Restoring Open Skies: Addressing Subsidized Competition from State-Owned Airlines in Qatar and the UAE January 2015 1
U.S. Open Skies Policy Is Predicated On a Level Playing Field • Since 1992, the United States has successfully 1 removed limitations on flights between the United States and over 100 foreign countries, leaving the market free to determine destinations, frequencies, routes and prices. This “Open Skies” policy has generally provided great benefits to U.S. consumers, airlines and the economy. • U.S. Open Skies policy is premised on the belief that Open Skies agreements enable U.S. airlines to compete in a marketplace free of government distortion, including subsidies. • U.S. carriers have proven that they can successfully compete against any carrier in the world when the playing field is level. • But in the case of the Gulf nations of Qatar and the United Arab Emirates (UAE), the playing field is not level. 2
The Governments of Qatar and the UAE are pursuing aviation industrial policies that are fundamentally incompatible with Open Skies • Over the past decade, the governments of Qatar, Abu Dhabi and Dubai have granted over $40 billion in subsidies and other unfair benefits to their state- owned carriers in order to stimulate their economies by promoting the flow of international passenger traffic through their Gulf hubs. • State-owned Qatar Airways, Etihad Airways and Emirates Airline are now using this huge, artificial cost advantage to exploit the open access they have to the U.S. market. • The routes that these subsidized airlines operate to the United States have not meaningfully increased passenger traffic; they merely serve to displace the market share of U.S. airlines and to shift good U.S. 1 aviation jobs overseas. • The status quo runs absolutely counter to fundamental Open Skies policy and cannot be justified or maintained. The agreements with Qatar and the UAE should be reopened and modified to address the flow of subsidized capacity to the United States. 3
Since 2004, the Governments of Qatar and the UAE have granted over $40 billion in subsidies and other unfair benefits to their state-owned carriers Total quantified subsidies ($39.2) and other unfair benefits ($3.1) 1 UAE Subsidies USD billions, by airline by date range Qatar Subsidies $42.3 $6.8 $24.8 2 $18.0 $17.5 $17.5 Total (Quantified) (2004-2014) (2004-2014) (2004-2014) 4
QATAR AIRWAYS: Over $17 billion in subsidies and other unfair benefits since 2004 Value of quantified subsidies and other unfair benefits to Qatar Airways from the Government of Qatar 1 USD millions, 2004-2014 Unquantified 17,472 984 22 616 215 452 Related party transactions 6,809 Subsidized airport infrastructure 618 7,756 and services Exemptions from corporate and other taxes and duties Exemption from Interest-free Interest savings Avoided Free Land Airport Passenger fee Grants Union ban Total competition laws "loans" and from interest- interest from Revenues exemption and resulting in shareholder free "loans" government rebates below market Absence of advances ('04-'09) loan guarantees labor costs independent regulatory oversight Financial statements acknowledge that Qatar would not be commercially viable without subsidies 2 2 GOING CONCERN The accumulated losses as at 31 March 2013 exceed 50% of the share capital. Article 46 of the Articles of Association of the Company requires that the Board of Directors shall convene an Extraordinary General Assembly to decide whether the situation requires dissolution of the Company or to increase its capital or to take any other suitable measures. In the Extraordinary General Assembly dated 28 July 2013, the shareholders of the Company resolved to continue the operations of the Company as adequate financial support will be made available to enable the Group to meet its liabilities as they fall due. The audited consolidated financial statements were prepared under the going concern concept due to the following facts: (a) The shareholders resolved in the Extraordinary General Assembly to continue with the operations of the Group; and (b) The shareholders resolved in the Extraordinary General Assembly to make funds available to the Group to allow it to meet its liabilities as they fall due. 5
ETIHAD AIRWAYS: Over $17 billion in subsidies and other unfair benefits since 2004 Value of quantified subsidies and other unfair benefits to Etihad from the Government of Abu Dhabi 1 USD millions, 2004-2014 Unquantified 246 17,966 Related party 4,172 501 751 transactions 1,375 Subsidized 4,630 6,291 airport infrastructure and services Exemptions from corporate and Equity infusions Interest-free Interest savings Grants Passenger Fee Additional Union ban Total other taxes and (‘07-’13) "loans" with no from "loans" exemption committed resulting in duties repayment subsidies below-market Exemption from obligation labor costs competition laws Absence of independent regulatory Financial statements acknowledge that Etihad would not be oversight commercially viable without subsidies 2 Acquisition of 2.1 Going Concern new assets: These annual financial statements have been prepared on a going concern basis notwithstanding the fact foreign airlines that the Group has accumulated losses of USD 3,763 million as of 31 December 2013. The Executive Council of the Emirate of Abu Dhabi approved in 2007 (pursuant to decision No. 17) and then in 2008 (decision No. 53) for the availability of committed funds to the Group comprising: USD 6,512 million of authorized share capital of which USD 6,427 million has been issued for cash to date and the remainder (USD 85 million) can be issued to fund future operational cash requirements (refer to note 18.1); and USD 5,213 million of shareholder loans (in substance these are equity in nature) of which USD 4,630 million has been utilized and the remainder (USD 583 million) is available for the acquisition of aircraft (refer to note 18.2) The Group prepares rolling cash flow forecasts for a five year term. Based on their review and approval of these forecasts and USD 3,504 million available for drawdown by Etihad as approved by the Executive Council during 2014 as additional funding from the Shareholder, the Directors confirm that the Group has access to sufficient cash facilities to meet its obligations for the foreseeable future and for a period of at least 12 months from the date of approval of these annual financial statements. Accordingly, the annual financial statements have been prepared on the going concern basis. 6
EMIRATES AIRLINE: Over $6 billion in subsidies and other unfair benefits since 2004 Value of quantified subsidies and other unfair benefits to Emirates from the Government of Dubai 1 USD millions, 2004-2014 Unquantified 1,878 6,839 4,961 2,264 Related party 2,395 302 transactions ($2.2 billion in 2013-14 alone) Government Carrying cost of fuel Subsidized airport Total quantified Union ban resulting Total quantified Exemptions from corporate and assumption of fuel hedging losses charges subsidies (excludes in below-market benefits other taxes and hedging losses unfair practices) labor costs duties Exemption from competition Subsidized airport charges: If Emirates’ home-hub were O’Hare, its costs would be $1.4 billion more per laws year (approximately 120% of its 2013/2014 operating profit) 2 Absence of $40 The Government of Dubai independent Airport Charges (per Operation), Boeing 34.2 has acknowledged that $35 regulatory airport fees and charges are oversight $30 too low to recoup the 777-300ER (Thousands) 3 24.7 money it spends to build $25 23.0 22.0 and operate DXB, unlike in 20.9 $20 the United States and 17.1 17.0 16.4 16.1 15.8 14.9 Europe. 4 14.7 14.1 13.9 13.9 13.3 $15 12.6 10.1 $10 8.2 7.8 6.8 6.8 5.2 3.8 3.8 3.5 $5 $0 7 Other Large International Hub Airports Gulf Carrier Hub Airports Large U.S. International Gateways
Pervasive state ownership and lack of transparency makes it impossible to determine the full extent of Gulf subsidies • Virtually every supplier of goods, services and capital that the airlines need are “related parties” (affiliated government- owned entities). • Massive purchases of goods and services 2 from these related parties at non-arm’s length prices. • Emirates purchased $2.2 billion in FY 2013-14 (over 10 percent of its total reported operating costs); $11 billion since 2004. 1 • No disclosure of specific counterparties, what is being purchased, or in what amounts. • Most of the related parties don’t disclose financials; governments can allocate profit and loss to show whatever results they want. No indication the purchase of these goods and services was conducted at arm’ s length 8
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