The US airlines are hoping that President Trump’s “America First” approach to international trade and foreign relations might get them some favors and benefits, with some protectionist type barriers erected to insulate them from the severest of foreign competition. But will this happen? We can’t see how it could be practically implemented.
For sure, foreign trade is one of the cornerstones of our new President’s worldview and it could be said that airline services are a type of foreign trade. He has already cancelled the TPP agreement, indicated he wishes to renegotiate NAFTA, expressed interest in one-on-one trade treaties with other nations, castigated companies for moving employment out of the US while still selling the finished goods in the US, and complained about the imbalance of trade with China. And all of that in just his first week in office!
President Trump has yet to turn his attention to airlines and the treaties that govern how airlines can operate between countries. Are there issues where the US has lost out on with the agreements we’ve made with other countries, or with the generally accepted international framework of how airlines operate between countries? Our three remaining major international carriers say this is so. But is this correct? And is there something Mr Trump might – rightly or wrongly – seek to change?
The Present Situation – the ‘Freedoms of the Air’
The first agreement for international air service is thought to date back to 1913, between France and Germany, allowing for airship service between the two countries.
Historically, the concept of allowing airlines to fly between countries was a complex one, wrapped up in government protectionism and national pride – all the more so in the many cases where the government of a country was also the owner or at least a shareholder in the country’s international airline (often referred to as a ‘flag carrier’). These concepts were unavoidably mixed with an understanding of the essential need for compromise – a country that refused to allow other airlines to fly in and out could hardly expect its own airlines to be given the very same rights in other countries that it was withholding, itself. But reaching agreement was difficult because there was no template for standard terms and conditions.
After a confusing process of one-off negotiations between countries, and much ‘rediscovering of the wheel’, an international meeting of 52 different nations, held in Chicago in 1944, resulted in a document that has been subsequently referred to as the Chicago Convention. It has been revised repeatedly since then, and has been ratified by all UN members except for Dominica, Tuvalu, and the Cook Islands.
This document established the International Civil Aviation Organization (ICAO), and created common rules for things such as the assignment of sovereignty for airspace to the nation underneath it, overflight provisions, some uniform safety standards, measurements to be in feet, nautical miles and knots as well as in metric units ‘for temporary use’, airplane registration, ‘rules of the air’ – a sort of international road code for planes, and many other issues.
It also created a common framework for defining what could and could not be done by airlines in other countries, which came to be known over time as the ‘Freedoms of the Air’ – a slightly misleading name because they are not freedoms as we’d understand them, but rather are negotiable optional permissions that may or may not be granted. Indeed, the default relationship between any two countries starts off with no ‘freedoms’ being recognized or honored, and from that point forward, everything has to be negotiated and then formally recorded in some form of treaty or other agreement.
We discuss the nine formally codified freedoms of the air here.
The Present Situation – Open Skies Agreements
A typical agreement between two countries would spell out which freedoms were being extended, on what basis and subject to various conditions, and might name the exact airlines that were covered, probably the routes they could fly, possibly even the types of planes they could operate, and how often they could operate flights, and/or total number of seats/week allowed.
This clearly gave a great deal of certainty to the agreement, and for a long time, was acceptable, allowing both sides to feel they were in control of what was happening and not having to worry that by leaving something open or unspecified, they were inadvertently giving the other side an unquantified present or future advantage.
But as international air travel continued to grow, and as the mix of different airlines, planes and routes started to multiply, the need to always be updating treaties to record changing airlines, changing routes, changing plane types, and to respond to requests for permission to operate more flights, or to transfer the right to operate one city pair and assign it to a different city pair, and so on – this all started to become enormously complex.
The generally growing sense of less government protection and more free market also meant that governments no longer felt it was necessary or appropriate to protect their ‘flag carrier’ – indeed, in many countries, the notion of ‘flag carrier’ was becoming more diffuse, with reduced government ownership and multiple carriers where formerly there had only been one.
Eventually, someone presumably threw their hands up in horror and said ‘look, why don’t we just say that all your airlines can fly to anywhere in our country, whenever they like, and our airlines can fly to your country, whenever they like’.
Agreeing to this wasn’t as obvious or easy as it might seem, though. Each country (and its airlines, hovering closely and nervously in the background) had to run through the list of the nine freedoms of the air and agree which were being assigned without any restriction, and were behind the scenes trying to work out if each element of the deal would be of greater benefit to them or to the other country. Such agreements came to be termed ‘open skies’ agreements, and generally have been created at the wish, and to the delight, of the affected airlines.
Even a full open skies agreement is seldom as ‘open’ as it seems. For example, while there is an open skies agreement between the UK (ie EU) and US, that doesn’t mean that a US airline could now be owned by Europeans. Although the agreement says ‘any airline can fly in and out of Heathrow’ (formerly only four airlines could do so) the slot constraints at Heathrow still impose restrictions on airlines, even if the agreement does not. And while open skies agreements typically always enable the first four freedoms, the fifth through ninth freedoms become successively less and less common.
Open Skies = Free Trade = Bad?
The US now has open skies agreements with over 100 countries.
Many are uncontroversial and popular with everyone involved. But some have become more problematic. In particular there are cases where the US carriers eagerly encouraged the US government to create open skies agreements with other nations at a time where the other nations had little or nothing in the way of potentially competing airlines. The US carriers saw such agreements as very much a one-way deal, giving them access to other markets in which there were no competing airlines to worry about. There was no downside to such deals, which is why US airlines liked them so much.
The most notable of these is the agreement with the United Arab Emirates – the home of Emirates, Etihad and (adjacent) Qatar airlines. Following on from an initial note in 1999, the formal agreement was established in 2002. At that time, Emirates Airline was just starting to appear on the international radar screen, Etihad Airways had yet to be formed (it started operations in mid 2003), and Qatar Airways was a small regional airline (also flying long-haul but only to London).
This has changed profoundly of course, and by some measures both Emirates and Qatar now figure in top ten lists of the world’s largest airlines, and Etihad, while smaller, is on a similarly steep growth curve.
All of a sudden, what had seemed like a one-sided agreement that was tilted in favor of the US carriers now seems much more balanced and even-handed – concepts abhorrent to our US carriers.
Total size is one measure, but a more important measure is that all three carriers feature prominently in the high-end of the market (ie for first and business class travel), making them more impactful on US carriers than size alone would imply. Add to that their rapid rate of growth and generally healthy profits, and very positive reputations with passengers and regular wins as ‘best airline’ in the myriad of such airline rating systems, and it is no wonder that the US carriers are feeling cowed and terrified.
The US carriers claim that the three Gulf carriers are unfairly competing against them due to being recipients of government subsidies. This claim has been weakened by credible costings that seem to suggest the US carriers have actually received more US government subsidies than have the Gulf carriers received from their governments, and the US carriers’ attempts during the Obama administration to get the open skies agreement overturned or at least massively rewritten have failed.
The recent addition of a flight by Emirates that goes between Newark and Dubai, but with a stop in Athens, has reinvigorated the complaints, even though for much of every year, no US carriers operate nonstop flights to Athens themselves. But just because they don’t want a route themselves doesn’t mean the US carriers will happily see a competitor snap it up!
Another recent high-profile argument has been with Norwegian Air and its application in 2013 to operate between Ireland and the US – something clearly allowed by the US-EU open skies agreement.
The ‘Big Three’ US carriers (AA, DL and UA, joined by the usual group of unions) objected, saying that because Norwegian’s parent company was actually based in Norway, and because Norway isn’t a full member of the EU, it was trying to cheat the system and shouldn’t be covered by the US-EU open-skies treaty. Norwegian said that its Irish subsidiary was an Irish company, had an Irish aviation operating authority, operated in full compliance with and under the control of all EU aviation and labor regulations, and as such was as completely European as any other European airline. After a shameful and unprecedented three-year period of delay, Norwegian’s request to start flights to the US was finally granted by the US DoT in December 2016.
The US Airlines’ Arguments Against Open Skies Agreements
The default argument our ‘Big Three’ carriers are making against selected open skies agreements is that they allow foreign airlines to ‘unfairly compete’ because they are using foreign lower paid pilots and flight attendants, and foreign lower costing maintenance, whereas the US airlines are employing US union staff and paying massively higher costs in the process.
On the face of it, this seems intuitively obvious, even though one wonders why this has suddenly become a concern now when it wasn’t apparently a worry in past years. But is it an accurate description of the underlying reality? No.
The truth is more complex, just like when trying to distinguish between, eg, a US branded car (which might have 40% foreign content) and a foreign branded car (which might have 40% US content). The “US” car might have been assembled in Mexico and the “foreign” car assembled in the US. Each probably have components made elsewhere in the world. And so on.
US carriers aren’t comprised solely of 100% US content. They routinely ship jobs off-shore, as you’ll know if you call an airline (800) number and end up speaking to someone in the Philippines or India or the Caribbean or wherever. They sometimes have maintenance done elsewhere. They even employ foreign staff – obviously in their foreign destinations, and less obviously on some routes/flights too. And when they do employ US staff, they’ll happily turn their back on high paid union staff and employ cheap contractors whenever they can.
When the US carriers aren’t hiring foreign staff, they’re actually doing something that is maybe worse – they’re contracting with foreign carriers to fly US branded flights for them. The code-share and ‘joint operating agreement’ and ‘joint marketing agreement’ concepts now allow US carriers to shop not just where they hire staff from, but even who operates every element of what are supposedly their flights. It is possible to fly around the world on what are identified as US flights, but none of which are operated by US airlines and US registered airplanes. That’s akin to General Motors complaining about competition from Toyota, then buying in Toyota cars and with a Sharpie marker crossing out the word Toyota and writing in ‘Chevrolet’ below it and saying “restrict imports of Toyota cars, but not the ones we write Chevrolet on with a Sharpie marker”.
Adding further to the hypocrisy of US carriers is their willingness to join forces with the same Gulf airlines when it suits them, even while they are simultaneously decrying the Gulf airlines as providing unfair competition. Surely this is the ultimate in ‘frenemy’ type relationships.
Another complicating factor – what happens if (as if often the case) the US carrier is flying Airbus planes and the foreign carrier is flying Boeing planes?
The flipside to US carriers having an unknown and varying amount of foreign content, is that foreign carriers in turn are not 100% foreign. They have a varying amount of US content. They make jobs and employ staff in the US, and even provide passengers to US airlines in cases where an itinerary involves travel beyond the flights to/from the US gateway they fly to (which is why some of the smaller US carriers were supportive of Norwegian’s application to fly from Ireland).
Norwegian Air currently employs both some US pilots and US flight attendants, as well as a growing number of ground staff at the airports they serve. Local hotels and tourist attraction operators love Norwegian because of the extra visitors Norwegian brings in to the country. The airline also operates an all Boeing fleet of nearly new 737 and 787 planes (average age of 3.6 years per plane).
So, it is far from certain there is a problem or how substantial it may be. Yes, there is more US content in most US airlines than in most foreign airlines, most of the time. But a careful analysis makes the total overall impact on the US economy and US jobs much more complex and shows little reason to fear foreign carriers (unless you’re a complacent US airline trying to shut out competitors).
Is it a foreign carrier’s fault if it pays its pilots ‘only’ $150,000 a year and requires them to work 125 hours a month, when US carriers have agreed to pay its pilots $250k in return for 80 hours of flying time? There’s no law forcing the US airlines to pay so much in return for so little work, just a series of ‘we don’t care, we’ll pass the extra costs on to our passengers’ style agreements with the pilot unions over the years.
Should we up-end international treaties so as to protect the jobs of a tiny number of pilots earning $250,000 a year for working half time? Should we break these treaties when the downside ‘risk’ to the pilots isn’t unemployment, but merely being required to accept a more realistic wage for their jobs – a wage that is still unthinkably more than the federal minimum?
So, what would or could President Trump do if somehow he was persuaded there was a ‘worst deal we’ve ever made’ lurking within one of our bilateral or multilateral aviation agreements – agreements which, when originally negotiated, were always greeted with grateful acclaim by our airlines and unions?
Sure, he could go about ending such agreements. But what about the other side of breaking a treaty – if President Trump breaks an airline treaty with another nation, that simultaneously terminates the US carriers’ rights and access to the foreign market as well as vice versa. Who actually wins in such a case?
Perhaps a better and more easily understood question/answer pair is ‘Who loses’? The answer to that is ‘The American public. They get fewer flights on fewer airlines to choose from, and almost certainly higher air fares.’
More than that, most flights simultaneously are taking American travelers out of the US, and also bringing foreign travelers into the US. The numbers are not necessarily exactly balanced, but whether there is a preponderance of travel from one side or the other of the route, there are always some of each, and all those inbound passengers represent new tourism income for the US, benefitting our economy on many levels and flowing through to indirect benefits reaching all the way to pretty much every one of us. Restricting airline access to the US doesn’t only harm outbound US travelers, it also harms incoming tourists and business travelers seeking to enjoy vacations and do business with the US, and in turn harms all the US businesses that would benefit from their arrival, and all the supporting/secondary businesses that in turn get work from the primary traveler contact businesses, and so on.
There may well be a clear and quantifiable loss to our economy and jobs when a manufacturer moves his factory into Mexico, while still shipping his finished goods back to sell in the US and simultaneously keeping the extra profit he has made from the lower cost manufacturing, also off-shore. That’s a simple transaction that allows for simple analysis of simple limited outcomes, and may also allow for a simple response to ensure the US doesn’t lose quite so much by the manufacturer’s actions.
But when we start restricting international air travel, we create a sea of affected constituencies, both obvious and less obvious (for example, freight as well as passengers).
It is clear that the US airlines wouldn’t rush to fill the gaps created by restricting foreign carriers, even if the other nations affected by the abandoned agreement were to say ‘don’t worry about it, guys, you can still fly to our airports any time you like’. For example, the new Emirates flight to Athens – that isn’t unfairly forcing out a current US airline’s flights. It is a totally new flight on a route the US airlines have no interest in operating.
One possible solution might be to require foreign airlines to set up US subsidiaries and pay US taxes on their US related profits. This is actually what some foreign airlines would love and which terrifies the US carriers – a chance to set up US airline subsidiaries (and then fly domestically within the US too).
Another possible solution might be to strike a compromise deal – foreign airlines should half staff their flights with US crews, and US airlines should be allowed to half staff their flights with crews from the destinations they are flying to. But that’s not going to please the US pilots and flights attendants unions, because the foreign airlines will seek to employ non-union US staff, and the US airlines in turn will also seek to hire non-union foreign staff.
This is why we say Trump shouldn’t target aviation. We don’t think there’s a problem that needs fixing at present, and even if there is, we don’t think it a problem that allows for an easy tweet-sized solution.
Something Trump Might (Should) Do?
We were delighted to see reference to speeding implementation the FAA’s long-delayed ‘Next Gen’ Air Traffic Control system as part of a Trump plan to rebuild America’s transportation infrastructure.
The Next Gen system would allow for more planes in the sky, flying more safely, using GPS-based and other updated navigation aids rather than the outdated and less accurate/reliable radar and radio type navigation systems at present. It would cut down on the congestion in the skies that results in delayed flights, and allow better flight paths, saving fuel and time – both precious commodities to both the airlines and their travelers.
The system has been ‘in development’ – ie, awaiting full funding – for close on 15 years. The admittedly substantial costs of implementation would be astonishingly quickly repaid in operational savings – perhaps in as little as two years. But because the costs would be incurred in part by organizations that wouldn’t in turn directly see the operational savings, funding has been a problem to date.
Getting Next Gen finally deployed would be a massive tangible boost to our aviation system. Let’s hope this part of the aviation system does indeed get focus and favor from the Trump administration.