U.S. Airlines Claim to Document Subsidies at Gulf Rivals

Delta hired gumshoes to find back call for Open Skies treaty revisions

April 20, 2015

As the battle intensifies over U.S. airlines’ allegations of unfair state subsidies to three Persian Gulf rivals, a look at how the American carriers gathered data to support their claims sheds light on the vast financial reporting divide between the two sides.

Alarmed by the rapid U.S. expansion of Emirates Airline, Etihad Airways and Qatar Airways, Delta Air Lines Inc. two years ago hired forensic accountants to learn more about the overseas carriers’ funding. All three are government-owned, and Etihad and Qatar don’t issue public financial statements.

The effort—later joined by American Airlines Group Inc. and United Continental Holdings Inc.—culminated in a trade complaint lodged in January with the U.S. government. The U.S. carriers claim the documents they found show the Gulf trio has received $42 billion in subsidies and unfair benefits since 2004, including about $17 billion for Abu Dhabi-based Etihad, and $16 billion for Doha-based Qatar Airways. The Gulf carriers say they are commercial enterprises that aren’t state subsidized.

Delta hired investigators to dig into their financial histories. The three U.S. carriers say their gumshoes discovered about a year ago that they could request and obtain copies of financial statements for the three from corporate registry offices in some countries where the Gulf airlines operate.

The investigators, which the airlines wouldn’t name, searched in nearly 30 jurisdictions, assembling their dossier mostly from documents filed in the U.K., Singapore, Australia, India, Belgium and Ireland, said Jill Zuckman, spokeswoman for the U.S. airlines’ coalition, called Partnership for Open & Fair Skies. They also used bond-offering prospectuses for the Gulf carriers and their governments to compile the information.

The picture remains incomplete, Ms. Zuckman said, given the often interlocking relationships among the Gulf governments, airlines, airport authorities and aviation service providers. The U.S. coalition, which previously issued only a summary of its claims, said it will release all its documents on Tuesday, giving the Gulf carriers their first chance to evaluate and respond to the assertions.

The U.S. airlines said they amassed 44 documents totaling 1,021 pages. The Wall Street Journal has viewed many of them, at least one of which is in Flemish. Among other information, they indicate that international auditors at times endorsed two of the airlines as viable businesses—or “going concerns”—contingent on further financial backing from their shareholders.

In Etihad’s 2013 annual report, for example, KPMG LLP said it audited the accounts on a going-concern basis “notwithstanding the fact that the group had accumulated losses of $3.76 billion” as of December 2013. KPMG said it had prepared the 2013 statements based on approval of $3.5 billion in additional shareholder funding in 2014 by Abu Dhabi’s ruling body.

The U.S. carriers, citing at least nine years of Etihad financial statements, claim such shareholder funding was part of $17 billion in state subsidies provided to Etihad since 2004.

Etihad says it has received equity investments and loans from its government. It says it can’t comment on specific claims because it hasn’t seen the full documentation behind the U.S. carriers’ previously issued summary.

The U.S. airlines said they also assembled 19 years of annual accounts for Qatar Airways that show it received $16 billion in total subsidies since 2004.

In Qatar Airways’ 2009 financial statement, auditor Ernst & Young LLP reported that the current- and previous-year losses exceeded 50% of company capital. A special meeting was convened that year to weigh options including dissolving the company. Shareholders decided instead to fund its liabilities.

In the same statement, the auditors noted that the government loans were non-interest bearing, had no specific repayment terms and could be converted to equity because repayment wasn’t likely to occur in the foreseeable future.

Qatar Airways said Chief Executive Akbar Al Baker is expected to address the U.S. carriers’ allegations in presentations scheduled for May 13.

Emirates has published its financial statements for the past 13 years and is starting to make earlier reports available as well. But the U.S. carriers claim they also uncovered evidence that it received at least $5 billion in subsidies since 2004.

Among other things, they pointed to a reduction from 15.1 billion U.A.E. dirhams to 5.6 million dirhams in fuel-price hedging contracts on its books between 2008 and 2009, a time when many airlines took hedging losses after jet fuel prices tumbled. The majority of the contracts were transferred to a Dubai government holding company, the financial statement said. PricewaterhouseCoopers LLP audited the books.

Emirates declined to comment on the hedging contracts. Last week, it said it had requested that the U.S. government release the materials received from the U.S. airlines, as well as information it had requested from them, so Emirates can “defend itself against the pernicious falsehoods that have wrongly been advanced against it.”

Emirates, Etihad and Qatar Airways say they abide by International Financial Reporting Standards. Qatar’s books also make that claim. All three companies say they have earned their burgeoning traffic with superior service and a range of new destinations. KPMG, PricewaterhouseCoopers, and Ernst & Young declined to comment on client accounts.

The U.S. carriers want the Obama administration to revise existing “open skies” air treaties with Qatar and the United Arab Emirates to account for the purported government aid. Meanwhile, the U.S. carriers also want the government to freeze additional Gulf airline service to the U.S., retroactive to January, restricting planned new routes.

The Gulf carriers and open skies air treaties generally have won support from U.S. cargo airlines, discount carriers such as JetBlue Airways Corp., and U.S. airport and tourism groups. Centre for Aviation, a respected Australian aviation researcher, took the U.S. airlines to task in a recent report for failing to account for the customer benefits such new airplanes, exotic destinations and lower fares provided by the Gulf carriers and not demonstrating serious harm to U.S. airlines by their expansion.

Write to Susan Carey at [email protected] and Rory Jones at [email protected]

Originally published at WSJ.com: U.S. Airlines Claim to Document Subsidies at Gulf Rivals

americans4fairskies2015U.S. Airlines Claim to Document Subsidies at Gulf Rivals