The USA3 v the ME3

A group of US Airlines is teaming up against American, Delta, and United

5 August 2015 Business Insider By Benjamin Zhang

The dispute between America's three largest domestic airlines — American, Delta, and United — and the Middle Eastern trio of Emirates, Etihad, and Qatar Airways just got more complicated.
A coalition of four US airlines— JetBlue, Hawaiian, Atlas, and FedEX — have spoken out against a request from the legacy carriers, which they refer as the "Big 3," to renegotiate America's respective Open Skies agrements with the UAE and Qatar.

The alliance — known as "US Airlines for Open Skies" (USAOS) — submitted a letter on Monday to the US Government detailing the harm that could be done to their respective businesses, consumers, and the US economy should the government comply with the wishes of the Big 3.

"The Big 3 do not speak for all, or even most, U.S. airlines," Hawaiian CEO and President Mark Dunkerley said in a statement.

"Our coalition believes that the United States should honor its Open Skies commitments, which opens markets for U.S. carriers, promotes competition on international and domestic routes, and facilitates U.S. exports."

In the letter, which was addressed to the secretaries of State, Commerce, and Transportation, USAOS stated its belief that any restrictions placed on the Open Skies agreements with the UAE and Qatar would constitute a violation of the agreement itself.

USAOS also point out that there could be political and national security consequences to restrictions placed Middle Eastern airlines.

"The unilateral actions demanded by the Big 3 likely would provoke retaliation by the UAE and Qatar, encourage other Open Skies partners to take restrictive actions, deter countries from entering into Open Skies agreements with the United States, and raise questions about the United States’ commitment to the Open Skies regime," USAOS wrote in the letter.

This is crucial for major cargo carriers such as FedEX and Atlas — both of which have significant operations in the Middle East.
FedEX currently operates a major sorting facility in the Dubai and 44 flights a week in and out of the emirate.

According to the coalition, both Atlas and FedEX operate support flights for US military operations in the Middle East.

While the large legacy carriers use their own interational flights to feed domestic routes, smaller airlines such as JetBlue and Hawaiian credit the growing presence of international airlines such as the Middle Eastern three with increasing traffic for their domestic services.

In fact, JetBlue believes the Big 3's goal is to roll back the clock on the airline business.

"JetBlue is not unfamiliar with efforts from the legacy carriers to stifle competition" JetBlue general counsel James Hnat said on a conference call with the media.

"Legacy carriers are trying to protect themselves ... Open Skies is good for trade, economic growth and politics."

Furthermore, USAOS claimed that increased competition in the airline industry through Open Skies agreements will "generate approximately $4 billion in annual savings for passengers on U.S.-international routes."
USAOS also dimissed United, American, and Delta's claims that 800 airline jobs will be lost for every route they lose to a Middle Eastern airline.

"The threat of job loss is just a distraction from the whole picture," Hnat said during the call. "There are other jobs to be created. It’s a just political distraction."

The Big 3 haven't taken today's announcement without comment. In a swift response, the Partnership for Fair and Open Skies — the lobbying group representing United, Delta, and American — didn't mince words about the formation of the USAOS.

"This is a meaningless coalition without a cause," Partnership for Fair and Open Skies spokesperson Jill Zuckman said in a statement to Business Insider. "The only risk to our Open Skies agreements is the Gulf carriers themselves and their massive, market-distorting government subsidies. Of the 117 Open Skies agreements with the United States, 115 are working beautifully."

Obviously, this is a dispute that's not going away anytime soon, and today's entry of a third party has added an extra wrinkle to the story. Stay tuned for more action...

Emirates comes out swinging with 210 page rebuttal

30 June 2015

Emirates President Sir Tim Clark met on 29 June with officials from the Departments of Transportation, State and Commerce. The three agencies are tasked with reviewing the allegations of Delta Air Lines, American Airlines and United Airlines that Emirates, Qatar Airways and Etihad Airways have received more than $42 billion in state subsidies.

Emirates Airline says it was assured by the US government that it would assess the ongoing dispute over alleged subsidies to Gulf carriers, without being influenced by the three US mainline carriers.

The US mainline carriers in March released a white paper detailing the alleged subsidies received by the Gulf carriers.

Emirates filed its formal response to the allegations today. The 210-page report is a point-by-point rebuttal of the US carriers’ accusations, says Emirates.

It is not immediately clear when the US government will take a decision, if any, in handling the US carriers’ complaints. Delta, American and United are calling for the US government to stop the Gulf carriers from adding new flights to the USA and begin talks with the UAE and Qatar, but this has not happened. Clark says today that US officials have not asked Emirates to hold off on adding new capacity.

Clark reckons that the three US agencies will likely review the allegations in “July or August”. “They’ve been receptive, they’ve been listening. They’ve been very anxious to receive this document to put some balance in the argument,” he says. “This inter-agency group will eventually - I hope - come up with an assessment from the facts and do the right thing.”

In Emirates’ response, the Dubai-based carrier rebuts the US carriers’ allegations, including those that claim Emirates had its fuel hedging losses assumed by the Dubai government and that the airline had paid below market rates for products and services.

The US carriers say that the Dubai government gave Emirates a multi-billion dollar subsidy by assuming its fuel hedging losses in 2008 to 2009 when fuel prices were volatile.

In response, Emirates says it had transferred its fuel hedging contracts to state-owned fund Investment Corporation of Dubai (ICD) to avoid a misleading picture of its operating results due to mark to market paper losses. Delta took the same position in its 2009 financial results, points out Emirates.

The fuel hedging losses were ultimately paid using Emirates’ resources, says the Gulf carrier. The airline paid dividends to ICD, and the fund eventually made a profit of $100 million in net fuel hedging gains, says Emirates.

Emirates also refutes allegations that it paid below market rates for jet fuel and airport fees at Dubai International airport, among other services.

The US carriers and their unions, which have formed a coalition to lobby the US government for action on the Gulf subsidies allegations, were quick to respond today to Emirates’ filing.

“Emirates can submit as many pages as it wants, but it still won’t paper over what has been well-documented: Emirates has received billions in subsidies and unfair benefits from the treasury of the UAE,” says a spokesperson for the Partnership for Open and Fair Skies. “We respectfully ask that the US government request consultations with Qatar and the UAE, and stand up against these unfair government subsidies that violate our open skies agreement.”

The issue has sharply divided the airline industry. US carriers JetBlue Airways, Hawaiian Airlines and FedEx have called on the US government to ignore the mainline carriers’ call for action. Delta, American and United have been backed by Lufthansa and Air Canada in their campaign.

The Emirates document can be found here: Emirates’ response to claims raised about state-owned airlines in Qatar and the United Arab Emirates

The Emirates response - Executive Summary

June 29, 2015

Throughout its history, Emirates has always needed to be managed and run in a profitable and self-sustaining manner, even during and after the global financial crisis in 2007 and 2008, a period during which a number of allegations contained in the White Paper are alleged to have taken place.

I. The White Paper conveniently omits to mention that this was a time when governments right across the globe were finding themselves in extremely difficult financial situations, including the Dubai Government which was, very publicly, working through its own financial priorities and challenges. Emirates continued to grow throughout this period, a feat which would have been impossible if it was reliant on Dubai Government funds. On the contrary, Emirates achieved this by continuing to focus on the key drivers behind its commercial success and the fundamentals underpinning its business model.

The Legacy Carriers claim to have spent two years preparing their White Paper by conducting in-depth research across the globe. As this submission
establishes, the White Paper in fact consists of a series of demonstrably inaccurate assertions, outright distortions, and legal misinterpretations of the
Open Skies Agreement.

Emirates is not subsidized. In their White Paper, the Legacy Carriers allege that Emirates has received over $6 billion in subsidies from the Dubai
Government. This claim is patently false. All of the individual allegations are briefly summarized here:

Fuel Hedging Allegation: The Legacy Carriers claim that the Dubai Government, through Emirates’ parent company, Investment Corporation of
Dubai (ICD), shielded Emirates from “massive losses” on fuel hedging contracts after a sharp decline in global oil prices in 2008–2009. 1 This allegation is drawn from a report by Mr. Charles Anderson of Capital Trade Inc. (“Anderson Report”), which bases its conclusion not on actual facts, but on mere
assumptions that are not true.

Fact: When fuel prices plunged in 2008, Emirates and ICD agreed that fuel hedging contracts would be transferred to ICD, so that non-realized,
paper losses for fuel hedging contracts under “mark to market” accounting did not present a misleading portrayal of Emirates’ operations.
Notwithstanding this transfer, all actual payments on the contracts at maturity were ultimately paid using Emirates’ own cash resources.
Letters of credit to meet collateral calls were issued against Emirates’ credit, not ICD’s, the direct opposite of what the Anderson Report asserts.
Neither ICD nor the Dubai Government absorbed any losses, and when the transactions were completed, ICD actually made a profit, which would
otherwise have gone to Emirates. As a result, the transfer cost Emirates money, the precise opposite of the alleged “subsidy.”

Related-Party Transactions: The Legacy Carriers allege that Emirates benefits from various below-market terms for goods and services purchased from
“related-party” suppliers.2 This allegation is based on no actual facts, and is proven false by the unqualified audit opinion of Emirates’ auditors on the March 31, 2015 financial statements.

Fact: The Legacy Carriers’ claim rests completely on inference: the White Paper asserts that since Emirates has not declared in its financial statements that its related-party transactions are at arm’s length, it is reasonable to infer that the transactions are not at arm’s length.3 That is the best of the “evidence” that the White Paper has, and it is wrong. International accounting standards do not require, or even suggest, that such a declaration be issued. Auditing standards merely provide that if a company does make a declaration, then the declaration must be audited.
Given this controversy, Emirates has included a declaration in its most recent financial statements that its related-party transactions were conducted at arm’s length for the fiscal year ended March 31, 2015 (and also for the prior fiscal year ended March 31, 2014, which is also included in the financial statements for comparison purposes as required under international accounting standards). PricewaterhouseCoopers (“PwC”) has issued an unqualified audit opinion in respect of these financial statements. This clearly shows that all such related-party transactions were conducted at arm’s length.
This paper shows that Emirates pays ENOC, a related fuel supplier, substantially the same prices as it pays to suppliers like BP, Shell, Chevron, and Emojet; that Emirates leases aircraft from DAE, a related company, on substantially comparable terms as aircraft leased from Allco, an unrelated party; and that dnata, a related supplier of ground services at Dubai International, actually earns a higher profit on its services for Emirates than it does on services to other airlines.

Airport Infrastructure and User Fee Allegations: The Legacy Carriers assert that the Dubai International airport user charges fail to recover the full cost of
infrastructure, and that this disproportionately benefits Emirates in its hub operations.4 They also assert that the collection of a passenger fee on departing, but not connecting, passengers is a subsidy to Emirates.5 Both of these allegations are grounded in a highly flawed study by Compass Lexecon, which ignores that the Open Skies Agreement imposes a ceiling on airport charges, not a floor, and fails to mention that airports worldwide follow the same
practices, including U.S. airports used as hubs by the Legacy Carriers.

Fact: The Open Skies Agreement requires that user fees “shall not exceed . . . the full cost . . . of providing the appropriate . . . facilities.” The law prevents the Parties from charging more than full costs (to prevent airports from gouging foreign airlines). It does not set a floor on charges, or require airports to cover their costs. Compass Lexecon ignores this and finds a “subsidy” on the assertion that airport fees are too low.

Airports worldwide do not charge to recover their full costs, including Legacy Carrier hubs such as Detroit, Atlanta, Newark and Dallas/Fort Worth, nor does the U.S. Department of Transportation or the Federal Aviation Administration require them to do so. The Legacy Carriers’ interpretation would put this U.S. policy in violation of Open Skies. Compass Lexecon also finds a “subsidy” based on the absence of a user fee on connecting passengers. They simply ignore that there is no legal obligation to collect fees on connecting passengers. Major Asian hubs such as Bangkok and Kuala Lumpur exempt transfer passengers from passenger service charges. Passengers transferring at airports in the United Kingdom, Hong Kong, and Taipei are exempted from airport or air passenger taxes.6 The exemption at London Heathrow is particularly telling. Under the Legacy Carriers’ baseless legal theory, Virgin Atlantic, forty-nine percent owned by Delta, impermissibly receives a subsidy, and Delta passengers who connect to Virgin Atlantic at Heathrow unjustly benefit.
Labor Rights Allegation: The Legacy Carriers allege that Dubai provides an artificial cost advantage to Emirates through the structure of its labor law.7
Neither the United States nor the UAE has ever agreed that labor laws can confer a “subsidy.”

Fact: There is no precedent under the Open Skies Agreement or under any international trade agreement for treating differences in national labor practices as a “subsidy.” The United States has always strongly objected to such efforts, since U.S. labor laws depart from the International Labor
Organization conventions in numerous respects, including with regard to the ILO’s “right of association.” The Legacy Carriers have asked the United States to adopt a legal position for which there is no international authority, and which if applied would require Congress and state legislatures to revise a host of U.S. laws, including those dealing with striker replacement and right-to-work, limits on union organizing and the right to strike, restrictions on primary and secondary boycotts, and restrictions on public employee unions.

II. The Legacy Carriers misstate the governing law, and then urge the United States to violate it. Much of the Legacy Carriers’ case rests on a single
legal premise—that the WTO Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) either applies to international aviation or is
somehow implicitly incorporated in the United States’ Open Skies agreements. This is a profound misstatement of both Open Skies and the WTO SCM
Agreement. The SCM Agreement, by its own terms, does not apply to services, which are covered by an entirely separate WTO Agreement, the General Agreement on Trade in Services (“GATS”). GATS, in turn, explicitly excludes air transport services, and does not include rules on unfair subsidies, as these were left to further negotiations after WTO Members could not reach agreement in the Uruguay Round. Such rules have never materialized.

The Legacy Carriers compound this error by misinterpreting the Open Skies Agreement. According to the Legacy Carriers, government subsidies violate
Article 11 of the Open Skies Agreement, which addresses “fair and equal opportunity” for carriers of each Party. However, they are citing the wrong
article. Subsidies are expressly addressed in Article 12, which sets out specific procedures for dealing with artificially low prices “due to direct or indirect
governmental subsidy or support.” Under customary rules of international treaty interpretation, Article 12 represents the exclusive remedy for subsidy concerns.

Article 11 contains no reference to subsidies and is legally inapplicable. The Legacy Carriers’ call for the United States to freeze additional landing rights
under the Open Skies Agreement would be a flagrant violation of U.S. international obligations. Unilateral actions of this type are strictly prohibited,
and Article 12 explicitly provides that subsidy-related restrictions on prices require “mutual agreement.” Unilateral U.S. action that so stridently violates an Open Skies agreement would jeopardize Open Skies relationships with 113 other countries, putting at risk all of the significant public and competition
benefits that the Open Skies program has generated.

III. The Legacy Carriers have failed to show that the objectives of Open Skies have been harmed by alleged subsidies. The Legacy Carriers have
framed their complaint in terms of their narrow commercial interests, but they are asking the United States to undertake a massive departure from Open Skies policy.

Open Skies policy embraces goals such as greater competition, increased flight frequency, more consumer choice, promotion of business travel and tourism, improved service, and innovation. The Legacy Carriers have not even tried to argue that these goals of Open Skies have been harmed. Even with respect to harm to their narrow corporate interests, the Legacy Carriers have failed to make a persuasive case. In no instance have they shown that they have suffered any adverse effect from any alleged subsidies, and they also have failed to show that they have been harmed by competition from Emirates. This is because they cannot make such a showing: the Legacy Carriers are earning record profits, and Delta is returning $7 billion to its shareholders. They claim that they have lost traffic to competition, but in fact on every route that Emirates has established to the United States, overall traffic has grown significantly after Emirates’ entry. Fundamentally, the Legacy Carriers fail to recognize that Emirates has grown in large part by focusing on markets like the Indian Subcontinent that have grown rapidly and yet have been neglected by the Legacy Carriers and their joint venture partners.

IV. The Legacy Carriers benefit from massive federal, state, and local government support of their own. The Legacy Carriers come to this debate
with unclean hands. They have received billions of dollars of government support, including U.S. Government assumption of airline pension obligations,
airline stabilization grants, loan guarantees, grandfathering of airport slots, bankruptcy relief from debt and other obligations, direct grants and tax
exemptions to support airport development, grants of antitrust immunity to form market-dominant alliances, protection of the U.S. market from foreign
competition, and the prohibition against majority foreign ownership. As demonstrated below, the Legacy Carriers have received more than $100 billion
in government support since 2002 and, with other U.S. carriers, receive annual benefits potentially exceeding $24 billion. Their suggestion that Open Skies agreements authorize a government unilaterally to freeze landing rights because of alleged subsidization would put the Legacy Carriers (but not Emirates) at serious risk.

V. The Legacy Carriers’ real goal is protection from competition and an end to Open Skies. While the White Paper is couched in the usual, tired, and
self-serving rhetoric about “fair trade,” “level playing field,” and “saving jobs,” it is not about trade, subsidies, fairness, or jobs. Rather, what the Legacy Carriers really seek is even more government support, this time in the form of protection from international competition. Such protection would come at the expense of other U.S. stakeholders—U.S. aircraft and engine manufacturers, competing low-cost U.S. carriers, non-Legacy Carrier hub U.S. cities and airports, U.S. tourism, U.S. air cargo carriers, U.S. jobs, and most of all, U.S. consumers, who have benefited enormously from Open Skies and an end to government mandated oligopolies on international travel. That is why U.S. stakeholders like JetBlue, Federal Express, Alaska Airlines, Airports Council International – North America, Atlas Air, the Cargo Airline Association, the Greater Orlando Aviation Authority, Las Vegas McCarran International Airport, the U.S. Travel Association, and the Business Travel Coalition, among many others, have publicly voiced their strong opposition to the Legacy Carriers’ call for a roll-back of Open Skies or unilateral freezing of Open Skies traffic rights.

The Legacy Carriers want to overturn a quarter-century of market-based Open Skies policy pioneered by the United States, and revert to the highly regulated, post-war aviation regimes of Bermuda I8 and Bermuda II,9 in which governments lightly managed carriers’ landing rights, flight frequencies, and fares. By broadly deregulating international air travel and minimizing government regulation, Open Skies has led to massive growth in international air travel and huge benefits for businesses and travelers worldwide. It has lowered fares and transportation costs; sharply increased competition and choice; fostered the entry of new lowcost carriers; encouraged innovative air transport services; and vastly expanded access to international travel for U.S. households. The Legacy Carriers simply want protection: they want the United States to cast aside the benefits of Open Skies, so that they can continue to reduce flights, provide indifferent customer service and increase fees and fares, all without fear of competition in the marketplace.

Conclusion

Despite their oft-repeated claims to have presented an “overwhelming” case, the Legacy Carriers’ allegations against Emirates collapse under closer analysis.

Their argument is nothing more than a mess of legal distortions and factual errors. Unlike the Legacy Carriers, Emirates is not subsidized. It has been
consistently profitable for more than a quarter-century. What the Legacy Carriers want is protection from competition. Such protection would do
irreparable harm to U.S. cities and airports, America’s world-leading aerospace industry, U.S. exports and jobs, U.S. air cargo carriers, and most of all, U.S. consumers, including passengers and shippers. It would also undermine America’s leadership in international aviation—leadership that has made Open Skies the global template for air services.

IAG comes out for the ME3

15 May 2015

The IAG has issued a press release indicating its support of the ME3 in the dispute with the big US carriers. IAG is led by Birtish Aiways and includes Iberia.

It should be noted that Qatar Airways owns 9.9% of IAG and that IAG are lobbying Qatar to increase their investment to 25%.

So the IAG argument is really in the best interests of its shareholders. Which only goes to show how objectivity disappears when real money is involved. It is an interesting read. And in fairness is far more powerful than the tit-for-tat allegations from Etihad.

"The International Airline Group (IAG) responded today to the US Department of Transportation, Department of Commerce and Department of State Stakeholder Engagement on Gulf carrier subsidy claims.

The consumer benefits brought to the US traveling public by the Gulf carriers are hard to ignore. New flights have opened up an array of new destinations and direct city-pairs, added to the choice of airlines available on existing destinations, and introduced levels of customer service rarely seen in this market. Not only do Gulf carriers bring competitive service and prices, they also stimulate the market, so that much of the increase in their own passenger traffic is incremental, not taken from existing operators.

The White Paper makes much of the Gulf carrier impacts in relation to passengers travelling indirectly e.g. between India and the US, as if consumers should be denied this choice. Passengers travelling between two points on the globe do not belong to any particular airline or group of airlines. Airlines must compete to offer passengers what they want. The outdated concept of ownership of passenger traffic must be rejected by all governments.

IAG disputes the evidence and conclusions that unfair subsidies are being provided by the Gulf States to the Gulf airlines contained in the White Paper prepared by American, Delta and United. IAG believes the evidence and therefore the conclusions to be unreliable and wholly inappropriate as a means of informing important government policy decisions. The White Paper's arguments should be rejected as a return to international aviation policies that protect airlines from competitors instead of fostering competition.

1. Introduction
International Airlines Group (IAG), parent company of British Airways, Iberia and Vueling, welcomes the opportunity to submit comments to the US Departments of Transportation, Commerce and State open forum for stakeholders, concerning subsidy allegations made by three US airlines (American, Delta and United) against three airlines from Qatar and the UAE (Qatar Airways, Emirates and Etihad, collectively known as the “Gulf carriers”).

IAG and British Airways is pro-consumer and pro-competition and is driven to win business by offering the best products and services to consumers in all the markets it serves. We have consistently supported the liberalisation of air transport worldwide.

Competition is a fact of life for all our businesses; we believe that embracing it offers IAG the greatest opportunities to deliver profitable growth and shareholder value over the long term. This includes markets where IAG competes successfully – i.e. profitably – with all three major Gulf carriers. British Airways has faced direct competition from Emirates for over 25 years.

IAG’s approach is entirely consistent with the rationale for pursuing Open Skies policies, as set out by the US Department of Transportation (DOT) on its own web site, which states:

“Open Skies agreements have vastly expanded international passenger and cargo flights to and from the United States, promoting increased travel and trade, enhancing productivity, and spurring high- quality job opportunities and economic growth. “
It goes on to say:

“Open Skies agreements do this by eliminating government interference in the commercial decisions of air carriers about routes, capacity, and pricing, freeing carriers to provide more affordable, convenient, and efficient air service for consumers.”

IAG takes this US policy position as the starting point for our comments relating to the concerns expressed by the three largest US airlines in their recently-published “White Paper”.

In this submission, IAG does not seek to defend specific carriers, nor go into detail on the individual allegations; this will be for the carriers concerned to address. Rather, we aim to support the important principles outlined by the DOT above.

2. Benefits of the US “Open Skies” policy

Economic benefits of the US “Open Skies” policy that have accrued over time stem primarily from the increased passenger and trade flows that have directly resulted from the freeing up of capacity and frequency limits on air services. This has enabled airlines to offer increased services on existing routes and to open entirely new markets that incumbent carriers did not exploit, connecting many city pairs that previously did not feature in the networks of the older airlines, which are tied to their historic hub markets.

This burgeoning of new routes and high quality service has undoubtedly brought enormous benefits for US consumers, whether individuals or businesses, leading to enhanced trade and tourism opportunities and the wealth creation and employment that follows.
On the trade relationship between the US and the UAE, figures from the US-UAE Business Council (citing US academic research) demonstrate that US exports to the UAE are growing strongly on the back of enhanced connectivity. The UAE is now America’s largest export market in the Middle East. US exports and foreign direct investment to the UAE rose from $3.6 billion in 2004 to $24.6 billion in 2013, representing a 6-fold increase in the space of just 9 years.

It can be no coincidence that this astonishing growth in trade is underpinned by the start of direct flights between the two countries in 2004 as a result of the enlightened “Open Skies” policy pursued by the US Government in its bilateral relationship with the UAE.

In addition to the trade benefits outlined above the US has also, in its leading role as an aerospace- manufacturing nation, been able to capitalise upon the growth of the Gulf carriers as they build their fleets. Orders of aircraft and engines by the Gulf carriers have dwarfed those of most other airlines around the world. Since Boeing aircraft represent the largest single category of US export earnings, and support many hundreds of thousands of jobs directly and indirectly in the US, it would be perverse not to take into account the value of the Gulf carriers to the US economy and US citizens, a value that is made possible by the opening of markets that has been catalysed and (in many cases led) by the efforts of the US Government across the world.
A key element of the benefits the US secures from its pursuit of “Open Skies” is enhanced connectivity for many regional US points that would otherwise have no direct flights to the Middle East.

This sharing of the benefits across the US brings the many benefits of direct connectivity with export markets and sources of tourism to US regions. The combined value of new services by Gulf carriers to US airports and their surrounding communities runs into billions of dollars per annum. Emirates alone generates some $2.8 billion per annum, according to various publicly-available studies conducted by or on behalf of US airports.

The consumer benefits brought to the US travelling public by the Gulf carriers are hard to ignore. New flights have opened up an array of new destinations and direct city-pairs, added to the choice of airlines available on existing destinations, and introduced levels of customer service rarely seen in this market. Not only do Gulf carriers bring competitive service and prices, they also stimulate the market, so that much of the increase in their own passenger traffic is incremental, not taken from existing operators.

The White Paper makes much of the Gulf carrier impacts in relation to passengers travelling indirectly e.g. between India and the US, as if consumers should be denied this choice. Passengers travelling between two points on the globe do not “belong” to any particular airline or group of airlines. Airlines must compete to offer passengers what they want. The outdated concept of “ownership” of passenger traffic must be rejected by all governments.

The overall picture today is an overwhelmingly positive one for the travelling public and it is hard to reconcile the arguments made in the White Paper with the overall interests of American (and foreign) consumers.

2. The benefits to US consumers, businesses and employment are plain to see. The global competitiveness of the US economy has been significantly enhanced by the aviation policies the DOT has pursued over the last 30 years. Turning the clock back now would be folly.

3. Alleged subsidies to Gulf Carriers. The White Paper’s allegations on subsidies to Gulf carriers do not withstand scrutiny. IAG also has serious doubts about the way information is presented in the White Paper. It is heavily caveated due to difficulties in obtaining information. Yet, even where transparent accounts are available, many of the conclusions drawn appear inaccurate e.g. in relation to jet fuel subsidies or alleged fuel hedging support.
Some of the arguments relating to IAG in the White Paper are inaccurate and misleading.

Even where independent studies are used to support arguments, the evidence is deliberately misquoted to distort its meaning so that unfavourable conclusions can be drawn (“US white paper on Gulf carriers distorts my academic report”, Frankie O’Connell, ATW 26 April 2015).
Such examples call into question the integrity of the whole document.
Whilst IAG does not intend to make detailed points to rebut specific allegations in this paper, our own review of the published accounts of Emirates shows that it is a well-run airline that is profitable and makes dividend payments to its shareholder. Similarly, the UK Department for Transport reached a similar conclusion with Qatar. It has recently lifted long-standing frequency restrictions contained in the UK-Qatar bilateral on the basis of a satisfactory review of all information relevant to fair competition.

More generally, IAG believes that:

• Fuel subsidies to any of the Gulf carriers are non-existent. It is not credible to make allegations simply because the States concerned have large oil and gas reserves, especially when there is clear evidence that the carriers concerned have standard commercial contracts in place with well-established jet fuel suppliers.

• Alleged subsidies in the form of investments in airlines, where they have occurred, are no different from the many investments made by States in airlines across the world in the past, or by governments elsewhere in the world, about which there appears to be no concern whatsoever.

• State investment in airports infrastructure is not, and never has been, regarded as “subsidy” anywhere in the world. In the Gulf, as in the UK, airports are (regardless of ownership) run on a commercial basis and commercial revenues from retail and car parking in particular (as opposed to aeronautical revenues) frequently make up approaching half of the income of the airport concerned. This enables airports to attract business through reduced aeronautical charges. Provided charges are applied in a non-discriminatory manner i.e. all airlines may benefit from the same charges, under Open Skies principles there can be no justification for complaint. It is good business and it translates to lower airport charges and lower fares for passengers. There is nothing wrong in that.

• The Gulf carriers are not protected from competition by their own governments. Competition at the Gulf hubs is fierce. This is the case in Abu Dhabi, Dubai and Doha. In Dubai, well over 100 international airlines compete successfully against Emirates and fly dubai. It is one of the most heavily competed international hubs in the world, as well as the largest.

• Complaints regarding lower labour and social costs could apply to many countries which the US has Open Skies agreements with, and reflect local market conditions and policies. The White Paper highlights a lack of trade unions in the Gulf States as a key issue yet OECD figures on union density (defined as the percentage of employees who are members of a union) for 2013 show that in the US these represent just 10.8% of the workforce, significantly below the OECD average of 16.9%. This compares with 25.4% for the UK, however IAG does not regard this relatively high figure as a legitimate reason to curb competition.

• Similarly, local tax regimes e.g. corporation tax and income tax are a matter of national policy. Such matters are not within the scope of Bilateral Air Services Agreements and never have been.

4. State support and practices that benefit US and EU carriers

Since the inception of international commercial airline service, nations have recognised the benefits of linking their peoples, businesses and governments to the world. With the recognition of those benefits, many nations also determined that it was essential to establish and support a homeland (national) airline ensure the reliability of those links. National support of such airlines over the decades took a variety of approaches – state ownership and capital provision, sole-source government contracts, state supported research and development of aviation equipment, airports and air traffic management systems – are among the approaches often used which directly benefitted airlines. IAG has consistently argued against state aid and has never attempted to place commercial restrictions on those in receipt of such aid.

There can be few major carriers in the world that have not previously benefited from State support of its business in one form or another or does not currently derive benefit from differences in national or local legislative, taxation and other policy regimes in different jurisdictions. Often it is a matter of definition or interpretation.
As mentioned already, infrastructure costs are frequently borne by States or that infrastructure was originally created by States to benefit carriers. This makes the Gulf States no different from other nations.

In the US, there are many rules that differ from other countries which could be interpreted by other nations and their airlines as “unfair”. These include Chapter 11 reorganisation procedures, which among other things has allowed airline pensions liabilities to be taken of carriers’ books, Fly America, where Government traffic must use US airlines (or their codeshare partners) not foreign airlines, the Department of Defense strategic airlift program, state and local air service development funding support, special state and local tax forgiveness incentive programs, and broadly, federal tax dollar support for research and development in aerospace. US airlines continue to be protected by ownership and control regulations which are more restrictive in the US than in many other countries.

The EU has its own State Aids policy which has frequently been a cause for concern for airlines that have not benefitted from their homeland government’s largesse. Many carriers have benefited from “lawful” State Aid to enable restructuring of their business. These often massive injections of state subsidy are meant to be granted on a “one time last time” basis and subject to the “Market

Economy Investor Principle” that aims to ensure capital injections are made on a commercial basis. However the rules may not always be applied as rigorously as they might, resulting in distortions to competition vis-a-vis other airlines (both EU and non EU). It is also the case that certain carriers have been able to have pension liabilities assumed by the State.

In addition to direct or indirect financial support, it is important to consider what some might describe as the largest and most pernicious – for consumers and business alike – forms of support that any government can give, namely protection from competition. The US has led the way in removing these protections through its aggressive pursuit of its open skies policy. Reintroducing restrictions targeting the Gulf at the behest of three highly profitable US airlines would be little different from offering those American carriers a cash subsidy underwritten by US consumers.

But the US and EU are not unique in supporting the aviation sector. This is a global phenomenon that takes a variety of forms.

5. Conclusion

IAG believes that our industry functions best when competition is allowed to flourish. This delivers the best outcomes for consumers and businesses alike and we want to see more, not less, liberalisation. It is a matter of grave concern to see protectionism raising its ugly head at the first sign of effective competition from the Gulf countries.

IAG disputes the evidence and conclusions that unfair subsidies are being provided by the Gulf States to the Gulf airlines contained in the White Paper prepared by American, Delta and United. IAG believes the evidence and therefore the conclusions to be unreliable and wholly inappropriate as a means of informing important government policy decisions. The White Paper’s arguments should be rejected as a return to international aviation policies that protect airlines from competitors instead of fostering competition.

As the US has demonstrated since it first liberalised its domestic air market in 1978, competition benefits consumers. The international liberalisation that the US has had the foresight, determination and confidence to pursue in the intervening years fosters economic growth through enhancing trade, tourism and inward investment.

It is a sound and enlightened approach that delivers enhanced prosperity to the US and its trading partners that must not be put at risk. To shield US airlines from their competitors would be to grant them the biggest subsidy of all.

CAPA Summit and Debate - Las Vegas

28 April 2015

Some notes on twitter from the Center for Aviation forum on the ME3/USA3 dispute today - proving little except that both sides are as entrenched as ever....and that CAPA as the host had a prevalent and disappointing bias towards the ME3.

The tweets have been left anonymous deliberately.

Americans For Fair Skies President: "Qatar and UAE should honor the trade agreements they signed."

Big 3 US #airlines “control the three clubs [alliances] that control >50% of global capacity” - @EtihadAirways’ chief counsel

Etihad counsel: my AUH-LAX flight had pax from 18 points beyond AUH. Only 2 of those points served by US airlines

Etihad feeds 25K pax to US carriers says Jim Callaghan of Etihad. They are benefiting from that feed so where's the damage,

@Delta EVP, "All we’re asking is that the 2 sides sit down & talk about how to stop subsidized capacity coming into the US"

Etihad: US carriers are using the same arguments against Gulf carriers as European airlines argued against Ryanair

@Delta's Exec VP & Chief Legal Officer Ben Hirst: U.S. firms cannot be expected to compete with governments and treasurers

Etihad: US carriers are using the same arguments against Gulf carriers as European airlines argued against Ryanair

Etihad: US carriers trying to shut the door on any type of competition

Etihad received $6.6 billion in govt “loans” – yet curiously they have no repayment obligation

AA not opposed to subsidies. We are opposed to giving access to US from airlines supported by state, violates US trade policy

US Travel Association: I want US visitors however they get here

Etihad: US airlines running "smear" campaign against Gulf airlines

@EtihadAirways: “We don’t receive receive state subsidies.”

Question at #CAPASummit: should this be government-to-government discussion, and if so should there be public lobbying by all sides?

Finally, the question that needs to be asked at #CAPASummit: Do passengers fly Gulf carriers because their product is better? (IMO, yes)

@AmericanAir EVP: 25 flights/day into US by Gulf carriers & only 2 from US carriers to Gulf- that’s not a level playing field.

@AmericanAir today expanded its codeshare agreement with @EtihadAirways. And yet they debate value of #openskies. Awkward.

US Travel Assoc: Emirates' new Orlando service will generate 4500 jobs.If we go back to Jan Gulf capacity, we'll lose those jobs

“No, we don’t receive subsidies” says @EtihadAirways chief counsel at #CAPASummit

Over past 10 yrs, @Etihad has received over $12B in cash but wasn't equity worthy or credit worthy at time therefore SUBSIDIES

Etihad DOES receive govt subsidies: $6.6bn in “loans,” 6.3bn in capital injections, 3.5bn in undisclosed funding in 2014 & more

Delta: "Gulf carriers are not stimulating traffic", only stealing from other airlines.

The US carriers have abandoned India” asserts @EtihadAirways counsel

How can US go through Ch 11, cut costs, get rid of pensions, and not call it a benefit, asks Etihad.

US airline white paper says govt money is a subsidy. Qatar bought 10% of IAG. Is IAG govt subsidised? End UK open skies?

From PPRUNE:

27 April 2015

"The US Airlines are not "whining." They are making allegations that EK is not abiding by the agreement to which they are a party. They have 1,000 pages of documentation supporting their allegations. Whether or not these allegations are true will be determined by a third party. Whining is what occurs on the PPRuNe ME forum on a daily basis. EK has gotten used to bullying employees and regulators to get their way. If you don't like it quit, if you don't give us what we want we will cancel 200+ orders, etc, etc. Dubai gets what Dubai wants. Finally someone calls them out on it and we all act like some great injustice has occurred.

If the US Airlines were paying too much or operating a poor business model it would be reflected in the results. American Airlines just reported a profit of 3.4 billion Dirhams for the first three months of 2015. Delta pays appx 50% more for drastically less flying and still paid out 100,000+AED profit share to each pilot. They are both on track to make about 12 billion AED profit for the full year 2015.

Old employees, ugly employees, fair rostering practices are a product of an environment that affords workers the right to organise and demand fair treatment. Hardly something we should all be mocking. It's funny that we bitch about contracts not being honoured, zero credit for sims or leave days, FTL's constantly tweaked to the employers advantage, a regulator that looks the other way, and a punitive work culture yet any company that provides these rights is somehow "out of touch." Rant over."

War Between US Legacies and MEB3 Pits Consumers Against International Law

27 April 2015 Vinay Bhaskara for Airways Magazine

(One of the more objective articles written about this dispute)

Middle Eastern carriers Emirates, Qatar Airways, and Etihad are under the public eye, after a consortium of US airlines publicly released documents that allege that the three carriers received more than $42.3 billion in subsidies and unfair benefits from their respective governments since 2004. A joint operation between United Airlines, Delta Air Lines, and American Airlines, the investigative efforts have culminated in the public release of a presentation and 55-page white paper that detail the allegations.

Of the total amount, $39.2 billion are alleged as quantified subsidies, primarily to Qatar Airways ($17.5 billion) and Etihad ($18.0 billion). The subsidies for Qatar Airways and Etihad appear to have primarily taken the form of interest-free loans (and the accompanying interest savings) and direct equity infusions, whereas for Emirates, they were primarily related to fuel hedge losses and subsidized airport charges. The unfair benefits were primarily related to local labor laws that prevented unionization, and the resultant cost savings accrued by the so-called Middle East Big 3 (MEB3).

The white paper and presentation indicate that the big 3 US carriers (US3) have thrown serious financial resources and time behind an investigative effort that they believe will pay dividends. The forensic accounting that underlies these numbers is painstaking and accurate, and despite the early misstep by Richard Anderson, their effort to date has been well-planned and implemented.

Based on initial assessment by trade lawyers, and with the caveat that I am not a legal professional and thus that my second hand relay should not be treated as a firm legal opinion, there is a case to be made before the WTO and the US government that the MEB3 have been unlawfully subsidized. These equity infusions and interest free loans match the WTO’s standards for subsidies. As noted in the report, “The WTO Agreement on Subsidies and Countervailing Measures defines “subsidy” as a ‘financial contribution’ by a government that confers a “benefit” on its recipient (i.e., government support on better than commercial terms).” Even if the WTO is not necessarily the arena in which this case will be judged, the WTO’s rules and definitions will still play a critical role in framing the legal debate in the US.

And if the US3 may have a case with the WTO, that bodes poorly for the MEB3′s prospects in the arena where this case will actually be judged, by US government agencies. The entire Open Skies project, which has seen scores of aviation markets opened up to the US since the 1990s, has unquestionably been a success. But while the language of these agreements allows for unlimited service by foreign carriers, one phrase that appears in many agreements would appear to do the MEB3 in. Essentially, the language notes that US carriers can expect to have “unrestricted, fair competition to determine the variety, quality and price of air service.” And unfortunately, subsidies would likely violate this condition.

The US government has the power to alter or halt the Open Skies bilaterals with the UAE or Qatar if it finds violations of this nature, and the Obama administration is already deep into its investigation. There is real danger that they will find in favor of the US3.

When Delta last month fingered the MEB3 as the reason that it does not serve India nonstop from the United States, it was just the latest in a series of hyperbolic statements about a supposed loss of service due to the MEB3. In reality the US3′s lack of success in India (United excepted?) is driven by a mix of factors of their own doing. First and foremost, the US3 do not offer a strong base economy class product (in particular skimping on baggage allowance), which hurts them with value-conscious Indian travelers. Moreover, if you actually wanted to cite competition as the reason for lack of nonstop service, you would actually have to point the finger at Indian flag carrier and perennial basket case Air India. Air india offered nonstop service with massive Boeing 777-300ER aircraft on Chicago-New Delhi and New York JFK – New Delhi in direct and indirect competition with American and Delta respectively. These services eroded any potential for the US airlines to earn a nonstop premium on fares, and that, more so than competition from the MEB3 helped kill the US-India nonstops. In fact across nonstop markets that the MEB3 has “stolen” from US airlines, India is the only market that would actually be large enough for US carriers to serve nonstop. Eastern Africa, Sri Lanka, Bangladesh, Yemen, Oman, Iraq, Afghanistan, and the Central Asia smorgasbord (basically the ‘Stans’) aren’t large enough markets to ever have a nonstop. I suppose you could make an argument for Islamabad or Karachi from New York (and only New York), but the chances of a US airline serving Pakistan in the immediate future are about as good as the chances of Airbus launching an A340-500neo.

So it’s not really the loss of nonstop opportunities that is affecting the US3. Their financial losses are more indirect. While the US3 don’t carry many passengers between the US and South Asia, East Africa, Central Asia, or the Middle East, their joint venture partners Lufthansa, Air France, and British Airways undoubtedly do. And due to these joint ventures, on a USA – Europe – South Asia/East Africa/Central Asia/Middle East routing, the US airlines are entitled to a profit share for the USA-Europe leg. And they’ve lost out on a not inconsequential amount of revenue due to the market share captured by the MEB3. That amount isn’t more than $30-40 million dollars per year (a bound, not an estimate), but it is still something.

At the end of the day the loss of $30-40 million in revenue in and of itself wouldn’t scare the US carriers into action. Rather, they perceive a much larger threat on the horizon; fifth freedom service. Thanks to the US’ liberal attitude towards aviation policy, many of its Open Skies agreements also contain provisions allowing third party carriers (airlines not from the two countries governed by the agreement) to fly so-called fifth freedom services between the US and the country covered by the agreement. In the past, these rights were mostly used by airlines who could not reach the US with nonstop flights (such as Air India’s longstanding services via London Heathrow), airlines who needed the financial boost of an intermediate destination, or airlines for whom security concerns require an intermediate stop (such as Pakistan International Airlines in Manchester or Barcelona).

The MEB3 don’t necessarily embody the spirit of these rights, and thanks to Emirates’ recent foray into the New York JFK – Milan market, where it recently introduced the Airbus A380, the US carriers are increasingly worried about the prospect of a widespread MEB3 invasion onto key trans-Pacific and trans-Atlantic routes. One of the arguments against the MEB3 having a major impact on US airlines has always been that the MEB3 have little relevance on routes between the US and Europe or East Asia (and Latin America) due to the fact that nonstop routings are much shorter than those through the Middle East. But because of the way that most US open skies agreements are written, that is not necessarily true any more. In fact, it’s not hard to envision a future under status quo bilaterals where Emirates serves Los Angeles – Sydney, Qatar Airways serves Tokyo Narita – San Francisco, and Etihad serves New York JFK – Amsterdam. And that prospect terrifies the US3.

With the US3 and MEB3 firing back and forth through the press, Emirates CEO Shaikh Ahmad Bin Saeed Al Maktoum threw the following jab at his (more profitable) US competitors, “Offer the best to the passengers and people will fly with you.” His implication, of course, is a variation on the usual boilerplate line about US airlines offering poor service quality while international carriers offer the sun , the moon, and the Mona Lisa; all for the low, low price of $1.99.

Reality of course is much more nuanced than that. For the moment, let’s set aside the fact that airline products are about more than just service quality. But to start there, Emirates, Etihad, and Qatar Airways do certainly surpass the US3 in that area of the product. The gap is closer than most people think (how comfortable is the 7-abreast business class on many of Emirates’ US flights or the 10-abreast economy class on their Boeing 777-300ER?), but it undeniably exists. There’s a very good reason for that. Unlike the MEB3, US carriers usually have to get some sort of return on their product investment, and accordingly, they weight their investment dollars heavily towards the kinds of improvements that people will actually pay for. US carriers have spent a lot of money on upgrading their business class seats to flatbeds, and commensurately not as much on building palatial lounges at their hubs.

More importantly, airline products encompass a lot more than just onboard service quality; in particular route. At the end of the day, customers do care about getting from point A to point B, in particular with nonstop flights. And unlike the MEB3 (who funnel absolutely everyone through their central hubs), the US3 provide a ton of different nonstop international from several different hubs. So when Al Maktoum asks US carriers to compete on product, the answer is that they already are, merely by offering nonstop flights.

Despite that defense, consumers are undoubtedly better off for the MEB3′s presence in this country. On a visceral level, they represent additional competition on international routes, driving down prices. This effect has become particularly important in recent years as previously robust competitive environments have been eroded by the spread of antitrust immunity and joint ventures between US airlines and foreign *competitors.* The entrance of Emirates onto fifth freedom routes (such as Milan – New York JFK) could potentially play an important role in offsetting the pricing power the US3 now hold on trans-Atlantic and trans-Pacific routes.

Moreover, the MEB3 substantially increase indirect customer choice. While they don’t offer a lot of nonstop options beyond their central hubs, the MEB3 (in particular Emirates) offer convenient one-stop service to secondary destinations across South and Central Asia, the Middle East, and North Africa. Consumers love these options (not in the least because they allow them to avoid frequently bottlenecked primary hub airports in these countries) and by and large these destinations were double connects from anywhere but New York prior to the rise of the MEB3.

Ultimately, customers are made better off by the MEB3′s existence. The competitive impact on the US3 is limited (even in a world where the MEB3 offer more fifth freedom flights), and while a direct economic impact on jobs at US carriers may arise, those costs are more than offset by the aggregation of customer benefits.

To give a back of the envelope example, let’s assume that the MEB3 cause the loss of 1,000 jobs (their international footprint in the US would have to be ten times its current size for this to ever happen, but lets roll with the example). At 70,000 per job, the economic *harm* caused by this job loss amounts to $70 million. But if through their own service and their pricing effect on competing airlines, they save 2 million customers an average of $50 per ticket, the economic benefits amount to $100 million. The overall US economy comes out ahead. Of course lost jobs have an effect in the additional spending that is lost from those employees, but that is offset by a mass of consumers having an extra $100 million to spend. The problem is that the lost jobs are highly visible, whereas the consumers saving money form something of a “silent majority.”

But if the legal question is decided against the MEB3, political expediency might force US political officials to act against the interests of US consumers, regardless of the long run harm that would be caused.

U.S. opens comment forum on Gulf airline subsidy claims

10 April 2014 - Reuters

The Obama administration on Friday solicited comments from interested parties about U.S. airline and unions' claims that Gulf carriers have received market-distorting subsidies, marking the latest step in its review of the matter.

"The U.S. government takes seriously the concerns raised," the U.S. departments of State, Commerce and Transportation said in a joint statement. The review of submitted materials is expected to begin by the end of May.

U.S. carriers and unions allege that Emirates Airline[EMIRA.UL], Etihad Airways and Qatar Airways benefit from more than $40 billion in state subsidies that have allowed them to drive down ticket prices and begin pushing U.S. airlines out of key markets. They have called on the Obama administration to request consultations on the matter with those airlines' home governments, the United Arab Emirates and Qatar.

The Gulf carriers have denied the subsidy allegations and said U.S. airlines' worse service has caused them to lose market share.

American Airlines Group Inc, Delta Air Lines Inc and United Continental Holdings Inc submitted the claims about subsidies.

"Etihad Airways is committed to setting the record straight regarding these unsubstantiated allegations," the airline said in a statement, applauding the U.S. government's transparency. "We hope that no one will pre-empt this process or prejudge its outcome."

All material received by the interagency team will be made public, unless the departments approve requests by interested parties, if any, to keep particular information confidential, the Obama administration's statement said.

"We are pleased that the U.S. government is taking the next step to further examine the issue," Jill Zuckman, spokeswoman for the U.S. airline and unions' group, said in a statement. "This process is an opportunity for more transparency and we urge the Gulf carriers to adhere to the same standards of financial disclosure and accountability as the U.S. carriers."

U.S. to investigate Gulf airlines for alleged subsidies

10 April 2015 USA Today

Three federal departments agreed Friday to investigate allegations by the three biggest U.S. airlines that three state-owned Persian Gulf carriers get unfair subsidies from their governments.

The Transportation, Commerce and State departments said the allegations of $42 billion in subsidies deserve a public hearing, so arguments from both sides will be collected in a public forum, on a regulatory website.

"The claims, which are asserted in a publicly available report, are of significant interest to stakeholders and all three federal agencies," the departments said in a statement. "The U.S. government takes seriously the concerns raised in the report and is interested in receiving insights and feedback from stakeholders before any decisions are made regarding what action, if any, should be taken."

The leaders of Emirates, Etihad Airways and Qatar Airways have denied receiving government subsidies from the governments of United Arab Emirates and Qatar. But the airlines have argued that the debate will be conducted primarily between the U.S. and Gulf governments.

"Etihad Airways is committed to setting the record straight regarding these unsubstantiated allegations," the airline said in a statement.

"However, so far the U.S. airlines have failed to provide the complete details and data supporting these claims to Etihad Airways. Only with all of this information available to us can we provide a full response."

The debate erupted a month ago, when American, Delta and United airlines and their unions released a 55-page report arguing that Gulf carriers received at least $42 billion in subsidies during the last decade.

The U.S. carriers contend that subsidies such as interest-free government loans, cheaper access to airports and services such as fuel and ground handling make it impossible to compete for lucrative international travelers.

Jill Zuckman, a spokeswoman for the Partnership for Open & Fair Skies, which represents U.S. airlines and their unions, welcomed the formal investigation.

"This process is an opportunity for more transparency, and we urge the Gulf carriers to adhere to the same standards of financial disclosure and accountability as the U.S. carriers," Zuckman said. "They should open their books if they have nothing to hide."

The chief executives of Emirates and Etihad said in separate events last month that they have not yet received detailed documentation of the subsidies they are alleged to have received, but that they would respond in detail when they do. The U.S. government website could provide that opportunity.

Delta's "crap" airplanes

16 March 2015

In an AFP article earlier today the chief of Qatar Airways on Monday denied his company receives subsidies and accused rivals Delta Air Lines of flying "crap" older planes, escalating hostilities between Gulf and American carriers.

Speaking at an arts conference in Doha, Akbar al-Baker said any money his airline receives from the state is in the form of "legitimate" equity and added his company's fleet of aircraft were much cleaner for the environment in comparison to Delta.

"I think Mr Anderson (CEO of Delta, Richard Anderson) doesn't know the difference between equity and subsidy. We never receive any subsidy," Baker said.

Cough. Cough. Maybe Mr. al-Baker has not read the US airlines white paper.

"The state of Qatar is the owner of Qatar Airways and whatever funds are put into the airline is as equity, which is quite legitimate.

The trouble is that it is not legitimate. No privately held western airline could expect that level of equity and a series of interest-free loans without repayment terms.

"The unfortunate thing is that because they are so inefficient they want to blame us -- whilst we are very efficient -- for their failures and drawbacks.

"The issue is that they cannot stand the progress the Gulf carriers are making."

Oh dear. One of the US carriers is American Airlines, part of the same one world alliance.

Baker's attack on Monday though was not merely limited to discussions over competition.

He also defended Qatar Airway's record when it comes to CO2 emissions and unflatteringly compared Delta's aircraft to those of his company when asked about aviation pollution.

"I am delighted that Richard Anderson of Delta is not here. First of all, we don't fly crap airplanes that are 35 years old. The Qatar Airways average fleet (age) is only fours years and one month," said Baker.

"We have ultra-modern airplanes. We have invested, my country has invested, huge amounts to make sure we are the lowest CO2 contributor in the aviation industry."

And he was also damning of those who criticised the aviation industry's record on environmental pollution.

"People who make lots of noise about CO2, people who make so much noise about greenhouse gases that are emitted from airplane engines, don't realise that they are constantly travelling by airplane, so they should start walking or going on horseback if they really mean what they say."

This debate has a long way to run!

Tim Clark goes to Washington with guns blazing

16 March 2015

In a blunt paywall protected interview in the Financial Times Emirates President and CEO Sir Tim Clark has challenged its critics in the management of US carriers and their congressional supporters to an open, public, line by line discussion of the issues and the financial records of the Dubai based airline.

Sir Tim Clark, chief executive of Emirates, will meet transport officials in Washington on Monday to rebut the allegations from US airlines and unions that his airline has grown aggressively on the back of state subsidies.

We will deal with [the allegations] line by line. They will be eating their words,” he told the Financial Times.

I assume he is also briefing lobbysists to work on behalf of Emirates and talking to lawyers.

Clark told the FT that if commercial damage to Emirates could be established by the current campaign in Congress against it, all options for redress, including legal action, would be considered.

Just where the US brawl involving Emirates might lead is unclear. But with an election loomig in 2016 there may be some American dismantling of open skies.

What works for Emirates on non-stop flights connecting over Dubai also works well for the likes of Qantas, Air NZ and, in so far as it participates, Virgin Australia, when flying non-stop across the Pacific or within the Asia-Pacific hemisphere.

Privately, US officials have said the campaign would not threaten the principle of Open Skies, which has helped to open up the global aviation market. But some in the industry fear US politicians could be susceptible to such lobbying in the run-up to the 2016 national election.

Willie Walsh, head of the UK-based International Airlines Group which is the parent of British Airways and Iberia, recently warned of “protectionism” that was “rearing its head again, notably in the US”.

Sir Tim said the allegations were also beginning to affect opportunities in other markets where legacy carriers were struggling to compete with Gulf carriers’ younger fleets, services and fares.

“There is an element of contagion in Europe,” he said. A German politician had recently called for a ban on granting landing rights to Gulf carriers “unless they answer the subsidies question,” Sir Tim said.

In fairness there have been issues in Europe for some years, led by France and Germany.

At the Monday meeting with US officials, Sir Tim said he would ask that the airline “reasonably be given the chance to respond in the time that it takes us” before any action was taken. “I worry about knee-jerk reactions,” he said.

Although he was making a direct appeal to the transport secretary he stressed that governments, not carriers, would ultimately address any potential renegotiation of the Open Skies agreement. “These are government issues. That is where it lies in the first instance.”

However, revising the treaties that liberalised aviation markets would be “a huge error of judgment because there are so many things at stake,” he said.

Sir Tim said the US carriers had missed an opportunity to benefit from the expansion of Gulf airlines, which flew to many destinations not served by the US aviation industry. Emirates had tried several times to link up with American Airlines, for example.

It does appear that Sir Tim will be speaking solely for Emirates. Any reasonable read of the US airline allegations indicate a much greater level of sovereign funding at Qatar and Etihad to the extent that both airlines would not be commercially viable without sovereign support.

But here is the problem; open skies and bilateral rights agreements are determined by governments and not airlines and it is the UAE government in Abu Dhabi that has been financing Etihad.

The US airlines issue is siimple - Emirates has for instance four flights a day to New York - but it is not bringing 2,000 Emiratis to New York; maybe 200. It is bringing 1,800 a day from onward destinations who have transited through Dubai. These are passengers that are lost to the US airlines and their alliance partners.

Emirates is having a webcast out of DC, at 1.30pm EDT on March 17 regarding subsidies allegations from the US3.

Arabian Gulf airlines face EU scrutiny amid competition complaints

15 March 2015 The National

As the Emirates president, Tim Clark, plans to head out to Washington this month to hit back at allegations from US airlines of unfair competition from Arabian Gulf carriers, the European Commission has stepped into the row saying it will take up the issue on behalf of its aviation industry.

In a meeting of transport ministers from the European Union on Friday, the French and German representatives asked the commission to address the subject of government subsidies during discussions over a commercial aviation agreement with the Gulf later this year.

“European airlines are losing market share against the Gulf airlines, because of their unfair competitive practices, particularly because of the significant public subsidies and guarantees that they enjoy,” said the French transport minister, Alain Vidalies. He said that an extension of traffic rights given to foreign airlines in Europe should be accompanied by effective control of “the mode of operation of these airlines”.

Germany’s Lufthansa and Air France-KLM have in the past voiced criticism against their Gulf rivals. The German airline’s earnings tumbled last year,with a €55 million (Dh212m) net profit for 2014 down from €313m a year earlier. Lufthansa was hurt by a pilots’ strike that cost the company €62m in November and December alone.

Similarly, American carriers are looking to win changes to federal legislation on open skies policies.

In a 55-page report, three US airlines – American, Delta and United – accused Gulf carriers of using unfair business methods and prohibited financial subsidies to contravene the open skies rules that govern international aviation.

The report said: “Fuelled by massive government subsidies, state-owned Qatar Airways, Etihad Airways and Emirates are aiming to dominate global aviation by exploiting open skies policy … This threatens our US airline industry, airline jobs and the US economy.”

Emirates said last week that it was “confident that it can debunk all those arguments quickly and robustly”.

It is putting together a team from its legal, strategic and financial departments to respond to the allegations, and Mr Clark is planning to fly to Washington to meet US transport officials and attempt to head off any changes to federal legislation.

A report from the US-UAE Business Council last year on the commercial aviation relationship between the two countries identified more than $16bn in benefits each year to the US, supporting more than 100,000 jobs and generating more than $1.6bn in taxes

Keep the skies open

14 March 2015 Editorial in the Detroit News

Cheating by Gulf state airlines distorts the international air traffic market and placing U.S. carriers at a disadvantage.

Free and fair trade demands that all parties engage in commerce on a level playing field. Or in the case of airlines, in level skies.

That's the idea behind the Open Skies Agreements the United States has been negotiating with other countries since 1992. There are now more than 100 such trade pacts in place to assure that foreign carriers don't use subsidies from their home governments to steal business from U.S.-based airlines.

And they've worked for the most part, allowing multiple players to expand air service in an efficient global marketplace. Passengers benefited from both competitive fares and increased travel options.

But the arrangement has hit some significant turbulence.

The United Arab Emirates and Qatar are ignoring the rules and channeling huge subsidies to carriers based in the Gulf, allowing them to cut fares below market rates and grab a greater share of passengers.

U.S. airlines are accusing state-owned Emirates, Etihad and Qatar airlines of taking more than $40 billion in government hand-outs, fueling a worldwide expansion of their reach.

The operating subsidies allow the Gulf airlines to cut fares below the level at which U.S. airlines can profitably fly. So passenger traffic is shifting to those foreign carriers, particularly on international routes servicing south Asia.

The Gulf airlines have 25 flights a day to the United States that then fly on to other parts of the world. And while that may not sound like such a large number, each international flight has a spin-off benefit of 1,000 jobs, the domestic airlines contend.

Very little of the traffic is generated in the home airports of the Gulf carriers. Rather, most of their passengers board the connecting flight in the U.S.

For passengers, fares may drop as the Gulf carriers fly at a loss to increase their market share. But ultimately, the number of competing flights will fall and prices for travelers will rise.

This is the equivalent of a state-owned foreign automaker dumping vehicles on the U.S. market at prices far below the real cost of production.

The Gulf carriers have been steadily adding capacity, distorting the marketplace. Their U.S. competitors also accuse them of creating vertically-integrated, wholly state-owned aviation sectors that include complex relationships between their governments, airlines, ground handlers and airports — all in violation of the Open Skies Agreements those countries signed.

Ultimately, such disregard for trade pacts will drive U.S. carriers out of certain international routes, costing jobs in this country.

The agreements signed with the Gulf states are very generous, placing few restrictions on their ability to serve the lucrative American market.

But they do demand that the service be based on honest trade practices.

The Obama administration can not allow the U.S. airline industry to be undermined by predatory, state-owned competitors.

It should demand that the Gulf states honor the Open Skies Agreements or risk losing access to U.S. airports.

Germany joins the fray

11 March 2015

The German government is also holding back the expansion plans of Arabian Gulf carriers in Europe’s largest economy, saying it will only consider additional landing rights once a dispute is resolved about alleged state subsidies.

Speaking in Doha during a visit to the region by a political delegation, the government’s aviation industry coordinator, Brigitte Zypries, said that “until the problems linked to the subsidies matter are solved and a level playing field for competition established there will be no additional landing rights” for the Gulf carriers in Germany.

That seems pretty clear!

Accusations that the Gulf states unfairly subsidise their airline assets should be proven, Sultan Al Mansouri, the UAE Minister of Economy said on Monday. The word “subsidies is really misused when it comes to this situation,” said Mr Al Mansouri, adding that the spat was souring relations.

Mr. Al Mansori has probably not read the white paper produced for the big three USA carriers. It is pretty clear that without massive state aid through capital funding and interest free loans both Etihad and Qatar would not be commercially viable businesses.

The German and French transport ministries said in a letter last month that state backing for rival airlines “seriously harms European carries, reduces the attractiveness of European hubs and seriously threatens the direct connectivity of the European Union with the rest of the world”.

“Traffic rights, almost exclusively to the German and French markets, are among the leverages the European Commission could use to ensure the positive outcome” of talks with Gulf countries, the letter stated.

Germany now grants each of the airlines limited landing rights of their choice in four airports in Germany. Emirates, the biggest Gulf carrier, serves Hamburg, Duesseldorf, Frankfurt and Munich.

The Emirates president, Tim Clark, has regularly said that the airline would also like to fly to Berlin, but not at the expense of a city it already serves.

Etihad is seeking two additional landing rights in Germany – in Stuttgart and Berlin – to add to the four it already has in Duesseldorf, Frankfurt, Hamburg and Munich.

The Battle commences

10 March 2015

In the airline world the rhetoric is stepping up between the USA3 and the ME3. The US airlines have launched www.fairskies.org - although it would have helped their credibility if they got the full name of Emirates Airline correct.

The website talks about protecting American workers; the USA3 have far more interest in protecting their shareholders. A rather misleading graphic depicts an armada of airplanes flying non-stop from Qatar and the UAE both non-stop and via Europe.

T...he website does not talk about the consumer. In the USA six major airlines have retrenched/consolidated into 3. The US consumer has less choice, less convenience and higher fares. But airplanes fly full and the airlines are making money again.

There is also no mention of Delta's Skyteam partner Saudia - or of the fact that Qatar is a OneWorld alliance member alongside American.

Which gets us to alliances. The competition is not for passengers flying into the UAE and Qatar. It is for transit traffic from the USA to South and SE Asia, the GCC countries and Africa. The USA3 serve these markets by flying to Europe and connecting to their alliance and code-share partners. These partners are being dragged into the argument with Lufthansa (Star Alliance), and KLM/AirFrance (Skyteam) lobbying their governments.

The 55 page white paper produced by the USA3 for the US government has now been made public:

http://www.openandfairskies.com/…/cus…/media/White.Paper.pdf

One of the better commentaries on the subject was in The Economist: do read it if you have any interest in this subject.

http://www.economist.com/…/g…/2015/03/airline-subsidies-gulf

It would not be a surprise to see Emirates put some distance between itself and Qatar/Etihad with their massive capital injections and interest free loans.

The momentum that is gathering may be the biggest threat yet to the growth of the ME3. Their trump card is the significant leverage of their purchases from Boeing and Airbus.

If Emirates joined Skyteam or the Star Alliance would the message suddenly change?

This could play out in many different ways.