- - Friday, April 17, 2015

Competition in international air travel is flourishing under the aegis of more than 100 Open Skies Agreements.

American consumers are benefiting from the enhanced competitiveness through lower prices, newer aircraft, faster connections and improved customer service valued at $4 billion. The U.S. State Department elaborates: “[The Agreements] eliminate government interference with commercial decisions of air carriers about routes, capacity, and pricing, freeing carriers to provide more affordable, convenient, and efficient service for consumers.”

Key to enhancing competitiveness in international air transportation has been the entry of three Gulf State carriers: Emirates, Etihad, and Qatar airlines. They have captured substantial market share from Delta, United and American.

The latter are whining like children deprived of candy because the Gulf carriers have received $42 billion in state subsidies. They are lobbying for a curtailment of Open Skies to shield them from allegedly unfair competition.

The promotion of competition through Open Skies or otherwise, however, is not to protect competitors but to maximize consumer welfare. The U.S. Supreme Court has repeatedly explained that consumer welfare is the North Star of the nation’s antitrust laws. And they are every bit as applicable to Gulf State carriers as they are to their Big Three rivals in the United States. If the former engage in practices injurious to the welfare of American consumers by abuse of monopoly power or otherwise, they would be vulnerable to suit for treble damages and attorney’s fees under the Sherman Act. The Big Three, however, have been unable to summon any evidence that the Gulf carriers have been harmful to American consumers.



But what about the future?

Suppose the Gulf carriers — using state subsides — slash prices to unprofitable levels to drive the Big Three from the market and acquire monopoly power. Wouldn’t they immediately raise prices above a competitive rate to recoup their losses and to reap monopoly profits going forward? Consumers would be injured.

But the Gulf carriers would never succeed — even if they tried. If they raised prices above a competitive level, new competitors would enter the market and drive prices down. Consumers would be saved from injury. This is not Pollyannish. There has never been a singled instance in the history of economics in which monopoly pricing endured when confronted with open entry.

In any event, the Big Three objecting to state subsidies is like the pot calling the kettle black.

According to a Congressional Research Service report, between 1918 and 1998, U.S. airlines received $155 billion in federal subsidies – a munificence dwarfing the $42 billion that Gulf carriers have alleged received from state coffers.
According to Forbes, “Delta and other airlines lobbied for and received $18.6 billion in bailouts from the federal government in 2001.”

In a perfect world envisioned by Adam Smith’s Wealth of Nations, state subsidies and their marketplace distortions would end. But that is no more likely than discovery of a perpetual motion machine. Open Skies Agreements are the optimal approach to competitiveness in international air travel that maximizes consumer welfare. They are superior to all other arrangements that are politically plausible, even if short of the ideal. If the Gulf carriers wish to benefit American travelers via state subsidies, why should we look a gift horse in the mouth?

Finally, the principle of perfect equality among international competitors professedly championed by the Big Three would push the United States toward aping state welfare programs abroad. If a foreign country provided free housing and medical services to all employees to reduce the compensation demands on employers, the United States would be required to do the same — a cure worse than the disease. Let’s no go down that road.

For more information about Bruce Fein, visit brucefeinlaw.

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