Airlines and subsidy: our position ¬ Myth Airline subsidies are a “Gulf” problem FACT Market-distortingsubsidiesandgovernmentsupportaresadlypresentineveryworldregion
Myth Emirates is subsidised FACT Completelyunsubsidised.Wecampaignagainstairlinesubsidies
Myth Emirates accesses cheap or free fuel FACT False.WebuyfuelfromBP,ShellandChevroninDubaiandworldwideatmarketrates
Myth US and European airlines received support decades ago but are now subsidy-free FACT Bankruptcyprotectionandgovernmentbailoutscontinuetoexist
1
Airlines and subsidy: our position ¬Weunderstandthatdespitenoevidence,anoftrepeatedmythcanultimatelybeacceptedasconventionalwisdom.Inthisdocumentyouwillfindourviewsonsubsidyintheairlineindustry,thoroughexplanationsaboutEmirates’businessmodelandourresponsetomisrepresentationsthathavebeenlevelledagainstus-fromclaimsaboutsubsidisedfuel,financialsupportandstaffconditionstoenvironmentalregulationandairportcharges.
Emiratesbelieves:•AcommonsetoftransparentfinancialreportingmetricstomeasureandapplyagainstallinternationalcarriersshouldbedeterminedbyIATAandICAOonwhatdefinesasubsidy.
•Governmentsshouldnotprovideinjections,borrowingsorfinancingtoairlines,regardlessofshareholdingstatus.
•Allgovernmentsshouldpursueliberalisationandopenskieswiththeobjectivetoendthegreatestsubsidyofall–aero-politicalprotection.
Tim Clark, President, Emirates Airline
3
Introduction 4
Recentairlinesubsidies 5
Therhetoricalmerry-go-round 6
Governmentownershipandsupport 8
Statesupport:ahistorylesson 9
Doesanairlineneedtobepublicly-tradedinordertobe“transparent”? 10
AnalystsconfirmEmirates’independent,commercialstatus 11
Faircompetition 12
StarAllianceandstatesupport 13
Sourcesoffinance 14
Themythofthe“GulfCarriers” 15
Airlinearbitrage:varyingcostbasesaroundtheworld 16
Landingfees,chargesandsuppliers 18
Airportinfrastructure 19
Oil 22
AtransparentfulldisclosureofEmirates’subsidiaries 24
Environment 26
Conclusion 27
Contents ¬
4
Despitetheaviationindustry’sbestattemptstoreachaself-sustaining,profitableposition,airlinesandgovernmentsubsidieshaveoftengonehandinhand.
Inthelastdecade,globalcarrierslostUS$50billion,awoefulresultcausedbycompoundingfactorsincludingtheeventsofSeptember11,highfuelprices,flawedbusinessmodels,theglobalfinancialdownturnand,ofcourse,subsidisedandpropped-upunderperformingcarriers.
Withperiodssuchasthese,itisnotsurprisingthatsomecarriershavebeenunabletoservicetheirdebtsandhavesoughtrelieffromtheirgovernments.
AlthoughEmirates,asaprofitableandcommerciallyruncarrier,isfundamentallyagainstthepracticeofairlinesreceivingstatesubsidies,weunderstandthatitmaytaketimeforthepracticetobewhollyeliminatedfromourindustry.
Market-distortingsubsidiescantakemanyforms.Thestate-runKoreaDevelopmentBankfroze3.76trillionKoreanWon(US$3.3bn)worthofdebtsfromAsianaAirlinesin2010.Thisisaveryclearexampleofsubsidy,aswasthe€500million“brideprice”giventoAustrianAirlinesfromtheAustrianGovernment,priortotheSeptember2009takeoverbyLufthansa.
Taxbreaks,underwrittenwarriskinsuranceand“onetime”state-bankloansareformsofsubsidy,evenif“approved”bygovernments.
Althoughnotasubsidyperse,Chapter11protectionintheUSalsohasasignificantmarketeffect,byprovidingalevelofprotectionforairlinebankruptcyreorganisationthatisseldomfoundinothermarkets.
The Star Alliance is the world’s largest airline group and 13 of its carriers - nearly half of its membership - have received subsidies and state aid totaling more than €6.8 billion.
Oneofthosesubsidies,€800millionpaidintotheLufthansapensionfundbytheGermanGovernmentin1995,waspartofaseriesofEuropeanbailoutswhennationalairlineswereawardedwithfinancialcontributionstotalingmorethan€10billion.OtherbeneficiariesincludedAirFrance,BritishAirways,TAP,OlympicAirways,AlitaliaandAerLingus.
Morerecently,thedebatehasshiftedtotheMiddleEast,oneofseveralregionswitnessinghighgrowthratesforairtravel.
Astheregionhasinjectednewcompetitionintotheglobalaviationlandscape,thishasinducedacacophonyofcriticisms,complaintsanddistortionsregardingtheissueofsubsidy–withtheaimofprotectingthestatusquoofsomenon-MiddleEasternincumbents.
EmiratesacknowledgesthatsomeairlinesintheMiddleEastareindeedgovernmentsubsidised,butthecriticismsincorrectlypaintallcarriersintheregionwiththesamebrush.
WithEmiratesbeingthelargestandmostvisibleairlineintheregion,thecriticismsareoftenleveledatus,eventhoughself-sufficiencyandprofitabilityhasbeeninEmirates’DNAsince1985.Asyouwillfindinthisreport,allofourachievementsarewell-earned,transparentlydocumentedandborneoutofoureffortstosustainablybuildourcompany.
Introduction
“AtEmiratesweseemuchtobeencouragedabout:moreandmorecountriesrecognisethatliberalairaccesshasamultipliereffectontheireconomiesandbestservestheirnationalinterest.Yettherearestillcaseswheresomeflagcarriersortheirallianceproxiessuccessfullyblocknewcompetition,bycreatinganecho-chamberofrepeatedfalseassertionsaboutrivals.WerecognisethatoursuccesshasmadeusatargetandsomeairlineshavebeenwillingtomakegrossmisrepresentationsaboutEmiratesandDubaiinordertoservetheirinterests.Wehavenothingtohideandwelcomealldiscussiononouractivities.”Tim Clark, President, Emirates Airline
“ThechargesofunfaircompetitionfromthelikesofLufthansa,AirFrance-KLMandAirCanadafailtostackup.Althoughitisgovernment-owned,Emirateshasbeenprofitableineveryyearbutonesinceitstarted.Itsfast-growingfleet…isfinancedconventionally.Itpaysthesamepriceforfuelasotherairlinesandthesamefeesatitshomeairport.”The Economist
5
• TheEuropeanCommissionfoundthatfinancinggrantedtoHungarianflagcarrierMalévbetween2007and2010inthecontextofitsprivatisationandrenationalisationconstitutedillegalstateaid.Asaresult,inJanuary2012theCommissionorderedHungarytorecovernearlyFt100billion(US$406million)fromtheairline.
• Alitaliacontinuestobenefitfromstateaidamountingto€700millionoversevenyearsviaa2008‘SaveAlitaliaDecree’passedbytheItalianGovernment,whichamongstothersupportmechanisms,imposesanairporttaxof€3perpassengeronallairlinesservingItaly.
• CitingconcernsoveramarketingagreementbetweenTimisoaraairportinRomaniaandHungarianWizzAir,theEuropeanCommissioninMay2011launchedaninvestigationintonon-paymentofairportchargesamountingto€2.6millionandadditionalrebates.
• TheEuropeanCommissionhasanopeninvestigationintoaCZK2.5billionloangrantedtoCSA-CzechAirlinesin2009bythestate-ownedentityOsineka.s.,whichhasrecentlybeenexpandedtocoverotherrestructuringfundingtotheairline.
• TheCypriotGovernmentinMarch2011approveda€20millionbailouttoCyprusAirways.
• InNovember2011theEuropeanLowFaresAirlineAssociationcriticiseda€25milliongovernmentsubsidytoSpanair,bringingthetotalamountofsupportfromlocalandregionalSpanishgovernmentsto€120million.
• JALreceived¥350billionoffreshcapitalinearly2010fromtheJapaneseEnterpriseTurnaroundInitiativeCorporation(astate-controlledinvestmentfund),andanadditional¥600billionlineofcreditfromfinancialinstitutionsincludingthegovernment-ownedDevelopmentBankofJapan.
• InDecember2011,theIndianGovernmentfinalisedplanstoprovidemorethanUS$11billioninstatesupporttoAirIndia.Thisincludescoordinatingloansfrom14banksworthUS$5.7billionovera10-yearperiodandUS$4.7billiontofunditsfleetacquisitionplans.InMarch2012,theIndianGovernmentapprovedacashinjectionofUS$800millionunderthefederalbudgetfor2012/13.
Recent airline subsidies
6
“TheGulfcarriersareabletodumpcapacityintomarketssuchasCanadaandundercutincumbentaircarrierssuchasAirCanadabecauseofthevirtuallyunlimitedsubsidiesandsupporttheyreceivefromtheirrespectivegovernments.’’The Impact of Emirates on the Industry - Air Canada website
Emiratesoperatesitsflightsonafullycommercialbasis,respondingtodemandandmakingrationalmarketassessments.SinceAirCanadadoesn’toperateaservicefromTorontotoDubaiwearetheonlycarrieroperatingthisrouteandourflightsflew90%fullonaveragein2011,revealingmajorcapacityconstraints.Wesimplycannotaffordtoassignaircrafttorouteswherethereisnodemand,norareweinthebusinessofcapacitydumping.
“Ourcompetitorsareinstitutionallylinkedwiththeirgovernmentsandregulatorybodies,theirairportsandserviceproviders..therearenomeaningfulcompetitionrules,noconsumer-protectionrules,aswehaveinEurope..wehavenochoiceofgroundhandler,orcateringsupplier,wherewecanonlyconductbusinessthroughanappointedsalesagent.”Ulrich Schulte-Strathaus, Secretary General, Association of European Airlines (AEA)
EmiratesbelievesthatDubaiishometothemostliberalcompetitiveenvironmentofthemall:completelyopenaccesstoall150carriers
servingtheemirateunderitsOpenSkypolicy.DubaiisclearlybeingsingledoutbyMrSchulte-Strathaus,forifheweretrulyagainstthepracticeofsingle-concessionairemodelsforgroundhandlingandcatering,hewouldalsoneedtocriticiseSingapore,SouthKoreaandJapan,amongstmanyothers.
“Theseairlinesaremanagedwithoutthefinancialandeconomicconstraintsforprofitabilityofaneconomyopentoallplayers.Profitability,whichisanabsoluterequisiteforanyprivateeconomicplayer,isofsecondaryimportancefortheseairlines.”Jean-Cyril Spinetta, Chairman of Air France-KLM
MrSpinettadescribestheGulfregioninbroadtermsthatdistortreality.Dubaihasnoneoftheoilwealthofitsneighbours,whichiswhyitpioneeredservice-basedcompaniessuchasEmirates.Asaresult,EmiratesisuniqueintheMiddleEastforhavingconsistentlyproducedprofitsduetoourstrongcommercialmandate.WehavebeenruninthiswaysinceOctober1985.ThereisnothingsecondaryaboutprofitabilityforEmirates,whichtapsinternationallendersforitsfinancingneedsandthusneedstooperateonaprofitablebasisinordertoservicetheseloans.
“TheyexpandthehubDubairegardlessoftheprofitability.Becausetheonlyissuethatcountsisthedevelopmentofthelocation.Theowner
isthelawmaker,theregulator,ownstheairline,theairport,controlstheATCandisthefuelsupplier.Moneydoesnotmatter.Moreover,therearenoemploymentlawsandnoenvironmentalregulationsinDubai.ThisissimilartotheT-shirtsmadebychildlabour.…”Peter Malanik, former CEO, Austrian Airlines
Money,andprofitability,certainlymattersforEmirates,likeitdoesforanyindependentlymanagedcompany.AllofDubai’saviationfirmsarerunonacommercialmandateandthisiswhylocalairportdevelopmentswerepostponedbymorethan10yearsduetotheglobalfinancialdownturn.
HadMrMalaniktakenthetimetoexamineEmirates’labourandenvironmentalpractices,hewouldhavelearnedthatEmiratesoffersexcellentworkingconditions,withmorethan8,600employeeshavingserved10yearsormoreatthecompany,andinexcessof2,100staffwith20yearsormoreofservice.Emiratesalsogoesaboveandbeyondstandardairlinepracticetospendhundredsofmanhourseachyeardetailingourenvironmentalperformance.OurthreelargestfuelsuppliersareBP,ShellandChevron–nottheDubaiGovernment.
The rhetorical merry-go-round...OPERATE
WITH HUGELY SUBSIDISED FUEL
COSTS !
...T-SHIRTS MADE BY CHILD
LABOUR...!
7
Gulfairlines“donothavetheirownmarket,andtheydependonpassengersfromothermarkets.EmiratesservesGermany56timesaweekfromDubai,buttheydonotbringtheirownguests,theybringpassengersfromIndiaforexample.”Gulfairlinesalsohaveaccessto“unlimitedresourcessince-asstateownedairlines–theygetfinancedbytherespectiveemirate.FurthermoretheyaresupportedbyverylowcostsfortheinfrastructureandbenefitpartlyfromEuropeanandUSexportfinancing.”Stephan Gemkow, the Chief Financial Officer of Lufthansa
Theeconomicbenefitsofairlinecompetitionareclear:everynewairserviceboostsemploymentinthetrade,tourismandaviationservicesectors,creatingadditionaljobsandopportunitiesforexports.EmiratesbelievesLufthansaistryingtopushtheGermanGovernmentintoaCanada-styleprotectionistaviationpolicy,ratherthantheliberalaviationpoliciesoftheUSthatGermanyismorealignedwith.Lufthansaomittedthat,likeEmiratesandallairlines,thecarriageoftransferpassengersisalsoanimportantpartofitsbusinessmodel.EachyearLufthansacarrieshundredsofthousandsofCanadianpassengerstoIndiaviaitshubinFrankfurt.
Regardingexportcreditfinancing,Emiratesagreesthatallairlinesshouldbeentitledthesame
accesstofinanceandsupportedtheOECD’sFebruary2011decisionthatraisedthecostofsomeformsofcapital.
“Gulf-stateairlineslikeEmirates…owntheairportsinthosecountriesandgetamassivesavingonlandingfees,terminalfees,orairportusagechargesintheirhomestate.Thesesamekings,emirsandprincesalsoownalargebulkoftheworld’soilreserves,whichisagreathelptotheairlinesbecauseitallowsthemtooperatewithhugelysubsidisedfuelcosts.’’Paul Howes, National Secretary Australian Workers’ Union
WithoilallaroundusintheMiddleEast,ourcriticshavefoundtheperfectlieinaccusingusofreceivingcheapfuel.Butthefactshavealwaysbeenhidinginplainsight:Dubaihasextremelylimitedoilreserves,andonlyonesmall-scalejetfuelrefinery.Becauseofthis,ourprimarykerosenesuppliersareWesternenergyfirms,whichchargecommercialprices.
“...itisverydifficulttounderstandhowEmiratescouldbeprofitableattheircurrentrateofexpansionwithoutsomeformofgovernmentfinancialsupport”Shakeel Adam, Athena Aviation
EmiratesreceivesnofinancialsupportfromtheGovernmentofDubai.Ourfinancialbooks
arepublishedannuallyandauditedbyPwC.WerepeatedlyurgethosewhoclaimEmiratesreceivesfinancialsupportfromtheGovernmentofDubaitoconsulttheseauditedannualreports,whichwehavepublishedfornearlytwodecades.
8
Airlineshavelongbeenseenaskeyelementsofamodernfunctioningeconomybasedonglobaltradeandinterconnectivity.Asaresult,nationalairlines,knownas“flagcarriers”wereaffordedmeasuresofsupportfromtheirgovernments.
Thepastfewdecadeshaveseenmanyairlinesprivatised,althoughmanyflagcarriersarestillownedbythestate.Asthisdocumentexplains,mostofthebiggestprivatelyrunairlinesinEuropehaveturnedtotheirgovernmentsforsubsidiesandbailoutstothetuneofseveralbillioneurosintotal.
AirFrance,forexample,wasgiventhreecapitalinjectionsbetween1991and1994fromtheFrenchGovernmenttotalling€3.8billion.Justayearlater,theGermanGovernmentsteppedintosupportLufthansawith€800milliontoplugagapinthenationalairline’spensionfund.
ThestoryofEmiratesisfardifferent.WeareownedbytheGovernmentofDubaithroughitscommercialinvestmentarm,theInvestmentCorporationofDubai(ICD),whichhasholdingsinfinance,transport,energyandrealestate.
In1985EmiratesreceivedUS$10millionfromtheGovernmentofDubaiinstart-upseedcapitalandUS$88millioninvestedininfrastructure,whichincludedtwoBoeing727aircraftandtheEmiratesTrainingCollegebuilding.Thishasbeenmorethanrepaidbydividendpaymentsto
theGovernmentofDubai,whichhavetotalledUS$2.3billiontodate.TheDubaiGovernmentandthemanagementofEmirateshaveconsistentlymadeitclearthatEmiratesisrequiredtobeself-sustainableandprofitable.
Dubai’scorporatemodelhasitsoriginsinthecity’shistoricpositionasanentrepôt,whichhasfreetradeandcompetitiveopenmarketsatitscore.WhilstthereisacloserelationshipbetweenthegovernmentandmanyofDubai’sstrategiccommercialentities,Dubaiisatitsessencedrivenbycommercialentrepreneurialprinciples.
Eachcommercialentityisanindependentcompanywithitsownprofittargetsandoperationalautonomy,includingEmiratesandDubaiAirports.ThesecorporatestructureswerepioneeredbySingapore,andreplicated
bysimilarapproachesthroughoutAsia,suchasChina,HongKongandTaiwan.Singapore’ssuccesshasprovidedinspirationformanygovernmentsintheMiddleEasthopingtospurgrowth.
AlthoughstateownershipisanissuethatforeignairlinesoftenusetocriticiseEmirates,EuropeanUnion(EU)lawandthestatementsoftheEuropeanCommissionmakeitclearthereisnopreferenceforpublicversusprivateownership,aslongasneitherreceivescompetition-distortingsubsidiesorisfavouredbylegislation.
Government ownership and support
ThebusinesscentresofSingapore,HongKongandDubaiallbeganastradinghubs.
9
State support: a history lesson
AerLingus €200millionIrishGovernmentcapitalinjectionin1996.AirFrance €300millionand€580millionFrenchGovernmentcapitalinjectionsin1991and1992. €3billionFrenchGovernmentcapitalinjectionin1994.Alitalia €1.5billionand€1.2billionItalianGovernmentcapitalinjectionsin1997and2005.BritishAirways £160millionUKGovernmentdebtwrite-offpre-privatisationin1981.Iberia €560millionSpanishGovernmentcapitalinjectionin1996.Lufthansa €800millionGermanGovernmentcontributiontoLufthansapensionfundin1995.OlympicAirways €2.6billionGreekGovernmentaccumulateddebtwrite-offin2008/09.Qantas A$1.4billionAustraliaGovernmentdebtwrite-offin1992.TAP €1.8billionpackageofPortugueseGovernmentaidmeasuresin1994.Swiss US$1.5billionstateaidin2002.
Many airlines – Lufthansa and Air France among them – have received cash injections from their governments in tough times or pre-privatisation. Here is a list of some of the biggest bailouts.
£160m
€580m
A$1.4b
€300m €3b
€2.6b
€560m
€200m
€800m
€1.8b US$
1.5b
€2.7b
1981 1992 1991 / 92 / 94 1994 1995 1996 1996 1997 / 2005 2002 2008 / 09
10
Does an airline need to be publicly-traded in order to be “transparent”? Inthemodernaero-politicaldebate,muchattentionisgiventostate-ownedairlinesandtheirleveloftransparency.SomeofEmirates’rivals,suchasLufthansa,haveaccusedusofbeingsomehowsecretlysubsidised.Althoughtheyhavenotofferedanyprooftobackuptheiraccusations,theyandothersusethefactthatwearenotpubliclytradedtosuggestthatwemaybehidingsomething.WhileEmiratesisnotpubliclytraded,theissueisirrelevantbecauseEmirateshaspublishedauditedfinancialreportsfornearlytwodecades,whichare
allfullyaccessibleontheinternetatekgroup.com.Theannualreportisalsoavailableinprintedformat.
EmiratesfinancialstatementsarepreparedconsistentlyinaccordancewithInternationalFinancialReportingStandards(IFRS),whichisusedbycompaniesinmorethan100countries.OneoftheprincipalobjectivesofInternationalAccountingStandardsBoard,theindependentstandard-settingbodyoftheIFRSfoundationistodeliverasinglesetofhighqualityglobalaccountingstandards.
OurauditisconductedbyPwC,Dubai,whichisamemberfirmofthePwCglobalnetworkinaccordancewithInternationalStandardsofAuditing(ISA)issuedbytheInternationalFederationofAccountants(IFAC).Over125countriesuseorareintheprocessofadoptingtheISA.ThusourauditiscompletedtothesamerigorasnumerouspubliclylistedcompanieswhichareauditedunderISA’s.AnauditcompletedinaccordancewithISAalsorequirescompliancewithIFAC’sInternationalStandardonQualityControl(ISQC),whereethicalaswellasengagementandqualityreviewstandardsarespecified.OtherformsofEmiratesdisclosurearemadetostockexchanges,sincesomeofourinternationalfinancingcomesfrombondslistedwiththeSingaporeandLondonlistingauthorities.Tofulfilrelateddisclosurerequirements,Emiratesisrequiredtoregularlyfileauditedfinancialreportstosuchlistingauthorities.AsasignofourhighlytransparentbusinessapproachandduetothequalityofEmirates’AnnualReports,Emirateswasawarded“ExcellenceinFinancialReporting”withintheMENAregionfromtheInstituteofCharteredAccountantsofEnglandandWalesinDecember2011.
11
“ThemaincriticismleveledatEmiratesbyrivalsisthatitbenefitsfromindirectgovernmentsubsidiesintheformofcheaperfuel,verylowlandingfeesandcheapaircraftfinancing.ThefactisthatEmiratespaysmarketrateforfuelandthatonlyaround20%ofitsfleetisfinancedthroughexportcreditagenciessuchastheUSExport-ImportBank.ItistruethatlandingfeesarelowatDubaicomparedtootherhubsbutthelegacycarriersinEuropealsoenjoyasignificantadvantagehavinginheritedaroundhalfthevaluableslotsattheirrespectivehubairports.ThemaincostadvantageofEmiratescomesfromhigheremployeeproductivity.”Deutsche Bank
“Anoverviewoftheauditedfinancialaccountscontainsnomaterialsurprisesonceonegetsusedtoseeingconsistentprofitsatanairline…Emirates’keycompetitiveadvantageisitsrelativeyouth(thefleetandthecompany),thelocationandefficiencyoftheDubaihub,andstrongmanagement.”UBS
“WecannotfindanythinginEmirates’accountswhichindicatesthatthebusinessissubsidiseddirectlyorindirectlyorgivenanyunduepreferences”…“WeareencouragedbythehighlevelofdisclosurethatEmiratesoffers,evenasanunlistedcompany.”JP Morgan
“GulfcarriersremainamaterialstrategicchallengetotheEuropeanlegacyindustry.Butwedonotseetheirgrowthcreatinganinevitablestructuralcrisisintheindustry.WewouldexpectEuropeancarrierstocontinuetolobbyagainsttheadvantagesoftheGulfcarriers…Themostsuccessfulstrategy,however,inourview,willbetofocustheirdevelopmentonrouteswheretheyhavestructuralgeographicadvantageoverGulfcarriers,ratherthanchasingthosemarketswhereDubai’slocationandEmirates’strongnetworkgiveitamajoradvantage.”RBS
Analysts confirm Emirates’ independent, commercial status
12
Faircompetitionininternationalairservicesisacentralconcernforgovernmentsandairlines.IneveryAirServicesAgreement(government-to-governmentagreementsthatregulateallinternationalairtraffic)thereisaclausesimilartotheonebelow:
“There shall be a fair and equal opportunity for the designated airlines of both [sides] to operate ….”
Thepointofthisclauseistoensurethateachairlinefacesthesameconditionsasothers,sothatthereisnounfaircompetition.Itisimportanttorealisethat‘fair’inthiscontextdoesnotmean‘equal’.Thereisnorequirementforequalityinairservices:whilethiswasthecasemanyyearsago,whenprices,thenumberofseatsandevenmealswereregulated,itisnolongertrue.
Rather,a‘fairandequalopportunitytocompete’simplymeansthattheremustbenon-discriminatorytreatmentofallcarriers.Differentcountrieshavedifferentrulesinplacewithregardtomanythings,suchasadvertising,taxesandconsumerprotection.Thereisnoobligationthatcountriesharmonisetheirlaws.Whatthe‘fairandequal’clausemeansisthatthoserulesshouldapplytoallcarriersdoingbusinessthereandnotjusttosome.Equaltreatmentisnot‘unfair’justbecausetherulesaredifferentfromanothercountry.
Inrecenttimesconcernregardingfaircompetitionininternationalairserviceshasfocusedontheissueofsubsidy.TheEUhasstrictrulesinplaceaboutthegrantofsubsidiestoailingbusiness,becauseagrantgiventoonebusinesscanaffectallotherbusinessesinthesameindustry.ItisunfairintheSingleMarketforonestatetobailoutanairlinewhenairlinesfromotherstatescannotbegiventhesamegrant.Concernabouttheeffectofstateaidtonon-EUairlinesledtoRegulation868,whichallowstheCommissiontotakeactionwhereasubsidisedforeigncarrierisseriouslythreateningtheairlines
oftheEuropeanCommunity.TheEUanditsMemberStates,aswellascountriessuchastheUSandCanada,haveaskedforprovisionsonthetreatmentofsubsidiestobeincludedinAirServicesAgreementswiththirdcountries.
Emirateshasnoissuewithfaircompetitionclausesperse,andsomethirdcountryproposalstodateseemfairandreasonable.Butotherthirdcountryclausesareclearlyasham:apoliticalexerciseproposingtheabsurdandimpossiblesothatanyreasonablerejectionofbiasedtermscanbepaintedasdemonstrationofguilt.
Fair Competition
13
CertainStarAlliancecarriersoftenmakereferencestosubsidiessupposedlyreceivedbyEmirates.Let’sexaminethelevelofsupportthatthesecarriersreceived:
Star Alliance and state support
Airline Government funding/support
AdriaAirways Lost€3.2millionin2008and€13.9millionin2009-bothabsorbedbytheSlovenianGovernment.€50millioncapitalinjectionfromthestateapprovedinSeptember2011.
AirCanada CA$250millionloanfromthegovernment-ownedExportDevelopmentCorporationin2009,ofwhichCA$100millionwasfromaspecialcabinet-controlledEDCaccount.
AirNewZealand NZ$885millioncapitalinjectionin2001.
Asiana DebtofKRW3.76trilliontostate-ownedKoreaDevelopmentBankwasfrozeninJanuary2010.
AustrianAirlines €500millioninstateaidfromtheAustrianGovernmenttocanceldebtspriortoSeptember2009takeoverbyLufthansa–onthebackofa€200millionloanfromtheAustrianGovernment.
BrusselsAirlines Loanof€125milliontoSNAirholding(stakeholderinSNBrusselsAirlines)grantedfromFederalInvestmentCompanyin2002.
CroatiaAirlines 195millionCroatianKunainstateaidbetween2007and2009.
Lufthansa €800millionGermanGovernmentcontributiontoLufthansapensionfundin1995.
SAS SoughtanewcapitalinjectionofSEK4-5billionin2010,halfofwhichcamefromtheGovernmentsofSweden,NorwayandDenmark-followingasimilarinjectionin2009fromthesamesources.
SouthAfricanAirways
ZAR1.5billionloanfromtheStatein2009/10inexchangeforshares,followingaZAR3billionloanfromtheStatein2008.
Spanair €120millioninloansandcapitalincreasesfromtheCatalanGovernmentin2010/11.
Swiss US$1.5billionstateaidin2002(equivalentto€1.5billion).
ThaiAirways THB23billionloanfromfourThaibanksin2008/2009,includingonestate-ownedinstitution.
The Lufthansa GroupLufthansa €800millionAustrian €700millionBrusselsAirlines €125millionSwiss €1.5billionTotal €3.125 billion
14
Operating Leases43%
Commercial Banks19%
Ex-Im12%
Bonds9%
ECA13%
Islamic4%
US$26 billion financed over last 15 years
Emirateshasalwaysraisedfundsonacommercialbasis.NofinancinghasbeenobtainedfromInvestmentCorporationofDubai(ICD)ortheGovernmentofDubai.UnlikesomeairlinesintheGulfregionwhobenefitfromsovereigndebtguarantees,theDubaiGovernmentdoesnotactasguarantorforanyofEmirates’loans.
EmirateshasraisedatotalofUS$26billionoverthelast15yearsforfinancingaircraftandothercorporatefinancerequirements.Emiratesfinancesitsaircraftthroughawiderangeofsources,includingoperatingleases,European/USExportCreditAgencies(ECAs)andcommercialasset-backeddebtaswellasnon-conventional
sourcessuchasIslamicfundingandequityfromJapanese,Germanandotherinvestors(aspartoftax-basedcrossborderleveragedleases).OurlendershailfromaroundtheglobeincludingfirmslikeCitibankoftheUS,France’sCreditAgricoleandSumitomoMitsubishiofJapan.
Recentdebateonexportfinancecreditsandthe‘homecountryrule’washijackedbysomeofEmirates’detractorsinbothEuropeandtheUS,whoarguedthatEmirates’limiteduseofexportcredits,whichfundaround25%ofitsfleet,constitutedamarket-distortingsubsidy.OnesuchfalsehoodinvolvedacomparisonbetweenEmiratesandDeltaAirLines.Theallegationwas
thatcreditavailabletoDeltaforfinancing27Boeingaircraftwaspricedunfairlyhigh.Thiswasaflawedcomparison,sincethetransactioninquestionwasforolderjetsdatingbackto1999and2000–thusacompletelydifferentassetandlendingriskassessment.Inaddition,Delta’sriskprofilewasvastlydifferentthanEmiratesatthetime,havingrecentlyemergedfromUSChapter11bankruptcyprotection,wheniteliminatedjobs,cutcostsandrestructureditsfleet.
ItisuntruethatAmericancarriersarebarredfromaccessingattractivefinancingrates.Delta’scompetitor,Continental,inMarch2012raised$892millionatanall-ininterestrateof4.38%.AmericanAirlinesraised$726millioninSeptember2011,albeitatahigherinterestrate,despitefilingforbankruptcytwomonthslater.
TheOrganisationforEconomicCo-operationandDevelopment(OECD),withaneyeontheUSandEuropeanjobssupportedbysuchexports,concludedanAircraftSectorUnderstanding(ASU)agreementinFebruary2011.Thisrejectedcallsfortargetedcapsonexportfinanceborrowingbutdidraisethecostofsomeformsofcapital.
InDecember2011,AirFrancesuccessfullyconcludedfinancingforoneA380withexportcreditbacking.
Sources of finance
15
ItfitstheobjectivesofsometoclassifythecarriersintheGulfasoneunit-asifpolicies,governments,businessesandindividualsareallalikeacrossthisdiverseregion.Therationaleissimple:rivalairlinesusetheterm“Gulfairlines”inlobbyingeffortsaspartofawiderstrategytoservetheirprotectionistinterests.
Manyinthemediarepeatthisdescription,therebyboostingtheimpactofthispejorativelobbying,whichrangesfromseekingsupportfromtheirgovernmentsagainstnewcompetitionoropposingotherliberalisingpolicymeasures.
TheGulfregionisnotasingleentity.DubaihasalmostnohydrocarbonreserveswhilethesituationisvastlydifferentinoilwealthySaudiArabia,QatarandAbuDhabi.Sowhywouldtheairlinesfromtheseareasallbethesame?
Intruth,therearemorethan35separateairlinesintheMiddleEastwhichcompeteagainsteachotherandagainstcarriersbasedinotherregions.IntheGulfthereare15airlines,includingagrowingnumberfocusedonbudgettravel.
EmiratesisproudofthefeaturesthatsetitapartintheMiddleEastandinternationally:profitability,transparency,andsustainability.Itisthemostprofitableairlineintheregion,competingwithcarriersthatareloss-makingandsubsidised.Inour2010/11financialyearEmiratesAirlinepostedaprofitofUS$1.5billion.
In2010/11wealsoexperiencedconsistentlyhighloadfactors,whichaveraged80%.Highdemandforourserviceswaspresentacrossournetworkincludingtrans-TasmanservicesbetweenAustraliaandNewZealand,whichaveraged75.1%loadfactors-despitesomeofourdetractorsmisreadingAustraliangovernmenttrafficdataandsuggestingwewereguiltyofcapacitydumpingandoperatingflightsonlyhalf-full.
Withitsissuanceofauditedfinancialandenvironmentalstatements,Emiratesisalsothemosttransparent.
Sinceitsfoundingin1985,Emirates’developmenthasbeenthemostmeasuredamongtheregion’slargelong-haulcarriers.WhatEmirates
accomplishedgraduallyoverthefirst20yearsinoperation,intermsoffleetsizeandroutes,otherairlineshavedoneinlessthanhalfthattime,asaresultofmassive,growth-at-all-costsstrategies.
Ratherthanreceivestatesubsidy,asisoftenincorrectlyclaimed,Emiratesisfullyindependentandinsteaddisbursesaportionofitsannualprofitstoitsmainshareholder,thestate-ownedInvestmentCorporationofDubai.ThesedividendshavetotalledUS$2.3billionoverthepast25years.
EmiratesalsooperatesinanopenskiesenvironmentinDubai,whereitcompetesagainst150foreigncarriers,aswellasflyinginhighlycompetitivemarketsaroundtheworld,receivingnoprotectionagainstcompetition.
The myth of the “Gulf Carriers”
16
Asnationsbecomeinterdependentintheglobalisedeconomy,airlinesfromdifferentregionsareengagingmoreandmoreindirectcompetition.Inthepoliticaldebatesoverfaircompetition,someairlineshavecomplainedthattheirrivalsenjoyloweroperatingcosts.
Thisisanundeniablefactoflife.EmiratesdoesenjoysomeadvantageswhenitcompetesagainstairlinesinEuropeandNorthAmerica,whicharesubjecttohigherlabourcosts.
However,EmiratesitselfisatadisadvantagecomparedwithSingaporeAirlines,whichhaslowerrelativelabourcostsandcanalsotakeadvantageofSingapore’sstatusasajetfuelrefininghub,wherethepriceofabarrelofjetfuelisthelowestintheworld.Thisisacommercialreality.Emirateshasnoqualmsaboutthisandishappytocompeteinthisoperatingenvironment.
ThereisnothingnefariousaboutEmirates’costbase.ItdoesnotreceivecostexemptionsforitsoperationsinDubaiandpaysforitsmainheadquarters,engineeringfacilitiesandothercorporateoverheads.Thesecostsareaccountedforinitsannualauditedfinancialstatements.
ThereisnoarrangementtouseDubaiGovernmentbuildingsorotherpropertiesfreeofcharge.
EuropeanairlineshaveattemptedtouseEmirates’costbaseasproofthatit“exploits”labourfromneighbouringnations,suchasfromtheIndianSubcontinent.Nothingcouldbefartherfromthetruth:outofthe11,000IndiannationalsworkingforEmirates,asignificantpercentagehavereceivedlong-serviceawards.Intotal,morethan8,600currentstaffhaveservedfor10yearsorlongerandinexcessof2,100havebeenwiththecompanyfor20yearsormore.Emiratesreceivesonaverage25,000newemploymentapplicationseachmonth.
ManyareattractedtoEmirates’profitsharingplanforstaff,whichhasbeeninplacesince1996andhaspaidatotalofUS$653milliontoitsstaff.Emirateshasconsistentlydeliveredprofitsforthepasttwodecadesandallowsouremployeestoshareinthewindfallthroughthisprofitsharingplan.Unlikeotherairlines,ourprofitsharingschemeappliestoallstaff,ratherthanjustseniormanagers(whichhasaveragedfiveweeks’payforallstaffeachyearbetween1996and2011).
ThisandotherfactorshelpexplainwhyEmirateshasenjoyedextremelyhighstaffretentionrates.
Likeallairlines,Emirates’highestproportionofoperatingcostsisrepresentedbyfuel(34.4%oftotalin2010/11),withemployeecostssecondat16%.
Emiratesalsoincurscostsonservicesthatmanyotherairlinesdonotprovide.Itpaysthecostofexpatriateemployeebenefitssuchasaccommodation,children’seducationanddedicatedcompanyhealthcareformanagement,pilots,engineersandotherstaff-whichtotalmorethanUS$500millioneachyear.
Airline arbitrage: varying cost bases around the world
17
Thefollowingchart,showingaveragelabourcostperemployeeforEmiratesand13otherairlines,highlightsthecostdisparitiesbetweenairlinesbasedinEurope,NorthAmerica,theMiddleEastandAsia.
WhereaslabourcostsaveragedUS$94,575peremployeeforthefiveairlinesfromEuropeandNorthAmerica,labourcostsaveragedaroundhalfofthisamount(US$49,510)fortheremainingeightairlines1.EvenCathayPacific,whichhasarelativelyhighlabourcostforanAsianairline,haslabourcostsaroundathirdlowerthantheaverageforthefiveEuropeanandNorthAmericancarriers.
Geographyplaysacentralroleinanycostcomparisons,reflectinglowerwagecostsinnon-EuropeanandUSmarkets.EmiratesandSingaporeAirlineshaveverysimilarlabourcostsatUS$47,000andUS$45,000respectively,reflectingsimilarbusinessmodelsandasharedrelianceonrecruitingstafffromabroadonexpatriatepackages.SingaporeAirlinesevenhasaverysimilarprofitsharingplantothatofEmirates.
DespiteenjoyingalowercostbasethaninEuropeandNorthAmerica,Emiratesalsohasaskilledworkforcewithproductivityrateshigherthantheindustryaverage.
Emirates’unitcostofUS11.75cperseatmileiscomparabletoitspeerairlinessuchasSingaporeAirlinesandCathayPacific.
1Theseareweightedaveragesacrosstheairlines(usingemploymentasweights),toreflectdifferencesinthesizeofthevariousairlines.
Labo
ur c
ost p
er e
mpl
oyee
(US$
000
s)
Labour cost per employee, financial year ending 2010
0
20
40
60
80
100
120
Lufth
ansa
Air F
ranc
e-KL
M
Qan
tas
Unite
d Ai
rline
s
Amer
ican
Airl
ines
Briti
sh A
irway
s
Cath
ay P
acifi
c
Thai
Airw
ays
Emira
tes
Sing
apor
e Ai
rline
s
Mala
ysia
Airl
ines
Air I
ndia
Jet A
irway
s
Sri L
anka
n Ai
rline
s
110 100 92 92 88 77 65 47 47 45 34 24 23 17
Source:OxfordEconomics,airlineannualreports
US c
ents
per a
vaila
ble
Seat
Mile
Unit Cost Comparison 2010-2011
0
5
10
15
20
25
30
4.04 3.54 5.59 4.43 5.06 4.72 4.28
EK TK SQ BA CX LH QF
7.71 7.27 10.63 10.59 8.94 21.82 12.66
Source: Published financial reports
Fuel Excluding Fuel
18
Emirates pays the full published landing charges atitsmainoperationalbase,DubaiInternationalAirport-asdotheover150otherairlinesthatflytoandfromDubai.Emiratespaysthesameairporthandlingfeestodnata(anEmiratesGroupcompanyandtheground-handlingagentatDubaiInternationalairport)aswouldasimilarhighvolumeairlinecustomer.Emiratespaysthesamestandardover-flightchargesacrossitsnetworkasappliedtootherairlinesandissubjecttothestandardcustomsdutiesandgovernmentchargesbothintheUAEandelsewhere.
ThisdoesnotstoprivalairlinesfromcastingaspersionsaboutEmirates’landingcosts.AstheGlobeandMailsummedupinFebruary2011:“SeekingtoprotecttheirFrankfurthub,thetwopartners(LufthansaandAirCanada)allegethatEmiratesreceivessubsidiesfromtheDubaiGovernmentintheformofcheaplandingfeesatDubaiInternationalAirport,anaccusationthatEmirateshotlydisputes.”
Infact,datacollectedbytheInternationalAirTransportAssociationshowsthatDubaiInternationalofferscompetitivepricesforlandingchargesandotherfees.IncomparisonagainstinternationalhubsbasedintheMiddleEast,AsiaandEurope,DubaiInternationalrankedasthefifthcostliestairport,moreexpensivethanchargesinBeijing,KualaLumpurandDoha.
Separately,astudycompiledbyOxfordEconomicsinJune2011,titled“ExplainingDubai’sAviationModel”foundthatoverallchargingatDubaiInternationalAirportwasbothhighlycompetitiveandcommerciallybased-withDubaibeingclosetotheaveragewhenlookingatairportchargesattheworld’slargestairports.
PaulGriffiths,theChiefExecutiveofDubaiAirports,wasrecentlyquoteddescribingthecommercialstrategyforDubaiInternationaltobe“competitiveonaeronauticalcostsinordertoattractmoreairlinesandmorepassengers”,whichhesaidinturnboostsnon-aeronauticalrevenues.
“Becauseofthis,Emiratespaysthesamecompetitiveratesaseveryoneelse,”Griffiths
noted.“Thisapproachalsorecognisesandcapturesthebroadereconomicvalueofaviationfarbetterthanthelegacymodelsbeingusedinmorematuremarketswhereregulationandtaxationhaveconspiredtohikecostsandcripplegrowth.”
“Aviation’sgrowthisdrivingwidereconomicbenefitsintermsofincreasedemploymentandtourismtotheemirate,”headded.
OxfordconcludedthatthechargesatmostairportsinDubai’speergroupareverysimilar.Thereare11airportsinthisgroup,includingDubaiInternational,whichchargelessthanUS$35perpassenger.Thehighestairportchargeamongthe96largestairportsintheworldisatLondonHeathrowwheretheyamounttoUS$126perpassenger.
Landing fees, charges and suppliers
SIN BKK BOM IST DXB CAI AUH PEK KUL BAH DOH-
1,0002,0003,0004,0005,0006,0007,0008,0009,000
10,00011,000
Terminal and runway charges Passenger charges Others
Airport charges at Dubai International and 10 other international airports*
Source: IATA *B777-300 August 2011
(in U
S$)
19
Airportsaroundtheworldarefundedinwidelydifferingways,withavarietyofownershipstructuresandrelationshipstothe‘home’carrierandrespectivenationalgovernments.DubaiInternationalAirportispartofDubaiAirports,aDubaiGovernment-ownedentitythathasresponsibilityforallaspectsofairportdevelopmentinDubai.
Itisnotuncommonforgovernmentsorstate-controlledentitiesaroundtheworldtohelpfinanceexpansionofairportinfrastructure,viewingthemaskeydriversforeconomicgrowthandessentialforconnectivitytotheglobaleconomy.
Some78%ofEurope’sairportswerepublicly-ownedandafurther13%hadsomeelementofpublicpartnership,accordingtoa2010studybyACI,theinternationalassociationoftheworlds’airports.Inaddition,a2007ICAOreportnotedthat70%ofthemorethan600internationalairportswerepubliclyowned.
FollowingtheSecondWorldWar,Australiaembarkedonamajorprogrammetobuildandfinanceairportsacrossthecountry,whichwereheldingovernmenthandsforahalfcenturyuntilrecentprivatisationefforts.
ThefourrunwaysatParisCharlesdeGaullewerebuiltbyAéroportsdeParis,whichwaswhollyownedbytheFrenchGovernmentfor22yearsuntilitsprivatisationin2006.TheFrenchfederalandregionalgovernmentsstill,however,retainsignificantstakesinthecompany.
ViennaAirportwasgovernmentheldfor50yearsuntilitspartialprivatisationinthe1990s;itisnow40%statecontrolled.
AsimilarhistoryisfoundatMunichandFrankfurt.FrankfurtAirport(Fraport)isnow51%controlledbytheGermanregionalandcitygovernment(withLufthansaowning10%,andprivateinvestorsholdingtherest).Forthefirstfivedecadesofitsexistence,however,itwasfullygovernmentowned.
LufthansaisanexampleofEuropeancarriersmakingloudclaimsaboutairportownershipinDubaiandtheGulf,despitethemselvescontinuingtobenefitfromstate-fundingofairports.InApril2011,theEuropeanCommissionopenedaninvestigationintoLeipzig-Halleairport,whichreceived€225millioninfundingforinfrastructurefromitsstateowners,makingchargeslowerthanwouldbethecaseiftheairporthadtofundtheimprovementsatmarketrates.Lufthansa,operatingaround30%ofall
flightsfromtheairport,hasbenefittedthemostfromthispublicfunding.
Norisitunusualforanairlineoritsalliancegroupingtohavededicateduseoffacilitiesatahomeairport-BritishAirwaysatLondonHeathrow’sTerminal5,AirFranceatParisCharlesdeGaulleandLufthansaatMunichTerminal2(whichitjointlyfinanced)arenotableexamples.Evengovernmentsthatclaimtobeoutoftheairportbusiness,likeCanada,arenotimmunefromfundingairportprojects.Forexample,since2006,Canada’sfederalgovernmenthassetasideCA$65millionforprojectsatQuebecCity’sairport.
Airport infrastructure
20
While Emirates is a major carrier at Dubai International Airport, it is also worthwhile looking at some of the world’s other large hub airports and how home carriers and respective alliances stack up in terms of market shares and the amount of competition faced.
Top20
Airport
Internationalpassengers-12monthsending
Dec2011-inmillions
Homecarriershareofinternationalflightdepartures
-Apr2012
Leadallianceshareofinternationalflight
departures-Apr2012
Totalallianceshareof
internationalflight
departures-Apr2012
Numberofinternationalcarriers-Apr2012
1 LondonHeathrow 64.69 BritishAirways-43% oneworld-48% 83% 912 ParisCharlesdeGaulle 55.67 AirFrance-54% SkyTeam-62% 80% 1043 HongKongInternational 52.75 CathayPacific-29% oneworld-31% 57% 924 DubaiInternationalAirport 50.19 Emirates-46% Star-4% 8% 1505 AmsterdamSchiphol 49.68 KLM-57% SkyTeam-67% 79% 936 FrankfurtInternationalAirport 49.48 Lufthansa-61% Star-76% 86% 1077 SingaporeChangiAirport 45.43 SingaporeAirlines-35%* Star-30% 41% 708 BangkokSuvarnabhumiInternational 35.01 ThaiAirways-28% Star-36% 53% 939 IncheonInternationalAirport 34.54 KoreanAirlines-33% SkyTeam-46% 84% 6110 MadridBarajas 32.45 Iberia-40% oneworld-45% 72% 7011 LondonGatwick 29.92 BritishAirways-18% oneworld-18% 23% 3812 MunichAirportInternational 27.88 Lufthansa-63% Star-75% 84% 7213 NaritaInternationalAirport 26.33 JapanAirlines-17% Star-38% 88% 6314 KualaLumpurInternational 25.92 MalaysiaAirlines-28% SkyTeam-5% 11% 5415 FiumicinoAirport(Rome) 24.45 Alitalia-28% SkyTeam-38% 63% 9416 NewYorkJohnFKennedy 24.16 DeltaAirLines-18% oneworld-28% 64% 7517 IstanbulAtatürkAirport 23.83 TurkishAirlines-73% Star-78% 85% 6418 ZurichAirport 23.63 Swiss-54% Star-67% 77% 6619 TaiwanTaoyuanInternationalAirport 23.14 ChinaAirlines-28% SkyTeam-39% 58% 4420 BarcelonaAirport 21.66 Iberia-9% Star-18% 42% 66
*SilkAirincluded Source:ACI,OAG,FGProandDubaiAirports(internationalcarriersincludecargoandcharteroperators)
21
Source:DubaiAirportsanddnata
Airlines serving Dubai
≥ A C G A i rCa rgo Ge rmany≥ Ae ro f l o t ≥Aerologic≥AerosvitAir l ines ≥ Afr icanExpress Airways ≥ AirAlgerie ≥ AirAlmaty ≥AirArabia≥AirAstana≥AirBaltic≥AirBerlin≥AirBucharest≥AirChina≥AirFinland ≥ Air France ≥ AirIndia≥AirIndiaExpress≥AirTransport International ≥ Airblue≥ AircompanyScat ≥ Alitalia ≥Al-NaserAirlines≥ArianaAfghan≥ArkAirways≥ArmaviaAviaCompany≥
AtlasAir≥ AustrianAirlines≥AzerbaijanA i r l i n e s≥ B a h r a i n A i r ≥ B iman Ba ng l a d e s h ≥≥ B r i t i s h Airways ≥ Cargoitalia ≥ CargoluxAirlines Intl≥CargoluxItalia ≥CaspianAirlines≥CathayPacific≥ChinaAirlines≥China Eastern Airlines ≥ChinaSouthern≥Condor≥CoyneAirways≥DaalloAirlines≥DeltaAirlinesInc.≥DHLInternationalE.C.≥Donavia≥DonbassAeroAirlines≥EasternSkyjets≥EgyptAir≥Emirates≥EPLFzco≥EritreanAirlines≥EthiopianAirlines≥EtihadAirways≥Euro-AsiaAirIntl≥ExpoAviation≥FalconExpressCargoAirlines≥FarsAirQeshm≥FederalExpress≥FelixAirways≥Finnair≥FlyDubai≥FreeBirdAirlines≥GarudaIndonesia≥GeorgianAirways≥GlobalJet≥GMGAirlines≥GryphonAirlines≥GulfAir≥HainanAirlinesCo≥IndigoAir≥Investavia≥IranAir≥IranAsemanAirlines≥IranianAirTransportNaft≥IraqiAirways≥JadeCargoInternational≥JazeeraAirways≥JetAirways≥JubbaAirways≥KamAir≥KenyaAirways≥KingfisherAirlinesLimited≥KishAirline≥KLM≥KoreanAir≥KubanAirlines≥KuwaitAirways≥KyrgyzstanAirCompany≥LatcharterAirlines≥Lufthansa≥M.E.A≥MahanAir≥MalaysiaAirlines≥Martinair≥MihinLanka≥Nasair≥NationalAirCargo≥NationalAirServices(NAS)≥NationalAirline≥Neos≥NepalAirlinesCorporation≥NorwegianAirShuttle≥OmanAir≥OrenburgAirlines≥PakistanIntl≥QatarAirways≥RomanianAir≥RoyalBruneiAir≥ Royal Jordanian ≥RusAviationLLC≥RwandairExpress≥SafiAirways≥SaudiArabianAirlines≥ShaheenAirIntl≥SiberiaAirlines ≥SilkWayAirlines≥SingaporeAirlines≥SomonAir≥S r iLankan Airlines ≥ Starlight Airlines ≥ SudanAirways≥ Swiss Intl AirLines≥SyrianArabAir≥TAAGAngolaAirlines≥ TabanAirlines≥TaimyrAirlines≥Thai
Airways Int ≥ Thomas Cook AirlinesSk ≥ TNT Airways ≥ TransaeroAirline ≥ TravelSvcsA.S. ≥ Tui
Airlines -Arkefly ≥ TunisAir ≥TurkishAirlines ≥ TurkmenistanAirlines ≥ Ukraine IntlAirlines
≥ United Airlines ≥ UnitedAirways (BD) ≥ United
NationsOrganization≥United Parcel Service ≥U r a l A i r l i n e s ≥
Uzbekistan Airways ≥V i m A i r l i n e s ≥Virgin Atlantic ≥
YemeniaYemenAir
OpencompetitionandfreemarketslayattheheartofDubai’sstatusasatradinghub.Everyday,Emiratesgoesheadtoheadwithmorethan150rivalairlinesservingDubaiInternationalAirport.
22
ItisundeniablethatmanyMiddleEastgovernmentsareoil-rich.ButmythsaboutEmirates’accesstofreeordiscountedoilfallflatontheirface.Dubaihasextremelylimitedoilresources,forcingittoinnovateintootherfieldsandopeningthewayforforeignfuelsupplierstodominateatDubaiInternational.
AsCNNonceaptlyputit,“Dubaiisastoryofsurvival-howonesmallcityrunningoutofoilsaveditselfwithamixtureoftourism,commercialism,andpizzazz.”
Asaresult,Emirates’fuelcostsarewhollycomparablewiththoseofothermajorlong-haulcarriers.In2010/11fuelaccountedfor34.4%(US$4.6billion)ofEmirates’totaloperatingcosts-upbyover40%onthepreviousyear.
ManycountriesintheGulfareblessedwithabundantoilreserves,makingiteasytoofferbelow-marketratesforjetfuel.SaudiArabianAirlinesforexampleenjoysfavourablefuelprices.
ButDubaiwasnotblessedwithoil,whichinturnforcedittocreateaservice-basedeconomy,leadingtotheestablishmentofgloballycompetitivefirmssuchasEmirates,dnata(withoperationsin38countries)andDPWorld,theworld’sthirdlargestportsoperator.
Emiratesprocuresitsfuelatmarketratesfrommultiplesuppliersatallairportstowhichitoperates,includingDubaiInternationalAirport.
ThemajorityofEmirates’fuelissourcedfromBP,ShellandChevrongiventhereisminimaljetfuelrefiningcapacityinDubai.
OutsideofDubai,Emirates’mainfuelsuppliersarealsoExxonmobil,BP,ShellandChevron.
EmiratesrecentlywrotetoShell,BPandChevronaskingthemtoverifythecompany’scredentialsasfullycommercialclientswithcontractsonparwiththeirotherairlineclientsaroundtheworld.
Chevron -“…happytoconfirmthatourpresentcontractandallourpreviouscontractscovering
jetfuelsupplytoEmiratesAirlineatDubaihaveallbeennegotiatedandagreedwiththesameconsiderationsasforthosejetfuelcontractswithourotherairlinecustomers…withnofreefuelandwithnoeconomicsubsidy.”
BP -“…havebeenasupplierofjetfueltoEmiratesatDubaisince1985throughacommercialfuelsupplycontractwhichiscompetitivelytenderedperiodically.”
Shell -“OurcontractwithEmiratesAirlineistheresultofafairnegotiationprocessinlinewiththenegotiationsthatwehavewithothermajorcustomers…andtheitemsinvoicedaresimilarintypetothosechargedtoourothercustomers…”
Oil
23
ThefollowingchartshowsfuelpricespaidbyEmiratesatmajorairportsaroundtheworldrelativetothepricepaidinDubai,alongwithanalysisofcomparativefuelcosts.AlmosthalfofallfuelupliftedbyEmiratesisdonesoatairportsoutsideofDubaionitsnetwork.
Relative fuel prices paid by Emirates in 2010/11
Source:Emirates
Inlinewithmarketprices,Emirates’fuelcostperATKM*increasedby25.7%between2009/10and2010/11andcomprisesasignificant34%ofitsoperatingcostin2010/11,upfrom27%in2005/06.
Airline unit cost break-up – fuel as a percentage of unit cost
Source:Publishedfinancialreports
Analysisoftheauditedaccountsforthelastfinancialyearrevealsthat,inpercentageterms,Emirates’fuelbillisinlinewithwhatothermajorinternationalcarrierspayforfuelperannum.
Likemanyotherairlinesoperatingonafullycommercialbasis,Emirateshasnotbeenimmunetothechallengesposedbyvolatilityinoilpricesduringthelastdecade.Inthelastfinancialyearmorethanoneineverythreedollarsspentacrossthecompanywasonfuel.ThefollowingtableprovidesevidenceofthedirectinfluenceandcloserelationshipbetweenaveragejetfuelpricesandEmirates’expenditureonfuelandoil.
Emirates’ fuel and oil expense per ATKM vs average jet fuel prices
*ATKM(Availabletonne-kilometres)–overallcapacitymeasuredintonnesavailableforcarriageofpassengers/cargoloadmultipliedbythedistanceflown**Source:EnergyInformationAdministration
100%
102%
100%
103%102%
97%
Dubai Frankfurt Hong Kong London(LHR)
Los Angeles Singapore
0
20
40
60
80
100
29% 34% 34% 36% 18%
71% 66% 66% 64% 82%
BA EK SQ CX LH
Fuel Others
0
50
100
150
200
250
300
US c
ents
per U
S ga
llon
US c
ents
0
5
10
15
20
Average jet fuel prices ** Emirates' fuel and oil expense per ATKM*
2005/06 2006/07 2007/08 2008/09 2009/10 2010/11
24
EmiratesFlightCatering(EKFC)-whichis90%ownedbyEmiratesand10%byDubaiAirportsCorporationisastand-alonecommercialentityservingallforeigncarriersatDubaiInternationalAirport.
ThisisverysimilartothesituationatmanyairportsinEurope,wheresingle-sourcecateringcontractswerecommonformanydecades.
CompetitionwasgraduallybroughtintoEuropeanairportsandthisisalsothecasewiththeUAEeconomy.InDecember2011,adraftlawallowing100%foreignownershipofcompaniesoutsideoffreezonespassedthroughthelegislativeprocess,promisingfarmorecompetitionacrossallindustries,includingaviation.
Inaddition,whilesomeofEmirates’rivalsmaycomplainpubliclyabouttheownershipofEKFC,thecateringproviderisrecognisedinternationallyforitscompetitivepricesandconsistentlyhighqualityofservice.Forexample,BritishAirwaysawardedEKFCits“PartnersinExcellence”awardin2001,2003and2005,DeltaAirLinesnamedittheCateringUnitoftheYearin2009,whileAirFrance,LufthansaandSingaporeAirlinesawardeditsimilaraccolades.
Doing business in DubaiInternationalairlines,bytheirverynature,willinevitablyencounterdifferentrulesandregulationsoneachnewroutethattheyoperate.Thebilateralagreementsregulatingairtransportbetweencountriesusuallyinclude‘doingbusiness’provisionsforairlines,butinallcasestheserightsareexercisedinconformitywithapplicablenationalrules.Importantly,bilateralagreementsdonotattempttoharmonisecompanyestablishmentlaws,labourrulesorotherdomesticlegislation,sincetheseareoutsidethecompetencyofaeronauticalauthorities.Justasforanyothercompany,eachairlinemustexaminetheregulatoryenvironment
inaprospectivemarkettodeterminewhetheritiswillingandabletomeetthenecessaryobligationstodobusiness.RuleswithintheUAE,forexample,ontheestablishmentofcompanieshavenotstopped150internationalairlinesfromoperatingtoDubaiorfromselectingalocalagencytoactasaticketingoutlettopassengers.WithintheDubaiAirportFreeZoneover1,100companiesoperate-includingglobalfirmslikeAudiVolkswagenandPanasonic-allofwhomaccessDubai’smarketthroughdistributors.
Inaddition,theUAEcompanieslaw,whichwasapprovedinDecember2011,willallowcompaniestoexistwith100%foreignownershipoutsideoffreezones.ThisshouldgreatlydiversifythecompetitivelandscapeoftheDubaieconomy.
A transparent full disclosure of Emirates’ subsidiaries
25
TaxesSomecompetitorsandafewgovernmentsraisetheissueofEmiratesnotpayingcorporatetaxinDubai;afiscalpolicysettingconsistentacrosstheGulfregionandinmanyotherpartsoftheworld.AmericanAirlinesfamouslymovedfromNewYorktoTexasin1979tosecurelowertaxes.Andofcoursethe150foreignairlinesoperatingoutofDubaidonotpaycorporatetaxesontheirDubai-basedoperationsandprofits.
Themoreimportantelementofanytaxdebateisthecommercialrealityofactualprofitabilityandwhattaxespayforandhowtheyarecollected.Airlineshavetobeprofitabletopaytaxes.Hencein2009-10,alargenumberofairlinesinEuropedidnotpaytax.Furthermore,inmostcountriesthereistheabilitytocarrylossesforwardtoreducefuturetaxpaidifprofitabilityreturns.Soinmanycasesoverthepastdecade,airlineshavepaidnoeffectivetaxatalltotheirgovernments.Consideralsothatthroughconsolidation,ahandfulofthedominantandgiantairlinemultinationalscancapturethelossesofacquiredentitiesintheirbalancesheetstoreducetheirtaxationpositionsintheirdomiciledstates.
Thebiggerpointiswhytaxesarepaidandwhattheyareusedfor,namelytheprovisionofsocialbenefits.InEmirates’case,apilotispaidapackageofwhichsome20%to30%ofadditionalbenefits,duetotheneedtoattractskilledexpatriates,aremetbytheemployer.Inthisregard,thereisareasonable(albeithypothetical)comparisontobemade:IfanAirCanadapilotispaid$100,ofwhich$30is‘lost’(paid)intax,equallyanEmiratespilotispaid$70andEmiratespaysanadditional$30toprovidehisfamily’shealthcare,housing,transportation,educationandpensionneeds(itisalsowhyweattractsomanyhighly-skilledCanadianpilots).
Emiratesfullysupportstheeffortsofthewiderairlineindustrytoreduceunfairandunnecessarytaxation,toallowcarrierstobuildupsustainableandprofitablebusinesses.
EmiratesvillasatDubaiSiliconOasis
26
Theissueofenvironmentaltaxesandemissionschargesareincreasinglydrawnintothediscussionaboutsubsidyintheaviationindustry.EmiratesisopposedtotheEU’sunilateralapproachtoreducingcarbonemissions,namelytheapplicationoftheEUEmissionsTradingScheme(EUETS)tointernationalaviationasfrom1January2012.Nonetheless,ithascompliedwiththenecessarylegalrequirementstodate.
IthasbeenclaimedthattheEUETSwouldcreateregionaldistortionbypushingpassengerstoflyvianon-EUdestinationstoavoidpayingadditionalETS-relatedcharges,withtheexampleofDubaibeingoftenusedtoarguethecase.
However,followingaseriesofimpactstudies,theEuropeanCommissionconcludedthattheaviationindustryis“notconsideredtobeatriskofcarbonleakage”.
Nonetheless,someEuropeanairlineshaveinrecenttimescalledontheEuropeanCommissionfor‘additionalemissionsallowances’toprotectthemagainst‘carbonleakage’.Thisisessentiallyarequestforback-doorsubsidies.
EmiratesitselfwillbesubjecttotheEUETSforallofitsover30,000annualflightsto/fromEurope,andthecostofcomplianceforthecompanyisestimatedattensofmillionsofEurosin2012andhundredsofmillionsofEurosoverthefirsteightyearsoftheprogrammethroughto2020.
Morebroadly,Emiratesstronglybelievesitisappropriatethatall(orasignificantportion)offundsraisedbytheEUETSaswellasotherexisting‘environmentaltaxes’intheUK,AustriaandGermany,shouldgobackintoimprovingaviationefficiency,specificallyforclimatechangeandaviationemissionsreductionprojects.Theyshouldnotgointogeneralrevenueofgovernments.
Environment
Emirates’WolganValleyResortandSpainAustralia.
Estimated top 10 purchasers ofEU aviation allowances
Lufthansa
BritishAirways
AirFrance
Iberia
Ryanair
Emirates
SingaporeAirlines
KLM
DeltaAirlines
VirginAtlanticSource:RDCAviation
27
Subsidyisanunpalatablereality.Whetherstatesanctionedorpermittedunderanotherlabel,governmentsaroundtheworldhaveoftenbeenreadyandabletointerveneinstabilisingindustriesofnationalimportance.Thisisespeciallysointhistimeofglobaleconomiccrisis,whenfinancialbailoutsandstateinterventionbygovernmentsareemployedtopropupeconomies.Emirates’viewisthatsubsidiesareanaffronttowhatwestandforandwhatwestrivetobuildforourcompany.Weunequivocallydisapproveofsubsidies,butrecognisetheydohappeninourindustry.
Wereaffirmourcommitmenttoopenandtransparentoperations,freeofsubsidy.
Emirateswelcomesafactbaseddebateonstateaidandhopesthisappliestoallindustryparticipants.Vocalrivalcarriers,whichthemselveshavebenefittedfromgovernmentalsupport,arepeddlingself-servingfalsehoodswhentheyallegethatEmiratesissomehowatanadvantage.
Conclusion
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