Gains offered by Arabian Gulf airlines add up for US economists

Amid the subsidies row that is rumbling on, a body of experts has already concluded that Gulf airlines’ involvement in the US aviation business is a good thing all round.

It is rare for this column to be about the same subject on two consecutive weeks, but I make no apologies for the fact that again I’m going to write about the row between the three big American airlines and their rivals in the Arabian Gulf over “open skies” policy.

Quite simply, it is about the most important single business issue for the region today. Aviation is absolutely central to the macroeconomic growth plans of Qatar, Abu Dhabi and Dubai; it already accounts for substantial proportions of GDP in all three economies.

Many other sections of business depend on the aviation sector. For example, in Dubai the strategy of focusing on the “three Ts” – trade, transport and tourism – as the drivers of economic growth simply falls apart if the aviation sector is removed from the equation.

So an attack on the Qatar, Etihad and Emirates airlines is an attack on the economic well-being and diversification strategy of the countries they represent. It is an existential threat to the economic health of the Arabian Gulf.

Last week Delta, United and American, the three US airlines which have mounted the threat, finally made public details of their allegations against the Gulf industry. They did so selectively, by declining to allow regional media such as The National to take part in the conference call in which the allegations were unveiled.

Such subterfuge is especially hard to understand when the report was finally made public via a website set up by the US airlines’ lobbyist.

The 55-page document posted on the internet is a pretty thorough piece of work, trawling all the public sources of information about the three Gulf airlines. It backs up its claims with specific references to published sources – many of them the financial records of the three airlines themselves – and generally makes a coherent, well-argued case. Many shareholder dollars must have been spent on it.

It is certainly a document that the three Gulf airlines will have to spend time and resources in studying, weighing and finally responding to.

Many of the specific allegations require quite specialist financial or accounting knowledge. Even with a panel of experts, there is likely to be disagreement about the differences between subsidy, capital injection and borrowings. One man’s subsidy is another’s industrial and economic strategy.

The debate will get particularly esoteric over the question of fuel subsidies, perhaps the most contentious part of the US document. The Emirates Airline president Tim Clark, who is travelling to Washington next week to discuss the claims with aviation officials, has said he will resign if allegations of subsidies are proven.

But while we wait for the rebuttal of the US airlines’ claims, it is worth noting the central complaint of the American side: that Gulf airlines have used the freedoms of the “open skies” policy unfairly, and to the detriment of the American economy.

This last point is the really crucial charge. If Gulf carriers – by reason of geographical advantages, or commercial smartness or the backing of business- friendly governments – were damaging the three US airlines, you’d say: all’s fair in love and business.

If, on the other hand, they were damaging US consumers or the country’s economy, that’s a different ballgame.

But a body of experts has already considered this matter, and concluded that actually Gulf airlines’ involvement in the US aviation business is a good thing all round. The American Economic Association published what is surely the definitive word on the subject a few months ago.

Economists from five US universities studied the effects of competition from the Gulf on fares and passenger numbers in America.

Their deliberations seem exhaustive to me, although I always was impressed by an algebraic equation in support of a business argument.

Their bottom line, however, is plain. When Gulf carriers get involved in US aviation, overall passenger numbers increase and fares decline. “Their [Gulf airlines] entry has likely resulted in a more competitive-based equilibrium that indicates, on a global basis, a net gain to society.”

That’s an astonishing verdict from a group of men as naturally staid and conservative as American economists. Why didn’t we read about that in the US airlines’ 55-page report?

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Published: March 10, 2015 04:00 AM


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