Differing Views on Whether the Agreement Between the US and UAE Is Worth Anything

After years of fighting, it looked like we had an official end to the dispute between the three biggest US airlines and the three big Middle Eastern ones. Now, however, there seems to be a dispute over the only provision that really mattered all that much: whether Emirates and Etihad could operate fifth freedom flights from the US to places like Europe and Asia. There’s more to the agreement, but this is really the crux of the

This argument stretches back for many years. The big three in the US, led by Delta, pushed the US government to do something about the three big Middle East carriers: Emirates, Etihad, and Qatar. As the story went, these airlines were massively subsidized and they needed to be stopped from taking advantage of US aviation policy. If that didn’t happen, they would put the US airlines out of business.

I had trouble picking a side on this. On the one hand, there’s no question that these airlines were very heavily subsidized (especially Qatar and Etihad). But on the other hand, there was real consumer benefit connecting people all over the world in ways that were far more difficult previously. I settled on a somewhat nuanced stance, and that was around the idea of fifth freedoms. A fifth freedom flight is one that starts or ends in the airline’s country of origin. It then goes to a second country and then on to a third. The airline has the right to carry passengers locally between the second and third countries. Emirates, for example, flies from Dubai to Milan and then on to New York (and back). The Milan to New York flight is a fifth freedom flight.

While I generally believed there to be too much consumer benefit to really push back on flights operating over the airlines home hub, these fifth freedom flights seemed like a step too far. The airlines could take advantage of their lower costs from operating in their home country but export that to routes in higher cost areas where no local airline could compete. If there was anything that should have been stopped, it was that.

Earlier this year, Qatar and the US came to an agreement that effectively noted that Qatar Airways had no plans to introduce new fifth freedom flights. That may sound good, but instead Qatar just invested in airlines that could do the flying for them, such as Air Italy. Now, we have the United Arab Emirates (UAE) following along with what seems to be a very similar agreement.

According to the press release put out by the US Department of State (yes, it still barely exists despite what you may have heard), the two nations agreed on some things that they “memorialized in a Record of Discussion dated May 11.” Um, right.

In this so-called Record of Discussion, the release goes on to detail the following.

  1. “The two governments recognize the possible adverse impact of government support on competition.”

  2. “They express their understanding that financial transparency is best served when airlines issue annual financial reports audited in accordance with internationally-recognized accounting standards.”

  3. “Those airlines should endeavor to take steps to ensure that material transactions with government-owned providers of goods and services of either country are based on commercial terms.”

So, yeah. That. What this really means is that the airlines will have to be more transparent financially and use international standards in reporting. Emirates has been doing this (and the release about the Record of Discussion noted as such), but Etihad has most definitely not. Once Etihad finishes restructuring and pulling itself out of the financial abyss it finds itself in, then it’ll report as well. I can’t wait to see that, though I’m sure things will have been cleaned up before the numbers start rolling out. Also, this talk of having arms-length transactions based on commercial terms is nice, but it’s also not entirely clear how this will be proven.

In the end, this says nothing about fifth freedom flights, so, what about them? Well, the US side had reported that there was a freeze on adding these flights, but the Chairman and CEO of Emirates said that’s not true. According to Arabian Business, an Emirates spokesperson added “contrary to some media reports, there is no freeze on any of the operating rights prescribed in the Air Transport Agreement or any tacit undertakings to do so.” The US, however, apparently came away with a different understanding.

Peter Navarro, Assistant to the President of the United States, spoke out about how it “was disconcerting to me to have [the UAE] issue a statement that basically disowned the side letter.” This side letter, in his eyes, put a freeze on fifth freedom flights to and from the US.

So what’s the truth? I don’t know. What we do know is that Etihad isn’t in a place to add fifth freedom flights. It’s just struggling to create a viable airline, and it can’t even think about growth right now. Emirates, however, has long been the least subsidized yet it is the only one that has had an interest in fifth freedom routes. Is it banned from adding more? We apparently don’t know. We also don’t know if Emirates would even want to add more fifth freedom flights to the two it operates to the US today. It’s currently struggling through a weak period.

I assume this will be clarified at some point, but that day may not happen until Emirates tries to add another fifth freedom flight. Everything else in the agreement is mostly fluff. With any luck, this will end the whole spat, but somehow I’m not convinced just yet. I’ll believe it when I hear both sides saying the same thing.

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