When Open Skies Mean Broken Windows

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Posted: May 28, 2019 12:06 PM
When Open Skies Mean Broken Windows

Source: AP Photo/Nicole Evatt

The sociologist James Q. Wilson is famed for the “broken windows” school of policing.  Small signs of disorder quickly lead to chaos on a greater scale, he reasoned. His theory holds that broken windows should be quickly fixed, fresh graffiti immediately painted over, and even seemingly small offenses like jumping subway stiles should be policed attentively to stop larger problems before they start.  

In the 1990s, New York City Mayor Rudy Giuliani applied the broken windows theory to make New York City, formerly beset by crime, into one of the safest major cities in the world. Of course, there is more than one way to break a window.  Other cities have successfully applied Wilson’s theory to make public spaces safer and more livable, but broken windows can occur in global trade as well.  

Imagine the case of one, or possibly two small countries with unlimited resources from oil production determined to build the largest airlines in the world without regard to expense or profitability.  These countries, if they wished, might spend $50 billion or more to build the world’s largest airline by capacity (not revenue) and build colossal airports to go with them.   This sounds fantastic, and yet it has happened.  

In an October 2018 study, scholar Thomas J. Duesterberg of Washington’s Hudson Institute compiles data to show that as of 2015, the oil kingdoms of Qatar and the United Arab Emirates have provided $48 billion in subsidies, plus another $4 billion of in-kind subsidies in the form of below-market-rate fuel, to build out not one but three separate airlines–Emirates Airlines, Etihad Airways, and Qatar Airways, known collectively as the Middle East 3 or ME3.  

The money is still flowing.   Duesterberg recounts that as of 2017, Emirates and Etihad had 228 Boeing aircraft in their fleet and orders for another 300 on the books.  Emirates Airlines also had 101 Airbus A380 planes which carry up to 500 passengers in its fleet and 77 more on order.  Emirates is literally the world’s largest carrier by capacity, though not in terms of revenue. Etihad similarly has 66 Airbus planes in its fleet and 62 more on order.  

These airlines have increased their passenger capacity by 10-fold since 2001, Duesterberg reports, and are building airport capacity to match.  Qatar’s Hamad Airport is five times the size of Chicago’s O’Hare.  The government of Dubai is building what it says will be the world’s largest passenger airport at a cost of $32 billion and that will be able to hand 200 million passengers per year and service 100 Airbus A380s simultaneously. This growth in capacity far exceeds growth in the actual number of passengers.  

The airline business has notoriously low profit margins.  Excess capacity lowers profit margins for everyone.  Excess capacity by state-subsidized carriers destroys the profitability of commercial airlines that receive no state support and even that of state-owned airlines that operate under commercial rules.  It destroys the value of private-sector investment and undermines competitive markets.

The excess capacity problem isn’t a fluke or isolated occurrence.  It is one of the major issues in trade disputes between China and its trading partners including the United States.  Unprofitable Chinese excess capacity in steel, for instance, has wiped out steel industries around the world.  China has state-subsidized airlines too, that are growing at rates similar to ME3 and, as they reach beyond China, will soon contribute worldwide to excess capacity in the way the ME3 have, and perhaps even on a grander scale.   

There is a way to stop this problem.  Air travel between countries is governed by bilateral treaties between countries called “Open Skies” agreements.  Open Skies agreements ensure that each country has a reasonable and equitable number of flights from one to another.  In the US, Open Skies agreements are managed by the US Department of Transportation. The United States has Open Skies agreements with the UAE and Qatar.   But Open Skies agreements must be kept up to date.

In late 2017, Qatar Airways has used its petrodollar resources to buy a controlling stake in a failing Italian airline with 11 aging planes which it has rebranded as Air Italy and furnished with 50 new aircraft (Boeing 737 MAX and 787s) with plans for more and larger planes to come.  Air Italy has landing rights in five U.S. cities. In the new Air Italy, these cities now form the US anchor of a global airline that stretches from the US to East Asia and employs state-subsidized, oil-financed excess capacity all the way.   

The DOT has not yet revised the current US Open Skies agreement with Qatar to address this new reality of a Qatar-owned Italian air carrier. It needs to, quickly, because subsidized overcapacity, along with technology theft and other uncompetitive practices, mostly by China, is a central issue in the trade disputes that threaten the global economy.  China represents an enormous challenge to fair and free bilateral trade worldwide.   Qatar is a small problem in comparison, but the broken windows theory tells us to fix small problems before the large ones become unmanageable.

James Lucier is a trade and industry analyst in Washington, D.C.

Source note.  Facts and figures in this comment are drawn from Thomas J. Duesterberg, Ph.D., “Subsidies and Unfair Competition in Global Commercial Aviation:  How to Respond,” Hudson Institute, October 2018.    Available here:  https://www.hudson.org/research/14641-subsidies-and-unfair-competition-in-global-commercial-aviation-how-to-respond

Figures cited in this column are to be found with appropriate citations on pages 4, 5, 8, 10, and 17.