US airlines’ fight against Gulf rivals gets new artillery

American airlines' assault on their Gulf rivals just stepped up a level. The big three US carriers have been on the rampage over the past 12 months, wielding the protectionist and law-and-order instincts of a new administration in Washington to roll back two decades of advances by their Gulf competitors. While a laptop ban and travel restrictions targeted mostly at nations in the Middle East and Africa have largely been shrugged off, the most damaging blow could be yet to come.

Under the text of the Senate's tax bill currently before the US Congress, rules that have for decades exempted foreign airlines from corporate taxes will be repealed in a weirdly targeted way. If a country's carriers are to qualify for the exemption, a tax treaty with the US must be in place and US airlines with at least $1 billion in annual revenue must have at least two weekly arrivals and departures there.

That's a remarkably efficient way of singling out Emirates, Qatar Airways Ltd. and Etihad Airways PJSC without being seen to do so. Large US airlines have hardly made a secret out of the fact they no longer fly to the Gulf, something they blame squarely on unfair competition in the region. As a result, the repeal will only affect the countries that America's big three want to exclude, leaving friendlier rivals in Europe and Asia intact.

That's annoyed many in the industry. The move would "upend decades of precedent" and encourage retaliation by foreign governments, the Financial Times quoted the International Air Transport Association as saying Thursday.

The frustration of Delta Air Lines, Inc., United Continental Holdings, Inc. and American Airlines Group Inc. is in many ways understandable. It's genuinely difficult to compete against the Gulf carriers. Government subsidies – largely in the form of interest-free advances and loan guarantees from their state owners – have amounted to about $52 billion since 2004, according to the Partnership for Open & Fair Skies, a US airline lobbying group. The well-honed plea mouthed by American aviation executives – that they only want a level playing field – seems a reasonable ambition.

That's precisely the problem with the proposed law, though: You don't create fair competition by singling out countries' airlines for punishment via a tax code. Effectively outsourcing such decisions to the route-network choices of Delta, United and American gives them a powerful tool for restricting competition in general.

That could have implications beyond the Gulf. For instance: At present, only a handful of countries in Latin America and Africa have tax treaties with the US, and many attract only sporadic flights from North American carriers. Should one of their airlines find a way of undercutting their US rivals on price, the big three could wield reductions in flight frequencies as a direct economic threat. Likewise, there'd be an immediate hit to the margins of Ethiopian Airlines Enterprise, one of the fastest-growing international carriers and a major success story for sub-Saharan Africa as a whole.

Level playing fields are a great idea, but they don't really exist in aviation, a heavily regulated, heterogeneous industry that by its nature crosses multiple jurisdictions. The state-backed-airline model being pushed by the Gulf carriers is so old that the term "flag carrier" dates back almost to the dawn of flying machines.

There are plenty of other areas of difference, too. The US, for example, doesn't let foreigners own more than 25 percent of its airlines, though the European Union allows up to 50 percent for non-member states, and Australia, Chile and India go up to 100 percent. And no amount of legislation can compensate for the fact that the US, Europe and China have vast domestic aviation markets that give their carriers potent advantages when competing against wholly international airlines like those in the Gulf and Cathay Pacific Airways Ltd.

It's possible this proposal will be amended away before the current tax bill is signed into law – but given the haste with which the process is advancing, the risks of it slipping through are considerable.

That would be a disastrous outcome for international aviation, which for decades has flourished on the sort of double-taxation exemptions this clause would trash. It would be great if aviation was a level playing field, but we're not going to get there by throwing up more barriers.

(This column does not necessarily reflect the opinion of Bloomberg LP and its owners).