Competition and subsidies in air transport liberalization – The UAE-North America dispute

  • November 28, 2017
  • Rachid Tiroual

Note: This is an abstract of an article that originally appeared in the SMU Journal of Air Law and Commerce Vol. 82 Issue 2.

Abstract: Context and scope

Subsidy allegations against the three major Middle-Eastern carriers – Emirates Airlines, Etihad Airways, and Qatar Airways – have been brought by the three major U.S. carriers – American Airlines, Delta Air Lines, and United Airlines – which claim that the Gulf trio receive letters of credit and subsidies from their governments. They claim also that their rivals take passengers and revenues from U.S. carriers and force them to reduce, terminate, or forego services on international routes.

This article rationalizes the ongoing debate without arguing whether the subsidy allegations are founded. It seeks to understand the basic rationale behind any findings and conclusions drawn by the different stakeholders that are involved or concerned by the subject. It is important to shed light on the conflicts of interests that might harm air transport development as a whole, and hence the fundamental right of the people: freedom of movement and, more specifically, the needs of the people for “efficient an economical air transport” prescribed by Article 44 of the Convention on International Civil Aviation.Footnote1

The focus is on the North American region. The air transport policies and competitive issues are addressed from different national and international perspectives, specifically, the International Civil Aviation Organization, the World Trade Organization, national civil aviation authorities, and for profit organizations. The analysis is based mainly on scientific data and legal and regulatory aspects, which are discussed through a case study of the United States and Canada on the one hand and the United Arab Emirates on the other.

Level playing field

The definition of a level playing field in the international trade is often a source of confusion. In fact, a conflict of interest is most likely to occur when various stakeholders are involved in complex processes within different environments, and hence, different conditions of operation (e.g. labour standards, taxes). An equilibrium is not easy to achieve when potential benefits for a party are more of threats for others. The aviation system is no exception in this regard; the definition will be even more complex for international aviation, which is based by its own nature on the international market mechanisms from regulatory, legal, and operational perspectives.

The comparative advantage approach in the aviation field is more difficult to achieve given “that aviation has been separated from general trade negotiations.”Footnote2 As a result, “the issue of the level playing field plays an inordinately larger role in aviation than in other sectors.”Footnote3 Nevertheless, many aspects in aviation remain consistent with this perspective. For instance, the national institutional policies play in favour of the aviation system as a whole in the UAE and Qatar. In addition, the geographic location is pointed out as a major advantage for the Middle Eastern carriers; that is, international hubs enable carriers to benefit from operations between the U.S. and Asia Pacific, as well as Europe and South Asia/East Africa. On the other hand, Boeing and Airbus benefit in return from the rapid growth of the Middle Eastern carriers; this is due to the comparative advantage of the United States and Europe in high tech manufacturing and skilled labour for the production of the largest aircraft tailored to the Gulf trio.Footnote4

Regulatory framework and settlement of disputes

The conflict of interest with regard to subsidy allegations against the three major Middle Eastern carriers might lead to political risks as a result of widely advertised allegations; the latter are fueled by accusations, counter-accusations, or rebuttals on the basis of analysis conducted separately by both sides. When such accusations persist with no way out, it is also because of a weak regulatory framework with respect to the procedure of settlement of disputes. Given the ASAs’ limited scope, the intervention of WTO should be considered in cases of commercial disputes related more specifically to alleged financial subsidies, which may distort the market. Even though there is no mention of WTO in the overall existing bilateral ASAs in case of a dispute relating to unfair competition, perhaps it is the will of civil aviation regulators to maintain the status quo by resolving possible disputes under the bilateral ASAs without any referral to an organization outside the aviation sphere or diplomatic channels of both parties – in the worst scenario.

Balanced analysis and proactive approach

Economic and social benefits have been pointed out as the very essence of air transport liberalization, which has been an engine and a catalytic tool of socioeconomic development within the aviation industry.Footnote5 Connectivity has been identified as a social benefit and considered a secondary effect of liberalization.Footnote6 However, what is considered by some stakeholders as a benefit occurring from liberalization might be perceived by others as a threat. Not everyone is convinced of the effects or side effects of competition in air transport, which is the driving force of liberalization.

The demand stimulation is of interest to global stakeholders, but at different levels; in fact, low fares as a result of the demand stimulation do not necessarily work in favour of airlines whose profit margins are the worst in the air transport chain. Besides, the quality of service and passengers’ rights are often compromised in the midst of growing demand. Hence the importance of a proactive and collaborative approach to achieve applicable regulations, to be elaborated and enhanced in concert with diverse stakeholders; the latter must include the passengers who are still very poorly represented in the global air transport system.

On the other hand, in a restricted market, regulations are generally rigid and contain clauses designed to protect the interests of (almost) one major player – the national carriers. Sometimes it is even difficult to tell who these clauses and regulatory texts benefit as a whole: the regulatory bodies or the flag carriers?

Consequently, the assessment of air transport liberalization must be conducted on a regular basis; a balanced analysis is needed to assess existent and potential impacts of liberalization on each of the various stakeholders, many of which are emphasised in this article. A cost-benefit analysis should be considered for a balanced assessment of the impacts of a liberalization policy. On the basis of this, eventual corrective measures or regulatory texts, if any, could be recommended.

Rachid Tiroual is GradCert in Air and Space Law (McGill University, Montreal, Canada, 2017); GradDip in Integrated Aviation Management (McGill University, Montreal, Canada, 2016); M. Sc. in Transport and Sustainable Development (ENPC, Paris, France, 2009); and B.Eng. in Process Engineering (ENIM, Rabat, Morocco, 2007). He is a project manager in the aviation field. He has previously worked at the Moroccan Civil Aviation Authority as head engineer for the Department of Strategic and Economic Studies. He was also an observer at the Committee on Aviation and Environmental Protection (CAEP) at the International Civil Aviation Organization (ICAO).