarded as “subsidy” anywhere in the world. In the Gulf, as in the UK, airports are (regardless of ownership) run on a commercial basis and commercial revenues from retail and car parking in particular (as opposed to aeronautical revenues) frequently make up approaching half of the income of the airport concerned. This enables airports to attract business through reduced aeronautical charges. Provided charges are applied in a non-discriminatory manner i.e. all airlines may benefit from the same charges, under Open Skies principles there can be no justification for complaint. It is good business and it translates to lower airport charges and lower fares for passengers. There is nothing wrong in that.”

Now, Qatar Airways has a 10% stake in IAG, the parent of British Airways, and BA was the sponsor airline for Qatar’s membership in the oneworld global alliance. So there is a business connection between those companies. Nevertheless, IAG’s submission is powerful and demonstrates how this debate has snowballed into one both local and global.

Some believe this is, in fact, a debate not so much about the US, but more about the wider future of international commercial air transportation and how it will look if the growth of the Gulf hubs and their carriers continue unabated.

Could it be that American, Delta and United fear their names and influence ultimately will go the same way as those of Pan Am and TWA?

I don’t know. But I don’t think this debate is going away any time soon.

[My full interview with Parker will be in the June issue of ATW]

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