Etihad Got $2.5 Billion Capital Injection From Abu Dhabi

By: Rory Jones

The Abu Dhabi government last year injected $2.5 billion into Etihad Airways, new funding that critics say proves the Persian Gulf carrier is unfairly subsidized by the state in violation of air treaties with the U.S. government.

The previously undisclosed cash injection is detailed in state-owned Etihad’s financial statements, which were made public on Monday by the Partnership for Open & Fair Skies, a lobby group led by the three biggest U.S. airlines.

The group, which includes several labor unions and U.S. carriers American Airlines Group Inc., United Continental Holdings Inc.and Delta Air Lines Inc., is pushing the U.S. government to limit the rapid growth of Etihad and its regional peers, Dubai’s Emirates Airline and Doha-based Qatar Airways.

Etihad reported a net profit of $73 million last year on revenue of $5.86 billion, according to the airline’s financial statements, which are audited by KPMG LLP. Earnings were boosted by a one-off sale of a subsidiary to another part of the group for $700 million.

“Etihad’s own financials prove that it is not a commercially viable enterprise and owes its continued existence to massive government subsidies from the United Arab Emirates,” said Jill Zuckman, chief spokesperson for the Partnership for Open & Fair Skies.

A representative for Etihad said the airline had never hid receiving equity capital and loans from the Abu Dhabi government.

“That is completely normal for any business which has significant long-term capital commitments, for example for aircraft deposits,” the Etihad representative said. “These issues have all been addressed in our submission to the U.S. government.”

The group submitted Etihad’s financial statements as part of its latest legal submission to the U.S. government as part of its effort to prove the Gulf carriers harm U.S. airlines’ operations.

Etihad’s documents were filed by the airline to a corporate registry in Hong Kong last month and were reviewed by The Wall Street Journal.

The big three U.S. passenger carriers in January asked the U.S. government to renegotiate air treaties with Qatar and the United Arab Emirates, where Emirates and Etihad are based. They allege the three state-owned Gulf airlines have received more than $40 billion in government subsidies since 2004 that allow the carriers to unfairly compete in the aviation market.

The U.S. Transportation, State and Commerce departments said they would review the allegations and opened regulatory dockets where any party could file information and lobby for either side.

Emirates, Etihad and Qatar have dismissed the U.S. carriers’ claims, denied they are unfairly subsidized and filed rebuttals on the U.S. dockets.

FedEx Corp.’s FedEx Express delivery unit, Atlas Air Worldwide Holdings Inc., JetBlue Airways Corp. and Hawaiian Holdings Inc.’s Hawaiian Airlines have also said they oppose the big three U.S. carriers’ submissions to the U.S. government.

The Abu Dhabi government’s latest capital injection came as Etihad invested hundreds of millions of dollars in other carriers around the world, according to the airline’s financial statements.

It wasn’t immediately clear how the latest government funds were used, and Etihad declined to comment.

Etihad has minority equity stakes in eight airlines, and supports the carriers through investment in their loyalty programs, bonds and operations. It paid $543 million for a 49% stake in Italy’s Alitalia and bought perpetual bonds valued at $399 million issued by Germany’s Air Berlin PLC. It also spent $150 million on a 50% interest in Jet Airways (India) Ltd.’s loyalty program.

The strategy has helped the airline, the smallest of the three Persian Gulf carriers, to achieve scale globally in markets where aviation rights are restricted or the carrier has faced fierce competition, particularly from its regional peers seeking to funnel traffic through their hubs.

The U.S. government has negotiated 117 “open skies” treaties with countries since 1992, allowing airlines from both sides to access any airport in both countries.

Originally Published on The Wall Street Journal:

americans4fairskies2015Etihad Got $2.5 Billion Capital Injection From Abu Dhabi
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Gulf Airlines Eat Into Traffic on American, Delta, United

By: Ted Reed

NEW YORK (TheStreet) — Newly available statistics show that U.S. flights by Mideast carriers have a significant impact on the number of passengers carried by American (AAL – Get Report) , Delta (DAL – Get Report), United (UAL – Get Report), as well as their joint venture partners, to the Mideast, Africa, Indian and southeast Asia — all destinations where international airline passengers generally rely on connecting flights.

In four U.S. gateway cities — Boston, Dallas, Seattle and Washington, D.C. — the combined decline in the year after Emirates began service to its Dubai hub ranged between 8% and 21%, according to the statistics, which were filed Monday with the U.S. departments of Commerce, State and Transportation by the Partnership for Fair and Open Skies, which represents the three global U.S. carriers and their unions as they seek to mitigate the impact of the subsidized Gulf carriers’ rapidly expanding U.S. service.

In Boston, Seattle, and Washington, U.S. carriers lost between 23% and 25% of their defined international traffic since the initiation of service by Emirates. In Dallas, the combined impact on U.S. carriers was minimal, but joint venture partners — led by British Airways — suffered a 14% loss in passengers to the defined destinations.

The statistics include flights to Mideast destinations except for Israel, to Indian subcontinent countries India, Pakistan, Bangladesh, Nepal, Maldives and Sri Lanka and ASEAN countries Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

The statistics respond to a previous filing by Emirates, which suggested that its service to the U.S. stimulates traffic and does not harm the U.S. carriers and their partners.

“A closer look at the data shows that, despite their allegations, the legacy carriers and their joint venture partners suffer no loss at all,” Emirates argued. “Far from harming the legacy carriers, in a large number of cases Emirates helped stimulate these emerging markets.”

Jill Zuckman, spokeswoman for the partnership, responded in an interview: “Not only have the Gulf carriers failed to meaningfully stimulate new traffic, but the data clearly show losses — that entry by a Gulf carrier into a U.S. gateway city is followed by an actual decline in U.S. carrier bookings.

“The subsidized Gulf carriers are distorting the global marketplace, harming the U.S. airline industry and threatening American jobs and airline service to communities across the U.S,” Zuckman added.

The four U.S. gateway cities were selected for the study because they were cited in the Emirates filing. In three cases, Emirates was the first Gulf carrier to provide service. At Washington Dulles, Qatar Airways was first.

The exact number of passengers lost to U.S. carriers and their joint venture partners is not specifically quantified in the filing. However, the total number could be as high as a few hundred thousand passengers annually, a partnership spokeswoman said.

In the airline industry, obviously, lost passengers result in lost jobs. The partnership estimates the impact of a lost international flight at about 800 jobs, including 267 airline jobs for each widebody aircraft and 62 jobs at connecting flights. The remaining job losses involve non-airline employees.

The partnership’s filing looks particularly closely at Seattle, where Delta is building an international hub. In the year following Emirates’ first Seattle flight in March 2012, U.S. airlines lost 12% of their passengers to select African, Asian and Mideast destinations, while joint venture partners lost 29%. The combined loss was 21%. At the time, Delta served Beijing, Paris, Osaka and Tokyo Narita from Seattle; it now serves nine international cities.

The impact is likely mounting. Since 2012, Etihad Airways and Qatar have added daily flights to their hubs in Abu Dhabi and Doha, respectively, while Emirates added a second daily flight to Dubai in July.

During Delta’s second-quarter earnings call in July, CEO Richard Anderson said the carrier connects more than 700 passengers per day (each way) between domestic and international flights.

“On the surface, that appears to be a healthy level of flow traffic,” Deutsche Bank analyst Mike Linenberg wrote afterward. However, Linenberg said, the number does not appear to have increased much since 2012, when Delta began its Seattle buildup.

The limited number of connecting passengers underscores “the inroads being made by Middle Eastern carriers,” he wrote, noting that Emirates now offers 626 daily seats between Seattle and Dubai and “will capture a portion of the connecting traffic flows currently being carried by the incumbent airlines {meaning that} Delta (and others) may find it harder to achieve their PRASM targets.” Passenger revenue per available seat mile is a key industry metric.

Breaking out the top 10 destinations from Seattle where U.S. carriers and their partners have lost bookings, the filing lists Hyderabad, with a 63% loss; Madras, 43%; Dubai, 38%; Bangalore, 36%; Mumbai, 26%; Johannesburg, 22%; Tehran 19%; Delhi, 19%; Nairobi, 15%; and Istanbul, 3%.

In Washington, after Emirates began service in September 2012, U.S. carriers led by hub carrier United lost 25% of bookings to the select destinations; partners led by Lufthansa lost 4% and the combined loss was 14%. Today, Emirates, Qatar and Etihad all fly daily to Washington Dulles. Qatar began Washington service in 2007. The statistics include Baltimore flights.

In Boston, American and Delta lost a combined 23% of bookings to the affected destinations, joint venture partners lost 7% and the combined loss was 11%. Today, Emirates and Qatar fly daily to Boston.

In Dallas, U.S. carriers, primarily hub carrier American, lost 0.2%, joint venture partners lost 14% and the combined loss

Originally Published on The Street:

americans4fairskies2015Gulf Airlines Eat Into Traffic on American, Delta, United
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Urgent Action: Gulf Carrier Subsidies Need to Be Addressed Now

By: Rob Britton

Earlier this week, the U.S. government closed the public docket on the dispute over the abuse of two Open Skies agreements; the procedure invited Americans to submit comments about the massive subsidies to three Gulf carriers, state-owned Qatar Airways, Etihad Airways, and Emirates. Initial results suggest that about two-thirds of the comments – from members of Congress, local mayors and local business leaders, U.S. airline employees, and individuals from across the country – urged the U.S. government to act now to protect American airline jobs. And a new research report highlights the urgent need for the action that so many have called for.

The airline industry, like others, has an ecosystem of experts, and at the top of that food chain is MIT Professor William Swelbar. Bill has an unmatched combination of deep professional experience within airlines (he paid for college as a flight attendant) and data-driven academic rigor. When he writes about aviation, people who truly know the business pay attention. Recently, he released a paper detailing how massive subsidies provided to Emirates, Etihad, and Qatar Airways, are harming airline service to and from small and medium-sized communities. The paper is entitled “Violations of ‘Fair and Equal’ Open Skies Agreements Threaten Large and Small American Communities and their Access to the Global Air Transportation Network,” and his compelling analysis highlights how important it is for our government to act now.

Prof. Swelbar opens with two foundational arguments. First, every one of the U.S. government’s 117 Open Skies agreements, including those with the United Arab Emirates and Qatar, has a provision mandating “fair and equal opportunity to compete,” which means if an airline wants unrestricted access to the huge U.S. market, it cannot be subsidized as their three clearly are – proven subsidies and other unfair benefits totaling $42 billion in the last 10 years alone. Second, established economic theory tells us what we would expect to see in unbalanced, subsidized markets, and the U.S.-Gulf (and beyond) market exhibits four telltale signs:

  1. Huge capacity increases, greater than growth in demand
  2. Decreases in local and connecting passengers on U.S. airlines and their European alliance partners (for example, United and Lufthansa)
  3. Traffic shifting from these services to subsidized Gulf carriers
  4. As a result of the above, drops in U.S. and alliance capacity in much of the world beyond the Atlantic

Swelbar succinctly explains network economics, in this case the flow of passengers from the U.S. to Dubai, Abu Dhabi, and Doha, the vast majority of whom connect to flights bound for points beyond. For example, only 6% of Qatar’s U.S. traffic is bound for its home, Doha, while 67% is headed to 11 cities in India. The paper then thoroughly dismantles the falsehood the Gulf carriers and their allies repeatedly advance, that these three airlines are serving destinations U.S. airlines don’t want to serve. For instance, Emirates claims that they “carry travelers from the U.S to 56 destinations . . . which are not served by any American carrier.” But the facts are otherwise: of the 178 cities the three Gulf carriers together serve, 175 of them (98%) are served by one or more of the three airline alliances to which American, Delta, and United belong. Indeed, United’s Star Alliance alone covers 172 of the 178. So much for “don’t want to serve”!

Professor Swelbar quickly bats down another oft-touted Gulf carrier argument, that they’re growing the market. He writes, “The math is clear. Subsidized Gulf carrier service threatens the viability of nonstop flights with greater economic impact than the Gulf carriers themselves could ever hope to provide.”

Continuing the discussion of network, Swelbar then explains, with customary clarity and brevity, the threat to small and medium U.S. cities: “Domestic flights to smaller airports rely on international traffic to justify their profitability and their existence.” And, parsing the traffic data, he has uncovered a new danger: it turns out that when Gulf carriers enter a new U.S. market, their subsidized low prices incent customers in nearby cities to drive to these new nonstop services, rather than begin their journey at their home airport. Since 2012, U.S. airlines have added capacity at Austin, Texas, and Richmond, Virginia, but traffic from these points to the Middle East and South Asia have declined 20% and 33% respectively, as travelers have opted to drive the 214 miles to DFW Airport, Texas, or 121 miles to Washington Dulles.

Swelbar next turns to a danger he describes as “perhaps even more worrisome,” one often overlooked in the Gulf-carrier debate: the Open Skies agreements permit Emirates, Etihad, and Qatar to carry passengers, without limits, on “Fifth Freedom” services, flights to or from a city not in the U.S. nor their home countries, as long as the flight begins or ends in either of the two countries. For example, for almost two years Emirates has flown New York-Milan (the flight goes on to Dubai). Fifth Freedom flights are an anachronism, dinosaurs with wings that date to a time when airplane range was limited, fuel stops were needed, and airlines could not economically operate without the right to carry “local” customers between countries. But since Emirates flies three times daily from New York to Dubai, it’s pretty clear they don’t need to land in Italy for gas. Their one daily Milan flight is likely just the start; they have the right to fly L.A.-London, Chicago-Paris, and so on, threatening the viability of U.S. service on these routes – and they could do this across the Pacific, too, say, San Francisco-Tokyo-(Abu Dhabi).* Of course, as above, these flights would also endanger service to and from smaller and mid-size communities, because those long nonstops depend on connecting passengers from places like Omaha, Birmingham, and Syracuse. It is an integrated grid – we’re all in this together.

Lastly, Professor Swelbar reminds us throughout the study that things will only get worse, given the expansion plans – and aircraft orders – of all three. The capacity dumping by Emirates, Etihad, and Qatar has rapidly accelerated in the past 18 months. In a single day, Qatar announced new service to three more cities, Boston, Atlanta, and Los Angeles. Although we lump them together, each airline is racing against the other two, and each has wheelbarrows of state-provided cash to advance their economic development goals.

Our government needs to heed this threat to the U.S. airline grid, to domestic economic objectives, and to good-paying U.S. jobs. As someone who worked in the U.S. airline business for 25 years, I know firsthand that American, Delta, and United can compete, but not on a playing field rigged by limitless resources. The American people have weighed in and the docket is closed – the U.S. government must act before the consequences become irreversibly dire.

* The exercise of Fifth Freedom rights also requires the consent of the third country, for example, Japan in the case of San Francisco-Abu Dhabi flights.

Originally published on The Huffington Post:


americans4fairskies2015Urgent Action: Gulf Carrier Subsidies Need to Be Addressed Now
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