Aviation free trade agreements under threat

October 6, 2015

Open skies policies are agreements designed to liberalise aviation services by allowing agreed countries to launch commercial, and sometimes military, aircraft into each other’s airspaces without it constituting trespass. The agreements can be bilateral or multilateral between countries, and also sometimes permit aircraft to stop in a third country, collect passengers, and continue on to another destination.

Airlines are often registered to a given state. These airlines are referred to as ‘flag carriers’. As sovereign states have control over their land, sea and airspace, if a foreign state-owned aircraft enters another state without permission it can be deemed as trespass.

There are two ongoing cases involving the aviation sector in the United States – one a domestic problem, the other concerning the United States’ agreement with Qatar and the United Arab Emirates.

United States domestic investigation

The United States Department of Justice (DOJ) recently requested information regarding communication between the country’s four largest airlines: American Airlines, Delta Air Lines, United Airlines and Southwest Airlines. The request led to accusations of misconduct which, in turn, has led to an investigation of the entire industry by the DOJ’s Antitrust Division.

The investigation centres on whether United States airlines have been controlling prices by dictating the amount of seats available on their flights. The Antitrust Division, headed by Bill Baer, is particularly interested in discussions on capacity that allegedly took place during meetings and conferences, according to Bloomberg. Baer announced that consolidating industries need to be examined as a whole rather than via specific companies.

Conversations over capacity plans are frequent in the airline industry as companies try to control the supply and demand for various routes. But having attempted to impose terms in a merger aimed at fuelling competition with low-fare carriers two years ago, Baer is now under the impression that a stronger solution is needed.

The issue of capacity plans has been topical since 2010, when airlines initiated the largest capacity cuts since World War II to avoid having to fill seats with reduced ticket prices.

‘In my experience of looking at markets with just a few players, sometimes there is a temptation to coordinate behaviour,’ said Baer. ‘It’s a pretty good idea to resist that temptation.’

The aviation industry is justifiably worried about the investigation, which, at best, will cost millions of dollars in legal fees and, at worst, could result in the DOJ pursuing guilty pleas and large fines.

The investigation hangs on the ability of the DOJ to find documented evidence of collusion, which is the linchpin of all antitrust cases. And, according to Corporate Counsel, incentives given by the DOJ’s leniency programme are the most effective means to encourage firms already convicted in one market to report collusive agreements in other markets.

As part of its current investigation, the DOJ will need to uncover evidence of a veiled offer to restrain trade and active acceptance of said offer. If any airlines are found guilty of such an offence, then the decision will almost certainly change the way that airlines conduct capacity planning and could dramatically reduce costs.

Middle East investigation

In the Middle East, meanwhile, antitrust accusations in the aviation sector are just as prevalent but for different reasons, with the region’s three largest airlines being accused of flooding the United States market and abusing the their open skies policy.

United Arab Emirates flag carriers Emirates and Etihad Airways and Qatar flag carrier Qatar Airways maintain that their rapid expansion is due to a rise in demand that resulted from the increased cost of fuel in Asia. However, the fact that there was only one flight from Dubai to the United States less than ten years ago and now all three airlines operate 25 daily non-stop flights to the United States has raised questions.

This period of expansion has happened despite the fact that Dubai, Abu Dhabi and Doha (where the three airlines are based) have populations of only 2.3 million, 2.1 million and 900,000 respectively. These figures include a huge number of foreign workers who rarely travel, and such comparatively small populations do not warrant such expansion. Rather, what the carriers have capitalised on is the connecting traffic from the United States to other regions around the world, according to Forbes.

Accusations by carriers in the United States cite the large subsidies by Middle Eastern governments that facilitated expansion of their airlines as an unfair advantage. American Airlines, Delta Air Lines and United Airlines even lobbied the Obama administration to take action on the matter, according to The New York Times.

Some commentators have therefore argued that many airlines are now rebelling against the open skies policies that they backed for so long in order to expand their own businesses.

Emirates president Tim Clark said that, by questioning a policy that has been the bedrock of modern aviation, the United States is playing a dangerous game. ‘By challenging open skies, you are not just challenging the aero-political situation, you are challenging the very essence of economic liberalisation that the United States has championed for decades,’ he added.

But, according to travel blog One Mile At a Time, the aviation industry has miscalculated in its examination of the three Middle Eastern carriers by assuming that they are for-profit organisations. In fact, with the slight exception of Emirates, they are not. The goal of Emirates, Etihad and Qatar Airways is not to turn a profit; it is to put their respective countries on the global map with a view to diversifying their economies beyond their current reliance on oil. Therefore, to challenge them on antitrust grounds could be something of a slippery slope given the recent propensity for governments in Asia and Europe to bail out their flag carriers.

Consumer advocates point out that the gulf carriers have opened up new markets that have ultimately benefitted consumers – not to mention the additional traffic that has been welcomed at airports around the United States.



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