April 24, 2015
Submission of Allan I. Mendelsohn in Respons e to the Request of the U.S. Government for Public Comment on the Issue of Forei gn Government Subsidies to Foreign Air Carriers
Following internet publicatio n of the paper (“Restori ng Open Skies: The Need To

Address Subsidized Co mpetition From Stat e-Owned Airlines in Qatar and the UAE”).
prepared by Delta, American and United Airlines and concer ning the issue of whether
subsidies are in fact provided by the Gulf nations of the United Arab Emirates (“UAE”)
and Qatar to their airlines (Emirates, Et ihad and Qatar), the U. S. Government has
requested public comment on this critically im portant issue. In their well-researched
paper, the U.S. carriers persuas ively argued that such subsid ies were in fact being
provided in very substantial sums by those na tions to their three ai rlines and that such
subsidies were having a very adverse di storting impact on the marketplace and on the
ability of the U.S. air carrier industr y to operate successfully and profitably.

While it is not appropriate to reach any definitive conclusions on this matter until
the Gulf carriers or their governments are permitted to, and do in fa ct, reply, and while
the issue will remain unresolved until that time, it is a fact that the U.S. carriers have
been joined in this controversy by their ma jor counterparts in Europe (Lufthansa and Air
France/KLM). All of these airlines are now requesting, if not demanding, that the U.S.
and other western governments take prompt and effective measures that will either
substantially restrict and limit the operations of the Gulf carriers to the United States and

other western destinations or will otherwise work to “level the playing field” so that the
Gulf carriers do not enjoy and benefit from s ubstantially more advantageous competitive2 operating conditions than those enjoyed by unsubsidized U.S. and other western

carriers. In other word s, in seeking “a level playing fi eld,” the U.S. and other western
air carriers are attempting to assure that government-provided subsidies do not skew
the marketplace in favor of carriers enjoyi ng those subsidies and against carriers that do
not enjoy those subsidies and, hence, face unfai r, if not destructive, competition in the
market place.

Attached to this submission is a speec h that the author presented as a
participant in a debate arranged this past Febr uary by the International Air Transport
Association (IATA) as part of its annual Legal Sy mposium. In that speech, the author
discussed the issue of Norwegian Air Internat ional (NAI) and whether it is a “flag of
convenience” enjoying low and, hence, preferential tax advant ages by incorporating or
“flagging” in Ireland rather than in Norway (t hus enjoying a 12.5% corporate tax rate in
Ireland compared to a 27% rate in Norway ). The author suggested that such an
advantageous tax rate would in effect consti tute a subsidy not unlike, for example,
Middle East air carriers that, because they are government owned, presumably pay no
corporate taxes at all. In addition – and th is speech was given before the U.S. air
carriers published their above-de scribed paper – the author questioned whether Middle

East carriers are also subsidized in other ways, not least of which would be the plain
and simple -- but very valuable -- subsid ies provided to Middle East carriers by the

ExIm Bank in the United States and va rious export credit agencies in Europe.3 Because of its direct relationship to the matters being discussed here, and in
response to the U.S. Government’s request for public comment, the author is including
in this submission a full copy of his remarks at the IATA Symposium. Before turning to
the contents of those remarks, however, the author wishes the reader first to focus on
two collateral issues by way of an introduction to the principal issues as to which the
U.S. Government is seeking input and comment.

First, however admirable and laudable this effo rt by the U. S. Government is to
attempt to explore the subj ect of Middle East government subsidies and how, if they
exist, they could work to distort and undermine the objective of a level playing field for
international air carriers, the fact of the matter is that the U.S. Government should be
encouraged to treat this inquir y only as a short-term approach to the problem. As this
author recommends in his attached remarks, the better approach, and especially for
purposes of the long term, is to vest the International Civ il Aviation Organization (ICAO)
with the responsibility of very promptly investigati ng and regularly monitoring all forms of
alleged and actual subsidies provided to all air carriers by their governments throughout
the world. Moreover, lest this be deemed too novel of a proposal, the U.S. and other
governmental authorities should keep in mind t he express provisions of Article 54(i) of
the venerated and venerable 1944 Chicago C onvention, which provides as follows:

“T he [ICAO] Council shall:

. . . (i) Request, collect, examine and publ ish information relating to the advancement of air navigation and t he operation of international air services, including information about the costs of operations and particulars of subsidies paid to ai rlines from public funds” (emphasis added)4 Nothing can be more certain from this provision than that the framers of the
Chicago Convention were not onl y well aware of the possibi lity that public subsidies
might be given by governments to their nati onal air carriers, but those framers also
expressly desired and authorized t he international community to keep careful track of
“the particulars” about what subsidies were pa id by which governments. To be sure,
and because of the importance of the subsidy issue, this provision implicitly empowers
individual governments, like t he U.S. Government here, to initiate the instant inquiry
and, if necessary, to take appropriate action to correct the issues being confronted.
More importantly, however, the provision su ggests that any inqu iry undertaken by the
ICAO Council ought not be limited only to Middl e East carriers, but should rather be
extended to all carriers throughout the world. In addition, the inquiry should be very
promptly undertaken and conducted by ICAO or by such committee or body within ICAO
as is designated by the ICAO Council.

Second, following presentation of his remarks at the February 2015 IATA
Symposium, the author was questioned by several attendees about two elements of
the U.S. legal system and whet her, in any examination of the overriding issue of
subsidies granted by governments, these elements should be included. The two
elements were: (1) the U.S. bankruptcy laws that allow U.S. carriers to file for
reorganization under the U.S. bankruptcy laws and, in doing so, they can thus emerge
as a new entity largely without debt; and (2) the Fly American legislati on that allows the
U.S. Government to require all of its employees, when traveling on U.S. Government
business, to fly to their destinations throughout the world on U.S. flag carriers. The5 replies provided to both questions were relatively brief and simple:

1) As to the bankruptcy laws, the fact of the matter is that the bankrupt
airline’s ability to emerge fr om and otherwise avoid its debt s (that caused its bankruptcy
filing) comes not at the expense of, or from subsidies or funds given by, the U.S.

Government but rather at t he expense of stockholders and unsecured creditors. These
individuals or entities, in losing their sto ck investments and their rights as creditors,
provide the means and the money whereby t he airline can begin anew debt free. In
other words, the bankruptcy law is not a gov ernment-provided subsidy but rather, if you
will, a “subsidy” provided by fellow Americans who suffe r the loss of their stock
investments and their rights as creditors.

2) As to the requirement s of the Fly American Act, not only do I personally
see no “subsidy” in allowing the payor for transportation to select the carrier on which
the payee can or will fly, but equally as impo rtant, with all the alliance and code share
arrangements in existence today, it is possibl e, if not likely, that foreign carriers
transport a sufficiently subs tantial number or percentage of U. S. Government
employees such that the issue is no longer relevant.

Nevertheless, and as I added, if ICAO does, indeed, undertake a sweeping
investigation of all government -provided subsidies, it would be appropriate for the U.S.
Government to list the two foregoing progr ams as “alleged” or “possible” subsidy
programs and allow them to be examined or questioned as such.6 All this now said by way of introduction, the text of the aut hor’s remarks at the

IATA conference follow:

I. Introduction
Allan I. Mendelsohn is a former Deput y Assistant Secretary of State (Transportation Affairs) of the U. S. State Department, an Adjunct Professor at Georgetown University Law Center and curr ently in his own private practice in Washington, D.C. He present ed the following remarks as part of the “Grand Debate” held at IATA’s Annual Legal Seminar in S eoul, South Korea on February 27, 2015.

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First I would like very quickly but very sincerely to thank IATA and each of the sponsors of this conference for putting on su ch an excellent and educational seminar for all of us. It could not have been better d one, and I am sure I speak for all of us when I say this. Second, I would like to thank Korean Air and the Korean people for being such totally marvelous, friendly and helpful hosts. It has been a true pleasure visiting and touring through your totally lovely and interesting country. That said, let me now quickly launch into my segment of this debate. I intend to raise and focus on three very controversia l issues that are right now facing the international aviation community and that deserve extended discussion in this debate. These issues are: (1) the recent emergence of this carrier, called Norwegian Air international (NAI), that appears to be owned by Norwegian nationals but that is flagged in Ireland - most everyone believes in order to be able to enj oy Ireland’s tax haven status and its lax labor laws; (2) the growing problem of governments that hugely subsidize their airlines - whether by direct subsidies of different sort s or by not imposing on their airlines any form of corporate or other comparable income tax; and, finally, (3) the increasingly controversial U. S. Export-Import Bank (“Ex Im Bank”) “subsidies” given to internati onal airlines to buy large ne w Boeing aircraft even though these airlines are anything but “developing” and are, indeed and for the most part, very profitable and, in a word, “ric h”. Needless to say, no one would have ever contemplated or predicted that such airlines would be t he recipients of subsidies to purchase new aircraft, while US and other nati onal carriers pay the full price. But let me get into these details later and let me start first with the highly controversial subject of NAI.7 I. NAI

Many of you are aware of the speech I gave la st year at an air law conference at American University in Washington, DC. T he speech was later published as an article in SMU’s Journal of Air Law and Commerce. 1 I understand that it’s been widely read, but If any of you have not yet read it, I brought a few copies with me and would be pleased to provide you with one. In any even t, in that article, I took the open position that NAI is nothing more than a “flag of convenience”, no di fferent from the flags of convenience in maritime law that destr oyed the once very dominant and powerful American flag fleet that emer ged and that largely governed maritime commerce in the first decade or so following the end of the second world war. By the mid to late 1960s, as I said in t he article, that fleet, once operating totally under the US flag and employing Amer ican seamen-employees, was totally nonexistent. Their US owners had been permitted by the United States Government to freely reflag all of their vessels to countri es like Panama, Liberia and Honduras, which imposed no corporate taxes of any sort (i nstead of the US 35 % corporate tax) and allowed the owners to discharge all their US seamen employees and hire in their place low-paid un-unionized South American and Asian seamen. As a result of all of this, there are today no US-owned, US-flagged vesse ls plying the blue water commerce; and no less than 55% of the ocean carriers operati ng around the world today are flagged in obscure, sometimes even landlocked, small “f lag of convenience” nations. Needless to say, this is exactly what I do not want to see happen in international aviation. Now let’s take a closer look at NAI. It is reflagging from Norway, with its 27% corporate tax rate and its enf orceable labor laws, to Ireland that openly prides itself on being a “tax haven” state wit h a corporate tax rate of only 12.5% and virtually nonexistent labor laws. This alone should be enough to prove that Ireland may well be the new and first flag of convenience country in international aviation. But the situation seems to get worse, as just recently we’ve read stories about Ireland’s increasingly popular secret tax deals, known locally as t he “Double Irish”, where foreign corporations that reincorporate in Ireland are given even lowe r and of course still secret tax rates. So frankly, it may not be an easy task to ascertai n what tax rate NAI (or, for that matter Ryanair) will enjoy. To be sure, the European Commission (EC) now seems to have woken up to the issue and has declared that it is inve stigating Ireland’s “Double Irish” and will presumably be taking steps to rectify the situat ion. But within days of the disclosure of the existence of the “Double Ir ish” in Ireland, we were next to learn that the Netherlands has a so-called “Dutch Sandwich” by whic h the Netherlands too reportedly provides very substantial tax reductions, again all secre t, to foreign corporati ons that re-register in the Netherlands. And as recently as this past November 7, the New York Times carried a lengthy exposé about the pervasive extent of tax cheating that goes on in Luxembourg, a country previously thought to be open and above board at least on tax issues.

1 Mendelsohn, Allan I., “Flags of Convenience, Maritime and Aviation”, 79 JALC 151 (2014).8 Two comments should be made about this. Fi rst, instead of the EC spending so much time pushing the US to allow NAI to operate, the EC would be far better advised to be spending its time cleaning up the deplor able tax mess that seems to be engulfing so many countries in Europe. And t he second comment is that the EC needs desperately to do this not only to restore some decency or l egitimacy to the tax picture in Europe but even more so to make sure that, if the US were ever to allow NAI to operate, EU countries like Latvia, Estonia or even Luxembourg or t he Netherlands might well not fashion their own tax laws, secret ly or otherwise, so as to be even more attractive as a corporate tax haven than Ireland. It is precisely such a “race to the bottom” that occurred and moved very quickly in maritime law some half century ago; and, as I said, the last thing I would like to see is a similar “race to the bottom” happening in international avia tion, whether within the Eur opean Union or elsewhere in the world. A final word should be said on the issue ab out labor conditions, especially as that is the issue upon which the US and EU pilot uni ons argue that there is a clear violation of Article 17 bis of the US/EU Open Sk ies Agreement. If anyone doubts just how deplorable Ireland’s labor laws are at least as they apply (or do not apply) to the employees of Irish-flagged Ryanair, please per use footnote 4 of my article that I mentioned earlier. 2 It sets out citations to four extr emely critical articles about Ryanair’s labor relations; and there are no fewer than at l east 20 other articles readily available of similar import. The long and short of my conclusion is t hat there can be no doubt but that NAI is a flag of convenience whose approval by the U. S. Government would almost surely lead to the emergence of other fl ag of convenience airlines a nd an inevitable race to the bottom just as occurre d in the world of maritime co mmerce. I strongly and sincerely encourage the US Government to take every st ep to make sure that this does not occur in international air transportation. I do not like to leave a controversial subject like this one without at least advancing some suggestions as to how the problems we’ve discussed can be solved in some fashion or at least what next best st eps we might be advised to take towards a solution. First, I think it is absolutely essent ial that, as I said, the EC must move itself: (1) to take major and ve ry prompt steps to ge t its tax act together, to remove incentives for the kind of tax cheating that now s eems to be running rampant throughout the EU, and, if at all possible, (2) to establish and enforce a uniform corporate tax rate, say perhaps of 20% or 25%, to apply throughout the EU or at least throughout those countries that use the Euro. If the EU does not believe it has such powers, perhaps the EU and the US might give thought to a multila teral treaty establishing such a uniform tax rate between the two - perhaps just for ai rline companies or possibly even for all corporations. Nor are these off-the-wall re commendations; I am certainly not the first one to think of them; and t here’s no reason why one or both ought not at least be seriously explored. Moreover, if it should ultimately turn out either that the EU has no power to move in such a direction or that the US and t he EU are unable to reach such a multilateral

2 See footnote 1 supra, 79 JALC at p. 154, fn. 4.9 agreement, then and especially if the EC conti nues to push the US on NAI, it may well be time for the US Government to fall ba ck on the less cooperative remedy, namely, for the US to give very serious thought to wit hdrawing from or cancelling the US-EU Open Skies Agreement altogether – or at least until such time as the EU can vest itself with authority to take the kind of decisive acti on that is now so essential in these circumstances. I should say a few words about such a seemingly serious step; and these words will be as applicable to the next subject I sha ll be discussing as this one. Despite the fact that so many who favor NAI regularly call the Open Sk ies Agreement a “treaty” -- carrying with it the suggestion that denunciation would, therefore, be almost unthinkable -- the fact of the matter is t hat it is nothing more than an executive agreement that can be cancelled or otherwise terminated eas ily with no advance treaty requirements and simply with notice of one year given by either of the contracting par ties to the other. I happened to have been one of those US Gove rnment officials who in the 1960’s moved the US Department of State and other US agencies and departments to agree to denounce the treaty known as the Warsaw Convent ion, which we felt at the time ran totally counter to U.S. values with it s antiquated $8,300 limit on personal injury and death of passengers in international air transpor tation. While we ultimately withdrew that denunciation -- mainly because our colleagues in IATA, and its then General Counsel, Julian Gazdik, came up with the uniquely inv entive and satisfactory 1966 interim carrier agreement -- I certainly learned fr om that experience how much more difficult it is to denounce a treaty than a mere exec utive agreement. So when supporters of NAI call it a treaty and try to at tach to it some level of force of la w, they should recall that it is not a treaty and can, therefore, be c ancelled or terminated almost without effort. Let me only add that I would much prefer not to be forced to do so. But if it is a question of either accepting NAI or cancelling the US-EU Open Skies Agreement, there is absolutely no doubt in my mind that I would unhesitatingly encourage the US Government to cancel the agreement.

II. Subsidies

I would now like to turn my attenti on to the second argument, this one about subsidies. And I want to begin this discussion with an open admission and apology. I have absolutely no facts upon which to base an ar gument that certain airlines operating today in the world are heavily subsidized by t heir governments. The unfortunate fact is that there is no governmental or non-governmental organiza tion anywhere in today’s world that in any way monitors or collects data or facts or figures on t he extent, if at all, by which airlines might be subsidized in one or another way, directly or indirectly, by their governments. Indeed, the world does not even have any dat a or information about the extent to which airlines are allowed by their governments to operat e free of any corporate or other forms of required tax pay ments to their governments. In other words, in most cases, we cannot even ascertain whether an ai rline pays taxes to it s governments or, if it does, the extent or perc entage of such payment(s).10 I also want to mention the fact that, whenever anyone in the US today complains about the unfairness caused by possible subsid ies, tax advantages, or other types of support given by foreign governments to thei r airlines, they are always and invariably accused of being a “protectionist”. Frankly, I prefer to use another term, namely, “level playing field”. It is not, and I repeat, not by any means “protectionist” to demand that your competitors operate and com pete on a playing field that is level for everyone or at least as level as possible for everyone. Now let me return to the issue of tax pr eferences as subsidies. We all now know, of course, that Ireland maintains a 12.5% tax rate on its books, but we have no idea whether Ryanair or NAI might be able to enjoy special tax advantages or refunds under the secretive so-called “Double Irish”. So, wh ile we might be aware of statutory national tax rates (e.g., 35% in the USA), we have no idea as to the extent to which airlines are in compliance with such rates or can av oid them with special (often undisclosed) deductions, discounts or rebates. I shall propos e a remedy for this very significant – and total - absence of information later, but fo r the moment, let me focus on the broader issue of subsidies in general. I can say with some truth that I have heard senior officials at both Emirates and Etihad Airlines deny publicly and on the record that their airlines receive any subsidies of any nature from the Gove rnment of the UAE. Shor tly after I made a similar admission in the speech that I gave at American University School of Law, however, I read an extraordinary comment that appeared in the Aviation Daily and that I quoted in footnote 7 of my article. 3 I would like to read that f ootnote now, because I believe it to be of critical importance. The speaker was Amer Hadidi, Pres ident and CEO of Royal Jordanian Airlines. As he was quoted in the Aviation Daily of April 28, 2014, he openly railed at the harsh “reality” that his ai rline had to face because of t he – and here is the important part of the quotation: “strong government subsidy policy of the UAE and Qatar for their airlines – Emirates, Etihad and Qatar Airlines – for fuel, airport charges and capital improvements”. Hadidi t hen added that “there is not hing we can do about it, we have to face it”. Now this is not a spokesman from Delta or American Airlines. It is a spokesman from a fellow Middle Eastern airline; and his ve ry accusatory statem ent, therefore, must not only be widely heard and credit ed, but it must also require us to move forward and conduct a real and intensive investigation into whether or not these Mi d-East airlines are or are not being subsidized. Depending on what this invest igation discloses, and if it does appear that certain airli nes are in fact enjoying si gnificant subsidies and tax advantages from their governm ents and that these subsid ies and advantages are not about to be terminated, we may well find ourselv es, not unlike the situation of NAI, with no acceptable alternative other than to c ancel the Open Skies Agreement and impose, in its place, very serious flight restrictions.

3 See fn. 1 supra, 79 JALC at p. 156 fn. 7.11 But before any of us needs to think about such a serious confrontation, I would much prefer to discuss and recommend the alte rnative path that I fi rmly believe the US and others must pursue as soon as possible, namel y, that it is now very clearly the time for the US and other major western count ries to call upon and invest ICAO with unlimited authority to immediately begin t he process of collecti ng all the facts and statistics about all forms of airline subsidie s, including their payment (or non-payment) of taxes. Many of you may have seen the recent i ssue of the quarterly magazine, Air and Space Lawyer, edited by our good friend and colleague, David Heffernan, who is with us today. Anyway, the issue contained an excellent article by Mr. Ruwantissa Abeyratne, who, as many of you know, served ICAO as one of its principal and extremely able legal officials for almost 25 years. 4 He recommended that ICAO be given a role as an economic regulator of air transport; and I can say that I agree with him totally that ICAO should be given such a role, including the specific task and responsibility of collecting al l the facts and statistics about airline subsidies, including corporate taxes. It will not be easy for ICAO to succeed in this effort. But if we are ever to make any progress in achieving that elusive goal of a level playing field, the air transport world must begin somewhere to assemble this increasingly important data; and there is certainly no organization that has a bette r proven track record for success in the aviation world than ICAO. And we absolutely must gain full knowledge in this critically important area, because it is ess ential that airlines be required, to the extent possible, to operate on a relatively level playing field -- lest the world be forced to consider such world trade-related phenomena as “countervaili ng duties” and comparable sanctions to counter unfairness. Let me say as a word of conclusion that the continuing absence of such a level field not only means an increasing number of bankruptcies among western airlines, but it will also necessarily mean major and c ontinuing persistent c onfrontations among airlines and governments in the days and years ahead. 5

4 Abeyratne, R, “Should ICAO Have a Role As An Economic Regulator of Air Transport”, 27 Air and Space Lawyer, No. 1 at p. 8 (2014).

5 Following the presentation of this speech in Seoul on Friday, February 27, 2015, newspaper articles began to appear in the US press about American, United and Delta Airlines joining forces in openly complaining, and providing some 55 pages of su pporting data, to the US Government, about the subsidies given by the Governments of the UAE and Qa tar to their carriers, Emirates, Etihad and Qatar. On or about March 9, 2015, the carriers placed t heir supporting documents and statistics on line at: www.openandfairskies.com. The papers are a “m ust” read and have since provoked a major and continuing confrontation between and among the official s of the carriers on both sides of the issue. Lufthansa and Air France/KLM have also since anno unced their agreement with the position of the US carriers, who argue in their document that the thr ee Middle Eastern carriers have received no less than $40 billion in subsidies in the past ten years. M eanwhile, the CEOs of both Emirates and Etihad have again publicly and categorically denied that their airlines are subsidized. See “Gulf Airlines Deny Getting Unfair Aid”, Wall Street Journal, 3/18/2015, at p. B-8.12 III. Ex–Im Bank Subsidies

The final subject I wish to debate is one that I think is very well known and perhaps even not subject to dispute. My di scussion, therefore, will be very short. The subject is the extraordinary competition in subsidies that are provided by the Ex-Im Bank and by various European Export Credit A gencies (ECAs) to subsidize lower-cost financing for the purchase of Boeing and Airbus aircraft by major, very well-capitalized foreign carriers - including, once again, t hose from the Middle Ea st. Why such wellcapitalized foreign airlines should be rece iving such subsidies when their U.S. and European competitors are not defies explanation - at least for me. These subsidies are given not just to allo w new airlines from emerging countries to buy single-aisle jet airc raft (a subsidy I would suppor t and encourage) but they are given to facilitate the purchase by well-capi talized foreign carriers of wide-body aircraft, including the largest and most costly aircraft that Boeing and Airbus manufacture. Frankly, it seems absolutely in conceivable to me that the United States Government would ever condone such subst antial subsidies given to the very same well-capitalized foreign airlines against which the U.S. carrier s must compete. Moreover, you should all be awar e that a 2 1/2 to 3% reduction in an interest rate can mean a savings of as much as US$20 million on a wide-body aircraft. I frankly know of no one with whom I’ ve exchanged views on this subject who supports such subsidies. But they are vi gorously defended by both Airbus and Boeing on grounds that, if one or the ot her does not offer – or is pr ohibited from offering - the subsidy on the sale of its aircraft, the purc haser will simply walk across the street and buy the competing aircraft from the other manufacturer - thus allegedly causing heavy job losses and profits for t he manufacturer that did not offer the subsidy. The reply to all of this is so simple and obvious that I can only be amazed no one has seriously suggested it to date – a mult ilateral treaty between the US and the EU outlawing and prohibiting all such export credit subsidies ex cept when given to airlines of developing countries. And needless to say, I have absolutely no doubt but that all the major airlines in both the US and the EU woul d enthusiastically support this solution. Moreover, to the extent manufacturers from third countries begin to find themselves called upon to provide such s ubsidies for any of their newly produced aircraft, those countries can be moved to join the US-EU multilateral treaty. Such an approach would help to put a ll western and other developed-country air carriers on a level playing field – which, as I have said repeatedly before, is a goal that we must achieve if we are to have any hope of avoidi ng serious escalation of various forms of unilateral retaliation in the days and years ahead.