Gulf, we have a problem

The rise of the heavily state-sponsored Gulf airlines had led to a significant market distortion and increasing job losses in Europe. And there is more to come.

Getting to grips with this reality has been one of the main drivers for the European Commission to seek a mandate from national governments to negotiate on their behalf far-reaching aviation agreements with the Gulf countries. Through such agreements, the EU wants to introduce unambiguous “rules” in the market on fair competition, financial transparency and labour protection. In return, it offers a (overly) generous liberalisation of ownership and control rules and of traffic rights (Read more about the mandate here). The good news is that EU Member States granted a negotiating mandate to the European Commission to start talks with the United Arab Emirates (UAE) and Qatar: the two fastest growing aviation markets. Less good news : those countries do not seem to be keen to negotiate at all. They prefer bilateral agreements with Member States. Is fair competition maybe too much of an ask for the Gulf? 

Understandably, the EU has not released the details of the negotiations mandates. But unofficial information has confirmed a number of points that could be included in the mandate.

A striking full liberalisation – up to 100% – of ownership and control of EU airlines seems to be part of a possible future deal. Transport Commissioner Bulc is prepared to abolish the current EU’s 49% limit on foreign ownership of airlines on a reciprocal basis. For example, now Etihad has 49% of Alitalia, 29% holding in Air Berlin, Qatar Airways owns 15% of IAG (owner of among others British Airways). Hence, there is much room for expansion for the Gulf airlines. 

Along with that, a full liberalisation of third and fourth traffic rights for passenger and cargo flights, allowing an airline to fly from another country to the airline’s home country (and the other way around). For cargo flights, the EU Commission might have a liberalisation of 5th freedom in stock, enabling airlines to carry out flights between two foreign countries, provided that the flight begins in or continues on to the carrier’s home country. However, in return for expansion and wider market access, the Commission expects from the Gulf airlines a clear commitment to compete ‘fairly’ and it will strive to negotiate a fair competition clause into the future agreements. What such a clause could include, is not spelled out yet. The ambition of the EU Ministers is that it includes transparency provisions, allowing for disclosure of relevant financial information and accounts to guarantee fair competition. 

The Commission’s mandate also requires a negotiation on a ‘social clause’. Something similar to – and hopefully more ambitious than – Art.17bis of the EU-US air transport agreement to protect labour standards and rights of employees. This article has demonstrated its limitations in the case of Norwegian Air International’s (NAI) requesting a foreign air carrier permit from the US Department of Transportations (more about it here).

For Europe, negotiations with the Gulf countries are a logical and reasonable step. A comprehensive agreement is the tool to ensure labour protections in countries, where labour rights are questionable, employer malpractices are daily business and unions are banned; countries, which are failing to (fully) implement International Labour Organisation (ILO) conventions, governing basic principles of workers’ rights. 

Introducing a ‘fair competition’ clause and financial transparency provisions could – if ambitious and binding enough – also become a powerful tool for enabling fair competition. Currently, the Gulf airlines’ non-transparent finances and structures have allowed them to expand and grow by dumping capacity on the market: launching or increasing capacity on unprofitable, unsustainable routes, ‘inundating’ it and destroying competitors, subsequently absorbing capacity to eventually be able to set prices and control the market. 

Reality is that the Gulf and its state-owned airlines have shown little enthusiasm in signing up for a common deal with Europe, or even start negotiations.

Fact is that an air transport agreement with the EU would be more restrictive than the current beneficial bilateral agreements the Gulf countries have managed to secure with a number of individual EU Member States. A united European Union voice does not play in their favour. A ‘fair competition’ clause and transparency provisions would be hard to digest for cash abundant airlines, which are used to playing according to the “cash” rule only. Tying up market access and interesting opportunities to conditions such as regulatory convergence, labour and social protection, adds even more fuel to the fire. Finally, the EU Transport Minsters also requested a ‘sunset clause’, limiting the duration of negotiations to 3 years for Qatar and UAE. This is one more pressure point for the Gulf negotiators, increasing the likelihood to not engage in negotiations at all or to engage and stall them. 

So far Gulf States have not been asked to give in on… basically anything ever. This is why the Commission’s mandate will be perceived by them as problematic. It puts pressure to commit to fair competition and it is challenging their modus operandi of unlimited and unrestricted growth, ambiguous structures and undisputed leadership. The growth opportunities come with conditions. Europe has certainly nothing to fear when it comes to such negotiations. But the Gulf, the Gulf may indeed have a problem.
 

ECA Recommendations on EU-Gulf negotiating mandate

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