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Some economic lessons to learn from airline industry inconsistency on competition and subsidies – Publications – AEI

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AEI Some economic lessons to learn from airline industry inconsistency on competition and subsidies Below, I’ll try to sort out what I think are some obvious inconsistencies about competition and government subsidies among US airlines and airplane manufacturers. The Venn diagrams illustrating those inconsistencies graphically appear above. Item 1: From the New York Times article “Open-Skies Agreements Challenged” (2/6/2015): For more than two decades, domestic airlines and successive administrations have pushed for, and achieved, broad international agreements that have fostered greater competition, lower airfares and more flights to hundreds of destinations like Tokyo, Beijing and Rio de Janeiro. But now, with the rise of Persian Gulf airlines and other nimble foreign carriers, those

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Some economic lessons to learn from airline industry inconsistency on competition and subsidies

Some economic lessons to learn from airline industry inconsistency on competition and subsidies - Publications – AEI Some economic lessons to learn from airline industry inconsistency on competition and subsidies - Publications – AEI

Below, I’ll try to sort out what I think are some obvious inconsistencies about competition and government subsidies among US airlines and airplane manufacturers. The Venn diagrams illustrating those inconsistencies graphically appear above.

Item 1: From the New York Times article “Open-Skies Agreements Challenged” (2/6/2015):

For more than two decades, domestic airlines and successive administrations have pushed for, and achieved, broad international agreements that have fostered greater competition, lower airfares and more flights to hundreds of destinations like Tokyo, Beijing and Rio de Janeiro.

But now, with the rise of Persian Gulf airlines and other nimble foreign carriers, those pacts, called open-skies agreements, are under attack from an unlikely alliance of domestic airlines and unions. The chief executives of American Airlines, Delta Air Lines and United Airlines recently joined together to quietly lobby the Obama administration to restrict access by fast-growing rivals based in the Persian Gulf. They cited unfair competition from the Middle East carriers Emirates, Etihad Airlines and Qatar Airways, which they say receive large government subsidies that put domestic carriers at a disadvantage.

Legacy airlines, which have traditionally backed open-skies policies to expand their markets, are now rebelling against the sort of competition that these policies are meant to bring about. The domestic airlines’ change of heart about open-skies agreements is an abrupt shift after decades of pushing for them. Since 1992, the United States has signed more than 100 open-skies agreements, a policy that usually gets the strongest backing from the domestic carriers.

Supporters of open skies point out that United States carriers have received government support in the past. Delta, American and United, for example, have been granted far-reaching antitrust immunity to set up joint ventures with rival carriers on some specific routes to Europe and Asia.

Item 2: From Delta Airline’s website:

Emirates Airline. Etihad Airways. Qatar Airways. These three airlines, also known as the Gulf carriers, are state-owned enterprises that are subsidized by their countries’ governments. This means that the Gulf carriers have a constant flow of money, and they can set ticket prices as low as they want.

So while the Gulf carriers are quickly expanding international services, U.S. airlines can’t compete with their unreasonably low prices and are cutting routes to international destinations. Even though the Gulf carriers are based in countries a fraction of the size of the U.S. and China, they have more than twice as many wide-body aircraft on order as both countries combined. The numbers just don’t add up. The Gulf carriers are violating the Open Skies Agreements. And those violations are causing U.S. carriers to lose international routes and American people to lose jobs. The future of U.S. aviation is at stake, and it’s time to speak up and protect it.

Item 3: From the news report “US slaps steep tariffs on Canadian planemaker Bombardier” (9/27/2017):

The US Commerce Department has said Canada unfairly subsidized the Montreal-based Canadian aircraft manufacturer Bombardier and announced that it will impose duties of 220 percent on every Bombardier C Series plane imported into the United States. The decision by the US Commerce Department follows a complaint by American manufacturer Boeing, which had claimed that Bombardier unfairly benefited from state subsidies in selling its C Series aircraft below cost to Delta Airlines. Boeing claims Bombardier has agreed to sell Delta Airlines 75 CS100 aircraft for $19.6 million each, despite manufacturing costs of $33.2 million.

Item 4: From the Emirates Airlines website:

The Legacy Carriers (Delta, United and American) have received more than $100 billion in government support since 2002 and share with other U.S. carriers in annual benefits potentially exceeding $24 billion. The support and benefits include U.S. Government assumption of airline pension obligations, airline stabilization grants, loan guarantees, grandfathering of airport slots, bankruptcy relief from debt and other obligations, direct grants and tax exemptions to support airport development, grants of antitrust immunity to form market-dominant alliances, protection of the U.S. aviation market from foreign competition, and the prohibition against majority foreign ownership.

Item 5:  From Mercatus Center economist Veronique de Rugy:

The US Export-Import Bank (Ex-Im) has been called “Boeing’s Bank” because of the overwhelming benefits that the aerospace conglomerate has received from the federal export credit agency over the years. In fiscal year 2014, Ex-Im authorized $10.8 billion in long-term loan guarantees, which is the Bank’s largest program and $7.4 billion of that amount, or 68.3 percent, belonged to Boeing.

Item 6: From Heritage Foundation fellow Diane Katz:

Subsidized financing is an attractive government-provided perk for some large, well-financed American companies—particularly Boeing, which is the largest beneficiary of the bank.

Item 7: From President Obama in 2012:

Boeing relied on support from the Ex-Im Bank to strike a deal selling more than 200 planes to one of the fastest-growing airlines in the world. As long as our global competitors are providing financing for their exports, we’ve got to do the same.

Let’s now summarize some of the obvious conclusions that can be reached from the items above.

Conclusion I: Open skies agreements and increased global competition were “good” for legacy carriers when it was US-based airlines expanding into foreign markets and expanding their global footprints, but suddenly “not so good” when foreign airlines started expanding their global footprints into America’s domestic markets and started to challenge the oligopoly of the legacy carriers (see first Venn Diagram above).

Conclusion II: Delta Airlines objects because the Gulf carriers allegedly receive “unfair” subsidies from their governments (Emirates Airlines strongly denies this and responded in a 210-page rebuttal), but doesn’t object to government subsidies when the airline becomes the beneficiary of such largess in the form of 75 heavily subsidized aircraft from Canada that Delta is scheduled to purchase at a price below the cost of production (see second Venn diagram above).

Conclusion III: Boeing objects to Bombardier unfairly benefiting from state subsidies in Canada but gladly accepts billions of dollars of generous corporate welfare in the form of subsidized financing from the Export-Import Bank (see second Venn diagram above).

Conclusion IV: The legacy carriers (Delta, United, and American) object to government subsidies they claim the Gulf carriers receive, but gladly accept billions of dollars of US government subsidies themselves, along with far-reaching antitrust immunity (see Item 4 above).

Bottom Line/Economic Lessons from the US airline industry:

1. Competition is great…. except when your company has to face it from lower-cost rivals. Then the main corporate talking points are to start using terms like “we support fair competition” and “our rivals have unfair advantages” in an effort to generate public sympathy and political support for some form of trade protectionism.

2. Government subsidies are evil and objectionable when a US company’s competitors receive them from foreign governments, but very desirable when those same US companies receive them directly from our government, or indirectly from subsidized low prices for imported inputs purchased by a domestic company.

3. The viewpoint of the dispersed, disorganized American consumer and taxpayer is always overlooked and disregarded when it comes to discussions about “unfair” foreign subsidies and “unfair” foreign competition. Understandably, the legacy carriers will never acknowledge the significant benefits of increased competition and lower airfares for American consumers. Boeing will never acknowledge the significant benefits of lower-cost airplanes from Canada for American airlines and consumers, and neither will it acknowledge the significant costs of the Export-Import bank to the American taxpayer. Neither will any domestic producer ever acknowledge the significant benefits to American consumers, and therefore America as a country, in the cases when foreign producers are actually being subsidized by the taxpayers of a foreign country. In those cases, the subsidies by foreign taxpayers are a generous gift of foreign aid to Americans, and redistribute wealth from foreign trading partners to Americans. If we are really serious about making America great, we should encourage, not discourage, foreign governments to subsidize Americans as generously as possible through subsidizing foreign companies, manufacturers and airlines that provide goods and services to Americans.

Some economic lessons to learn from airline industry inconsistency on competition and subsidies
Mark Perry

Mark Perry

Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan’s Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for American.com and the AEIdeas blog.

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