Odds and Ends: WTO and 777X tax breaks; US airlines vs Middle East; Goldman and Boeing; ExIm Bank

WTO to examine 777X tax breaks: Well, we predicted this in November 2013 when Washington State extended the Boeing 787 tax breaks to the 777X. And it’s happened. The World Trade Organization is going to take a look at that action. The 787 tax breaks were found by the WTO to be illegal. Washington didn’t change anything when it extended the tax breaks to the 777X.

US carriers vs Middle East airlines: Pretty much anyone who follows airlines has read about the war of words and politics between American, Delta and United airlines on the one hand and Emirates, Qatar and Etihad airlines on the other.

The blog Boarding Area has done perhaps the best independent analysis we’ve seen on the topic. You can find it here.

Goldman puts a Sell on Boeing: Goldman Sachs became the second firm to put a Sell rating on Boeing (after boutique Buckingham Research last year). Goldman believes the industry has had a strong run up and is now beginning to enter a period of over-supply, so it’s time to sell.

ExIm may get renewed: Maybe some Republicans are coming to their senses: there is a move in the House, controlled by the GOP, to renew the ExIm Bank for five years. The Tea Party still objects, calling it corporate welfare (mainly for Boeing), but as we’ve written many times, this is about global competition and domestic jobs. Boeing is able to sell airplanes to airlines that need help (although some deals are dubious to carriers that don’t seem to need it), which creates jobs putting these airplanes together and building all the parts for them. If ExIm was not reauthorized, Airbus would have a clear advantage. Let’s hope the more sane Republicans prevail

 

11 Comments on “Odds and Ends: WTO and 777X tax breaks; US airlines vs Middle East; Goldman and Boeing; ExIm Bank

  1. Looks like we have a major discussion point in the near future: ME3 vs Rest of the World!

    If you exclude Emirates and Qatar Airlines from the Open Skies agreement, Airbus and Boeing might face main customers cancellations for the A380 and B777X programs. So, if they can´t fly everywhere,they don´t need that much planes anymore.Besides all the points made in the blog,it´s still a multi billion dollar game,with multi billion players,governments and Trade Organisations in it! Who will be the Winner?It´s interesting to watchfrom the outside!

  2. The question is if the competition from the Middle East big 3 is “fair”. Do they play by the same rules? Airbus and Boeing are happy, passengers are happy, the princes are happy, the local ME communities are happy. But if they don’t play by the rules someone is paying the price.

    I remember the same discussion 20 years ago. Then it was Singapore Airlines, who weren’t democratic at all.

    They selected crew based on criteria that would be unacceptable in the West, payed them low fares (unions forbidden) and fired them out when they reached the age of 30, or any other reason. The SIN government financed spanking new aircraft every 6-8 years and made sure the flagship carrier got all it needed, as it was strategically important for the little country. Because of the low wages SQ could put an addition 5-8 carefully selected smiling crew members on each 747. Passengers loved it!

    Fair?

    Re Aircraft purchases, if we assume the number of passengers stay about the same, the same aircraft in use would only fly different routes and different tails.

    • Please don’t talk nonsense. In your opinion the competition is not “fair ” because they don’t comply to the same rules. The fact is, globally the rules are not the same and that is globalisation. And because airlines are by definition global considering that they take off in one continent and land in another it makes the industry more prone to the effects.

      I know SQ well and had ex SQ crew as employees. Some facts: they are union represented. They are not fired at 30: they are recruited on 5 year contracts which is legal in most countries. Why do people take the job if it is only a 5 year contract? Because pay is above average, it is an exciting lifestyle if you are young and if you don’t continue (all the ex-SQ staff I had working for me left because family life made the job no longer attractive) you ended up in a good place because the training you received made you a highly attractive prospect in many areas of business resulting in an above average pay.
      SQ is showing luxury when it comes to interaction with passengers but is running an LCC type operation wherever they can get away with it. At the same time running high utilisation of all assets. And if a CEO will lead them to loss position he will be fired (see what happened to Tiger management?).
      And to top it off, Changi Airport always had priority of SQ which led to open skies. And Changi Airport is a lot more profitable than SQ.
      So please get the facts correct before you talk about non-democratic regimes. The fact that things work differently from Europe does not automatically make it bad.

      Same with ME3. The rules are different. That will not change. But ME3 are taking advantage of that with well run businesses. And it is fair because it ensures the prosperity of the airline employees, their families and the country they live and work in. They should not have to lower their standard of living just because their competitors have other rules.

      • Oh please NdB, cut the crap. They must be younger then 25, must be single and comply to strict looks. For you and your family that may be totally acceptable, that’s ok. It is allowed locally. In Iran, Korea and Venezuela they no doubt have specific ideas and laws too. Luckely we have the UN, Universal human rights and the WTO to put those aside and speak out.
        For me entities being succesfull doesn’t mean I find them ok. The nazis were leading aerospace innovation, the Chinese autocracy is extremely succesfull, Stalin put man in space, the oil economies airlines are Airbus / Boeing love babies. Ever looked at working conditions, female rights there? Looking the other way is a choice.

  3. So the article says it’s the airports that are important, not the airlines, which I agree with. However, he can’t point to any actual subsidy in the system. It’s possible the airport itself loses money on current expenditure, due the massive expansion works that are taking place. In principle this is amortized over future revenue anyway. There’s no doubt the Emirates/Dubai Airport system is extremely profitable for Dubai Inc, not just with the Emirates airline, retail at the airport, but also airport services, tourism and the business hub effect.

    Dubai doesn’t have many natural resources such as oil and gas and has to raise its own capital at commercial rates.

  4. US carriers vs Middle East airlines: Pretty much anyone who follows airlines has read about the war of words and politics between American, Delta and United airlines on the one hand and Emirates, Qatar and Etihad airlines on the other.

    The blog Boarding Area has done perhaps the best independent analysis we’ve seen on the topic. You can find it here.

    While Ben Schlappig’s “analysis” IMJ is seriously flawed, there are quite a few good comments debunking his assertions.

    Any reasonably crafted analysis would put geography on top of the list of comparative advantages the ME3 possess — and start from there.

    As for subsidies, the author doesn’t seem to grasp the principle that according to WTO, low or no taxation is not a subsidy if it’s across the board; that no single industry or a particular group of people are granted targeted and specific subsidies that are not available to other players in that country’s tax system.

    Here’s a more academic look at the causes of the rise of the ME3:

    The Rise of the Emerging Middle East Carriers:
    Outlook and Implications for the Global Airline Industry

    http://dspace.mit.edu/bitstream/handle/1721.1/89852/890140089.pdf?sequence=1

  5. “As for subsidies, the author doesn’t seem to grasp the principle that according to WTO, low or no taxation is not a subsidy if it’s across the board; that no single industry or a particular group of people are granted targeted and specific subsidies that are not available to other players in that country’s tax system.”

    The last 5 words say it all.

    Regarding giving subsidies to companies that pay tax and have them pay it back overtime, or ask no tax and leave it at that, the WTO luckily has realistic view. Sidelining local law / opinions / interests.

  6. the AB3’s (American Big 3) real competitive problem with the ME3 is not government subsidies, as they get plenty of their own.

    the AB3’s problems are rooted in the American model of Capitalism – whereby short term stock price gain is the only metric of success. this leads to cutting service to the bone, 28″ seat pitches, old aircraft and “monetizing” every possible thing from baggage fees to aisle seat fees to carry on fees to charging for peanuts.

    I have never, ever, heard someone make a positive comment about their experience flying on one of the AB3 airlines (other than shock and surprise at a less than horrific experience) and I constantly hear about how awesome flights are on any of the ME3 airlines.

    The EU3 (BA, AF and LH) are competitively disadvantaged by EU labor laws that drastically limit their flexibility, but still manage to provide much better service than the AB3 at competitive costs.

    the ME3 are playing the long game, delivering great service on new aircraft at competitive cost (in coach), building customer loyalty and brand rep in exchange for marginally less short term profit. That is what is really killing the AB3

    • We’ve previously reported Airbus has already notified the supply chain to prepare for 54/mo in 2018.

  7. Am surprised to see the Boarding Area article being praised. There certainly are issues but to my mind this article is very poorly thought through. It sidesteps ownership issues (espcially in the U.S.), the history of 5th Freedom Rights, the whole point of scale, gets oddly personal against Al Baker (the airline consistently ranks around the best airline in the world league so how can the person in charge have ‘zero credibility’?), spends an awful lot of time discussing the US$20 passenger service charge that is relevant only to the miniscule % of flights that other carriers fly to/from that 1 airport, and simply gets finance wrong.

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