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Without Balance, Open Skies May Mean Closed Gates

This article was originally published on June 2, 2017 in Investors’ Business Daily.

There has been much recent debate over how airlines can improve the customer experience. Perhaps the most obvious suggestion is to avert physical confrontation and ensure passenger safety; another less obvious but important idea is to provide efficient and affordable service.

To their credit, the airline industry has sought creative ways to accomplish the latter. Unfortunately, the days of cheap and convenient fares could be coming to an end.

For 35 years, the United States has participated in what are known as Open Skies agreements with other nations, with the goal of offering more efficient international passenger and cargo services. According to the U.S. Department of State, Open Skies agreements meet these ends by “eliminating government interference in commercial airline decisions about routes, capacity, and pricing, so airlines can provide more affordable, convenient, and efficient air service to consumers.”

In other words, the intent of Open Skies agreements is to expand consumer choice and welfare. Open Skies agreements also seek to ensure that international airlines are operating on equal terms and that cronyism and over-regulation in one country doesn’t hurt free market enterprises elsewhere.

Ideally, these bilateral agreements benefit consumers, promote competition, and foster economic growth. However, if one party doesn’t honor the terms of the agreement, the one who plays by the rules will lose out.

And right now, America is losing out.

The Open Skies agreements that the U.S. has with Qatar and the United Arab Emirates (UAE) both state, “Each Party shall allow a fair and equal opportunity for the designated airlines of both Parties to compete in providing the international air transportation governed by this Agreement.”

Despite this, the UAE and Qatar have engaged in unfair and unequal competition by providing their national airlines — Emirates, Etihad Airways and Qatar Airways — with an estimated $50 billion in subsidies.

These subsidies enable the Gulf carriers to undercut U.S. airlines on certain international routes, shifting passengers from American carriers and consolidating them onto fewer and larger Gulf carrier flights.

Right now, domestic carriers can handle the domestic demand capacity, but if they are subsidized out of their international routes, the number of flights between domestic and international destinations will diminish, as will the frequency of feeder passengers arriving in hub airports, ultimately compromising the profitability of flights to and from smaller airports.

That process will seriously threaten the current spoke-and-hub system that forms the basis for our current air travel system, and will endanger the continued existence of domestic connecting flights and smaller airports.

In the short run, consumers may see better prices for international travel; in the long run, however, they will lose the domestic feeder routes to these international flights.

According to former MIT research engineer William Swelbar, “Domestic flights to smaller airports rely on international traffic to justify their profitability and their existence. Passengers traveling from a smaller airport to Tokyo, Beijing, Stockholm, or Hyderabad on a U.S. carrier or an alliance partner bolsters the network revenues on the domestic flight they take to the nearest hub. That is, the more international traffic, the more likely a domestic flight to a hub will succeed.”

It’s also important to recognize that even if Etihad, Emirates and Qatar succeed in pushing domestic carriers out of overseas routes from the U.S., there is no guarantee that the “low fares” will continue. Rather, it’s more likely that fares will rise substantially in the absence of competition.

The U.S. government should enforce these existing agreements and apply pressure to restore a truly fair and equal competitive atmosphere when parties to these agreements do not respect them. If the Gulf carriers are allowed to continue their practices, affordable international travel as well as the availability of domestic connecting flights will be endangered.