Accounting Shenanigans at the UAE’s Etihad Airways

By: Rob Britton

One is never comforted when the words “accounting”, “gimmicks” and “shenanigans” all appear together, especially when one is discussing our nation’s major international trade partners. But it’s become glaringly clear that these descriptors ring true when it comes to the three airlines owned by the United Arab Emirates and Qatar. For the latest example, witness the recent discovery of Etihad Airways’ 2014 financial statements (in Hong Kong, not this country), which were found by investigators, but were never disclosed to U.S. regulators.

This lack of transparency is simply one more benefit of being cozy with the state — and reliant on its treasury. And it gives yet another point of credence to what U.S. airlines have said for months now: absent wheelbarrows of government cash in subsidies, Etihad and Qatar Airways would be unlikely to exist and Emirates’ growth would be substantially reduced.

These subsidies violate core U.S. Open Skies aviation agreements with the UAE and Qatar, and the Obama administration must act to address this serious distortion of trade.

As someone who has spent almost his entire working life in the airline industry, five things jumped out when reviewing these newly-revealed statements, and the broader legal filing submitted by the Partnership for Open and Fair Skies — the coalition of American Airlines, Delta Airlines, and United Airlines, and interested aviation trade unions.

First, the massive size of the 2014 subsidy — it must have required a big wheelbarrow to deliver $2.6 billion in cash from the state treasury to Etihad last year, more than twice as large as the prior single-year high for subsidies from Abu Dhabi to Etihad of $1.25 billion in 2010. And the Etihad filing in Hong Kong indicates that total government funding last year was as much as $5 billion.

Second, although in late May Etihad trumpeted that its enterprise generated a 2014 profit of approximately $73 million (“its strongest financial results to date,” they said, but without transparent financial statements), the truth is that their accountants, KPMG, issued a “going concern” opinion. In accounting parlance, this means that auditors are concerned about the ability of the firm to remain in business for the foreseeable future (generally 12 months).

In Etihad’s case, the going concern statement was explicitly tied to the “expected continued financial support from the shareholder of the Company,” which in this case is the Abu Dhabi government. In short, according to KPMG, Etihad would not be commercially viable without the huge subsidies from its sovereign owner.

Third, in 2014, Etihad continued to employ tricks and gimmicks to create the illusion of financial viability. Last year’s whopper was recording a $700 million gain from the sale of the Etihad Global Cargo Management Company LLC to… itself! Just this transaction made the difference between its “profit” and a loss of hundreds of millions of dollars. Self-dealing appears to be common in the UAE: in 2013, Etihad recorded a big gain by selling its frequent-flyer program to itself, and Emirates routinely does a wide range of all-in-the-family, related-party transactions.

Fourth, as a longtime airline marketing professional, I took special interest in the astronomical revenue, $884 million, that Etihad reported last year in other operating revenues for “advertisement, marketing and promotion of supplier products,” for example, Shell paying Etihad cash to run a Shell TV commercial on Etihad’s inflight entertainment system, or Boeing running this advertisement in Etihad’s inflight magazine, Aspire:

These numbers must be incredibly exaggerated. I would estimate that the total revenue that Etihad could derive from advertising in all of their in-flight media, airport properties, and all the rest would not be more than about $100 million. And yet the 2014 total was more than twice what was reported in 2013 ($282 million). No other airlines, certainly none in the U.S., report anywhere near those amounts, either absolute sums or as a percentage of total revenues. In their report, Etihad’s auditors specifically called out the “significant judgments applied by the company” for those revenues. To me, that’s a sanitized version of “I guess it’s okay in your country but it wouldn’t pass muster elsewhere.”

Fifth and finally, the fact that forensic accountants dug up the filing in a third country, Hong Kong, highlights what was already obvious: Etihad has made no serious effort to address the U.S. airlines’ and various labor groups’ demonstration of their receipt of massive subsidies in violation of the U.S.-UAE Open Skies agreement. Indeed, Etihad’s most recent comments in the United States on the issue of their subsidies does not include any evidence in support of what it says — not a single document.

U.S. airlines have learned to compete in a global marketplace. They ask no special favors; only that our government provide equal opportunity to compete, and act to control airlines that could not exist without enormous and ongoing state capitalism.

Originally published on

americans4fairskies2015Accounting Shenanigans at the UAE’s Etihad Airways