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Subsidies in Aviation: The elusive flight towards fair competition

24 August 2015
by Guest author

A380_on_ground_front_shotAlain Lumbroso, economist at the International Transport Forum

Subsidies in aviation are almost as old as air transport itself. Most if not all countries at one point or another have provided public funding to some parts of their aviation value chains, be it air carriers, airports or air navigation services such as air traffic control.

This year, much attention has been focused on three Gulf carriers. Their strong growth and increasing market share, especially between Europe and points east and south, has generated concern from competitors that they are being unjustly subsidised and thus distorting the marketplace. Is this a legitimate concern or simply old-fashioned protectionism?

Although each side makes an eloquent case in the ongoing debate, some arguments do not pass muster. For example, while operating in a labour union-free environment can certainly reduce costs, it is by no means a subsidy. Airports the world over receive generous public subsidies which are passed on to their customers, the airlines. Although airlines who hub at a subsidised airport benefit most from the subsidy, it’s tenuous to affirm that a specific airline gets a subsidy and not others. Likewise, benefits accorded under US bankruptcy laws to any company that places itself under its protection should not be considered a subsidy, nor should provisions in competition law that permit the issuance of anti-trust immunity to help companies perform better together. A key point to remember here is that sovereign jurisdictions have the right to set their own labour, fiscal, bankruptcy and competition policies and legislation and, of course, as they vary country by country, they will confer comparative advantages or disadvantages to companies operating in those countries.

As accusations fly back and forth, it’s worth considering what actually constitutes a legal subsidy in aviation. Or what constitutes a balanced and fair competitive landscape, often referred to as a “level playing field”. Or fair competition for that matter. Unfortunately, none of these terms are actually defined for aviation, and simply adopting a commonly-accepted definition from other sectors may be an effective intellectual shortcut but has no basis in law.

What constitutes an acceptable subsidy is clearly defined for other industries. For example, the General Agreement on Trade and Tariffs defines what a subsidy is for the international trade of goods, but it is mute on what constitutes a subsidy in air transport, or any other service for that matter. The General Agreement on Trade of Services has so far failed to define what constitutes a subsidy and, in any case, specifically excludes air transport services from the agreement. Thus, reasonable people can disagree on what constitutes fair competition, especially when no competition law is broken.

The Chicago Convention of 1944, the key legal foundation of international aviation, speaks of equality of opportunity but not equality of outcomes. In that respect, operating in a low cost, low-taxation, non-unionised environment is opened to all airlines operating in the Gulf, with the local carrier benefiting the most simply because it has a higher concentration of flights there. The Chicago Convention only makes a single mention of subsidies, in Article 54i, where it tasks the International Civil Aviation Organisation (ICAO) Council to collect and publish information about public subsidies in aviation but fails to put an obligation on countries to report them or to set any kind of boundaries as to which type of subsidies are permitted and which are not.

While much focus has been on monetary subsidies, one cannot discount the impact of public policies and how they can favour domestic carriers. A prime example of this is how nearly all countries in the world outlaw cabotage, meaning that the domestic market is reserved for domestic carriers only, or, in the EU, that the intra-EU market is reserved for EU carriers. This can be a significant advantage for US, EU, Chinese, Japanese and Canadian air carriers, while remaining meaningless for carriers from smaller countries. A second example is how a number of countries negotiate air services agreements in a way to try and favour their home carriers rather than simply improving connectivity for travellers and shippers. Defending the interest of national carriers can arguably be a reasonable policy goal, but such a policy does have a very positive value for home carriers which does not show up in any accounting balance sheet.

Finally, one should note that most countries inject some sort of public funding into international aviation and that there exists no law, convention or treaty that forbids it or sets boundaries for country interventions, with the exception of the EU which has a legal framework for State-Aid of the air transport sector but applies only unilaterally to EU member countries, airlines and airports. While much of the attention has been on two countries and three carriers, most if not all countries have a rich history of public financing of the air transport value chain which continues to this day. Applying the remedies suggested by the Partnership for an Open and Fair Skies to all countries who have financially supported in some way their air transport industry, including the US, would significantly dampen efforts to liberalise global aviation and curtail the benefits that come from operating in an open and free market. And even when all public funding has ceased, the stock of subsidies has enabled the creation of the same global carriers and global hubs who are today calling for an end to subsidies in order to restore fair competition to the air transport industry.

So what could be done? Three things:

  1. In the absence of a clear legal framework defining acceptable and unacceptable behaviour, the first step is somewhat obvious: defining rules of conduct of what actually constitutes fair competition. Most likely through the auspices of the ICAO, countries must first define what is an acceptable and an unacceptable subsidy, a concept that right now is left wide-open to the interpretation of parties with a vested interest.
  2. Countries should agree on a mandatory, transparent and uniform reporting system for public subsidies that would inject some much needed transparency to the issue and avoid the volleys of accusations and counter-accusations we have witness this year.
  3. A binding arbitration process, preferably through ICAO, will need to be put in place and permit one country to file a complaint against another. Arbitration could lead to a monetary penalty paid by the country who granted unfair subsidies to the country whose carriers suffered from unfair competition. This monetary penalty would avoid the present situation where perceived wrongdoing is punished through traffic rights restrictions, in effect imposing a quota on the international trade of service, the most harmful of outcomes.

Useful links

ITF work on air transport

ITF Discussion Paper: What do we mean by a level playing field in aviation?

ITF Research Report: Liberalisation of Air Transport. Summary: Policy Insights and Recommendations

ITF Country-Specific Policy Analysis: – Air Service Agreement Liberalisation and Airline Alliances




3 Responses leave one →
  1. James Straw permalink
    August 25, 2015

    Very interesting piece. I think at the end of the day, all we are seeing is some good old fashion protectionism from a fully globalized sector.

  2. Charles Kovacs permalink
    August 26, 2015

    This is an excellent and informative article. I would note only the following:

    1. The attacks against Gulf carriers are similar to those made against SIA, Cathay Pacific and some other Asian airlines back in the 1970’s. Back then, they too were operating with much lower labor costs than Western carriers regardless of whether or not they were unionized.

    2. Government owned airlines are under less pressure for profits and this can affect their decisions on fares and opening routes. Perhaps one can call this a passive subsidy, but it is certainly not a prohibited one.

    3. Most airlines and all aircraft manufacturers benefit from the loans and/or loan guarantees of state-owned export credit agencies. This is a contentious issue in the USA just now, but one can reasonably question in any country whether or not this is the best use of public funds.

    • Bruce McGill permalink
      August 27, 2015

      Excellent and insightful article!

      @Charles Kovacs…There was also another carrier that used to be attacked for the 6th freedom business model..a small entity that went by only 3 letters…K-L-M. Now, ironically, it is the Dutch government that has turned protectionist against those who have copied the model, but with better service!

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