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Emirates' Position on Subsidies: A Smart Answer

Emirates' Position on Subsidies: A Smart Answer

The release of the White Paper by the U.S. airlines accusing the Gulf airlines of anti-competitive behavior has spurred many reactions that we've covered in our recent podcast episodes.



Emirates showed once more that its taking a smart approach by releasing a well-document paper on its position, which is summarized below:

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Tim Clark is currently in Washington, meeting with US transport officials to tackle the claims that subsidies have funded Emirates' growth.

There are a lot of quotables in the report, showing, as Alex mentioned in our last podcast episode, that it is directed at a general public (the U.S. airlines White Paper is much drier).

Here are some extracts—the full report is at the end of the post.

On the subsidies (all emphasis ours):

Although Emirates, as a profitable and commercially run carrier, is fundamentally against the practice of airlines receiving state subsidies, we understand that it may take time for the practice to be wholly eliminated from our industry.

Market-distorting subsidies can take many forms. The state-run Korea Development Bank froze 3.76 trillion Korean Won (US$3.3bn) worth of debts from Asiana Airlines in 2010. This is a very clear example of subsidy, as was the €500 million “bride price” given to Austrian Airlines from the Austrian Government, prior to the September 2009 takeover by Lufthansa.
Tax breaks, underwritten war risk insurance and “one time” state-bank loans are forms of subsidy, even if “approved” by governments.

Although not a subsidy per se, Chapter 11 protection in the US also has a significant market effect, by providing a level of protection for airline bankruptcy reorganisation that is seldom found in other markets.

The Star Alliance is the world’s largest airline group and 13 of its carriers - nearly half of its membership - have received subsidies and state aid totaling more than €6.8 billion.

On Dubai's form of economy:

Dubai’s corporate model has its origins in the city’s historic position as an entrepôt, which has free trade and competitive open markets at its core. Whilst there is a close relationship between the government and many of Dubai’s strategic commercial entities, Dubai is at its essence driven by commercial entrepreneurial principles.

Each commercial entity is an independent company with its own profit targets and operational autonomy, including Emirates and Dubai Airports. These corporate structures were pioneered by Singapore, and replicated by similar approaches throughout Asia, such as China, Hong Kong and Taiwan. Singapore’s success has provided inspiration for many governments in the Middle East hoping to spur growth

On oil:

The Gulf region is not a single entity. Dubai has almost no hydrocarbon reserves while the situation is vastly different in oil wealthy Saudi Arabia, Qatar and Abu Dhabi. So why would the airlines from these areas all be the same?

Emirates itself is at a disadvantage compared with Singapore Airlines, which has lower relative labour costs and can also take advantage of Singapore’s status as a jet fuel refining hub, where the price of a barrel of jet fuel is the lowest in the world.
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Adding: This is a commercial reality. Emirates has no qualms about this and is happy to compete in this operating environment.

On the Middle-East:

In truth, there are more than 35 separate airlines in the Middle East which compete against each other and against carriers based in other regions. In the Gulf there are 15 airlines, including a growing number focused on budget travel.

On DXB:

Dubai International ranked as the fifth costliest airport, more expensive than charges in Beijing, Kuala Lumpur and Doha.

Vienna Airport was government held for 50 years until its partial privatisation in the 1990s; it is now 40% state controlled. A similar history is found at Munich and Frankfurt. Frankfurt Airport (Fraport) is now 51% controlled by the German regional and city government (with Lufthansa owning 10%, and private investors holding the rest). For the first five decades of its existence, however, it was fully government owned.

Lufthansa is an example of European carriers making loud claims about airport ownership
in Dubai and the Gulf, despite themselves continuing to benefit from state-funding of airports. In April 2011, the European Commission opened an investigation into Leipzig-Halle airport, which received €225 million in funding for infrastructure from its state owners, making charges lower than would be the case if the airport had to fund the improvements at market rates. Lufthansa, operating around 30% of all flights from the airport, has benefitted the most from this public funding.

On jobs:

more than 8,600 current staff have served for 10 years or longer and in excess of 2,100 have been with the company for 20 years or more. Emirates receives on average 25,000 new employment applications each month.

Emirates itself is at a disadvantage compared with Singapore Airlines, which has lower relative labour costs
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That last graphic is quite staggering. No wonder Lufthansa is in a period of struggle with its staff, with its attempts to offload operations to its low cost structure, Eurowings. It would have been interesting to see where Turkish, a flag-carrier in the middle of a transformation, is ranked (estimates say that it has costs 30% cheaper that Lufthansa).


✈︎ LISTEN: the history of Lufthansa and its low cost PLAY:


The report also briefly talks about the environment with the EU system of pollution allowance (a stricter law was so opposed by the U.S. airlines that they lobbied President Obama into writing legislation excluding them to pay ever—which in turn made the EU back down on the proposal).

All in all, a smart answer, in addition to the video targeted at Europe they recently published.

Of note, Tim Clark has stated that Emirates would seek all options for redress if any commercial damage could be established. 

The full report can be read over at Emirates.com. It's embedded at the end of this post for your convenience.

We've discussed this report in the News of the Week of episode 008 of the podcast:

The full Emirates paper:

Full Report of U.S. Airlines to the White House Blaming Gulf Carriers

Full Report of U.S. Airlines to the White House Blaming Gulf Carriers

The report that has been the subject of so many headlines in the past weeks is finally out for everyone to read: Delta, American and United have released the white paper providing what they claim is proof of heavy subsidies received by Emirates, Etihad and Qatar Airways 

These massive subsidies have enabled Qatar, Etihad and Emirates to rapidly expand their fleets and international routes, distorting the commercial aviation marketplace and diverting global traffic to their hubs.

The summary of their findings, below, shows the areas of what they call unfair competition:

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The Economist weighed in on the debate and is seemingly siding with the view that those numbers can be read as market distortion:

First, the sheer scale of equity apparently being provided to the Gulf carriers dwarfs what any privately owned airline could hope to secure for start-up capital. Second, debt guarantees are two different animals in the public and private sector. In the latter, they are provided when a shareholder believes there is little to no chance that the debt will be defaulted on; in the former, they are provided irrespective of the likelihood of repayment, effectively kicking the borrowings into the long grass. On both counts, the Gulf carriers enjoy clear financial advantages over their American and European rivals, affording them a safety net which permits them to operate unprofitable services in order to gain market share.

The full report, which you can peruse at the end of this post, also points out at distortions via the use of cheap labor and tax-free regimes (which is one of Emirates' arguments to hire staff).

We will be discussing this (again) on the next episode of the podcast—we believe it's more complicated than both accounts above. You can hear our current thoughts in episode 004 (starting at 0:56)

On episode 005 (starting at 1:27), in which we also briefly looked at the inception of the Gulf airlines and why they were at the center of such a debate (starting at 53:13):

And finally in episode 006, to discuss Emirates' report on its impact to the European economy (starting at 6:55)

This Gulf airlines haven't yet commented the white paper, as they've just received it as well. It's pretty certain that we will see some counter-attacks (the anti-trust immunity, fuel tax rebates across a majority of U.S. states or the pension liabilities transfers come to mind) and a potential revival of the debate in Europe. This is really far from over.

Even within the U.S., sides are still being formed. Boeing, FedEx, JetBlue, U.S. airports are, for instance, siding against negating any Open Skies agreements, whilst the Air Line Pilots Association along with some Congress representatives are asking for an official stance on renegotiating the deals (you can follow the #FairSkies hashtag on Twitter to see that side of the campaign).

Here is the full report:

The economic impact of Emirates Airlines in Europe

The economic impact of Emirates Airlines in Europe

In our latest podcast episode, Alex and I discussed how a recent report commissioned by Emirates Airlines about its contribution to the European economy. 

It argues that it brings an annual windfall of close to $7 billion, supporting 85,000 jobs with an additional 40,000 via its Airbus aircrafts acquisitions. 

Close to 12 million passengers to and from the EU. (source: Emirates YouTube channel)

Close to 12 million passengers to and from the EU. (source: Emirates YouTube channel)

At recording, I didn't realize Emirates had done a video synthesizing the findings:

It's obviously the natural follow-up to the mounting debate between European flag carriers and US airlines on one side, and the Gulf airlines on the other. Lobbying and PR aside, Emirates is doing an excellent job communicating its position here.

We've also seen a recent spike in Emirates Facebook ads, touting its advantages—including the tax free salaries for staff. 

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Listen to us discussing this campaign at 6:55 on episode 006 of the podcast:


U.S. Airlines vs Gulf Carriers: That Escalated Quickly

U.S. Airlines vs Gulf Carriers: That Escalated Quickly

Alex and I opened the last podcast episode with the story of the major U.S. airlines sending a report to the White House about what they call unfair competition.

Little idea we had that the war of words would reach fever pitch that fast, or, in the words of Ron Burgundy in Anchorman:

Boy, that escalated quickly

Skift reports that Delta CEO, Richard Anderson, went live on CNN with what can only be described as very harsh words. I'll let you be the judge:

it’s a great irony to have the UAE from the Arabian Peninsula talk about that, given the fact that our industry was really shocked by the terrorism of 9/11, which came from terrorists from the Arabian Peninsula.

Contentious to say the least. 

Unfair competition?

This comes as the last, well, escalation, since the report was filed. The U.S. airlines argue that they've lost market share due to various forms of state aid given by governments to the Gulf carriers, Emirates, Etihad, Qatar (and others). It affirms that more than $40bn of loans, tax exemptions and other support since 2004 is what allows those airlines to compete—unfairly if you follow their argument.

Delta, United and American Airlines have apparently lost, for instance, more than 5% of the share of bookings from the US to the Indian subcontinent since 2008. The overall share of booking from the carriers located in the Arabian peninsula has increased more than tenfold if you follow their numbers.

Tim Clark, Emirates Airline CEO, was quick to ironically respond that he'd be very interested to see how the aforementioned $40bn was calculated—not to mention hinting that the Chapter 11 proceedings are a form of state aid, which certainly led to Anderson's reply mentioned above.

Competing on experience?

EK's chairman simply added "offer the best to the passengers and people will fly with you."

That last sentence seems to be what Richard Quest echoed when interviewing Anderson:

Everyone would accept they give superb service and quality of flight, so you’re not necessarily going to have the consumer on your side.

Or Akbar Al Baker, Qatar Airways' CEO, never shy from pushing his point across:

It is like you open a shop and there’s a neighbor who is already established. Everybody knows him so they mostly go there. You have to do something different for people to come to your shop. We attract customers by giving them a ‘wow’ product.

Ben Schlappig, author and aviation expert at One Mile At A Time, contends that it's a bit too easy of an argument:

The US airlines historically haven’t had nearly the capital of the Middle Eastern carriers — no US airline could afford to order 100 A380s, for example

This is why I said on the podcast that it was difficult to take sides here. A lot of the airlines around the world, including U.S. ones, were borne out of government subsidies, sometimes being the flag carrier of a country. It is the case in Japan, in China, in Thailand, in Europe, almost everywhere. Even to this day, after privatization efforts have gone underway, voices are raised on how Lufthansa got help for its pension plan funding or how SAS seemingly had preferred treatment during its latest restructuration. 

Such subsidies still exist in many parts of the world, but even beyond that, it's the philosophy of building an airline, a corporation or even an entire economy that is at stake here. Gulf countries are building an infrastructure, not only companies—no matter how people judge this goal. Shareholder value, potential subsidies notwithstanding, is not the primary concern. I again encourage you to read Schlappig's point of view on this.

Closing Open Skies?

As Alex and I mentioned in the podcast, the creation of a Milan-JFK route is certainly not foreign to the heating up of the debate, nor is the Etihad's capital entry into airlines, from Alitalia to IAG. The competition is basically not centered for flight routing via the Middle East anymore.

The more general topic of Open Skies, the "free trade agreements for airlines", is what it boils down to in the end. Which airline can fly where to and from? The U.S. has 114 such agreements currently. We will cover the topic in a forthcoming episode, as it's more complex than a few lines I could write here.

Of note, the deregulation of the market has led, in the U.S.A. to a consolidation of the market, whereas in Europe it seems to have opened the market more widely. While the two entities are hardly comparable for various reasons (timing, regulation, history, local rules, etc.), the largest carrier in Europe controls 13% of the market, whereas AA/US has 25%. The top 4 control 39% and 83% respectively (read more about those numbers over at The Travel Insider). 

Competition is a variable concept, depending on how you see it, whether based on the numbers I've just mentioned or on your opinion on the "Big Three" ways of doing business from the Gulf.

Sides are another variable concept. While the unions are, for once, siding with the airlines in the US, not everybody is. JetBlue voiced its willingness to defend the Open Skies agreement—a sign of its challenge to the big four. The U.S. Airports are in that same camp.

This might just be the beginning

It is not the first time we've heard those types of argument. Delta had, for instance, already sought to block the loan guarantees for Gulf carriers acquiring Boeing jets (Emirates is, for instance, the largest operator of 777s in the world, having almost double the number of them compared to UA).

In Europe, Air France-KLM and Lufthansa addressed the European Commission to complain about the competition—seemingly focusing on voiding traffic rights.

It's not the first time and it won't be the last time. Those last comments by Anderson have escalated the debate to a new height and I'm not sure to like where all this is going. 

Listen to Alex and I talking about this topic (starting at 0:58). I've added some articles in the show notes too.