Who wouldn’t agree that competition is a great thing? After all, it’s market competition that drives innovation and entrepreneurship, and in the process delivers tremendous value for consumers that comes from new products, lower costs, faster delivery, and greater choice. Competition is what has made America great.
Unfortunately, there are now some American firms turning their backs on the very force that fostered their birth, growth, and global dominance.
That is the case with American, Delta, and United airlines. These Big 3 U.S. carriers have built some of the most dominant airlines and alliance networks in the world as a direct result of America’s leadership on Open Skies agreements. These agreements, which the U.S. began negotiating in the early 1990s, opened the door to increased global competition in the aviation industry and set the stage for U.S. carriers to significantly increase their expansion abroad.
And expand they did. In fact, the Big 3 airlines and their alliance partners now corner more than 80 percent of the European air travel market. For many years, American, Delta, and United airlines were among the most vocal proponents of Open Skies and global competition. But today they are singing a different tune. Why? Because the same competitive Open Skies arrangements that opened the door to the global success of the Big 3 also opened the door to nimbler Gulf airlines with some of the newest planes and the best customer service in the industry. The new competition from the Middle East has the Big 3 breaking a sweat.
As often happens when companies become entrenched oligopolies, the Big 3 are fighting to limit competition. Instead of fighting in the marketplace for consumers’ hard-earned money, they are lobbying the government for protection; complaining about “unfair” subsidies, “unfair” advantages, and “unfair” competition. They want the Trump administration to renegotiate U.S. Open Skies agreements with two Gulf states (UAE and Qatar) and freeze new routes for their successful, consumer-friendly airlines.
There are several problems with the legacy carriers’ request for protectionism.
First, the Big 3 haven’t specified any violation of existing Open Skies agreements. In fact, the bilateral treaties mention the word “subsidy” just once, in regard to “artificially low airfares”—which the Big 3 have not alleged and any traveler can tell you isn’t the case in today’s market.
Second, the Big 3 have no problems with the deep-pocketed investments of foreign governments when those domestic carriers themselves are the beneficiaries of such government influence. Combined, American, Delta, and United have codeshare partnerships with 28 state-owned and state-invested airlines, many of which are recipients of government subsidies including Air China, Aeroflot, and South African Airways. Also, Delta Airlines didn’t object to generous government subsidies when it ordered 75 CS100 airplanes from Canadian-based airplane manufacturer Bombardier at such a steep discount that Delta’s price is about 50 percent below the actual cost of production!
Third, the Big 3 have no evidence to back up claims that these “unfair” subsidies are causing them any economic harm. They are experiencing record profits and industry job growth is robust. The three legacy carriers collectively earned more than $5 billion over the last two most recent quarters, which is nearly $30 million in profits every day. In addition, government data show that U.S. airline industry jobs exceeded 700,000 in October for the first time since September 2001. Over the last year, full-time jobs in the airline industry grew nearly 3 percent compared to job growth of less than 2 percent for full-time workers overall. This is hardly a picture of a suffering industry.
Worst of all, the Big 3’s attempt to use politics to avoid competition, if successful, would have a negative impact on the U.S. economy and the travel and tourism industry more broadly. A study by the U.S. Travel Association found that if the U.S. had frozen Gulf carrier flights as requested by the legacy carriers, more than 7,000 American jobs would have been lost in 2015 and 2016. These job losses will be trivial compared to what could happen if the Trump administration caves to the demands of the Big 3. Reopening agreements with the UAE and Qatar could lead to less access for U.S.-based airlines not only in those markets but also with other Open Skies partners that decide they now want a “fairer” playing field with U.S. carriers.
Open Skies agreements are the gold standard for a consumer-friendly and competitive international aviation market. The main purpose of the agreements is to take governments out of our skies and let the marketplace and competition choose winners and losers. For decades, American, Delta, and United have been successful and profitable winners in a competitive global marketplace. If the Big 3 want to continue winning in the future, they should compete against their global rivals, and not run to Uncle Sam for protection against them.
Mark J. Perry (@Mark_J_Perry) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.
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