The US and EU slug it out with the United Arab Emirates and Qatar.
By MC01, a frequent commenter, for WOLF STREET:
In March 2014, EU Transport Commissioner sought a mandate from EU members to open talks with unspecified “Persian Gulf States” over “unfair airline subsidies,” following a formal joint request by the Dutch, French, and German governments. This wasn’t granted until December 2015, when the Transport Commissioner was given a new mandate to “negotiate” with extra-EU governments “suspected” of having airline subsidies in place. And that was about it. Since then no meaningful process has been announced.
In 2015, the three main US airlines, American, Delta and United, presented to the US Senate an investigative report they had commissioned regarding subsidies three Gulf carriers had received from their respective governments: Emirates (United Arab Emirates, or UAE), Etihad (UAE), and Qatar Airways (Qatar). The three airlines and the two governments were held to be in violation of air transport agreements the US government had signed with Qatar in 2001 and with the UAE in 2002. In Article 12, it explicitly targets “prices that are artificially low due to direct or indirect government subsidy or support.”
These agreements have no built-in penalty for violations, but they do authorize one party to demand documentation from the other in case of suspected violations.
While Qatar and the UAE are widely suspected of having released only a small part of documents dealing with airline subsidies, what the Obama Administration eventually obtained, despite a brazen charm and advertisement offensive by Emirates in the US press, was highly illuminating.
For example: The Government of Dubai, part of the UAE and hence a signatory to the 2002 agreement, admitted paying $7.8 billion for the construction of the exclusive Emirates terminal at the Dubai Airport; and the wholly state-owned Investment Corporation of Dubai paid for Emirates’ fuel hedging contracts for years, thus allowing Emirates to shift the savings to their own books and show large profits.
Etihad engaged in what can only be called highly creative accounting up to 2015, including selling its own cargo division to itself in 2014 to show a profit. Given the sums involved and the Etihad corporate structure, the Abu Dhabi government, which, as part of the UAE is signatory of the 2002 air transport agreement, must have been in the know about these accounting methods: Etihad’s board of directors is chaired by Hamed bin Zayed Al Nahyan who also is the director of the state-owned Abu Dhabi Investment Authority and the half-brother of the Emir of Abu Dhabi and UAE president Sheikh Khalifa bin Zayed Al Nahyan.
Once this creative accounting was put under control, Etihad started to book enormous losses: $1.8 billion in 2016 and $1.5 billion in 2017. How these large losses are dealt with remains an open question.
This led to long negotiations between the US government on one side and Qatar and the UAE on the other, which resulted in yet another agreementbeing signed earlier this year, apparently satisfying all parts involved.
Despite the headlines, tensions had merely been simmering under the surface, and the row exploded again in December 2018 when 11 US Senators reopened the issue of subsidies to Gulf airlines. And this time Italy is the unlikely battleground.
In October 2017, Qatar Airways bought a 49% stake in Italian-based carrier Meridiana. This is the maximum stake any extra-EU investor can hold in an EU-based airline, a measure introduced after Etihad and Qatar Airways aggressively acquired stakes in various European air transport companies in the aftermath of the 2009 financial crisis.
Intriguingly, the remaining 51% of Meridiana is owned by companies that are part of the Aga Khan Fund for Economic Development (AKFED), ultimately controlled by the worldwide leader of the Nizari Ismailites, Aga Khan IV.
In February 2018, Meridiana was renamed Air Italy and given a completely revamped livery. It announced grandiose expansion plans, which were so different from the old pattern of Meridiana activity they immediately attracted widespread attention inside and outside the air transport industry.
This expansion has so far been generously bankrolled by Qatar Airways, which has not merely provided financial support but has also:
- Transferred a number of their Airbus A330 to the fledging air company to start long haul flights right away.
- Wet-leased (explanation) a number of their own brand new Boeing 737 MAX to Air Italy at very favorable conditions, with more to come.
- Seconded many of their flight and cabin crews to help operate the new aircraft.
- Planned to transfer to Air Italy a number of the 30 Boeing 787-8 Dreamliner that Qatar Airways has on order.
This is not the first time Italian airlines have attracted the attention of Gulf carriers: In 2015 Etihad bought a 49% share in perpetually troubled flag carrier Alitalia, which effectively saved the company from bankruptcy. Just two years later, however, the agreement was terminated as Alitalia slipped into bankruptcy protection anyway and effectively became a ward of the state.
While Emirates, Etihad and Qatar Airways are coming under renewed scrutiny in the US, so far they have dodged similar treatment in the EU, but things may be changing.
The Lufthansa Group and Air France-KLM have constituted an interest groupcalled, “Europeans for Fair Competition,” whose aim is to put pressure on EU authorities to launch a serious investigation into the practices used by the three Gulf airlines to fuel their aggressive expansion plans.
The situation in the EU may be more complicated than in the US, however. The Strasbourg-based European Parliament has little of the power of the US Senate, and Emirates has already made its displeasure known by opting for Boeing aircraft over Airbus in the much anticipated 2017 widebody maxiorder. The issue of how Gulf carriers exert political pressure on foreign governments by shifting aircraft orders around is well known but very little discussed in public.
On top of this, European airlines have so far shown little in the way of the unity of intent displayed by their US rivals. This may be due to the general cutthroat nature of the European air transport market; and due to IAG — the holding group for British Airways, Iberia, Aer Lingus, Vueling, and other companies – which has Qatar Airways among its main shareholders.
Recently Air Italy has started to use the newly arrived Boeing 737 MAX to aggressively expand on internal EU routes (example), which have so far been the preserve of European low cost carriers such as Ryanair and EasyJet, and at a time when US private equity firm Indigo Partners (no relationship with Indian low cost carrier IndiGo) is renewing its commitment to the European market by putting out feelers to add ailing Icelandic carrier WOW Air to their investment portfolio.
This means that the highly favorable environment these three Gulf carriers have enjoyed in Europe so far may be starting to sour. The court-appointed liquidators of Air Berlin, the German low-cost carrier which collapsed so spectacularly in summer 2017, are seeking between €500 million and €2 billion in damages from Etihad, citing a letter of intent dated April 2017 which promised financial support “for 18 months.” Regardless of the outcome, this will be a nasty and expensive legal battle for both sides, a far cry from the warm welcome Qatar Airways CEO got from the EU Parliament back in May.
With interest rates ticking up and wary investors finally questioning the sanity of taking huge financial risks for very little reward, the air transport industry in Europe is bound for a major and prolonged correction. A necessary part of this correction will be addressing the issue of state aid, both inside and outside the EU, and hopefully come up with the same set of rules for everyone, not the usual “let’s make up the rules as we go” environment we have been forced to endure so far. By MC01, a frequent commenter, for WOLF STREET
- The tables are turning: Twitter is cleaning the house… Banning dangerous Leftists
- BIDEN MEDIA IS LYING TO YOU – No one is spending a dime, inflation at all time high, China dumping dollar, black Friday bust!
- The Dollar is Dying in Ways Most People Don’t Understand and I’ll Explain Why
- Why is Klaus Schwab Sucking up to China?
- China may have ‘passed the point of no return’ as Covid infections soar. Government has changed all protestors Covid QR codes to RED. Effectively locking them down.
- Why Are Large Groups Of Animals, Insects And Birds Suddenly Walking In Circles All Over The Globe?
- Supreme Court Case to Remove Biden On Docket. Finally Justice? Or is America Dead?
- The theme of 2023 will be deflation, as frugality is already coming back into style with a vengeance for the middle class. Meanwhile, investor FOMO is about to explode with extreme dislocation
- Americans Don’t Want to Join the Military Anymore
- New Visa Card Features Personal Carbon Emissions Tracker, M.O.B. Begins