Report Says Gulf Airlines Got $39B (With More to Come) in Illegal Subsidies

By Ted Reed

(The Street)- A report compiled for the big three U.S. airlines presents a chilling picture of efforts by some Mideast governments to establish airlines funded by massive subsidies which, according to the report, have been systematically covered up in order to mask violations of Open Skies agreements that have enabled the three Gulf airlines’ disproportionate growth.

The governments of Qatar, the United Arab Emirates, and Abu Dhabi and Dubai, the two largest emirates, have provided about $39 billion in subsidies to the airlines — Qatar Airways, the flag carrier of Qatar; and Etihad Airways and Emirates Airlines, flag carriers of the UAE — according to extensively researched report, compiled over two years for American (AAL – Get Report) , Delta (DAL – Get Report) and United (UAL – Get Report) and provided to TheStreet by an airline industry source who asked not to be identified.

The Gulf governments and airlines “have created vertically-integrated, wholly state-owned aviation sectors that include monopoly service providers and complex interrelationships between their government institutions, airlines, ground handlers, airports and state-owned banks,” said the report, which is titled: “Restoring Open Skies: The Need to Address Subsidized Competition From State-Owned Airlines in Qatar and the UAE.”

The subsidies come in forms including cash grants, interest-free loans and favorable contracts with airports, vendors and suppliers funded and generally owned by the governments, the report said. They inevitably reflect close relationships between governments and the airlines, which are often led by the same families and the same individuals.

The $39 billion is just the start. Governments in Dubai, Abu Dhabi and Qatar all plan to build huge new airports because they believe the large airports they already have are insufficient to accommodate the growth they expect.

Dubai is spending $7.8 billion to expand capacity at Dubai International Airport to 90 million passengers annually by 2018. It plans to spend $32 billion more to build the first phase of Dubai World Central Airport, 40 miles away, which could ultimate accommodate 240 million passengers annually.

Abu Dhabi is spending $7 billion to expand capacity at its airport to an annual capacity of 50 million passengers. Qatar is spending $17 billion on Hamad International Airport, which opened in May 2014 and also will have an annual capacity of 50 million passengers.

The report represents “the first time anyone has investigated these subsidies,” said an airline industry spokesperson who asked not to be named. “It took a couple of years for the report to be put together” by a team of forensic accountants and investigators.

“We’ve begun a discussion with the Obama administration about these subsidies and what remedies there are,” the spokesperson said. “The executive branch of government has the power to take a look at this. There is a process in place under Open Skies to address subsidies.”

The report suggested the Gulf airlines’ practices make a mockery of Open Skies policy, developed in the early 1990s in an effort “to enable U.S. carriers to compete in a global market undistorted by government actions that advantage foreign carriers.

“The UAE and Qatar have turned this policy on its head by pursuing aviation industrial policies that are designed to distort the global market in favor of their state-owned carriers,” said the report, which noted that Open Skies policy requires that “competition is fair and the playing field is level.”

In fact, Open Skies treaties have turned into lopsided deals where Emirates flies from Dubai to Boston, Chicago, Dallas, Houston, Los Angeles, New York, San Francisco, Seattle and Washington, and from Milan, Italy to New York; Etihad flies from Abu Dhabi to Chicago, Dallas, Los Angeles, New York, San Francisco and Washington; and Qatar flies from Doha, Qatar, to Chicago, Dallas, Houston, New York, Miami, Philadelphia and Washington.

What do U.S. airlines get? Only this: Delta flies from Atlanta to Dubai and United flies from Washington Dulles to Dubai.

The Gulf carriers already fly 363 wide-body aircraft and expect to add 130 by 2020, ensuring they will grow at a rate that substantially exceeds global GDP growth. “To fill this excess capacity, they must take passengers from other countries’ carriers,” the report said.

Here are brief analyses of each of the three Gulf carriers, based on the information in the report, as well as the carriers’ comments.

Etihad has received more $17 billion in subsidies since 2004, including “$13.5 billion in interest-free government loans, equity infusions, airport fee exemptions and other types of government funding that have enabled the airline to continue in operation despite its $4 billion in accumulated losses.” the report said, citing “company filings in certain third party jurisdictions.”

Abu Dhabi’s government committed to spend an additional $4.2 billion in subsidies in 2014 and beyond, the report said.

Without subsidies, “Etihad would not be commercially viable,” the report said. “The airline’s auditors have been unwilling to classify the company as a ‘going concern’ … without explicit commitments by the government to continue covering Etihad’s financial obligations.”

Etihad spokeswoman Katie Connell declared Thursday that “Etihad Airways operates with a clear commercial mandate — we do not receive government subsidies.

“In common with national airlines the world over, we have received equity and start-up investment from our shareholder during this early phase of our development,” Connell said. “Our 2014 revenues topped $7 billion, our third straight year of profitability. Our success has been built on bringing new competitive choice to consumers on many routes which other carriers choose not to operate.”

Qatar Airways has received more than $16 billion in subsidies since 2004 including $8.4 billion in subsidized loans and shareholder advances, which have been made in every year since 1998, the report said. The government also guarantees the airline’s term loans. “Without the subsidies, Qatar Airways would not be commercially viable,” the report said.

On Thursday, Qatar CEO Akbar Al Baker appeared on CNN International’s “Quest Knows Business” to refute subsidy claims made the previous night on the same show by Delta CEO Richard Anderson.

“Quite frankly Mr. Richard Anderson needs to study to find out the difference between equity and subsidy,” Al Baker said. He argued that the U.S. government provided $5 billion in aid and $10 billion in loan guarantees to U.S. airlines following the Sept. 11, 2001, terrorist attacks. “Was this a subsidy or just a donation?” he asked.

As for Emirates, the most successful of the Gulf carriers, it has received at least $5 billion in subsidies since 2004, the report said.

“Although a pervasive lack of transparency in Dubai’s aviation sector — in combination with Emirates’ failure to release its financial statements for the first 16 years of its existence — precludes anything near a full quantification, information from public and confidential sources indicates that Emirates has received at least $5 billion in subsidies in the last 10 years alone,” the report said.

Speaking Thursday on CNN, Emirates CEO Tim Clark declined to comment on the report saying he hasn’t seen it. “I would have thought if these airlines were going to make allegations the least they could have done is to supply us with that report,” he said.

Clark also challenged Anderson’s controversial reference to “the great irony” involved in Gulf carriers complaining about the Sept. 11 airline bailouts since the attacks “came from terrorists from the Arabian Peninsula.” Clark said Anderson “crossed the line with what he said in regard to 9/11, which has caused great offense in this part of the world.” Later Thursday, Anderson apologized for the remark.

Originally published on TheStreet.com: Report Says Gulf Airlines Got $39B (With More to Come) in Illegal Subsidies