James Hogan, the chief executive of Etihad Airways, has reaffirmed his claim that the Gulf carrier is a “commercial organization” that benefits from “no subsidies or state support”.

In a speech to The Wings Club in New York last week, the boss of Abu Dhabi’s flag-carrier talked up the consumer benefits and the economic growth that have accompanied the rise of the Persian Gulf carriers. Responding to accusations of unfair competition by US lobbyists, he said that Etihad’s opponents are promulgating “myths about our business” – specifically that its shareholder does not expect “a clear return on its investment”.

It is true that both sides of the Gulf-US aviation dispute are spinning a narrative to suit their own biased agendas.

On the American side, claims of unfair advantages seem hypocritical given the decades of government support that US carriers enjoyed before deregulation in the 1970s. On the Gulf side, counter-claims of protectionism gloss over the fact that subsidies distort the competitive landscape, in turn harming consumer choice by pushing out competitors. Both groups have legitimate grievances, and I make no attempt to resolve their dispute in this article.

However, there is one aspect of the Gulf argument which deserves particular scrutiny. Though he avoided discussing profitability last week, Hogan routinely claims that the company has been in the black for several years. “We set a timetable to break even within a decade and we beat that target,” he said during another speech in Washington in 2015.

Unclear costs from equity alliance

In a May 2015 statement announcing its “fourth consecutive year of net profit”, Etihad claimed a positive result of $73 million for 2014 with total revenues of $7.6 billion. The latter figure included $1.1 billion of “partnership revenues” – a reference to bookings throughout codeshares, interlines and other commercial arrangements with its equity partners.

Etihad holds sizable stakes in seven foreign airlines – Air Berlin, Air Serbia, Air Seychelles, Alitalia, Darwin Airline, Jet Airways and Virgin Australia – each of which feeds traffic into its Gulf network.

However, while Etihad includes partnership revenues in its top line, the extent to which associated alliance costs bear down on its bottom line is not disclosed. Let’s be clear: the revenues that Etihad enjoys from its partners do not come for free. Its 49% stake in Alitalia came with a price-tag of €560 million ($750 million), for example. The funds for this acquisition came directly from Abu Dhabi’s government, according to The Wall Street Journal, which alleged overall capital injections of $2.5 billion by the state in 2014.

Such investments are not one-off expenses. Since Etihad upped its stake in Air Berlin in 2012, the German carrier has posted net losses of $916 million. It is logical to suppose that Etihad, as a significant shareholder, shoulders some of the pain. Indeed, the same WSJ report alleged that Etihad purchased perpetual bonds in Air Berlin to the tune of $399 million two years ago.

By talking up the positive returns from the alliance without acknowledging associated costs, Etihad is reaping the rewards of its government’s spending spree in a vacuum – ignoring all concomitant liabilities. That doesn’t sound like a commercial operation to me.

How Etihad can defend its claims

If Etihad is serious about demonstrating its claim to profitability as a commercial entity, the path forward is clear: it should release its financial statements in their entirety.

The airline makes much of the fact that its annual reports are audited by KPMG. Beyond serving as an impressive sound-bite, however, this assertion means very little. KPMG’s involvement will be limited to ensuring compliance with International Financial Reporting Standards (IFRS), and validating the claims made by management on behalf of the government shareholder and any lenders. KPMG has no higher responsibility to the media or general public vis-à-vis disproving subsidies and affirming self-sufficient profitability.

It is very likely that Etihad will become a profitable company in the future, given its proven operating strengths and ubiquitous brand. It may already be one today. But as long as the company refuses to publish financial reports, a cloud of suspicion will rightly hang over its claim to success.

Hogan would be better off defending Gulf subsidies as a legitimate response to historic US advantages, rather than making bold assertions bereft of any supporting evidence.

Originally Published on Forbes.

The Partnership for Open and Fair Skies, a lobby group representing three major U.S. airlines and other industry groups, chose its name well when it entered the scene last year.

By incorporating a variant of the term “open-skies” into its brand, the Partnership explicitly affirmed its support for aero-political deregulation – the removal of bilateral traffic rights and the expansion of cross-border competition between airlines.

To do anything less would be foolhardy given the overwhelming body of evidence that open-skies accords – of which America has signed more than 100 – create vast economic benefits.

Yet, interposing this widely-acclaimed term, the lobbyists snuck in the most subjective and malleable of conditions: “fair”.

What is “fair”? Defining the concept at an abstract level is easy enough – “equitable treatment,” let’s say – but how do we apply an abstract idea in the real world? To be truly “fair” to several parties, we have to understand, quantify and counter-balance the “benefits” and “opportunities” that each has been afforded. That is an impossible task with any degree of mathematical precision.

Which brings me, in a roundabout way, to the subject of Norwegian Air and its long overdue green-light for transatlantic expansion.

The Partnership for Open and Fair Skies, a lobby group representing three major U.S. airlines and other industry groups, chose its name well when it entered the scene last year.

By incorporating a variant of the term “open-skies” into its brand, the Partnership explicitly affirmed its support for aero-political deregulation – the removal of bilateral traffic rights and the expansion of cross-border competition between airlines.

To do anything less would be foolhardy given the overwhelming body of evidence that open-skies accords – of which America has signed more than 100 – create vast economic benefits.

Yet, interposing this widely-acclaimed term, the lobbyists snuck in the most subjective and malleable of conditions: “fair”.

What is “fair”? Defining the concept at an abstract level is easy enough – “equitable treatment,” let’s say – but how do we apply an abstract idea in the real world? To be truly “fair” to several parties, we have to understand, quantify and counter-balance the “benefits” and “opportunities” that each has been afforded. That is an impossible task with any degree of mathematical precision.

Which brings me, in a roundabout way, to the subject of Norwegian Air and its long overdue green-light for transatlantic expansion.

Norwegian’s flag of convenience

America’s Department of Transportation (DoT) announced on Friday that Norwegian, one of Europe’s largest low-cost carriers, has at long last received tentative approval for a foreign-air-carrier permit. Norwegian waited more than two years for this provisional nod, which will allow it to operate more transatlantic flights under the open-skies treaty between the European Union and the United States.

The promise of cheaper transatlantic fares will be music to the ears of the travelling public. But the DoT had to weigh up their lot with the competing interests of all involved parties.

Let’s follow in its footsteps, starting with Norwegian itself.

The airline currently provides less than 2% of scheduled transatlantic seats between Europe and America. That compares with 17% for Delta Air Lines DAL -2.00%; 16% for American Airlines; and 12% for United Airlines. Norwegian has long wanted to grow operations across the Atlantic, but has been hamstrung by Norway’s high labor costs and limited traffic rights (the country is a member of the European Economic Area, but not the E.U.). Its solution was to create an Irish subsidiary, Norwegian Air International.

In considering the airline’s Irish application, the DoT took stock of lobbying by the U.S. majors and their myriad related trade unions – all of which, understandably, would rather keep Norwegian out of the market.

“DoT is proposing to allow a foreign airline to compete directly with U.S. airlines on long-haul international routes with unfair economic advantages,” the Air Line Pilots Association (ALPA) complained after the ruling, describing the Irish license a “flag-of-convenience”. Unions had previously warned that Norwegian would hire Asian employees at a fraction of the cost of western staff, although the airline is promising not to do this.

While acknowledging that the case presents “novel and complex issues,” the DoT ultimately concluded that there is “no legal basis to deny” Norwegian’s application. It reached its decision after consulting with both the Department of Justice and the Department of State .

Though undeniably a victory for Norwegian, the ruling should not necessarily be considered a defeat for U.S. aviation interests.

To the contrary, it could spur the Partnership’s members to refocus their energies toward more justifiable lobbying efforts. Instead of haranguing a European competitor with an impressive cost-base and a transparent balance-sheet, Delta, American and United can now double-down their focus on two of the fast-expanding Persian Gulf carriers: Etihad and Qatar Airways.

Gulf-carrier state subsidies

The U.S. majors began lobbying against three Gulf carriers – Dubai’s Emirates Airline, Abu Dhabi’s Etihad, and Qatar Airways – last year, accusing them of receiving $42 billion of “unfair benefits” over the past decade.

Proponents on both sides of the fence have been quick to rally around their cause, flinging accusations of protectionism and subsidization back and forth to no avail.

Dismiss the naïve notion that either side is really concerned with “fairness,” though, and the path forward is clear.

Emirates, the largest and oldest of the Gulf three, is a futile target. The bulk of the evidence against Emirates relates to lax labor laws, non-arms-length contracts, and benign governmental policies. These benefits – which even the Partnership avoids calling subsidies – occupy a grey area in the debate. Much like Norwegian’s employment practices, they are too abstract and subjective an advantage to compel Washington to act.

As Dubai’s flag-carrier correctly notes, bilateral agreements “do not attempt to harmonize company establishment laws, labor rules or other domestic legislation, since these are outside the competency of aeronautical authorities”.

Lobbying against Emirates – like lobbying against Norwegian – is doomed to fail because rectifying these kinds of ”unfair advantages” falls beyond the DoT’s remit.

When it comes to Etihad and Qatar Airways, however, the financial mandate for regulatory intervention is clear-cut. Filings unearthed by the Partnership show that Etihad has received $4.6 billion of interest-free loans – liabilities which the airline has “no contractual obligations to repay” – plus $6.3 billion of capital injections. Qatar Airways has received $7.8 billion in interest-free loans and $6.8 billion in government loan guarantees, with repayment “neither planned nor likely”.

These are cold hard figures – tacitly acknowledged by the airlines themselves – which contravene both the letter and the spirit of America’s open-skies treaties.

If the Partnership is serious about living up to its name, its members need to pick their fights carefully. Going after a commercially successful, state-owned airline like Emirates that happens to enjoy benign government policies is pointless. Going after an innovative, privately-owned airline like Norwegian is downright unjustified.

Etihad and Qatar Airways are the two airlines with a serious case to answer. It’s time to turn up the heat on them.

Originally Published on Forbes.

Emirates has expanded its already massive fleet of Airbus A380 superjumbos with two additional aircraft.

Airline CEO Sir Tim Clark confirmed the order in a statement on Wednesday.

According to Bloomberg’s Andrea Rothman, the two additional A380s come from Skymark Airlines’ canceled six-aircraft order.

Airbus scrapped the Japanese budget carrier’s $1.7 billion order in July of 2014 after the airline fell behind on its financial obligations.

Later that year, the airplane maker sued Skymark in an attempt to recoup some of the delinquent payments.

In January of 2015, Skymark told Bloomberg that it could go out of business if it had to pay Airbus a breach-of-contract penalty.

Later that month, Skymark filed for bankruptcy protection, citing weak Japanese currency, fuel contracts and its dispute with Airbus.

At the time of the cancellation, Airbus had several of the Skymark superjumbos already near completion.

The Toulouse-based airplane maker has been looking to offload the airplanes ever since.

Although the order carries a list value of $865 million, it’s likely Airbus offered generous discounts to push the deal to completion. Industry sources told Reuters that Emirates likely paid no more than half price for the A380s.

According to Emirates, the two ex-Skymark jets will be delivered at the end of 2017 and will be equipped with the airline’s two-class interior that seats up to 615 passengers per plane.

The ex-Skymark planes push Emirates’ A380 order sheet to 142 aircraft. With 75 A380s in service, the Dubai-based airline is the aircraft’s biggest customer.

The Emirates order balanced out Air Austral’s cancellation on Tuesday of its two A380 orders.

Skymark emerged from bankruptcy last month with the help of private equity firm Integral Corp. and fellow Japanese airline ANA.

Originally Published on Business Insider.

Geneva – The International Air Transport Association (IATA) announced global passenger traffic results for February showing continuing strong demand growth for domestic and international travel. Total revenue passenger kilometers (RPKs) rose 8.6%, compared to the same month last year. Monthly capacity (available seat kilometers or ASKs) increased by 9.6%, and load factor declined 0.7 percentage points to 77.8%.

“In the first two months of 2016, demand for passenger connectivity is off to its strongest start in eight years. However, February was the first month since the middle of 2015 in which capacity growth exceeded demand, which caused the global load factor to decline. It is unclear whether this signals the start of a generalized downward trend in load factor, but it bears watching,” said Tony Tyler, IATA’s Director General and CEO.

International Passenger Markets

February international passenger demand rose 9.1% compared to February 2015, which was an increase over the 7.3% yearly increase recorded in January. Airlines in all regions recorded growth. Total capacity climbed 9.9%, causing load factor to slip 0.6% percentage points to 76.6%.

• European carriers saw February demand increase by 7.7% compared to a year ago. Traffic has recovered following disruptions in the 2015 fourth quarter related to airline strikes and the shutdown of Transaero in Russia. Capacity climbed 7.8% and load factor dipped 0.1 percentage points to 78.3%
• Asia-Pacific airlines’ February traffic rose 11.2% compared to the year-ago period. Capacity increased 10.3% and load factor climbed 0.7 percentage points to 78.3%. Comparisons with 2015 are distorted by the timing of the Lunar New Year celebrations, which took place in February this year. Slower economic growth in many of the region’s economies has been at least partly offset by the 7.3% increase in the number of direct airport connections within the region, which has helped to stimulate passenger demand
• North American airlines’ traffic climbed 3.6%, which was the slowest among the regions and was exceeded by a capacity expansion of 4.8%. In turn, this caused load factor to fall 0.9 percentage points to 75.9%. US airlines have been focusing on the larger and more robust domestic market, although that market is showing signs of slowing in recent months
• Middle East carriers had an 11.3% demand increase in February compared to a year ago. This was exceeded, however, by a 16.9% rise in capacity that caused load factor to drop 3.7 percentage points to 73%. Traffic growth has now lagged capacity growth for six consecutive months
• Latin American airlines saw February traffic jump 10.4% compared to February 2015. Capacity increased by 10.1%, boosting load factor 0.2 percentage points to 79.8%, highest among the regions. Domestic passenger demand remains under pressure from economic difficulties in the region’s biggest economies, but this seems not to be affecting business-related international travel
• African airlines posted the strongest demand growth among the regions with February traffic up 12.7% compared to a year ago. The pick-up indicates that carriers here are regaining market share through efforts to rationalize networks and enhance revenue management systems, after several difficult years. It also aligns with a jump in exports from Africa. Capacity rose 13.4%, and load factor slipped 0.4 percentage points to 63.7%.

Domestic Passenger Markets

Domestic travel demand rose 7.9% in February compared to February 2015, which was an increase over growth of 6.9% in January. All markets except Brazil showed growth, with the strongest increases occurring in India, the US and China. Domestic capacity climbed 9.0%, and load factor fell back.0.8 percentage points to 79.7%.

• India led all domestic markets again with a 24.6% year-on-year growth, supported by the strong economic backdrop, as well as notable increases in services. This trend is expected to continue with flight frequencies in 2016 scheduled to increase by 11.5% year-on-year
• Brazil’s domestic market decline may be starting to bottom out but the highly uncertain economic and political outlook could pose challenges for airlines in the near-term

The Bottom Line

“On March 22 we had a grim reminder that transportation—including aviation—remains a target for terrorism. The attacks in Brussels were an attack on humanity—a terrible tragedy—that was met with resilience. The subway is back in operation. And the airport is working hard to return to normal operations that will reconnect Europe’s capital with the world. Aviation is a force for good. And we are once again proving that terrorists will never succeed in destroying the fundamental urge of people to travel, explore and learn about the world,” said Tyler.

Originally Published on IATA.

Dubai: The Middle East airlines have been adding more capacity than there is demand for the past six months, the International Air Transport Association (IATA) said on Thursday, in its monthly traffic updates.

Demand for air travel among Middle East carriers rose 11.3 per cent in February but that was outstripped by a 16.9 per cent increase in the number of available seats offered by those airlines.

“Traffic growth has now lagged capacity growth for six consecutive months,” IATA said in a statement.

The Middle East, home to the world’s largest airline on international routes — Emirates, is one of the fastest growing aviation markets today. Emirates, along with hub airlines Etihad Airways and Qatar Airways, compete with other major global airlines for transcontinental passenger traffic.

Globally, demand for air travel rose 8.6 per cent in February while the total number of available seats rose by 9.6 per cent, as per IATA estimates.

“February was the first month since the middle of 2015 in which capacity growth exceeded demand, which caused the global load factor to decline. It is unclear whether this signals the start of a generalised downward trend in load factor, but it bears watching,” stated Tony Tyler, IATA’s Director General and Chief Executive Officer.

Originally Published on Gulf News.

While the battle between three major U.S. airlines and their Middle Eastern competitors over alleged government subsidies has drifted out of the public eye after dominating headlines last year, the issue is still very much on the radar for American Airlines CEO Doug Parker.

“This is the biggest threat I’ve ever seen to commercial aviation in the United States,” Parker said during a speech at an aviation maintenance conference in Dallas on Wednesday. “I’m sure that sounds like hyperbole, but it’s not. What’s happening is those two countries are subsidizing those three airlines to a point where they don’t need to be profitable.”

The two countries Parker referenced are United Arab Emirates and Qatar; the three airlines are Emirates, Etihad Airways and Qatar Airways.

Officials at American as well as United Airlines and Delta Air Lines launched a public lobbying effort last year pushing the U.S. government to revisit Open Skies agreements with United Arab Emirates and Qatar over concerns that those countries were providing their airlines with billions in subsidies.

Officials from Emirates, Etihad Airways and Qatar Airways have fiercely denied the allegation, with Emirates’ CEO calling the accusations “repugnant” and “patently false” last June.

Despite the denials, Parker said some of the routes being flown by the three Middle Eastern carriers cannot possibly be profitable, pointing specifically to Emirates’ flight from New York’s JFK International Airport to Milan.

“I’ve been in this business long enough and know what the numbers are, and it can’t be done,” Parker said. “They add routes that cannot be profitable, but they don’t care because they’re subsidized.”

So far, the encroachment of Middle Eastern carriers into the U.S. has been limited, with the New York-to-Milan flight the only route involving U.S. destinations that doesn’t pass through one of the foreign carriers’ respective hubs in Dubai, Abu Dhabi or Doha.

But Parker said the allegedly uneven playing field limits U.S. airlines’ ability to compete in certain foreign markets, like India, and threatens to undermine the hub and spoke model that American, Delta and United all use.

“The entire hub and spoke network particularly, for us large global airlines, is based on our ability to have fair competition across international markets,” Parker said.

His comments came during a question-and-answer session following his speech at Aviation Week’s MRO Americas conference in Dallas.

The majority of the speech dealt with American’s need to adapt how it deals with employees and invests in its product to compete in a transformed airline industry, a pitch that Parker has made to American employees and Wall Street investors in recent months.

Originally Published on The Dallas Morning News.