Commercial air passenger service is a mixed business with privately owned companies competing against state-owned enterprises (SOEs) and partially state-owned firms throughout much of the world. Because World Trade Organization (WTO) rules and those of other trade agreements do not apply to international air passenger service, a system of bilateral “Open Skies” agreements has developed in order to open markets, reduce government interference in international aviation, and facilitate efficient resolution of disputes over rates, landing rights, and general fair practices for commercial aviation. In recent years, heavily subsidized SOEs in the Persian Gulf states Qatar and the United Arab Emirates (UAE) have posed a major challenge to the maintenance of a stable Open Skies regime, however. Using tens of billions of dollars in government-provided capital not available to their overseas competitors, these SOEs have taken significant market share from established airlines in the United States, Europe, Australia, and India, for example. And subsidized SOE air carriers in China—which has no open skies agreements with the world’s major industrialized nations except Australia—are beginning to raise many of the same concerns.
Earlier in 2018, the United States and the two Gulf sheikdoms concluded separate bilateral agreements intended to begin addressing this problem. Both accords mandated greater transparency in accounting by Qatari and UAE-owned air carriers so that unfair, market-distorting government subsidies would be more visible, and each agreement also included concessions from the sheikdoms about a related irritant: the proliferation of third-country stopover destinations on otherwise direct Gulf-carrier routes to and from the United States.
These accords are too new for any confident prediction to be made about how effective they will ultimately be in restoring open and fair competition to international commercial aviation. The United States—and its allies in Europe and Asia, many of whose established airlines have also been hurt by subsidized SOE competition from the Persian Gulf—should remain highly vigilant until relevant data can be collected and analyzed. Qatar Airlines recently purchased the small Italian carrier Meridiana, restocked its aging fleet, rebranded the company “Air Italy,” and began opening new international routes with third-country stopovers—which suggests an intention to evade the spirit of the U.S.- Qatari agreement. In the future, if the results prove disappointing, expanded use of the WTO or other trade agreements may be worth considering as a further tool to help address the problem of SOEs in general, not just those affecting the airline industry. In the meantime, however, the U.S. and its allies should vigorously pursue the guarantees of financial transparency and fair and equal opportunity to compete accorded to their domestic air carriers by the open skies system—and give cautious but serious consideration to the pursuit of additional open skies agreements with China, which currently operates outside the system’s framework of rules.
Commercial aviation, especially in the international arena, has long been an outlier in a world increasingly characterized by open competition and lightly regulated markets. The early years of the airline industry were dominated by national champion carriers, frequently owned by national governments. The experience of the two 20th Century world wars resulted in tight control over the use of air space, and the need to plan for emergency mobilizations provided major national governments a strong incentive to keep air fleets— even those privately owned—in strictly domestic hands.
Broader competition emerged after World War Two, as widening prosperity and technological advances in the jet era led to greater demand and lower costs for air travel. In the 1970s and 1980s the United States, then by far the world’s largest market for air travel, deregulated its airline industry. As the European Union grew and became more market oriented, and the former Soviet bloc disintegrated and abandoned fully centralized command economies, new privately-owned airlines emerged to challenge the old system of national champion carriers and meet increasing demand.
Yet as the world’s largest economies integrated and developed an elaborate system of open trade under the umbrella of what became the World Trade Organization (WTO), major elements of the older model for commercial aviation persisted. This was due in part to issues of air-space sovereignty and a continuing felt need to preserve national fleets. Commercial aviation, like most service industries, has never been included in the WTO system of disciplines for cross-border trade, and most countries still require majority domestic ownership of commercial passenger service providers.1 As a result, the international air market is now a mixed one, with many state-owned enterprises (SOEs) competing against mixed public-private and fully private entities.OpenSkiesPDF
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