Beijing is using the global pandemic to keep U.S. airlines from operating inbound flights.

The U.S. has threatened to retaliate by restricting Chinese carriers.

What happens with airlines this week will be telling for how the two nations will proceed in the months ahead.

Tensions between the US and China has been threatening to boil over in recent days as both sides stepped up their threats. The two are still clinging to a tenuous trade deal brokered at the beginning of the year, but at this point even that appears to be at risk.

In the current climate, neither Beijing nor Washington are keen to fire up another trade war, but that has caused some back-room bickering that threatens to further damage the US’s beleaguered airline sector.

China Hits U.S. Airlines Under Pandemic Cover

The Chinese government has been accused of using the pandemic crisis for a number of things including grabbing back some of its power over Hong Kong and ducking out of its trade obligations. But it seems Beijing is also taking underhanded jabs at U.S. airline carriers under the guise of the pandemic lockdown.

U.S. international carriers like Delta Airlines (NYSE:DAL) and United Airlines (NYSE:UAL) have found it difficult to get up and running in China despite the fact that the nation has loosened its lockdown. For weeks US carriers have been bumping up against reluctant Chinese regulators to reopen their routes, but on Friday the Transportation Department (DOT) called Beijing out in a public shaming via its website.

China Protects its Interests

The DOT alleged that China was purposefully hurting U.S. carriers, violating the two nation’s air transport agreement.

This is not the first time that China has been caught helping its own state-run companies and purposefully making life hard for foreign competitors. Beijing has been accused of hiring hackers in order to steal a variety of classified information across several sectors in order to give it’s own businesses a leg-up. So, it’s easy to believe that the nation is purposefully boxing out U.S. carriers.

The latest attack on the airline sector makes sense— China’s three largest carriers, Air China, China Eastern Airlines and China Southern Airlines have been the hardest hit by the pandemic. Stiff competition among Asian carriers makes clawing back some of that profitability even harder. Of course the government, which backs all three, is going to do what it can to give them a boost.

Trump’s China Conflict Spills into Airlines

Plus, the airline industry gives Beijing something else to spar with Donald Trump over. The two have been taking jabs at each other for weeks without any concrete retaliation. Cutting the U.S. out of China as its recovery takes hold is a huge blow to U.S. carriers who are still waiting for travel to return domestically.

Both Delta and United say they’re ready to start flying to China in June, but that regulatory hurdles have kept them from reopening their schedules. Meanwhile Chinese carriers have been permitted to continue operating between the U.S. and China, offering them a distinct advantage as China is further along in its economic reopening than America is.

U.S. Threatens Retaliation

In response, the DOT is threatening to bar Chinese flights from coming to America, a move that could open up a dangerous can of worms if it isn’t resolved without imposing new restrictions.

Both Delta and United generate less than 10% of their international rout capacity from China, but being barred from flying there would create further strain on an already battered industry. Cash burn is a huge problem for airlines, whose overheads continue to empty their pockets whether their planes are flying or not. So the prospect of resuming flights, even on a limited basis, is a huge step toward digging themselves out of this hole.

Next Week, China and U.S. Show Their Cards

According to the DOT, Chinese airlines have until May 27 to submit their scheduling requirements. At that point, the market will see the first true test of how far Donald Trump is willing to go in the escalating ‘cold war’ with Beijing.

If the Trump administration does impose restrictions on Chinese carriers, it sends a powerful message that the two aren’t backing down despite the potential economic impact their dispute might have. If Chinese regulators are willing to step aside, it sends a more positive message suggesting most of the recent developments were more-or-less posturing.