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The spat between the US and Gulf carriers over government subsidies that we discussed in last month’s Aviation Intelligence Reporter continues, with the French and German transport ministries now also raising concerns to the European Commission.
The hastily-formed lobby group Americans for Fair Skies claims that subsidies of $40billion to the Gulf carriers undermines the intentions of the Open Skies Agreements and means they do not compete with American airlines on a level playing field.
So what does a level playing field look like? Here are three suggestions to start with.
Carriers should be easily able to enter or leave a market, implying no (or limited) barriers to entry or exit. Barriers to entry may include large capital investments needed to enter a market (for example, establishing a hub), the strength of the brand and advertising associated with an existing carrier, and access to essential resources such as the right to land at an airport.
The latter is a significant issue and was a source of tension between the United Arab Emirates and Canada in 2010 while Emirates Airline has long complained about securing rights at German airports.
And, of course, there is the issue of slots. Incumbent carriers often have ‘grandfather rights’, whereby they are able retain control of desirable slots for perpetuity. This can be a major barrier to a carrier looking to enter a market.
The actions of one carrier should not impose a cost on other carriers (ie, externalities). For example, a decision by a carrier to increase its flights from a particular capacity-constrained airport may lead to congestion, and thereby increase the costs of other carriers whose flights are subsequently delayed.
Prices should reflect costs. This implies that prices should not be below the cost of providing the service (including an appropriate cost of capital).
That is not to say that every carrier will face the same costs. For example, a carrier offering a premium service will likely have higher costs than a ‘low-cost’ carrier. Carriers operating with more efficient aircraft may also have lower costs than other carriers who use older aircraft. International carriers’ costs may also differ if they are able to take advantage of their countries’ comparative advantages, such as cheaper labour (this has led to concerns from some about ‘social dumping’).
However, it does not suggest that carriers should be able to avoid costs that a typical carrier operating in that market would otherwise face. As we mentioned in last month’s Aviation Intelligence Reporter, the Gulf carriers have pointed out that US carriers do not pay for ATM services.
As with most things, interpreting the definition of level playing field is not black and white. What do you think a level playing field implies under the Open Skies Agreements?
For more insight on similar issues, including the issue of ‘social dumping’, subscribe to the Aviation Intelligence Reporter
