MIAMI — The U.S. Travel Association (USTA) has come out with a report claiming that U.S. airlines received $155 billion in federal subsidies between 1919 and 1998. An industry observer says the ongoing Open Skies battle is all about airlines getting and maintaining market share.
Citing a Congressional Research Service report, unearthed by the Business Travel Coalition via WikiLeaks, USTA’s stand is the latest shot fired in the ongoing war between the Big Three U.S. and Gulf carriers.
“The Big Three U.S. airlines have constructed themselves an enormous glass house, and their amnesia about their own subsidies has now cost them the credibility of their own core argument for breaking Open Skies agreements,” said Jonathan Grella, USTA executive vice president for public affairs in a statement. “I give all credit to our friends at the Business Travel Coalition for discovering this pivotal bit of evidence that completely alters the landscape of this debate.
“This exposes the fiction that the U.S. airline cartel’s furious and expensive assault on Open Skies is about subsidies. We hope this prompts policymakers and the public to ask: OK, what’s really motivating the campaign to break these agreements?” said Grella. “We hope there is something else to dissuade us from by far the most likely conclusion: the Big Three airlines hate competition, and rather than cope with it in the marketplace they will undertake extreme means to stamp it out politically.”
The subsidy argument for breaking Open Skies agreements was thin if not downright foolhardy, said Grella. “And now we have strong evidence of that from an unbiased source, the Congressional Research Service. This development, coupled with the inarguable harm rolling back Open Skies would inflict upon American travelers, economic productivity and job creation, should end any discussion over selectively abrogating the agreements,” he said. “But the Big Three airlines have shown a lot of determination and resources, so we’re resigned to the fact they’ll keep this up, and we’re curious to see what their next whopper is going to be.”
Wade Eyerly is the founder and CEO of New York-based Beacon, an all-you-can-fly membership company and the founder behind Santa Monica, California-based Surf Air, another all-you-can-fly operation connecting Los Angeles and Silicon Valley. “Airlines are finally making a profit and so everyone’s scrambling for more market share. When everyone is losing money, you have less need to be the top dog,” he said.
It also takes time for innovators and competitors to enter a market, so while the opportunity has been around for a while, airlines like Turkish Airways or Emirates are massive operations and it takes a lot of work to enter new markets, said Eyerly. “The things we’re seeing now are results of a lot of work over a long period of time.”
Government subsidies are a dangerous game on any side, said Eyerly. “Businesses need to be self-sufficient. In rare cases, like national security or a general public interest (like health research), some subsidies may make sense, but in general they distort the playing field. Both sides are probably right to complain about the subsidies the other side receives,” he observed. “And it’s not a game anyone wins. Governments spend more to make these airlines profitable, and taxpayers in both geographies lose. [Essential Air Service] subsidies in the U.S. are aggressive and egregious, but they ensure air service to areas that would lose it without those subsidies. So far, Congress thinks that’s a good thing. As that changes, so will the subsidies.”
U.S. carriers could provide amenities similar to those provided by the Gulf carriers, but they choose not to, said Eyerly. “Their business models are transactional. They acquire a customer, fulfill a one-time need and discard the effort to start over. If the Gulf carriers are focused on service then they are building longer-term customer loyalty. It’s a different strategy, but certainly a fair one,” he said.
The industry is desperate for upheaval for some kind of innovation or change, said Eyerly. “Without it, the average passenger is suffering, and that’s why you see so many people who hate flying. US domestic carriers stripped out service as part of their offering long ago and we’ve been conditioned as passenger public to expect very little from our airlines,” he said. “So the Gulf carriers may have identified a good market opportunity. They aren’t the only ones. Virgin America flies the same planes on the same routes as other domestic U.S. carriers, but mood lighting and smiling staff make them stand out.”
Legacy carriers have set a pretty low bar for service, said Eyerly. “This is one of the reason we’ve seen innovative companies in the U.S. like flybeacon.com pop up. We serve a niche clientele of folks who want to fly in comfort, and who need to do it regularly,” he said.
The Gulf carriers don’t represent much threat to the core business of U.S. domestic carriers, said Eyerly. “From a regulatory standpoint they can’t operate flights between two domestic U.S. cities. But in the broader global marketplace, they represent a massive threat,” he said. “People want more out of their airlines and if U.S. carriers won’t give it to them someone else will.”
The battle will never end, said Eyerly. “Just as the pendulum starts to swing too far in one direction or the other, the market will demand a return to center,” he said. “These sorts of changes are natural, and good for everyone.”