The success of any industry is partly facilitated by the establishment of fair competition among all the players. It enables each competitor to have a share of the market by developing specific competitive advantages that others cannot emulate. Such an entity is then in a position to take up a share of the market. Fair competition makes it possible for an industry to develop as the competitors make better deals to their consumers (Zhang, 2010). However, there can be instances where there is no fair competition because some of the players have external benefits that other do not access. In such a case, these benefits make some players more competitive and heightens the possibilities of the other not to remain in the market.
This work will highlight the threat to American airline carriers that results from government subsidies made to foreign competitors. The global market has become more open for domestic carriers. Gulf carriers such as Fly Emirates and Qatar Airways are state owned and are cited to receive subsidies from their respective government to remain competitive (Versace, 2015). The work analyzes the effect this has to American based carriers.
Government Subsidies
A government subsidy is financial aid offered to an economic entity with the aim of promoting economic or social policy. There are various forms of subsidies such as interest-free loans, tax breaks, and depreciation write-offs. The two main categories are direct and indirect subsidies. The subsidy used reflects the available resources to a government. In most cases, subsidies are offered to critical industries within an economy in order to facilitate their development. For instance, a government may offer interest free loans to energy producers because they form a key part of the economy. The fact that economies differ from one to another means that the recipients of such subsidies also differ (Kashani, 2009).
Considerations should be made before subsidies are made in a way to advance the industry without resulting in adverse outcomes such as unfair competition. One of the considerations has to be the effects of globalizations to subsidies. Many companies have taken up roles at the global stage, and the effects of subsidies may be felt on the same platform. In this work, the provision of subsidies for foreign airlines carriers will be assessed as a threat to American carriers. The subsidies may facilitate unfair competition to the detriment of the American carriers.
The Global Airline Market
Air transport has grown considerably over the last few decades. It has played a key role in globalization as people has found it effortless to access other regions. From a general perspective, the global air transport market is constantly growing. It is declining in a few countries such as Afghanistan and Greece but the trend is positive in most economies. Some emerging such as China and India are experiencing high growth rates in the number of passengers (Barnhart, 2003). This overall growth means that there is a market for both the manufacturers and operators of passenger aircrafts. Many carriers have been realizing growth over the same period.
According to the U.S. Department of Transport, there was an increase of 2.8% in the number of enplaned passengers for the months of January for the years 2014-2015 (BTS, 2015, May). This growth creates opportunities that the carriers have to exploit. The American market can be viewed as competitive with many players. The competition is also fair since there is little government involvement in the running of the industry. Most of the operators based in the U.S. such as Southwest and Delta airlines also operate international flights to various destinations. The growing trend in the industry makes this a profitable venture.
There are many foreign operators that compete with the American carriers, but the ones that have been cited to receive subsidies from their governments include Fly Emirates, Qatar Airways and Etihad Airways. All these operators are based in the gulf. Subsidies are offered by governments to critical players in the market. Both the United Arab Emirates and Qatar lack many resources and have to do a lot of business to diversify their economies. When compared to the United States, the United Arab Emirates and Qatar have very different types of economies that may require subsidies in facilitate specific economic policies (Grosso, 2012).
Foreign Airlines Supported by Government Subsidies
CEOs Jeff Smisek of United Airlines, Richard Anderson of Delta, and Doug Parker of American Airlines have been on the forefront to call for fair competition after carriers from the Persian Gulf were cited to receive subsidies from their governments. They have formed a coalition recognized as Americans for Fair Skies to lobby the government to intervene. The three CEOs represent the largest airlines in the United States and expressed concern that three carriers operating from the Middle East receive billions of dollars from their governments as subsidies resulting in unfair competition. The three carriers that the CEOs cited were Fly Emirates and Etihad Airways from the United Arab Emirates, and Qatar Airways from Qatar (Karp, 2015).
These entities are state owned and play a key role in the running of their respective economies. For instance, tourism is one of the key revenue earner in the United Arab Emirates (UAE). This means that the country has to subsidize facilities that enable tourism into the country. Both Fly Emirates and Etihad Airways are key players in the industry. Most of the tourists who visit the country use either of the carriers. Another notable aspects of both the UAE and Qatar is that they lack diverse economies as compared to countries such as the United States (Bagchi, 2001).
A fact that is hard to overlook is that of the impact of globalization on the functioning of airlines. Since Qatar and the UAE are dependent on tourism, most of the visitors have to originate from other countries. The three airlines that have been cited to receive large sums of subsidies hence operate on a global market. The effect of this is that the subsidies that they receive will also influence the way that the global market operates (Kashani, 2009). The economies of both countries are rapidly growing and influencing the travel of people into and outside the country using air transport.
The rapidly growing economies are reflected in the growing size of the airline carriers. For instance, Fly Emirates is one of the fastest growing airline carrier as the economy of the UAE develops rapidly. Etihad Airways and Qatar Airways are also realizing similar developments but at a slower magnitude. The overall outcome is that they have an advantage over other players in the market such as those based in the United States where the market is almost fully exploited and there are many competitors. However, many carriers in the U.S. are also realizing significant growth due to the growing number of passengers.
The difference is that the three foreign carriers may be receiving billions in billions of U.S. dollars may make them more competitive to the detriment of other players. There are many competitors with these three Persian Gulf airline carriers. Many carriers have access to Qatar and the UAE although the tree carriers are the most competitive in those markets. Where they are a bit lacking is that the two economies are relatively small as compared to other carriers that they compete with such as Easy Jet in the U.K. that has a large market share in the domestic market.
American Airline Carriers
The CEOs of Delta, American Airlines, and U.S. Airlines have been on the forefront to oppose the subsidies offered to the Gulf carriers by their respective governments. The basis for their argument is that it does not facilitate fair play in the industry and that the move is detrimental to American carriers. These three carriers are also among the biggest in the United States. The claims that the gulf carriers are subsidized by their governments has been refuted but the Americans have provided a white paper that serves as prove. Qatar Airways, Fly Emirates and Etihad have all contested these claims (Mouawad, 2015). However, it is apparent that subsidies of such magnitude would have a negative impact on America carriers.
There are obvious differences between the markets that the two sets of carriers operate from. The American air transport system is well structured with a large number of passengers. In fact, there are many major airports across the country that makes it possible for many carriers to operate. Delta, American Airlines and U.S. Airlines all have a strong domestic market but also exploit the international trade. The three American carriers are also some of the largest in the world.
Although the American market has many carriers unlike in the case of Qatar and the UAE, most carriers in the market are also experiencing rapid growth particularly because of the growing number of passengers. The Persian Gulf carriers represent a small section of the market and hence most of the other carriers have also exploited the growing number of passengers. The three CEOs expressed concerns that the subsidies would make it impossible for them to remain competitive although they are still among the largest global carriers and that there is an increasing number of passengers (Mouawad, 2015). One of the causes of concern is that the three gulf counterparts are some of the fastest airline carriers.
The industry is capital intensive and the carriers strive to make profits by utilizing their resources to the maximum. Although the American airline carriers are large and have a large market share, this also means that there are huge expenses required to make this possible. The company’s make profits by vigorously utilizing the planes they have. Most passenger planes operated by either carriers need minimal maintenance and can operate for extended periods. The disadvantage is that they are expensive to acquire and require to keep running in order to return the investment. The subsidies from the Gulf States may influence the operations of the American carriers (Mouawad, 2015).
Subsidized Foreign Airlines as a Threat to American Carriers
The threat to the American carriers is based on economics where the subsidies offered to the foreign airlines would allow them to be more competitive and exploit the market more. The view of whether they would be pose a threat can be taken from different stand points. However, the threat that will be discussed in this section will be an economic threat that will make American airlines less competitive and therefore be threatened in operations.
One of the indication that the subsidies may prove to be a threat is that the largest airlines in the U.S. and the world have been on the forefront to seek intervention from the government. The indication is that the subsidies may have dire consequences in the industry. Delta, American Airlines, and U.S. Airlines all have larger operations as compared to Fly Emirates, Qatar Airways and Etihad Airways. There are many players in the industry, but the fact that the largest and most profitable airlines have shown concern over the issue means that the subsidies are likely to pose a threat to American carriers. Much smaller entities might feel the heat more than the larger ones (Mouawad, 2015).
One of the considerations to be made on whether the subsidies would pose a threat is the amount used. There are various forms of subsidies that governments can offer to economic entities within their jurisdiction. Some of the subsidies may include interest-free-loans and access to specific resources. The nature of a subsidy is key to determining whether it can pose a threat to other competitors. According to the three CEOs of the leading American airlines, the three Gulf carriers have received about $42 billion in subsidies (Mouawad, 2015). This is a large figure that presents very tough conditions for which the American airlines can compete. It is a large enough amount to present a threat to the American counterparts.
With the amount of subsidies that were made available to the Gulf airlines, the nature of the industry is a key consideration to assess the threat that the amount poses. Although the industry is capital intensive, the profits do not match the investments made. There are more profitable ventures, but the reason many players invest in the industry is that it is difficult for new entrants. Therefore, there is an assurance of perpetual income for an extended time period. This is so because conditions such as subsidies amounting to billions of dollars are not accounted into the process (Mouawad, 2015). The result is that the possibility of making a significant amount when others are receiving such backing is difficult. This makes the subsidies a significant threat to the American fleet.
In this work, the focus was on the threat of subsidies for foreign airlines on American based carriers. The three CEOs under the as Americans for Fair Skies lobbied for government intervention, but it is important to identify whether the foreign carriers can influence the operations of those operating in the U.S. (The World Bank, 2015). The response to this can be exemplified by the concept of globalization. Air transport passengers are not only operating within individual countries but across the globe. Airlines are also allowed to enter most countries. Therefore, the subsidies will influence the market in which the American airlines operate in and pose a threat because they are only accessible to some Gulf carriers.
The main American carriers have resorted to lobbying the government to intervene in the matter. The government’s response is a significant factor in determining whether the subsidized foreign airlines pose a threat. Since the response has not been issued, it is only viable to analyze the available facts and propose a possible response. The government has to respond in a way to preserve the interests of the United States. In this case, a basic view would be that they would discourage the subsidies. However, there are more perspectives involved. The subsidies are mostly offered because the Gulf States where the foreign airlines are based do not have diverse economies and the governments have to offer the subsidies. It is highly unlikely that the lobby by the top American airlines will be heeded by the government.
The foreign airlines also make up a large portion of the market for Boeing. The interests of the U.S. will be preserved where the government does not intervene. Therefore, the subsidized airlines can be cited to be a threat for the American carriers from this perspective.
From the various perspectives taken in this work, it is apparent that there are many ways that the subsidies offered to foreign airlines in the Gulf are a threat to the functioning of the American counterparts.
Conclusion
Subsidies are a common form of influencing economic and social policies by governments. The provision of subsidies is a clear indication of the relevance of an industry to a government. However, governments differ and this is also manifested in the way they offer subsidies. In this case, the main industry of concern was the air transport. The market for air transportation is gradually growing and therefore presenting opportunities for both manufacturers and operators. For some economies in the Persian Gulf with high revenues and small economies, the air transport is a favorable industry to invest in. However, offering subsidies for this industry may cause a ripple effect that can be felt across other economies.
To respond to the dilemma of whether subsidies offered to foreign airlines are a threat to the American carriers, the economies of each was analyzed. The U.S. market is large and has many players but that of Qatar and the UAE are relatively small and are dependent on investments on sectors such as air transport to diversify their economies. However, the issue of globalization means that the input of one economy is likely to affect others. In this instance, the economies are closely linked because the airlines operate from various destinations across the globe and that they use the same manufacturers.
In the argument, no view was apparent that opposed the threat that the subsidies posed to the American fleet. There are a number of reasons why this threat is deemed to be present. To begin with, the lobby for the government to intervene is likely to be futile since this would contradict the interests of the state. The amount of the subsidies is also estimated to be in billions of dollars. This amount is considerable to limit the competitiveness of American airlines. Another reason that is given as a basis for the view that the subsidies will act as a threat to the American counterparts is that globalization will influence the effect of the subsidies in favor of the Gulf airlines.
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