Subsidy slayer

In a new report, Emirates hits back at its many critics with telling case histories that show many airlines continue to get bailouts, while it insists it gets none. Despite the aviation industry’s best attempts to reach a self-sustaining, profitable position, Emirates argues that airlines and government subsidies often have gone hand in hand

It says that in the past decade, global carriers lost US$50 billion, a woeful result caused by compounding factors including the events of September 11, high fuel prices, flawed business models, the global financial downturn — and subsidised and propped-up under-performing carriers.

In such times, according to Emirates President Tim Clark, it’s not surprising that some carriers have been unable to service their debts and have sought relief from their governments: “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 and the Emirates report points to the state-run Korea Development Bank, which froze US$3.3 billion 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,” it argues.

And Emirates says 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.”

Star Alliance is the world’s largest airline group and 13 of its carriers — almost half its membership — have received subsidies and state aid worth more than €6.8 billion, claims Emirates.

It says one of those subsidies, €800 million paid into the Lufthansa pension fund by the German Government in 1995, was part of a series of European bailouts when national airlines were awarded with financial contributions totalling more than €10 billion — and that other beneficiaries included Air France, British Airways, TAP, Olympic Airways, Alitalia and Aer Lingus.

Emirates states that more recently, the debate has shifted to the Middle East, one of several regions witnessing high growth rates for air travel: “As the region has injected new competition into the global aviation landscape, this has induced a cacophony of criticisms, complaints and distortions regarding the issue of subsidy, with the aim of protecting the status quo of some non-Middle Eastern incumbents.

“Emirates acknowledges that some airlines in the Middle East are indeed government subsidised but the criticisms incorrectly paint all carriers in the region with the same brush. With Emirates being the largest and most visible airline in the region, the criticisms are often levelled at us, even though self-sufficiency and profitability has been in Emirates’ DNA since 1985.”

Mr Clark sees much to be encouraged about: “More and more countries recognise that liberal air access has a multiplier effect on their economies and best serves their national interest. Yet there are still cases where some flag carriers or their alliance proxies successfully block new competition by creating an echo-chamber of repeated false assertions about rivals.

“We recognise that our success has made us a target and some airlines have been willing to make gross misrepresentations about Emirates and Dubai in order to serve their interests. We have nothing to hide and welcome all discussion on our activities.”

Mr Clark points to a recent article in the highly respected Economist, which says: “The charges of unfair competition from the likes of Lufthansa, Air France-KLM and Air Canada fail to stack up. Although it is government owned, Emirates has been profitable in every year but one since it started. Its fast growing fleet … is financed conventionally. It pays the same price for fuel as other airlines and the same fees at its home airport.”

The Emirates report details a number of recent subsidies that have gone virtually unnoticed:

The European Commission found that financing granted to Hungarian flag carrier Malév between 2007 and 2010 in the context of its privatisation and re-nationalisation constituted illegal state aid. As a result, in January 2012 the Commission ordered Hungary to recover almost US$406 million from the airline.

Alitalia continues to benefit from state aid amounting to €700 million over seven years via a 2008 ‘Save Alitalia Decree’ passed by the Italian Government, which among other support mechanisms imposes an airport tax of €3 a passenger on all airlines serving Italy.

Citing concerns over a marketing agreement between Timisoara airport in Romania and Hungarian Wizz Air, the European Commission in May 2011 launched an investigation into non-payment of airport charges amounting to €2.6 million and additional rebates.

The European Commission has an open investigation under way into a CZK 2.5 billion loan granted to Czech Airlines (CSA) in 2009 by state-owned entity Osinek, which recently has been expanded to cover other restructuring funding to the airline.

The Cypriot Government in March 2011 approved a €20 million bailout to Cyprus Airways.

In November 2011 the European Low Fares Airline Association criticised a €25 million government subsidy to Spanair, bringing the total amount of support from local and regional Spanish governments to €120 million.

JAL received ¥350 billion of fresh capital in early 2010 from the Japanese Enterprise Turnaround Initiative Corporation, a state controlled investment fund, and an additional ¥600 billion line of credit from financial institutions including the government-owned Development Bank of Japan.

In December 2011, the Indian Government finalised plans to provide more than US$11 billion in state support to Air India. This includes coordinating loans from 14 banks worth US$5.7 billion over 10 years and US$4.7 billion to fund its fleet acquisition plans. In March 2012, the Indian Government approved a cash injection of US$800 million under the federal budget for 2012-13.

Going further back in history, Emirates highlights that Air France received €300 million and €580 million French Government capital injections in 1991 and 1992 and another €3 billion in 1994. Even Qantas was the beneficiary of a $1.14 billion debt write-off in 1992. Iberia picked up €560 million from the Spanish Government in 1996 and Swiss US$1.5 billion state aid in 2002.

But the criticism continues despite leading analysts rejecting the subsidy rhetoric. Deutsche Bank says: “The main criticism leveled at Emirates by rivals is that it benefits from indirect government subsidies in the form of cheaper fuel, very low landing fees and cheap aircraft financing. The fact is that Emirates pays market rate for fuel and that only around 20 per cent of its fleet is financed through export credit agencies such as the US Export-Import Bank.

“It is true that landing fees are low at Dubai compared to other hubs but the legacy carriers in Europe also enjoy a significant advantage having inherited around half the valuable slots at their respective hub airports. The main cost advantage of Emirates comes from higher employee productivity.”

The UBS view: “An overview of the audited financial accounts contains no material surprises once one gets used to seeing consistent profits at an airline … Emirates’ key competitive advantage is its relative youth (the fleet and the company), the location and efficiency of the Dubai hub and strong management.”

JP Morgan’s perspective: “We cannot find anything in Emirates’ accounts which indicates that the business is subsidized directly or indirectly or given any undue preferences … We are encouraged by the high level of disclosure Emirates offers, even as an unlisted company.”

And the Royal Bank of Scotland’s view: “Gulf carriers remain a material strategic challenge to the European legacy industry but we do not see their growth creating an inevitable structural crisis in the industry. We would expect European carriers to continue to lobby against the advantages of the Gulf carriers … The most successful strategy, however, in our view, will be to focus their development on routes where they have structural geographic advantage over Gulf carriers, rather than chasing those markets where Dubai’s location and Emirates’ strong network give it a major advantage.”

But that doesn’t stop the angst from Air Canada, Air France, Lufthansa and others:

Air Canada says: “The Gulf carriers are able to dump capacity into markets such as Canada and undercut incumbent air carriers such as Air Canada because of the virtually unlimited subsidies and support they receive from their respective governments.’’ (The impact of Emirates on the industry – Air Canada website).

But, says Emirates, the reality is that Air Canada doesn’t operate a service from Toronto to Dubai and Emirates flights are operating at 90 per cent full on average in 2011, revealing major capacity constraints.

Secretary General of the Association of European Airlines Ulrich Schulte-Strathaus says: “Our competitors are institutionally linked with their governments and regulatory bodies, their airports and service providers. There are no meaningful competition rules, no consumer protection rules, as we have in Europe. We have no choice of ground handler or catering supplier, where we can only conduct business through an appointed sales agent.”

But Emirates believes that Dubai is home to the most liberal competitive environment of them all: completely open access to all 150 carriers serving the emirate under its Open Sky policy. The airline says Dubai clearly is being singled out by Mr Schulte-Strathaus and that if he were truly against the practice of single-concessionaire models for ground handling and catering, he would also need to criticise Singapore, South Korea and Japan, among many others.

Weighing on for Air France-KLM is its chairman Jean-Cyril Spinetta: “These airlines are managed without the financial and economic constraints for profitability of an economy open to all players. Profitability, which is an absolute requisite for any private economic player, is of secondary importance for these airlines.”

But Emirates claims Mr Spinetta describes the Gulf region in broad terms that distort reality, saying Dubai has none of the oil wealth of its neighbours, which is why it pioneered service-based companies such as Emirates. As a result, Emirates was unique in the Middle East for having consistently produced profits due to its strong commercial mandate.
The company says: “We have been run in this way since October 1985. There is nothing secondary about profitability for Emirates, which taps international lenders for its financing needs and thus needs to operate on a profitable basis in order to service these loans.”

Lufthansa’s Chief Financial Officer Stephan Gemkow says Gulf airlines don’t have their own market,and depend on passengers from other markets: “Emirates serves Germany 56 times a week from Dubai but they do not bring their own guests, they bring passengers from India. for example.”

And he alleges that Gulf airlines have access to “unlimited resources since, as state-owned
airlines, they get financed by the respective emirate. Furthermore they are supported by very low costs for the infrastructure and benefit partly from European and US export financing”.

Emirates’ response is that it believes Lufthansa is trying to push the German Government into a Canadian-style protectionist aviation policy rather than the liberal aviation policies of the US with which Germany is more aligned.

It says Lufthansa had omitted that, like Emirates and all airlines, the carriage of transfer passengers is an important part of the German carrier’s business model. Each year Lufthansa carries hundreds of thousands of Canadian passengers to India via its hub in Frankfurt.

On export credit financing, Emirates agrees that all airlines should be entitled the same access to finance and supported the OECD’s February 2011 decision that raised the cost of some forms of capital.

Commenting for the Australian Workers’ Union National Secretary Paul Howes says: “Gulf-state airlines like Emirates … own the airports in those countries and get a massive saving on landing fees, terminal fees, or airport usage charges in their home state. These same kings, emirs and princes also own a large bulk of the world’s oil reserves, which is a great help to the airlines because it allows them to operate with hugely subsidised fuel costs.’’

And Emirates’ response: “With oil all around us in the Middle East, our critics have found the perfect lie in accusing us of receiving cheap fuel. But the facts have always been hiding in plain sight: Dubai has extremely limited oil reserves and only one small-scale jet fuel refinery. Because of this, our primary kerosene suppliers are Western energy firms, which charge commercial prices.”

The Emirates report cites some fascinating labour costs figures. Top of the list is Lufthansa with a labour cost per employee of $110,000. Air France-KLM comes next at $100,000 then
Qantas at $92,000. The figures then tumble with Cathay Pacific at $65,000, Thai International and Emirates $47,000 and Singapore Airlines $45,000. The Malaysia Airlines figure is a low, low $34,000.

Emirates says that geography plays a central role in any cost comparisons, reflecting lower wage costs in non-European and US markets and that it and Singapore Airlines have very similar labour costs, reflecting similar business models and a shared reliance on recruiting staff from abroad on expatriate packages.

It adds that despite enjoying a lower cost base than in Europe and North America, it also has a skilled workforce with productivity rates higher than the industry average.

Emirates’ unit cost of US 11.75c per seat mile is comparable to its peer airlines such as Singapore Airlines and Cathay Pacific. Compare this with Qantas, with a unit cost of US 16.94c per seat mile.

On airport charges, Emirates again hits back at critics: “In comparison against international hubs based in the Middle East, Asia and Europe, Dubai International ranked as the fifth costliest airport, more expensive than charges in Beijing, Kuala Lumpur and Doha.”

Separately, a study compiled by Oxford Economics in June 2011 entitled Explaining Dubai’s aviation model found that overall charging at Dubai International Airport was highly competitive and commercially based —with Dubai being close to the average when looking at airport charges at the world’s largest airports.

And Chief Executive of Dubai Airports Paul Griffith was quoted recently as describing the Dubai International commercial strategy to be “competitive on aeronautical costs in order to attract more airlines and more passengers”, which he said in turn boosts non-aeronautical revenues.

“Because of this, Emirates pays the same competitive rates as everyone else. This approach also recognises and captures the broader economic value of aviation far better than the legacy models being used in more mature markets, where regulation and taxation have conspired to hike costs and cripple growth.”

He added: “Aviation’s growth is driving wider economic benefits in terms of increased employment and tourism to the emirate.”

Oxford Economics concluded that the charges at most airports in Dubai’s peer group are very similar.

On airports and infrastructure, Emirates points out that airports around the world are funded in widely differing ways with a variety of ownership structures and relationships to the ‘home’ carrier and respective national governments, saying: “It is not uncommon for governments or state controlled entities around the world to help finance expansion of airport infrastructure, viewing them as key drivers for economic growth and essential for connectivity to the global economy.

“Some 78 per cent of Europe’s airports were publicly owned and a further 13 per cent had some element of public partnership, according to a 2010 study by ACI, the international association of the world’s airports. In addition, a 2007 ICAO report noted that 70 per cent of the more than 600 international airports were publicly owned.”
The four runways at Paris Charles de Gaulle were built by Aéroports de Paris, wholly owned by the French Government for 22 years until its privatisation in 2006. However, the French federal and regional governments still retain significant stakes in the company.

Vienna Airport was government-held for 50 years until its partial privatisation in the 1990s. It’s now 40 per cent state controlled. And a similar history is found at Munich and Frankfurt.

Frankfurt Airport is now 51 per cent controlled by the German regional and city government with Lufthansa owning 10 per cent and private investors the rest. But for the first five decades of its existence it was fully government owned.

Emirates singles out Lufthansa, saying: “It makes 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 had to fund the improvements at market rates.”

And Emirates claims that Lufthansa, operating about 30 per cent of all flights from the airport, has benefited the most from this public funding.

The final word?

Germany’s pre-eminent national aviation and space research institution, the Cologne-based German Aerospace Centre (DLR), recently took on the questions of to what extent is Emirates affecting the operations of Lufthansa, and how Emirates impacts on the German economy.

As Emirates points out: “With an annual research budget of €745 million and a staff of 7,000 at 32 institutes and facilities across Germany, this government-affiliated agency was well-placed to dissect the numbers and come up with an independent and impartial analysis.”

Underscoring its expertise and standing, DLR also manages Germany’s space program for the Government.

After months of research, it released a report in May entitled The Impact of Emirates Airline on the German
Economy. It estimates:

Since 2003, the aviation market between the Eastern Hemisphere and Germany has grown by 60 per cent, enhancing connectivity and spurring growth in German
airlines and airports.

Passengers travelling on Emirates have not defected from other airlines or hubs but to a large extent represent Emirates stimulating additional demand.

Emirates adds €1.6 billion to the German economy and supports more than 18,000 German jobs annually.

In markets where Emirates and Lufthansa have directly competed, Lufthansa has continued to “grow substantially in terms of seat capacities and destinations offered”.

The success of Emirates and Lufthansa reflects the fact that the two airlines offer slightly different offerings and therefore serve different market segments, namely time-sensitivity.

Introducing double-daily services to Berlin and Stuttgart would lead to 2,000 new jobs and €109 million across the air transport and tourism industries and wider German economy.

The UAE and Germany enjoy a positive bilateral Air Services Agreement and Emirates operates 63 passenger flights a week to Frankfurt, Munich, Hamburg and Dusseldorf.

Emirates wants to expand further by opening routes to Berlin and Stuttgart but is unable to do so under the current agreement as it is limited to serving a total of four points in Germany.

DLR concluded:“Germany would strongly benefit from further air transport liberalisation. Enhancements in connectivity would lead to an increase in overall global competitiveness for business relations, exports, job creation, expenditure and incoming tourism, not to mention the added benefit to the passenger with reduced travelling times, more choice and competitive pricing.”

In summary Emirates says it’s undeniable that many Middle East governments are oil-rich. But myths about Emirates’ access to free or discounted oil fall flat on their face. Dubai has extremely limited oil resources, forcing it to innovate into other fields and opening the way for foreign fuel suppliers to dominate at Dubai International.

As CNN once aptly put it: “Dubai is a story of survival — how one small city running out of oil saved itself with a mixture of tourism, commercialism, and pizzazz.” And that pizzazz resonates with passengers.

Under the guidance of vice chairman Maurice Flanagan and President Tim Clark Emirates has led the industry with innovation for nearly 30 years. It has become the world’s first truly global airline, employing 130 nationalities, including over 4,500 Aussies who call Dubai home.

With a fleet of 174 twin-aisle aircraft the airline serves 124 destinations in 74 countries in Europe, the Middle East, Africa, the Indian subcontinent, North America, South America, and Asia-Pacific.

Since the beginning of 2011, it has increased its European network to 29 destinations with new services operating to Geneva, Copenhagen, St Petersburg, and Dublin. Last month it began flights to its 30th European destination, Barcelona, and the 31st, Lisbon.

Since Emirates began flying to Australia in 1996 it has carried over 15 million passengers into and out of Australia. In 2010-11, it bought over 72,000 flights on Qantas and Virgin Australia flights to provide flights to domestic points outside of Brisbane, Melbourne, Perth and Sydney.

But the airline s does more than carry passengers into Australia. Today, the United Arab Emirates is Australia’s largest trade partner in the Middle East North Africa (MENA) region with bilateral trade reaching $5.3 billion in 2010. Australian exports to the UAE have had an annual average growth rate of 10 per cent since 1996 and will grow to over $2.4 billion in 2011.
In 2011, Emirates was the fourth largest international carrier in the Australian market with 8.1 per cent market share behind Qantas Group (27.1 per cent) Singapore Airlines (9.2 per cent) and Air New Zealand (8.2 per cent).

A 2011 study by Oxford Economics found that Emirates’ one-stop connectivity to and from Europe via Dubai generated an extra l US$248 million for the Australian economy and over US$840 million in consumer benefits. The study also found that Emirates’ 2009 passenger traffic generated US$1.33 billion in GDP for the Australian tourism sector.

On top of that in 2010-11, Emirates’ direct expenditure through its procurement of Australian goods and services was worth over US$500 million and since 1996 it has invested over $75 million in arts, community and sports sponsorships here.

The airline’s spectacular rise has not surprisingly attracted hundreds of awards, the most notable Air Transport World’s Airline of the Year for 2011. And the airline of the year has Australia – with or without Qantas — firmly on its expansion radar, says the airline’s President Tim Clark.

The A380 is figuring heavily in those plans, Mr Clark saying Melbourne would get the jetliner later this year and that he wanted to introduce it to Perth. Speaking from Dubai, he said the Western Australian boom means the airline’s flights into Perth are full.

“We want to introduce a third daily flight sooner than later and certainly with 12 months. Our operations people are looking at the ability of Perth Airport to handle the A380 but I have my concerns,” he said.

The airport’s ability to handle the passenger aspects of the A380 is limited and will not be addressed till expansion of the international terminal is complete in 2014. But Mr Clark said he would even consider having the giant A380 remote parked at Perth Airport and would bus passengers so the airline could meet demand.

“Perth Airport must grab the initiative and get on the front foot with expansion plans. They must look at the passenger numbers — WA is booming. I would bring the A380 to Perth tomorrow if I could.”

But he’s concerned that he’s “not getting clarity” about Perth Airport’s ability to handle the A380: “I have told my operations team to do an assessment and get answers.”

Mr Clark also wants a third daily Brisbane service, saying Adelaide is now in his sights.

On Qantas, he said talks were proceeding but warned that codeshares and alliances are hard to do and might take a year or more: “The talks are still exploratory but the initial engagement has been good. There is a greater degree on interest from both parties.”
And he added: “If something can be done it will be a very robust alliance.”

It would seem Qantas’s international future lies well and truly in Dubai.