The Corner

White House

Why Trump Needs to Tackle the Subsidized Foreign Carrier Issue

President Donald Trump answers questions on the South Lawn of the White House in Washington, D.C., July 15, 2019. (Leah Millis/Reuters)

President Trump presided over an extraordinary meeting in the Oval Office earlier this month.

The heads of most major U.S. airlines sat down with both Trump and vice president Mike Pence to air their grievances.

The U.S. carriers believe some Middle Eastern airlines are unfairly competing with them. Specifically, they complained about Qatar Airways, which recently bought a large stake in an Italian airline and expanded its flights to the U.S.

The U.S. carriers believe this violates the letter and spirit of the Open Skies agreement, which regulates which airlines get to enter another country’s territory. The goal is to benefit consumers by providing open entry, unless a government-subsidized carrier is using an artificial advantage to unfairly compete with private carriers.

At issue is whether Qatar can use a form of trade “transshipment” — the method that China uses to avoid tariffs by rerouting much of its steel and aluminum exports through Malaysia or Vietnam before they reach the U.S. — to evade a 2018 agreement with the U.S. not to launch flights between Europe and the United States.

Qatar Airways denies its recent explosive growth is being subsidized by the natural-gas rich government of Qatar. But the rest of the aviation industry doesn’t believe that. In fiscal year 2017, Qatar’s government injected $491 million into the flagship carrier.

It’s probably not a coincidence that was the same year that Qatar Airways bought a 49 percent stake in a failing carrier called Air Italy, which previously had flown only regionally in Europe along with a couple of seasonal flights to the U.S.

Two days after Qatar Airways bought a stake in it, Air Italy began an expansion that now has it making nonstop flights from Milan, Italy to New York and Miami year-round. It also flies from Milan to Los Angeles and San Francisco in the summer.

Its bargain rates are clearly designed to poach passengers from U.S. carriers. It can count on Qatar-government subsidies to make up any losses while it builds market share.

United Airlines CEO Oscar Munoz calls Air Italy “the Italian version of Qatar” and he told President Trump at the Oval Office meeting they fly in the face of existing air service agreements.

But Trump has to factor in the stance of the European Commission, which believes that Air Italy’s activities are permissible under the Open Skies agreement. Last month, the commission used unusually direct language in warning the U.S. it “will take all steps necessary to defend” the rights of Air Italy if the U.S. tries to curb its transatlantic service. In other words, if the U.S. sanctions Air Italy, the European Commission could sanction U.S. carriers.

But the Trump administration is unlikely to be dissuaded easily. It has long been worried about the abuse of transshipment by foreign nations. Last year, President Trump told reporters that: “If you talk China, I’ve watched where the reporters have been writing 2 percent of our steel comes from China. Well, that’s not right. . . they trans ship all through other countries.”

So watch the outcome of the U.S. negotiations with China over tariffs — the June truce both countries declared to block scheduled tariff increases is set to expire this fall. The transshipment issue will be on the table in those talks. The result of those negotiations could provide a template for how the U.S. approaches the transshipment issue when it comes to airlines applying for entry in the lucrative U.S. market.

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