COMMENTS OF QATAR AIRWAYS Q.C.S.C.

Transcription

1 COMMENTS OF QATAR AIRWAYS Q.C.S.C. Re: Information on Claims Raised about State-Owned Airlines in Qatar and the UAE Submitted to Docket Nos.: DOT-OST DOC DOS Dated: July 30, 2015

2 Table of Contents I. INTRODUCTION AND EXECUTIVE SUMMARY... 1 II. ABOUT QATAR AIRWAYS... 9 III. APPLICABLE LEGAL STANDARDS A. QATAR AIRWAYS SERVICES ARE ENTIRELY CONSISTENT WITH THE AGREEMENT B. WTO/GATT RULES ARE INAPPLICABLE TO AIR TRANSPORT SERVICES IV. SUBSIDY CLAIMS A. THE BIG THREE PROPOUND AN OVERLY BROAD DEFINITION OF SUBSIDY B. THE CAPITAL TRADE REPORT IS RIFE WITH FACTUAL AND METHODOLOGICAL ERRORS C. FINANCIAL HISTORY OF QATAR AIRWAYS D. REBUTTAL OF SPECIFIC SUBSIDY CLAIMS E. THE BIG THREE HAVE FAILED TO MAKE ANY SHOWING OF COMPETITIVE HARM Claims of harm are entirely unfounded Qatar Airways service growth is in line with regional trends Qatar Airways does not compete against US carriers Far from causing competitive harm, Qatar Airways has created important new service options in under-served markets The Big Three are pursuing a competitive strategy that focuses on mature (and capacity constrained) markets Qatar Airways Does Not Threaten US Employment The Agreement has created significant benefits for US business and consumers V. THE US GOVERNMENT SHOULD NOT ROLL BACK THE AGREEMENT VI. CONCLUSION APPENDICES

3 I. INTRODUCTION AND EXECUTIVE SUMMARY A coalition of the largest US carriers (the Partnership for Open & Fair Skies, comprised of Delta, American and United, and their labor unions) (the Big Three ) has issued a White Paper that urges the US Government to roll back its Open Skies agreements with Qatar and the United Arab Emirates, claiming that Qatar Airways and other Gulf carriers are subsidized, and therefore should not be permitted to fully exercise the traffic rights created under those agreements, which were drafted and propounded by the United States, and which have been in force (and used) for several years. The Departments of Transportation, State and Commerce should reject calls to freeze the US-Qatar Open Skies Agreement, and recognize them for what they are a transparent (and concerted) attempt by the Big Three to block the introduction of air service options that offer an alternative to their own. While the Big Three attempt to cloak their claims in pro-competitive rhetoric, the reality is that they object to the emergence of new competitors that are harnessing changes in aircraft technology to efficiently carry traffic to Qatar, the Gulf Region and the Indian subcontinent, markets that they have largely ignored over the years. While it is understandable why the Big Three might wish to have 100% of this traffic move over the inefficient and congested hubs of their European alliance partners, US aviation policy has been expressly designed to encourage innovation and the introduction of new service options. As Qatar Airways will show herein, its services have provided important one-stop travel options to cities and parts of the world that never have been served by US carriers, such as Cochin and Amritsar. In fact, many of the points that Qatar Airways serves behind its hub at Doha are cities that are not even served by the European partners of the Big Three. The overblown nature of the claims being propounded by the Big Three should not be permitted to obscure the facts. Although the Big Three and their supporters have - 1 -

4 asserted that Qatar Airways is somehow a threat to 11 million US aviation jobs, 1 the reality is that Qatar Airways does not compete against any US carrier on any nonstop route. Qatar Airways is a member of oneworld, and actually code shares with (and feeds traffic to) American Airlines, 2 which also is a member of oneworld and a vocal member of the Big Three. American claims to be under grave threat from Qatar Airways and others, even though it does not serve a single point in the GCC region or India. Compounding the irony of this is the fact that British Airways, American s primary European alliance partner, has deliberately chosen to distance itself from this campaign, expressing concerns about initiatives that would serve to limit consumer choice. 3 The US Government should reject these false and disingenuous claims, and find that, on the contrary, Qatar Airways contributes greatly to both direct and indirect US employment. 4 It is against this backdrop that the claims of the White Paper should be evaluated. The Big Three assert that the strong growth of Qatar Airways gives rise to concerns about overcapacity in the world market, and falling yields, 5 without providing any substantiation of such concerns. Indeed, the Big Three have just completed one of their best financial years on record, and serve markets that are characterized by high load factors and yields. The truth underlying the claims of excess capacity made by the Big Three in the White Paper is that the service alternatives offered by Qatar Airways might loosen their ability to hold the line on competition, and prices. Indeed, a statement by the CEO of Air France at the most recent IATA AGM makes this clear: It s normal that capacity is deployed in an area that is profitable. Our joint venture with Delta Air Lines has a very 1 The Big Three include this claim on their website, without reference to a source. See 2 American also code shares with and is fed traffic by Etihad Airways, another carrier under attack in this proceeding. 3 See, Comments of International Airlines Group, at 2. 4 To add further perspective, Qatar Airways notes that the Big Three collectively operate a fleet in excess of 2500 aircraft, compared to its own fleet of 158 aircraft (as at June 1, 2015). Given that Qatar Airway s home base is located 8000 miles from the United States, in a city that is not served by any US carrier, one can only wonder how Qatar Airways is of any competitive concern to any US carrier. 5 See White Paper, at

5 strong position. We have about 25% of the market with 900 flights a week across the Atlantic, but we are very wise as regards to capacity. We would like everybody to be as wise. 6 The comment above exposes two critical truths: (1) that the Big Three have deliberately chosen to focus their competitive energies on the transatlantic routes because they enjoy market power; and (2) they look askance at any player, large or small, that threatens this position. The Big Three have mischaracterized their claims of subsidy in the same manner that they mischaracterize the threat posed by Qatar Airways. Setting aside the fact that the US-Qatar Open Skies Agreement ( Agreement ) does not define the term subsidy, the claims include items of support that US carriers have themselves received for decades, and items that never have been viewed as a form of subsidy. Indeed, as several parties (including US parties) have acknowledged in these dockets, the Big Three have themselves been long-time beneficiaries of subsidies and favorable US policies and support. The Big Three claim that they have been harmed by Qatar Airways, yet have not used the clear remedies available to them under the Agreement. Should a Party believe that a fare being offered is artificially low due to direct or indirect governmental subsidy or support, 7 then that Party can object to the fare. 8 The Big Three have not raised specific concerns about ticket prices offered by Qatar Airways (which is where the impact of subsidy would be felt) and this is in itself a clear indication that Qatar Airways fares are not the issue here. Rather, they are instead urging the US to abrogate its bilateral obligations by imposing a unilateral limit on Qatar Airways capacity. This step would be entirely unwarranted and would send a chilling message to the rest of the world about how the United States does business. 6 Air France-KLM Cautions for Overcapacity on Transatlantic, Aviation Daily, June 16, 2015, at 4 (emphasis added). 7 Agreement, Article 12.1 (c). 8 Agreement, Article

6 Ignoring the fact that the US-Qatar services offered by Qatar Airways are entirely permissible under the express terms of the Agreement, the Big Three try to argue that investments made by the State of Qatar in the airline are somehow improper based on the application of WTO trade principles, and US domestic trade laws that apply solely to trade in goods. They do so even though the US Government for many years has expressly opposed the inclusion of air transport services in the GATS, which is the global trade regime that applies to trade in services. Qatar Airways rejects all efforts to apply legal regimes that are completely inapplicable to its operations. It would be especially egregious to apply global trade rules here, given that the Big Three derive enormous financial benefits (such as enjoying a protected home market) as a result of their exclusion from those rules. 9 Setting aside the impropriety of applying trade rules that are inapplicable to aviation, Qatar Airways must note that the findings made in the Capital Trade Report are replete with factual and methodological errors, if not outright deceptions. The claims of subsidy being advanced by the Big Three are predicated on findings made by the Capital Trade Group that Qatar Airways was not creditworthy between 2004 and Those findings were based, in part, on highly selective comparisons across inconsistent years. For example, even though the findings made covered , comparisons of Qatar Airways ROE to other carriers were confined to the time period, 11 and were based on a comparison with only nine carefully selected carriers 12 (for example, one of these - TAM - reported a 289% ROE for 2004, and Asiana reported 36%, which clearly skewed figures upward). The Cherrypicked Nine had an average ROE of 9.2% for , 13 but more globally 9 See Comments of Federal Express Corporation, Docket No. OST at 8-9 (May 29, 2015). 10 Capital Trade Report, at Capital Trade removed 2008 from their ROE calculations, citing a financial crisis year, but of course did not take the situation into account when reviewing the finances of Qatar Airways. 12 See Appendix 1. Not surprisingly, the sample group did not include any of the Big Three carriers (two of which were bankrupt in 2005) or their European partners

7 representative IATA industry statistics placed the industry figure for the same time period at just 4.17%. While Capital Trade s figures are plainly not representative of the industry, we also note that when reviewing Qatar Airways performance, Capital Trade chose to withhold figures that contradicted their desired findings. The financial data provided by Capital Trade indicated that Qatar Airways had a 102.8% return on equity in If comparative figures had been acknowledged and applied (i.e., providing an average figure for Qatar Airways ROE for to compare against that of the nine carriers given, instead of merely saying that ROE was negative for most years), the report would have concluded that Qatar Airways had an average annual ROE of about 25.7% for the time frame, a figure which is far higher than that of the baseline group. 15 Of course, Capital Trade did not cite that figure, or provide any specific comparative ROE figure for Qatar Airways for the time period other than to note that the ROE was not negative in The Capital Trade analysis betrays manipulation and misrepresentation of data that warrants its complete rejection. Unfortunately, the problems noted above are not isolated. The methodological problems of the report are compounded by factual errors that are so basic that the integrity of the entire analysis must be drawn into question. For example, the Capital Trade Report at one point suggests that a rational investor would not have made the decision to launch Qatar Airways, stating as follows: In the first decade of the 21st century, private investors considering an investment into a start-up Middle Eastern 13 Capital Trade Report, Exhibit 3. In a footnote to a Capital Trade Exhibit, Qatar Airways found that many computations made excluded 2008 due the financial crisis of that year, but of course the events of that year were in no way factored into the assessments made of Qatar Airways. 14 Capital Trade Report, Exhibit See Appendix Capital Trade Report, at 49. In a similar vein, the Big Three fail to mention anywhere in their narrative that Qatar Airways had positive net income in three of the five most recent financial years

8 long haul carrier would have taken into account the fact that Qatar Airways was pursuing a niche business model (a Middle East-based international carrier focused on long haul routes using wide body aircraft) already being pursued by two other major state-backed entities Emirates and Etihad. Emirates is based less than 400 kilometers from Qatari s home airport while Etihad s home base in less than 320 kilometers away. 17 Qatar Airways was launched in 1994, not in the 2000 s, and Qatar Airways was launched nine years prior to Etihad, not after Etihad. The Company initially focused on regional routes, and not on long haul routes using wide body aircraft. Errors such as these are fundamental and underscore the lengths to which the Big Three strained to reach their conclusions. The findings of the White Paper and Capital Trade Report are without support and must be rejected in their entirety. Just as the claims of subsidy have fallen flat, so too has the proof of any harm causally related to such subsidy. This is not surprising, given that Qatar Airways does not compete with any member of the Big Three in any nonstop market. Indeed, up until very recently, Delta itself has said that they [the Gulf carriers] are halfway around the world from us and we don t really participate in a lot of flows that they have the primary gateway for. 18 Although Delta changed its story for the White Paper and for the press, it repeated much the same thing in an earnings call held just a few days ago. The only specific harm the Big Three attribute to Qatar Airways is a drop in the overall US carrier share of the US-India/Indian Subcontinent/Southeast Asia market over a multi-year period. 19 Setting aside the fact that US carriers have been absent from these markets for decades, these claims are unfounded as well. As Qatar Airways 17 Capital Trade Report, at Delta Airlines, Investor s Day 2013, transcript found at f (Remarks of Glenn Hauenstein, at 39)(emphasis added). 19 White Paper, at 46. Qatar Airways does not currently offer fifth freedom passenger service to the United States

9 will demonstrate, while the Big Three s market share may have declined, the number of passengers they carry has increased in absolute terms. Many of the market developments lamented by the Big Three are not the product of unfair competition (or anything remotely related to subsidy), but are instead the byproduct of important advances in aircraft technology and significant demographic changes. With ultra-long range B777 and B787 aircraft, Qatar Airways can offer convenient one-stop services from points in the United States to secondary points in the Gulf Region (GCC), the Indian Subcontinent (ISC) and Southeast Asia that neither the US carriers nor their European partners serve at all, or only serve via longer, less efficient connections and routings. Qatar Airways catchment area is a region that is home to sixty percent of the world s population, 20 and which has a burgeoning middle class. The region is woefully short on road and rail transportation, and is almost entirely reliant upon air transport. In fact, far from injuring the public interest, Qatar Airways benefits the public interest by offering convenient one-stop service to the United States from cities such as Amritsar, Ahmedabad, Dhaka, Lahore and Kathmandu. As we show herein, by shaving hours off long and tedious journeys, Qatar Airways has helped to foster tourism, and has brought families and businesses closer together. While US carriers profess a newfound interest in these markets, they have heretofore chosen to focus almost all of their competitive energies on the mature European, Latin American and Asian markets. Especially disingenuous is the claim of the Big Three that it is somehow unfair for Qatar Airways to capitalize on its geographic advantages and extensive regional network to support its US-Qatar services. US carriers have long benefited directly from many of the practices that they decry here. For example, having for years touted the pro-competitive benefits of their partners carriage of Sixth Freedom traffic and their own carriage of Fifth Freedom traffic, they now declare these rights which are fundamental to open skies to be unfair when exercised by Gulf carriers. 20 See

10 The US Government must reject their transparent efforts to force US- GCC/ISC/Southeast Asia traffic to flow over the hubs of their European partners, routings that are far less convenient or attractive to consumers than those offered by Qatar Airways. Qatar Airways and other Gulf carriers serve routes that US carriers in the main do not serve, and provide valuable competitive alternatives in the few cases in which there is route overlap. The US Government should reject the specious claims made in the White Paper, and recognize that its Open Skies agreements are working well, and generating broad-based consumer, commercial and public benefits. Indeed, the Agreement, which enabled Qatar Airways to provide scheduled air links between two important strategic, military and commercial partners, has been a particular success. Qatar Airways services to the United States have enabled American universities to expand their campuses in Doha, have facilitated travel between the two countries by governmental and commercial organizations, and have greatly expanded cooperation between Americans and Qataris. Although the Big Three have been relentless in their campaign to block the future growth of Qatar Airways, the US Government should firmly resist demands to reopen the Agreement and, instead, close this inquiry. This would be appropriate because services offered by Qatar Airways are lawful, consistent with existing bilateral arrangements and are well-received by the traveling public. Although Qatar Airways has concerns about the events that led to this review, 21 Qatar Airways is pleased to share its views, and is confident that the facts will prevail. The Departments of Transportation, State and Commerce must reject the groundless claims that Qatar Airways is competing unfairly, and recognize the simple truth, which is that the Big Three are unhappy having to face competition from carriers such as Qatar 21 As is well known, the Big Three had circulated the White Paper and supporting documents amongst the press, Congress and Executive Branch for several months, but refused to provide Qatar Airways (or the other Gulf carriers) with these materials. While Qatar Airways has attempted to refute the main claims advanced in the White Paper and elsewhere, it should be noted that it has not received any response to the Freedom of Information Act requests filed with the above-captioned agencies, and thus cannot be sure it has seen all relevant claims being made. Accordingly, Qatar Airways emphasizes that its omission of any point from this document is by no means a concession as to its validity

11 Airways, which offers convenient and premium service, and which has invested several years developing its own route network. The US Government should also be mindful that other US aviation trading partners have, over the years, lamented the growth and power of US carriers, and have sought (and sometimes obtained) limits on their growth. By wavering from its policy supporting Open Skies, the US would strengthen the hands of governments which oppose open trade in aviation, and jeopardize the broader public interest. II. ABOUT QATAR AIRWAYS History, fleet and network. Qatar Airways, the national carrier of the State of Qatar, began operations in When launched, the airline was a small regional carrier serving a handful of routes with just 4 aircraft. The airline was re-launched in The Company, which has one of the industry s youngest fleets, has been instrumental in the development of Doha as an important passenger and cargo hub, and is a catalyst for the diversification and expansion of Qatar s economy. Doha is a regional home to various US universities, and has emerged as a major developing center of culture and tourism. Furthermore, Qatar serves as an important base for US military operations. Qatar Airways operates 158 aircraft, of which are wide-bodies, and 45 of which are narrow-bodies, serving markets on all continents. 23 The Company has Boeing aircraft in its fleet, with an estimated value of $19 billion. 25 The average age of Qatar Airways Boeing fleet (both passenger and cargo) is 3.1 years. 26 The Company 22 As of June 1, Despite claims of the threat created by Qatar Airways, it is dwarfed by the Big Three. For a comparison of the Big Three U.S. carriers versus Qatar Airways in key areas such as fleet size, operating revenue and destinations, see Appendix As of June 1, These Boeing aircraft have engines manufactured by General Electric. Whenever possible, the company selects GE engines for its Airbus aircraft. 26 As of June 1,

12 has a further 148 Boeing aircraft on order (including firm orders, options and purchase right aircraft) with an estimated value of $50 billion 27 in today s prices. From its hub at Doha, Qatar Airways serves 151 destinations 28 spanning Europe, the Middle East, Africa, South Asia, Asia Pacific, North America and South America. The airline serves numerous markets that are either underserved or not served at all by the big U.S. carriers, including many hubs and secondary cities in: The Indian subcontinent (India, Pakistan, Bangladesh, Sri Lanka) The Middle East (Iran, Iraq, Jordan amongst others) The Gulf region (all GCC countries) East Africa (Ethiopia, Eritrea, Mozambique, Tanzania) Southeast Asia (Cambodia, Indonesia, Thailand) Service to the US, and partnership strategy. Qatar Airways initiated passenger service to the United States in June 2007, offering flights initially from Doha to Newark via Geneva and in July the same year, following the delivery of its first pair of B ER aircraft, nonstop service to Washington, DC, was added. In 2008, with an enlarged B777 fleet, Qatar Airways launched its nonstop service to JFK, and ended its one-stop Newark service. Following the arrival of its ultra-long range B LR aircraft in 2009, nonstop service to Houston was launched. Subsequently, nonstop flights were added to Chicago in 2013, and Miami, Philadelphia and Dallas in The Company recently announced the introduction of new nonstop passenger services to Atlanta, Boston and Los Angeles in The Company also operates freighter service to Atlanta, Chicago and Los Angeles. Qatar Airways has always sought to partner with US carriers. When Qatar Airways first initiated service to the United States, it established a codesharing arrangement with United Airlines, and later with US Airways as well. As a result of pressure from fellow Star Alliance partners, United terminated the codeshare agreement in Estimated value based on 2014 list prices. 28 Operated or announced as of June 1,

13 Qatar Airways in 2013 entered into a wide-ranging two-way codesharing arrangement with American Airlines. This arrangement covers behind-us and behind- Doha gateway routings as well as US-Qatar nonstop and intermediate-hub routings. The Company has also implemented a one-way codeshare arrangement with JetBlue, pursuant to which JetBlue transports Qatar Airways passengers on certain domestic routes beyond the Company s US gateways. Alliances. Qatar Airways is a member of the oneworld alliance, and has extensive codesharing relationships with other oneworld members. As we will explain in greater detail below, American Airlines, one of the Big Three, is in fact Qatar Airways primary US codeshare partner and a fellow member of the alliance. Emphasis on customer service. In a few short years, Qatar Airways has emerged as a carrier renowned for its customer service. Qatar Airways is one of only seven airlines worldwide currently ranked Five Star for service excellence by Skytrax, the independent global aviation industry monitoring agency. Moreover, at the latest Skytrax award ceremony held in June, 2015, Qatar Airways was confirmed as the Airline of the Year for the third time in five years, Best Airline in the Middle East for the ninth year and its premium product was acknowledged with the award for world s Best Business Class Airline Seat. In 2014, Qatar Airways also won awards for the Best Business Class in the World for the second consecutive year and World s Best Business Class Airline Lounge for the second year consecutively. Differences from other Gulf carriers. The Big Three make repeated references to the Gulf Carriers, as if all three companies were one and the same. While Qatar Airways, Emirates and Etihad come from the same region, it is essential to bear in mind that the carriers are of different sizes and maturity, and have very different histories and competitive strategies. The carriers compete vigorously with each other for regional and international traffic Emirates is the oldest and largest of the Gulf carriers. Emirates has been in operation since 1985, and operates a fleet of 234 aircraft from its hub in Dubai. While Emirates is not a member of any of the global alliances, it maintains a codeshare arrangement with JetBlue. Unlike Qatar Airways, Emirates currently operates passenger fifth freedom service to the United States, serving the Milan-New York market

14 III. APPLICABLE LEGAL STANDARDS A. Qatar Airways Services Are Entirely Consistent with the Agreement Although the Agreement forms the legal basis for Qatar Airways service to the United States, the White Paper addresses the Agreement only in passing. The template for this Agreement, which was drafted by the United States, has been offered to (and accepted by) more than 100 US trading partners. The version of the Agreement in place between the US and Qatar was expressly designed to give US carriers the freedom to fly from the United States to the foreign country (and beyond) over any routing, and to operate seventh freedom all-cargo services from that country. Given longstanding disputes involving US carrier services and capacity offerings, 30 the Agreement governing fair competition (Article 11) enshrines the right of the airlines of each Party to determine the frequency and capacity they offer based upon commercial considerations in the marketplace. In essence, the Big Three are complaining that Qatar Airways offers excessive capacity to the United States. Setting aside the fallacy of this statement (Qatar Airways currently offers a single daily service from Doha to each of its US gateways), 31 the Agreement does not authorize parties to reject or block services proposed or operated by carriers of the other Party. 32 Indeed (and contrary to the demands of the Big Three), 33 the Agreement very clearly says that the Parties may not unilaterally limit the Etihad is the youngest of the three Gulf carriers. Unlike Qatar Airways, Etihad is not a member of any of the three global alliances, but maintains a codesharing arrangement with American Airlines. Etihad has opted to expand its commercial presence through a series of equity investments in (and codeshare arrangements with) several other air carriers including Alitalia, Jet Airways, Air Berlin, Virgin Australia and Air Serbia. 30 Indeed, the US had disputes with both France and Germany in the 1990 s due to concerns about excessive US carrier capacity being offered under liberal air service agreements. At Air France s behest, the Government of France in 1992 renounced the US-France Air Service Agreement because US carriers were gaining market share on Air France, and Germany in imposed temporary limits on US carrier capacity in the US-Germany market. 31 Qatar Airways has enjoyed strong load factors. See Appendix Agreement, Art. 11(2). 33 The Big Three effectively have demanded that the US Government place a freeze on the Gulf carriers U.S. service and capacity, contrary to Article 11(2) of the Agreement. See Letter of American Airlines, Delta and United to Secretaries Kerry, Foxx, and Pritzker, Docket OST (Apr. 17, 2015)

15 volume of traffic, frequency or regularity of service, or aircraft type operated by airlines of the other Party. 34 The relevant language follows: Each Party shall allow each designated airline to determine the frequency and capacity of the international air transportation it offers based upon commercial considerations in the marketplace. Consistent with this right, neither Party shall unilaterally limit the volume of traffic, frequency or regularity of service, or the aircraft type or types operated by the designated airlines of the other Party, except as may be required for customs, technical, operational, or environmental reasons under uniform conditions consistent with Article 15 of the Convention. The Big Three have attempted to sidestep the clear language of the Agreement 35 by instead referring to WTO and more general trade principles that are not, by their terms, applicable to air transport services, and asserting that Qatar Airways is only able to offer its level of frequency because of its (alleged) receipt of subsidy. These contentions should be rejected. The Agreement does not define the term subsidy, let alone prohibit the receipt of subsidy. Rather than giving foreign trading partners the means of objecting to US carrier expansion, the US instead chose to create a more narrowly tailored remedy to object to competitive harm that may arise if prices being offered in the market are artificially low due to direct or indirect governmental subsidy or support. 34 Agreement, Art. 11(2). 35 In a March 15, 2015, questionnaire issued to the Big Three, the US Government asked the parties to identify the specific provisions of our bilateral aviation agreements upon which the UAE and Qatari government actions infringe. Questionnaire, Question 25. Not surprisingly, the Big Three in their response chose to skirt the issue: The United States does not need to allege a violation of a specific provision of the bilateral agreement in order to seek redress against the subsidies that Qatar and the UAE have provided to their carriers Response at 76. This deliberate obfuscation should be read for what it is a concession that the services complained of are entirely consistent with the applicable agreements

16 Article 12(1) of the Agreement provides: Each Party shall allow prices for air transportation to be established by each designated airline based upon commercial considerations in the marketplace. Intervention by the Parties shall be limited to: a. prevention of unreasonably discriminatory prices or practices; b. protection of consumers from prices that are unreasonably high or restrictive due to the abuse of a dominant position; and c. protection of airlines from prices that are artificially low due to direct or indirect governmental subsidy or support. If a Party believes that prices in the market are inconsistent with the considerations set forth in paragraph (1) of this Article, then the remedy for that unfair pricing is for the complaining Party to seek consultations about such prices. 36 To the best of Qatar Airways knowledge, the Big Three never have objected to a fare offered by Qatar Airways under Article In fact, aside from an unsupported Big Three assertion in the White Paper that basic economics suggest that prices will be driven down 38 sometime in the future, 39 the White Paper does not make any specific claim that the government subsidies that Qatar Airways has allegedly received have led to artificially low prices in any relevant market. Indeed, the White Paper does not contain any specific claim that fares offered by Qatar Airways are unreasonably low at all. If US Government negotiators had intended to include in its Open Skies template a mechanism to object to excess capacity or other factors believed to be affected by the receipt of government subsidies, then such language would have been included in 36 Agreement, Art. 11(2) and Art. 12(1) 37 Agreement, Art. 12(1)(c). 38 White Paper, at Setting aside the fact that unspecified fears of future harm are not actionable, the assertions made here are especially speculative and weak

17 the Agreement. By referring to subsidies only with relation to price, the US clearly intended to prevent foreign partners from unilaterally blocking the capacity offered by US carriers. This point is underscored by Article 11.2 of the Agreement, which makes this point expressly. Despite this clear language, and despite the huge outcry that would be heard if the tables were turned, the Big Three have urged the US Government to impose a unilateral freeze on the introduction of new capacity by Gulf carriers while their complaints are addressed. 40 As FedEx and others have noted, such an action would violate Article 11.2, 41 and send a clear message to the rest of the world that the United States supports Open Skies only when their counterparts fail to fully exercise those rights. 42 The Big Three have asserted that they might not have supported the US entering into Open Skies agreements with the Gulf States had they understood the growth trajectory of the state-owned carriers in the region. 43 Those claims ring hollow. Although Qatar Airways was young at the time the US-Qatar Agreement was negotiated and signed, the US Government did not express concerns about Qatar Airways partial State ownership, 44 much less object to concluding an Agreement with a very small nation. What we see here is buyer s remorse masquerading as a legal argument. The fact that Qatar Airways has grown faster than the Big Three would like is not reason for the US to abrogate the Agreement by imposing an illegal unilateral capacity freeze on the services of Qatar Airways. Similarly, the fact that Qatar is a small country that it is 40 See Letter of American Airlines, Delta and United to Secretaries Kerry, Foxx, and Pritzker, Docket OST (Apr. 17, 2015). 41 See Comments of Federal Express Corporation. 42 This point is especially clear with regard to Fifth Freedom services. Although US carriers have a long history of making (very) full use of their Fifth Freedom rights, and for fighting very aggressively to defend those rights, they are objecting very vigorously to Emirates operation of a single Fifth Freedom route (Milan-New York). 43 White Paper, at The US has concluded Open Skies agreements with many nations which own their flag carriers, such as Turkey and India

18 geographically well-positioned to be a transfer point for behind-gateway traffic should not be a cause for concern. After all, the United States deliberately selected the Netherlands and Singapore, countries which are home to powerful Sixth Freedom carriers, as its pioneering European and Asian open skies partners in part because arrangements with those countries might prod more recalcitrant trading partners to come to the table. Complaints about Qatar Airways offering excessive Sixth Freedom capacity 45 should also be rejected on the grounds that they are at odds with the letter of the Agreement, with US Government policy and with US carrier practice. Speaking at an aviation function, Douglas Steenland, the then-ceo of Northwest Airlines (which has since been merged into Delta) boasted that Northwest/KLM were offering high levels of frequency in the Detroit-Amsterdam market, despite the (very) small size of the local O&D market: By linking Northwest s domestic network to KLM s Amsterdam beyond network and vice versa, each of Northwest and KLM has been able to introduce expanded transatlantic capacity. For example, look at Northwest s largest U.S. hub, Detroit. The Detroit Amsterdam city pair has approximately 85 passengers daily each way. Yet this summer, NW/KLM are operating 5 daily nonstop wide body flights. 82% of the total traffic on the NW/KLM Detroit-Amsterdam route connects behind Amsterdam. Even though Northwest s U.S. hubs collectively account for slightly more than 4% of U.S.-Europe O&D bookings and KLM s Amsterdam hub is smaller than Frankfurt, Paris, and London-Heathrow, the NW/KLM alliance has enabled Northwest and KLM to be an effective transatlantic competitive force, and our joint venture generates approximately $2 billion in annual revenues for the two companies. 46 The Big Three may be displeased to face competitors that have taken a page from their own playbook by offering a comprehensive range of services between the United States and GCC (and from points behind the GCC), but the US Government 45 See White Paper at Remarks of Douglas Steenland, International Aviation Club, at 3 (Jun. 5, 2005) (emphasis added)

19 should not view the expression of this displeasure as any indication that the Agreement has been violated. On the contrary (and as Northwest/Delta itself has observed), [t]o gauge the likely competitive impact of a proposal, competition authorities typically rely on consumer views as opposed to views of competitors. Indeed, complaints by competitors are routinely considered by such authorities to be strong evidence of the pro-competitive nature of a transaction. 47 Passengers traveling to and from India have weighed in strongly in support of Qatar Airways services, 48 as have a plethora of other consumer groups. These plaudits (and the support of US carriers other than the Big Three) are clear evidence that the Agreement is working and producing the very benefits that are supported by US aviation trade policy. 49 B. WTO/GATT Rules Are Inapplicable to Air Transport Services Having failed to substantiate any violation of the Agreement, the Big Three now urge the US Government to apply the principles of an alternative (but inapplicable) legal regime to address their claims. Despite the fact that the GATT Agreement on Subsidies and Countervailing Measures (SCM) applies only to goods, the Big Three nevertheless argue that that the government should apply the SCM and general WTO principles to resolve their complaints. These efforts are both unlawful and entirely misplaced. Air services between the United States and Qatar are governed solely by the Agreement. As discussed above, Article 12 of the Agreement is quite clear that if a Party believes that a price being offered in the market is artificially low due to direct or indirect subsidy, then that Party can object to the price, and seek consultations. Given 47 Id. at See Appendix The Department of Transportation has long rejected the view that benefits under an open skies agreement must be precisely matched: if we were to embark on negotiation initiatives only where we could anticipate precisely equal economic benefits we would have been deterred from some of the most successful agreements we have achieved in the last decade. See Defining Open Skies, DOT Order , at

20 this very clear language, efforts to refer to extraneous agreements are completely improper. 50 Even if WTO rules were applicable here, the proper agreement to apply would be the General Agreement on Trade in Services (GATS). But the GATS expressly excludes air traffic rights from its coverage, and does not define, much less prohibit, subsidy. Moreover, it bears emphasis that the US Government has affirmatively opposed the inclusion of air transport services in the GATS framework. 51 While the Big Three and their unions argue here that the WTO principles should be applied to achieve their desired result, it bears noting that they would likely object to the application of these principles in other areas. 52 As discussed further herein, the US Government should be wary of these blatant efforts to cherry pick amongst facts, statistics and legal regimes. 53 Even if the WTO rules were applicable (and they are not), and even if the Big Three could prove the existence of subsidy (which they cannot), the inquiry would not end there. While the White Paper alleges that Gulf carriers have received subsidies, it fails to acknowledge that in order for a subsidy to be prohibited or actionable under the applicable rules, 54 the complaining party must show more than the bare fact that a 50 In addition to being improper, the efforts being made to apply WTO principles here are also pointless. Even if these rules were applied and even if a subsidy (and harm related to subsidy) were to be found, the remedy would not be a denial of market access. Instead, the remedy would be the imposition of a duty to countervail the subsidized price. A variation of this remedy (the ability to object to a fare in the US-Qatar market) already is provided under the Open Skies Agreement. See also Comments of Federal Express, at In multilateral trade talks, the US Government has stood steadfastly behind its decision to decision to oppose the inclusion of air transport services in the GATS. See WTO Council for Trade in Services, Report Of The First Session Of The Review Mandated Under Paragraph 5 Of The Annex On Air Transport Services Held On 12 September 2006, at para. 27. [The U.S.] delegation continued to believe that the almost total exclusion of air transport services from the scope of coverage under the GATS had been farsighted and had contributed to the ongoing liberalization of air transport agreements through air services-specific agreements and the facilitating activities of ICAO and numerous regional fora. This was equally true for traffic rights and ancillary air services in support of traffic rights. 52 Indeed, the cabotage rules and restrictions on airline ownership and control are squarely at odds with GATS principles. 53 See section D, infra. 54 See Subsidies and Countervailing Measures Agreement, 1869 U.N.T.S. 14 (1994) (hereinafter, SCM Agreement ), and US countervailing duties statute, 19 U.S.C

21 subsidy exists. To be actionable, the parties must show injury, 55 and a causal link between the subsidized imports and the alleged injury. 56 As will be shown below, the Big Three have failed to make any showing on any of the prongs of the test. IV. SUBSIDY CLAIMS A. The Big Three Propound an Overly Broad Definition of Subsidy The Big Three in the White Paper allege that Qatar Airways has received improper subsidies from its government. Included in the allegations are not only items that never have been viewed as subsidies, but also benefits that the Big Three have themselves received. For example, they cite as a benefit differences between the Qatari and US aviation regulatory regimes, as well as certain antitrust law exemptions that apply to the air transport sector. 57 Needless to say, the arguments being advanced by the Big Three are highly disingenuous they are propounding an overly broad definition of subsidy for Qatar Airways, yet ignoring all subsidies that they themselves have received. If variations in national and local laws and practices can constitute a subsidy as the Big Three suggest, 58 it should be noted that the United States is amongst only a handful of countries that allows insolvent companies to walk away from their debts and continue in business. According to the consultancy Risk Advisory Group, US carriers have received upwards of $30 billion in cost savings associated with their Chapter 11 restructurings, 59 and respected publications such as the Economist also have acknowledged the unique benefits that US carriers have enjoyed when they have been permitted to walk away from their debts. 60 Moreover, the Big Three have similarly 55 As defined by GATT 1994 Article VI and interpreted by the SCM Agreement. 56 SCM Agreement, See White Paper at Id. at See Risk Advisory Group PLC, Financial & Other Governmental Benefits Provided to American Airlines, Delta Air Lines & United Airlines, at 5 (May 14, 2015), available in Docket OST (hereinafter, Risk Advisory Group Report ). 60 The Economist, Flights of Hypocrisy: The Airline Business Is Riddled with Protectionism. The Answer is Open Skies (Apr. 25, 2015)

22 walked away from their defined-benefit pension obligations, leaving the US taxpayer to foot the bill. 61 It is particularly ironic that the White Paper cites the lack of applicability of certain aspects of competition law to the air transport sector in Qatar as a disguised form of subsidy, 62 given that each member of the Big Three is a core member of an immunized joint venture that has received antitrust immunity (ATI) from the US Department of Transportation. 63 ATI enables these carriers to jointly set fares with their direct competitors, and to coordinate (and limit) capacity in key international markets. Whilst Qatar Airways is a member of the oneworld alliance and may consider future opportunities to enter into an ATI-immunized joint venture, it must take strong exception to any assertion that operating under its national laws is somehow unfair when its detractors have benefitted from ATI, and have been active participants in mergers that have sharply increased the level of concentration in the US air transport market. 64 The Big Three also assert that Qatar Airways is not subject to independent regulatory oversight, and that this confers an unfair benefit upon the Company. 65 These assertions are false. As the Department is aware, only carriers from countries that are placed in Category 1 under the FAA s International Aviation Safety Assessment (IASA) program may launch scheduled passenger service to the United States. The Qatar Civil Aviation Authority (QCAA) underwent an exhaustive FAA audit of its aviation oversight and enforcement capabilities prior to Qatar Airways launching its US services, and has been subject to periodic re-evaluations since then. The FAA would not have approved Qatar Airways to operate direct air service to the United States if it had found that oversight of Qatar Airways by the QCAA was neither independent nor robust. Moreover, 61 Risk Advisory Group Report, at White Paper, at See DOT Order (Jul. 20, 2010) (Oneworld), DOT Order (May 22, 2008) (SkyTeam); DOT Order (Jul. 10, 2009) (Star). 64 Setting aside the irony of these claims, it also should be noted that they are not true. As a global carrier, Qatar Airways commercial activities fall under the jurisdiction of many national competition authorities. 65 White Paper, at

23 Qatar is not unique and many national aviation authorities, including the Civil Aviation Administration of China, have legal ties to their national carriers. Over the years, US carriers have enjoyed many structural and governmentfinanced benefits that have not been matched by other countries. These include: Exclusive access to government-financed traffic under the Fly America program. Exercising their ability to eliminate or freeze their defined-benefit pension plans. Subsidies through the Essential Air Services Program for providing service to specific small communities. State-granted fuel tax exemptions and rebates (indeed, Delta is currently complaining about the loss of a $23 million annual fuel tax break from the State of Georgia). 66 Free land to construct aircraft maintenance facilities. While the list of benefits bestowed upon US carriers is far longer than this, the fundamental point to be made here is that US carriers have themselves been very significant beneficiaries of governmental largesse. 67 Whilst Qatar Airways makes no complaint about US carrier receipt of such benefits, it is essential to understand the fundamental inconsistency of the position being advanced by the Big Three, which is to have the US Government challenge as a subsidy policies that might benefit a carrier from a Gulf State whilst having the US Government turn a blind eye to any and all benefits enjoyed by US carriers. As indicated above, the Big Three are seeking to have the US tear up its agreements with its critical Gulf trading partners because Gulf carriers have emerged and now (to some extent) compete with their European partners for Europe-Asia traffic 66 Indeed, Delta is currently complaining about a $23 million fuel tax break that it has received each year from the State of Georgia. New York Times, Lawmakers May End Tax Break on Jet Fuel, to Delta's Dismay (Mar. 1, 2015), available at 67 The US cabotage rules, which reserve access to the US domestic market to US carriers, can be viewed as perhaps the biggest subsidy of all. Indeed, several commenters have noted the value of this benefit. See, e,g., Comments of Federal Express at 9, and Comments of Hawaiian Airlines at 4, Docket DOT- OST Other carriers note that the Big Three hold grandfathered slots at constrained airports now worth billions of dollars. See Response of Emirates, June 30, 2015, at

24 flows. While US carriers are free to make this request, it is critical to note that the very European carriers that the US Government would insulate from competition from Gulf carriers are airlines that themselves have received massive subsidies in their lifetimes. These subsidies have been taken the form of both direct state aid and the forgiveness and governmental assumption of significant financial obligations when these carriers were privatized. 68 Figure 1: Subsidies Received by European Airlines Year Airline Amount (US $ million) 1991 Sabena 1, Air France Iberia Finnair Aer Lingus British Airways TAP 1, Air France 3, Olympic 2, Lufthansa KLM /1999 Iberia Sabena AOM Lufthansa Alitalia 1,708 Qatar Airways State ownership is not unique, and should not be viewed as problematic. Indeed, many of the alliance partners of the Big Three currently are Stateowned, and have been reported to receive financial support from their governments. 69 For example, Star Alliance members Air India and Turkish Airlines are each State- 68 Source: Doganis, R (2001), The Airline Business in the 21 st Century, London Routledge & Raj S. Chari (2004), State Aids In The Airline Sector: A comparative analysis of Iberia and Aer Lingus, Studies in Public Policy 13, The Policy Institute at Trinity College Dublin. 69 Indeed, Delta just announced an investment in and expansion of its relationship with China Eastern, a carrier which has been heavily subsidized by its government. See, e.g., CAAC doubles subsidies to Chinese domestic carriers in 2014, -