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The New U.S.-UAE Aviation Agreement Changes Nothing

Adam Levine-Weinberg, The Motley Fool

For more than three years, the Partnership for Open and Fair Skies -- an airline industry trade group sponsored by American Airlines (NASDAQ: AAL), Delta Air Lines (NYSE: DAL), and United Continental (NYSE: UAL) -- has aggressively lobbied the U.S. government to halt the expansion of fast-growing Gulf airlines Emirates, Etihad Airways, and Qatar Airways.

The U.S. carriers' gripes gained some traction under the Trump Administration's "America First" agenda. This led to a series of bilateral aviation-related talks, first between the U.S. and Qatar, and more recently between the U.S. and the United Arab Emirates.

The United States and Qatar resolved their differences earlier this year. A similar U.S.-UAE deal was reached just in the past week. Yet while American, Delta, and United are hailing these agreements as landmark victories, they don't enforce any major substantive changes.

The U.S. and UAE reach a new understanding

On Monday, representatives of the United States and United Arab Emirates formally announced that they had reached a compromise in response to the concerns raised by the U.S.

The two sides agreed to maintain their Open Skies agreement, which means that qualified airlines don't need government approval to fly between the two countries. However, state-owned carriers Emirates and Etihad Airways will be required to publish audited financial statements annually. They also must "take steps" to avoid below-market deals with government-affiliated suppliers.

An Etihad Airways jet on the tarmac

Etihad Airways will have to start publishing audited annual financial reports. Image source: Etihad Airways.

Additionally, a side letter between the two countries states that Emirates and Etihad Airways are not currently planning any new "fifth freedom" routes between the U.S. and points outside the UAE. American Airlines, Delta Air Lines, and United Continental have harshly criticized Emirates' two existing routes from New York-area airports to Milan and Athens.

Do the changes have any substance?

The negotiators for the U.S. and the UAE clearly took great pains to find evenhanded language to describe their dispute and its resolution. For example, one section of the document states that "government support in whatever form may adversely impact competition," while another section notes that such support is common and not necessarily bad.

The agreement also acknowledges that FedEx operates numerous fifth-freedom flights in Dubai. This waters down the argument against allowing additional fifth-freedom routes by Emirates and Etihad. Indeed, there is no binding language preventing either carrier from attempting new fifth-freedom routes in the future, although there may be an unwritten understanding to that effect.

Lastly, the requirement for Emirates and Etihad Airways to publish audited financial statements won't necessarily create a level playing field. After all, Emirates has provided audited annual reports for many years, but the Partnership for Open and Fair Skies still alleged that it received $5 billion of subsidies over a 10-year period. Furthermore, Etihad could potentially publish audited annual reports while continuing to receive cash infusions from the government structured as loans or equity investments.

Despite the lack of teeth in the U.S.-UAE aviation deal, the U.S. legacy carriers have declared victory. Delta Air Lines CEO Ed Bastian even promised that his company would soon announce new international routes in response.

New flights to India? Not because of this deal

The new agreement between the U.S. and UAE will allow Delta Air Lines to go back into parts of the world that it exited due to fierce competition from Emirates and Etihad, according to Bastian. Delta's CEO hinted that a new route (or routes) to India could be announced soon, more than three years after the carrier canceled its Mumbai service. (Flights to the UAE are less likely, due to the oversupply of seats to Dubai and Abu Dhabi relative to local demand.)

It probably does make sense for Delta to fly to India, which is set to surpass the U.K. as the world's fifth-largest economy this year. The carrier has upgraded its fleet in recent years with new long-range planes that have much lower unit costs and better premium seating options, to attract high-paying business travelers (and offset pricing weakness in the coach cabin). Delta has also grown its presence in New York and Seattle, which could be convenient East Coast and West Coast gateways for India flights.

However, this has nothing to do with the recent U.S.-UAE agreement. Emirates and Etihad can and will continue offering convenient connections between the U.S. and India via their hubs. If the legacy carriers' behavior changes, it will be because of changes in their own capabilities and strategies -- not because the competitive environment has improved dramatically.

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Adam Levine-Weinberg owns shares of Delta Air Lines. The Motley Fool recommends FedEx. The Motley Fool has a disclosure policy.