War Of Words

They’re not only under attack fromDelta, American Airlines and United Airlines in the US but are getting similar flak from major airlines in Europe, particularly Lufthansa and Air France/KLM, accusing them of being heavily subsidised and attempting to put a stop to the major investments the like of Etihad has been making, gaining a foothold with stakes in Alitalia, airberlin, Air

The issue is that they cannot stand the progress the Gulf carriers are making. AL-BAKER

Serbia and others. The French and German transport ministers have called on the European Commission (EC) to tackle the subsidy issue, with French transport minister Alain Vidalies saying the Gulf airlines were benefiting from “unfair competitive practices”. In essence these US and European operators want the brakes placed on the growing amount of capacity the Gulf airlines are continuing to throw into their home markets.

And while this may all be taking place north and west of the Middle East, if they succeed there will be implications on the long-haul operations of Qantas and Virgin Australia. For Qantas, its partnership with Emirates and increasing access through Dubai into a growing number of European destinations is a vital part of ongoing strategy. The same applies for Virgin. It doesn’t fly to Europe but a major plank in serving the continent is through its close tie-up with part-owner Etihad. As these two Gulf carriers expand their USdestinations the Australian airlines also have an ability to link with their Gulf partners there. Restrictions on the Gulf carriers will add up to restrictions on Qantas and Virgin.

The latest subsidy clash erupted into full-scale warfare in March and it hasn’t cooled since. Three of America’s four largest airlines – American, United, and Delta – teamed up with labour unions representing their workers to form a coalition called Americans for Fair Skies, which is demanding US government action against the Gulf three, claiming they are cheating on existing international agreements by receiving government subsidies that violate the terms of the existing Open Skies agreements between the US, the United Arab Emirates, and Qatar.

They accuse Dubai-based Emirates of benefiting from their government assuming $2. 4 billion in fuel hedging costs, getting $2. 3 billion in artificially low airport charges at its Dubai hub and winning $1. 9 billion in low labour costs due to non-union labour (all figures in USD). They accuse Etihad of getting $6. 3 billion in equity infusions from the emirate of Abu Dhabi, which owns the airline, $4. 6 billion in interest-free loans from Abu Dhabi and $4. 2 billion in unclearly specified “additional committed subsidies”. And they accuse Qatar of getting $7. 7 billion in interest-free loans from the government of Qatar and $6. 8 billion in reduced interest costs due to sovereign guarantees for its borrowing. Altogether, they claim the three have benefited from over $40 billion in state subsidies in the past decade.

On their part, the Gulf airlines argue that equity investments are not subsidies and that cheap labour and cheap airport fees simply reflect a pro-business policy environment. They also say discount loans are the equivalent of the airline industry bailout the US Congress approved in the wake of 9/11’s disruption to the industry, financial assistance that also arguably violated the terms of the Open Skies deal.

Five megacarriers are trying to pull the ladder up after years of having it their own way. JAMES HOGAN

“I think Mr Anderson (chief executive of Delta, Richard Anderson) doesn’t know the difference between equity and subsidy. We never receive any subsidy. 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,” said al Baker. Emirates chairman Sheikh Ahmed bin Saeed and Clark also describe the allegations as far off base.

Sheikh Ahmed echoed al Baker’s comments, saying what the US carriers need to do is simply “improve their service” to compete with the Gulf airlines. “Offer the best to the passengers and people will fly with you,” he added.

Clark said he was unsure how the US carriers had come up with their figures. “We did receive start-up capital of $10 million in 1985 and a one-time infrastructure investment of $88 million for two Boeing 727 aircraft and a training building but we have never received financial subsidies or bailouts,” he said.

Emirates currently flies directly to nine cities in the US. Last year, it added services to Boston and Chicago. “Our US operations generate more than $2. 8bn of estimated economic value annually for the (US) airports,” he said, adding that the airline creates jobs for American-based industry manufacturers such as Boeing and GE.

“It would be ironic, and a shame, if the US, who have been the forerunners of liberalisation and deregulation, would now contemplate a U-turn on its successful international aviation policies for the benefit of a narrow few,” said Clark.

Etihad’s Hogan has taken a similar stand, strongly denying the subsidy claims and warning there are wider implications. “The dark clouds of protectionism are gathering,” hedeclared. “Five mega-carriers are trying to pull the ladder up after years of having it their own way. ” Hogan played the economic card, saying research conducted by Oxford Economics verified that in 2014 Etihad’s core operations in the European Union (EU) contributed $1 billion to the combined GDP (Gross Domestic Product) of the 28 EU member nations and supported more than 11,000 jobs. Additionally, the airline’s 2014 capital spending on aircraft and other aviation equipment contributed $2. 6 billion to the EU’s GDP, and supported more than 28,100 jobs. The research also showed that during the past decade, the airline’s operations contributed approximately $6. 1 billion to EU GDP, while its capital spending on aircraft and aviation equipment exceeded $11 billion dollars.

“Etihad Airways is not just another foreign airline flying to Europe to poach local traffic. We are a sophisticated partner to and investor in Europe for long-term mutual benefit, contributing billions of euros every year to EU and non-EU economies, supporting tens of thousands of jobs and both maintaining and expanding choice for air travellers to and from Europe,” Hogan said.

“Through our own flights, our 21 European codeshare partnerships and our minority investments in five European airlines, we are adding value to Europe in a way that no other foreign airline is…we also operate one-stop services between Europe and 19 destinations not served by any EU carriers. And we provide codeshare access to many of these markets for European airlines, including connections to Australia for 11 carriers, five of which ceased operating their own services on these routes prior to us entering the market. ” Hogan warned the ultimate priceof any action taken against Gulf airlines would be the impact on the future growth of the global aviation industry. “Growing resistance to us from a handful of protectionist competitors could have unintended consequences well beyond limiting our development. . . If our growth is curtailed or our investments in airlines are compromised, the real damage will be to Europe in lost jobs, lost flight connectivity, lost investment in local and national economies and lost consumer choice. ” He added that as the debate “heats up around the world” the industry is in danger of losing sight of the fact that competition stimulates growth, both for the sector and for the economies that gain millions of dollars from the increased trade links that follow new aviation routes.

Meanwhile, in the US the Obama administration agreed to look at the subsidy issue in a review that was due to extend through May. That sparked another round of accusations, with the big US airlines alleging the Gulf carriers were “rushing” to add new flights to the US ahead of possible restrictions. “It is now apparent that the Gulf carriers are taking advantage of this delay to change the facts on the ground, rushing to add new widebody services in an attempt to gain even more marketshare before the US government acts to counter their subsidised expansion,” said American Airlines chief executive Doug Parker, Delta chief Anderson and United head Jeff Smisek in an April 17 letter to the US government. They asked for a freeze on any expansion until a resolution of the disagreement is reached.

But whatever decisions are made in Washington and Brussels it seems unlikely the arguments will end any time soon.