Ah, finally, the report is published - perhaps the US3 and the 4 unions were waiting for the Berlin trade show to hold a joint press conference (in Washington), although, I did enjoy the answer to why they didn’t release the report earlier, if they had such compelling evidence “We just didn’t”. Oh well. It is here now and that is what matters. You can scroll down to a tl;dr.

I know throughout this thread I have begun to sound like a bit of a broken record defending EK, but I just want to preface this by saying I have absolutely no stake in the success of the Middle East carriers, specifically Emirates, no “skin in the game”, no financial interest or otherwise. Where my interest comes from is a confluence between aviation (in general) and my general dislike for cynical and disingenuous attempts at manipulation of public opinion and narrative especially from a position of hypocrisy and ulterior motive. Also, I’m sure I take subconscious pleasure from posting long threads on the internet in some sort of masochistic-therapeutic way…

After reading the report, I think it will be helpful to state their conclusions in each part, pull out the main threads of the paper’s arguments, isolate the issues that pertain to EK whilst highlighting the differences between QR and EY and then to compare the points raised in the paper with our discussion in this thread - it does indeed seem that most of the points raised in the paper have been dealt with in our thread here. Also it saves those who have been enjoying reading this thread from wading through the 74 pages It is also important to note the context that the report was authored in - there is a lot of referral to concepts of state capitalism and free-market, as well as the structure of the report (as in, what do the authors keep coming back to, how much time to they spend on various issues, what do they highlight). That is fairly illuminating as to the subtext of the piece.

We can split each part of the report into two major themes - accusations, and complaints: or more simply, what the report says is or is not happening or has happened, and why they (the authors: AA, DL, UA and 4 labor organisations) think it’s “unfair” and damaging for them.
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Opening and Background Remarks
Conclusions of the report are presented first with some background about what Open Skies is and what the US wanted out of the agreements, which they have with 111 foreign governments: acknowledging that Open Skies has been successful “in opening new markets for U.S. air carriers and promoting competition and consumer choice.”

- Open Skies was a U.S. model and has to be consistent with “U.S.” interests. The problem they see is that they believe some of these open skies traffic rights which the U.S. granted are “being used in ways that are contrary to free market competition and U.S. interests”.

What we see is a deliberate attempt to align the 3 airlines and the 4 unions interests with United States interests - there is no mention of other airlines and companies, such as FedEx and Jetblue who urge the Administration to not mess with the agreements at all. We also note that there is no mention of many of the free-market restrictions that the United States has made (some of which you can go back to post 624 to read about) - such as Fly America Act for tax payer funded travel, cabotage restrictions, anti-trust immunity for Joint Ventures, the offloading of legacy pensions.

- The UAE and Qatar are criticised for economic development strategies that depend on air passenger traffic through their hubs.

I am pleased to note that the 40 billion dollars in subsidies has now been qualified as: “40 billion in subsidies and other unfair government-conferred advantages” - and the report does, to its credit, go into as much specifics as it can, later on.

Essentially the thrust of the background and introduction is to complain that US negotiators thought that Open Skies would be there to let US carriers compete throughout the world and be able to outcompete because they were seen to be better managed than other (state controlled/influenced) carriers around the world. They now see these three Gulf airlines, outside of the major alliance system to a general extent and therefore not party to JV revenue sharing/philosophy of capacity discipline, as a threat to yields as they encroach on previously margin-protected routes. The complaint is that this being “out-competed” is due entirely to unfair help some of their competition have been able to take advantage of.

The general argument outlined in page 2:
- “U.S. Open Skies policy is designed to enable U.S. carriers to compete in a global market undistorted by government actions that advantage foreign carriers.” - note, there is no mention of advantages preserved by these policies given to domestic carriers
- evidence of subsidy, as defined by the WTO
- Gulf airlines have ordered hundreds of wide body aircraft - although I am unsure as to the relevance of this, surely this is a good thing for U.S. manufacturing interests, considering the vast numbers of 777s ordered? Of course, it is a wonderful paragraph to put in if you want to seed the idea of capacity dumping into a reader’s mind…
- Gulf carriers are adding new capacity at greater than global GDP growth, and therefore to fill that capacity they must take from other countries’ carriers. No mention of course is made of the major target markets that these airlines aim at: Asia, (South and North), where population and therefore GDP growth is much higher than the EU and US - 7% in China this coming year! And there is a deeper, anti-free market insinuation that is it should be illegal or is unfair, if you decide to invest at a rate that is greater than some external benchmark. We could follow that argument all the way back and argue that no investment anywhere is allowed above the global or local GDP growth - but that is patently absurd.
- “they take passengers and revenues from U.S. airlines”- I’m not sure what the justification is to have a natural right to that revenue. It’s almost as if the mentality is the world is divided up into certain regions and routes and any encroachment must be stopped at any cost. That is the definition of cartel…
- U.S. carriers’ international and domestic networks have a symbiotic relationship: as Gulf carriers force U.S. carriers to reduce, terminate or forego services on international routes, the loss of these flights from the U.S. carriers’ hubs will reduce passenger flow to/from their domestic flights” - no mention of course that domestic travel is protected by law - anyone arriving into the US and travelling from a gateway needs to take a U.S. carrier for the final or initial sectors; there are other domestic airlines (Southwest and JetBlue come to mind) and that much of this foreign travel to the United States terminates in gateway cities anyway. Perhaps the authors of the report should modify U.S. carriers, to AA, UA and DL, some of whose domestic network connects to international gateways…
-The Open Skies agreements have conferred enormous benefits on Qatar and the UAE by opening up the most lucrative market in the world to their airlines, even though they provide essentially no benefits to U.S. carriers in return, given the low level of demand for travel originating or terminating in the two Gulf countries - clearly there is not much O&D traffic, but the agreements provide US carriers the right to establish operations in these Gulf countries and capture onward connecting traffic. Just because the US carriers do not take advantage of these rights, does not mean that they aren’t available. I am not sure why carriers are being penalised for taking advantage of a right that reciprocally US carriers can as well - although the establishment of global cargo hubs in foreign locations by US companies is a right that they use under the agreements. Additionally the complaint is that airlines should only be focusing on O&D service? That would throw many of their alliance partners under the proverbial bus..
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Part 1
Part 1 talks more in depth about the Open Skies agreements and how the report authors feel their interpretation of the intent of the agreements have been violated, giving the US grounds to withdraw. It is entirely a list of complaints, with no accusations.

It is predicated on the idea that free-market capitalism was the basis of the agreements, but state-capitalism is now threatening the foundations of that agreement. However, in page 4, it is admitted by the report’s authors that when Open Skies Policy was proposed, state-capitalism was an issue for negotiators, who acknowledged that foreign governments used and would use financial aid etc. to distort competition (in fact, how could negotiators go into negotiations with a straight face to demand removal of that aid considering US competition distortions in aviation!) - but was dismissed because “state-owned airlines are less competitive than U.S. carriers”. One could argue this is still true.

There are further complaints that it is unfair that Gulf carriers take advantage of connecting traffic from other destinations through their hub. I think it is up to readers to see how seriously they should take that complaint There is a further complaint that Gulf carriers fly to numerous U.S. cities, but U.S. carriers only flight two flights a day to Dubai. I think this is a trivial complaint because there is clearly connecting demand from “behind” the Gulf hubs - so why haven’t US carriers stepped up to meet this demand? Is it because their price and offering just isn’t good enough value?
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Part 2
Part 2 focuses on Dubai (4 pages), with 2 paragraphs given to Abu Dhabi and Qatar. It focuses on the interrelations between Dubai entities and the government, and specifically on Sheikh Ahmed. We have gone over what this means in reality in this thread.

The crux of the report’s argument is that the situation is not “transparent”. This is patently obvious - what I dislike is that it insinuates, with little in the way of actual evidence, some sort of nefarious dealings. There is no actual evidence presented. Indeed in this thread, many posters have given arguments as to why cross-subsidy in the case of Dubai is simply infeasible, or industrial policy is simply the prerogative of any government anywhere to promote an industrial sector (in Dubai’s case, aviation and tourism). The argument is that aviation is closely linked to Dubai national prosperity - that is where the facts end and the insinuations begin: that things are done for Emirates and then, in some cases, this might be unfair.

However, there is a very interesting point about Dubai Airports. As FD1971 stated in many posts, it is general theme when trying to establish aviation as an industry for airports and their owners, usually local or national governments, to offer cheap landing fees to get people through the terminals and into the local economy. No one disputes whether a government has the right to do this, or indeed - should be doing it. The question for us is whether the airport continually operates at a loss and/or gives EK specifically preferential rates beyond that which would be expected for a major airport user. Luckily for us, this is answered on page 8 of the report:

So there we have it - operationally, the airport is profitable. However, it can’t pay for expansion. The report’s authors highlight this as a accusation that EK profits unfairly from this airport expansion expenditure. But look at it from the other side. You own a profitable airport, as DXB is. Your major tenant says, we need more space. You know that this tenant will generate revenues to cover operating costs (with a small surplus) of the new space as has been shown in previous years, but you can’t afford it from reserves. So owners provide financing. I am not sure how this can be properly spun into a narrative about specific state subsidy - governments don’t exist to make profits, and infrastructure spending is exactly one of the services people expect from their governments. It is not even going to be a money-sink: historically the airport covers its own costs. How is this different from LHR T5 building additional terminal space - apart from LHR T5s owners wanting to make as much cash as possible whereas the government owners of DXB only want cover operating costs and presumably longer horizons for capital payback. Or we can look at Fraport back in the days pre-privatisation or BAA - no one is seriously suggesting that current operators/tenants pay for any of the historical public infrastructure associated with these major capital projects that are now in private hands?

Additional complaints are that the government is spending more in Dubai on infrastructure. Using this as a complaint to allege unfair competition is simply US carriers complaining that the US government or its airport owners (all public) don’t have the priorities they want.
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Part 3
This is where the juicy bits are.

The report defines what they mean by subsidy - the WTO definition of: “a financial contribution by a government that confers a benefit on its recipient, i.e. government support on better than commercial terms”

Firstly, let’s talk briefly about EY and QR, as they have been comprehensively busted in receiving massive cash injections.

EY: 6.6 billion USD in interest free loans, 6.3 billion USD in additional capital injections. Sponsorship of Manchester City picked up by the government for 640 million USD, 3.5 billion USD in additional cash support in 2014.

QR: 8.4 billion USD in forgiven loans and shareholder advances. 6.8 billion USD in government loan guarantees. QR receiving airport ancillary revenue such as parking, rental of space, duty free distribution.

The report also goes on about various things such as free land, on paper profit transactions (like EY selling its loyalty scheme to itself) and unquantifiable subsidises such as purchasing from related entities and tax exemptions. However we’ll come onto those for EK in a bit.

By their own financial reports, neither EY or QR would be going concerns without owner guarantees and constant and on going capital injections. None of this should be any surprise to anyone on Flyertalk!

But what about EK - which is what this thread has been about all along.

Unfortunately for the reports authors there is no smoking gun on cash injections to be found. What there is a historical assumption of fuel hedging losses by EK’s owner. Notional values of hedging contracts of 4 billion are bandied about, but anyone who works in derivatives will tell you that the notional value and actual profits and losses are different things. What is important to note that EK did take a big hit on their accounts for that year as well as novating the contracts to its owner ICD, as well as receiving 1.6 billion in credit guarantees. There was a 4 billion margin call according to counter parties.

Thus here is the case about subsidy - clearly EK was given rescue finance, assuming they did not have cash on hand to meet the call. The question is whether you want to class rescue finance (considering this is an airline that had a history of profits and moreover, accumulated profits) as a subsidy. Any reasonable observer is not going to think that the provision of this kind of credit on a one-off basis is anywhere near the same as on going capital injections of the order of EY and QR. Is it now unfair/illegal to declare a loss for a year?

That is pretty much the most serious charge that can be laid at EK. They once, historically, got bailed out by their owner. The report accuses EK of getting subsidised airport infrastructure because landing fees are low - but we have covered that in earlier posts in this thread, and indeed this post. Airports are a real estate project with different motivations of owners. Sure, it benefits EK disproportionally as they are the main user of the airport, but why don’t other carriers use their Open Skies rights to establish operations there to take advatange of it? BKK I see is not mentioned in costs. Why does an airline like BA, which operates out of the vastly expensive LHR still make more money than EK?

There is the issue of why transit passengers attract lower passenger charges than O&D traffic - another poster commented this was also true in SIN, MEL and BKK as well. I think this is rather disingenuous. And also a moot issue, if the airport covers its operating costs.

We then move into familiar territory, highlighting opacity in the ME and then using that as a way to insinuate nefarious support. We have a mention of dnata and “confidential sources” saying EK gets a discount of 15%. However, in one of my previous posts I brought up the fact that dnata and Emirates are part of the Emirates Group directly (not via ICD) - so why would you put losses onto dnata and have more profits on Emirates? dnata makes money as a going concern in any case? Is it to obtain marginally better interest rates on financing deals? It makes little sense. Also, 15% seems reasonable for a major customer.

ENOC is mentioned - and the report acknowledges that BP, Shell and Chevron are suppliers to EK - but it insinuates that ENOC provides fuel at below market prices. However, and I think this is where EK has a problem in that ENOC makes it seem like it’s the UAE’s oil company, whereas it’s actually only Dubai’s. we know that ENOC only has one refinery in Jebel Ali with a daily raw capacity of 120,000 barrels, enough for only 8 A380s worth of Jet fuel, as it also produces LPG, Naphtha, Diesel etc.…this is on their website.http://www.enoc.com/EN/PerSer/Produc...1-786a9985e9ef

Now, Dubai Aerospace Enterprise - they entered into a sale and leaseback deal with Emirates SkyCargo for the 747-8F fleet. Sale and leaseback is a relatively common practice globally. It does indeed make the reports look good. The issue here is the interest rate of course: and that is available in aggregate on the financial reports. Of course this is all about whether you believe them…

Emirates and the tax authorities - Emirates is exempt from various customs duties. But then if your owner is the government, surely all dividend payments are functionally equivalent to tax payments. You would have to do an analysis to see the historic dividend payments as a percentage of net profit on a yearly basis to determine an effective tax rate. Plus, EK has actually paid net tax/dividends to its owners - I’m not sure if US airlines want to go down that rabbit hole…

Then there is an insinuation that EK receives below market rate costs on its debt - but its borrowing costs are there for all to see in the forms of its bond offerings, lease arrangements with publicly traded companies and a debt breakdown.

The essential argument that is made is that EK is not transparent, insinuating they are dodgy. The report has no evidence direct and ongoing cash injections such as that which is going on at EY and QR.
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The Rest
The rest of the report is simply complaints that the gulf carriers are taking US/JV “rightful” bookings and encroaching on TATL ventures, and they don’t stop, then the US3 carriers are going to fire people, which is Bad For America. No more accusations, just complaints. I don’t think it bears summarising here, I think the general gist of things have been put forward in this thread already.

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tl;dr
Finally we have the report. We can split things into on-going direct subsidies and historical subsidies. In the case of EY and QR, there is evidence of ongoing cash transfers. Case closed. In the case of EK, the argument is much looser and relies on implication due to lack of transparency rather than anything black and white, except in the historical case of fuel hedging losses. Some of the complaints levelled at the Gulf airlines, US airlines take advantage of in their home market (e.g. aviation infrastructure subsidies: airports can issue tax-exempt municipal debt to fund themselves).

So, to discuss that we have to look at the position of hypocrisy these accusations come from. As FD1971 has said multiple times - what is the big deal about historical subsidies? Every airline in the history of the world ever has taken subsidies. It is a bit rich complaining about historical subsidies if you yourself (US3) are taking ongoing ones - and are trying to pretend to represent an entire nation and all its industry, whereas its a brazen attempt to protect high-margin routes, which goes entirely against the spirit of “promoting competition and consumer choice”.