The Success of Emirates, Qatar, and Etihad Airways Concerns Their Competitors
The recent success of Emirates, Etihad, and Qatar Airways has concerned global competitors, who have responded with government-mediated complaints alleging of “unfair” assistance from the Gulf governments, such as interest-free loans. Gulf nationals are surprisingly willing to accept claims of “financial doping”, often believing that their carriers’ success is merely an artifact of an uneven playing field.

Unperturbed, the Gulf airlines produced vigorous defenses based on two pillars. First, denying the alleged governmental assistance. Second, alleging financial doping by the accusers. This strategy has thus far been successful, though the conflict may persist due to the financial stakes.

Success within industry circles does not necessarily equal success in the court of public opinion, however, and they have overlooked a particularly convincing defense: the fact that they actually deliver a good service, as reflected by hundreds of leading global awards. A consistent theme in the annals of international trade is that from the customer’s perspective, “corporate welfare” hurts quality, be it in airlines or any other product, for three main reasons.

First, governments are historically bad venture capitalists, and with good reason. Civil servants tend to make poor investment decisions because they have so little incentive to make good ones. An entrepreneur is confident that if he or she delivers a product valued by others, riches will follow, which acts as great motivation to gather precise information, study consumers’ needs, and work day-and-night. In contrast, a civil servant who picks the next big thing will get no more than a pat on the back. In fairness, there are success stories, such as South Korea and Singapore, where the government has played in important role in large-scale investments. However, history is littered with examples of state-led white elephants, such as Spain’s highly extravagant solar power industry, where Spanish citizens are still searching for the benefits that justify the billions of dollars of subsidies.

Second, the aforementioned well-meaning but demotivated civil servant is not necessarily paradigmatic; instead, many corporate welfare decisions are simply corrupt transfers from the public purse to the pockets of shrewd lobbyists, sometimes referred to as “crony capitalists.” Without subsidies, firms can only make money by providing a good service; once the government starts providing financial support, management focuses its effort on further lobbying, possibly in a corrupt form, rather than service quality. Farming subsidies usually fall into this category: the European Union’s Common Agricultural Policy throughout the 1990s was the poster child for decision-making verging on the kleptocratic.

Finally, in the event that politicians successfully introduce subsidies untainted by corruption at the inception stage, they sometimes inadvertently engender poor performance. This can be because they reduce the financial pressure on management, such as the case of soft budget constraints for public transport providers in many metropolitan areas; or it can be because they reward bad decisions, such as the banking bailouts in the wake of the 2008 global financial crisis.

If you open up the books of the companies that receive subsidies, you are more likely to find a toxic cocktail of incompetence and corruption than evidence of a direct positive effect on service quality. Consumers often face the double insult of deteriorating service quality combined with a higher tax bill to underwrite the subsidies. That is why economists urge governments to do nothing in response to “unfair” subsidies by the government of a trading partner, despite the fact that the World Trade Organization’s rules on subsidies and countervailing measures afford them the right to respond with their own financial doping.

Among scholars in the fields of international trade and government regulation, Delta Airlines’ claim that subsidies were helping competitors deliver a better service probably led to a lot of head-scratching. The irony was accentuated by the fact that the inferior service delivered by the accusers can itself be partially attributed to the subsidies that they actually receive! Regardless, Emirati and Qatari citizens should be proud of their carriers’ success.

August 2017
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