As U.S. airlines and labor unions launch their campaign against alleged subsidies for the “Big Three” Gulf carriers, the debate is already well underway in Europe. Key players in transport policy seek a new agreement with Gulf states to regulate subsidies, but Gulf countries and carriers are strongly resisting the effort.

While the white paper issued on behalf of U.S. majors has made many headlines, European airlines have been lobbying against Emirates, Qatar Airways and Etihad Airways for years. A larger part of their networks is affected by the new competitors, and as the investments by Etihad into the subsumed Alitalia (Etihad now owns a 49% share of the Italian flag carrier)show, they not only face them on long-haul services, but also within Europe.

Thus the Gulf carriers are facing a new level of scrutiny and pressure. The European Commission appears to be seeking a mandate from its member states to negotiate with the Gulf states following the disappointing first round of talks, according to Transport Commissioner Violeta Bulc.

The process was initiated by a joint letter from Air France-KLM and the Lufthansa Group to the EC last December in which the two airline groups and several of their subsidiaries stressed that competition with Gulf carriers should be more equitable. They did not say precisely what action they would like the EC and governments to take, but French and German transport ministers Alain Vidalies and Alexander Dobrindt, respectively, jointly proposed that Gulf carriers should not be granted additional traffic rights into the European Union until fair competition is ensured.

The German and French ministers write that they welcome “the clear message of the [EC] to the Gulf Cooperation Council (GCC) as to the legitimacy of the member states to refer to the lack of progress in the dialog to delay negotiations with the Gulf countries or to refuse to grant new traffic rights.” 

The transport ministers further state:  “Despite major adaptation, . . . European airlines have kept on losing market share to their competitors in the Gulf countries on many destinations such as the Indian subcontinent, Asia, especially Southeast Asia, Oceania and Eastern Africa.” The letter, which has not been publicly released, was obtained by Aviation Week. 

Noting an urgent need to act, the two ministers say the situation “severely harms European carriers, reduces the attractiveness of European hubs and severely threatens the connectivity of the European Union with the rest of the world.” They suggest that a response could “take the shape of a comprehensive air transport agreement with the Gulf countries [if] certain conditions are met.”

These conditions include a guarantee of fair competition, financial transparency, detailed provisions on subsidies, unfair practices and competition, as well as giving the EC and member states “efficient means of action, going beyond the usual dispute-settlement mechanism in case of non-compliance with these provisions.”

The opening of European markets, they say, should be gradual and limited. Only third- and fourth-freedom rights should be covered in a comprehensive air service agreement, and further traffic rights to Gulf airlines would be linked to “a positive evolution of the competitive environment,” the ministers say.

The third and fourth “freedom of the air” dicta cover the rights to carry traffic to and from an airline’s home country. But the Gulf carriers’ business model is built to a large degree on connecting traffic and beyond (sixth freedom), thus the condition has to be unacceptable to the GCC and its airlines.

A similar proposal has now been put forward by Delta Air Lines CEO Richard Anderson, who says new U.S. agreements with Gulf states should preclude Emirates, Etihad and Qatar from offering trips that don’t end in their home markets (or the U.S.). This proposal would be equivalent to a ban on connections, the very model under which Delta and many other carriers in the U.S. and Europe are operating.

Noticeably absent from the protest is the U.K., the only one of the three countries that has an open skies agreement in place with the United Arab Emirates (UAE). Unlike other bilaterals, it includes a clause on fair competition. The U.K. has traditionally favored open competition and is against interfering in issues such as regulating how airlines are financed by governments. That position is supported by International Airlines Group, which is now partly owned by Qatar Airways.

Exactly what Transport Commissioner Bulc is seeking remains to be clarified. A spokesman says the EC is “considering to propose a number of EU-level air transport agreements with certain important third countries.”

Such a potential agreement between the EU and GCC would supersede the bilaterals now in place between individual countries. The EC would insist on including a fair-competition clause, an issue it has been discussing with the Gulf states for some time now. Along the lines of the German and French position, it is understood to have asked members to refrain from new bilateral agreements with Gulf countries unless fair-competition clauses are included, a move that has been criticized by the Arab side.

The process is unlikely to lead to a satisfactory result from a European point of view. Most current bilaterals do not include clauses that define “fair competition”; any change would be subject to approval by the Gulf states themselves, and they have no interest in signing up for a common deal that is more restrictive than the one in effect.

Meanwhile, in Washington, Emirates Airline President Tim Clark and Etihad CEO James Hogan vigorously defended their positions in a recent series of meetings, which came on the heels of a push by Delta, American Airlines, United Airlines and several of their unions to limit the Gulf carriers’ access to the U.S.  

Claiming these airlines received almost $40 billion in subsidies, the three U.S. carriers are calling for the U.S. government to begin consultations with the governments of Qatar and the UAE. Until there is a resolution, the U.S. carriers contend, no new Gulf carrier capacity to the U.S. should be allowed. But critics point out that this condition would abrogate the open-skies treaty.

Clark expressed hope that the U.S. policy of open skies will remain unfettered nonetheless. “Open skies is probably the most powerful global ‘aeropolitical’ tool,” he said, praising the U.S. government for negotiating liberalized treaties with more than 100 countries. Emirates is not in violation of the treaty, he said in Washington on March 17.

Clark said that, other than seed money from Dubai when Emirates was launched 30 years ago, the airline has received no government subsidies. “Make your own way in as stylish a manner as you think you can,” Clark said was the mandate from the state. In response to assertions that Dubai absorbed more than $4 billion in fuel hedges for Emirates, Clark simply said, “tosh.”

The U.S. carriers’ claims are detailed in a report they released earlier this month that had previously been circulated among lawmakers and officials from the State, Transportation and Commerce departments. Clark said Emirates is evaluating the report: “We have to check all of this to make absolutely sure that what has been said . . . has not been taken out of context or in a manner . . . that will help the people that produced the report.”

The Gulf carriers, including Emirates, are adding capacity to the U.S. that far outstrips demand, given that there is very little origin and destination traffic between the U.S. and Qatar and the UAE, an industry insider familiar with the U.S. airlines’ position tells Aviation Week. This means Gulf carriers are siphoning traffic to Asia and beyond from U.S. carriers and their partners at a scale with which the U.S. carriers cannot compete, thanks to what they say are unfair subsidies from the Gulf governments. 

“We cannot compete with airlines that benefit from government subsidies,” the source says. “If [the Gulf carriers] are not going to operate as commercial airlines, then our doors shouldn’t be as open as they are today.”

Clark rebutted this claim in his remarks, saying: “It’s a little bit of the pot calling the kettle black.” He points out that most large international airlines in Europe and Asia earn money through connecting traffic. Lufthansa, Air France, KLM and Singapore Airlines make significant amounts of money through connecting traffic.  

The mission now, Clark says, is to prove to the U.S. government that Emirates is not subsidized. If questions remain after he has done so, he said, he would then argue that U.S. carriers’ access to protection under Chapter 11 of the U.S. bankruptcy code, as well as support airlines received post-9/11, give them an unfair edge.

Etihad’s CEO, too, rejected the U.S. claims. According to Hogan, the carrier has always made clear it has received equity investment and shareholder loans. Those have been “supplemented” by $10.5 billion in loans from international institutions, he says.

“It is surprisingly hard to find financial information about the first one or two decades of national airlines around the world,” Hogan says. “We get criticized regularly for our so-called lack of transparency, but we see few national airlines that were as open in their first stages of development as we are being in ours.” Also, Hogan argues that Etihad has had “a greater focus on reaching and delivering sustainable profitability—we believe—than any other airline in history.” He underscores that his airline beat its target to post a profit within 10 years of its launch.

Hogan dismisses claims that governments should stay out of air transport. “Why can’t a state invest in building an airline?” he asks. While European airlines were often privatized for €1 ($1.09) or 1£ ($1.51), he argues, Etihad had to build an airline from scratch. Therefore he says, “I don’t apologize for anything.” 

Referring to the government of Abu Dhabi, Hogan says: “Our shareholder believes in our business plan. They have increased their commitment as we have developed—they have invested in our success.” As any rational shareholder in the world would, the government “expects a return,” he says. “The key word is ‘return.’”

Hogan says passengers opt to fly Etihad instead of many other competitors. “But quite honestly, it is very rare that U.S. carriers offer those alternatives,” he says. “No U.S. carrier flies into Abu Dhabi. There are very few U.S. carriers operating to where we do in the Indian subcontinent, in Southeast Asia or in the wide Middle East.”