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Abu Dhabi, UAEFriday 16 November 2018

Emirates’ response to US open skies claims – allegation by allegation

Emirates president Tim Clark went to Washington prepared with a 400-page report that spells out his airline’s response to claims it was a recipient of unfair subsidies and preferred treatment.
The 400-page rebuttal was prepared by a team at Emirates led by Tim Clark, aided and advised by lawyers, accountants and industry experts. Above, Mr Clark speaks at the National Press Club in Washington DC on Tuesday. Frank Kane / The National
The 400-page rebuttal was prepared by a team at Emirates led by Tim Clark, aided and advised by lawyers, accountants and industry experts. Above, Mr Clark speaks at the National Press Club in Washington DC on Tuesday. Frank Kane / The National

WASHINGTON // When accusations of unfair state subsidies and anti-competitive business practices were first levelled against Emirates airline in January, the carrier’s president Tim Clark promised a “robust, fact based, point-by-point rebuttal” of the charges.

Yesterday at the National Press Club in Washington, he delivered on that promise by unveiling a hard-hitting document to answer the claims laid against his airline (and against Etihad Airways and Qatar Airways) by three North American airlines and some US aviation trade bodies.

The document – entitled “Emirates’ response to claims raised about state-owned airlines in Qatar and the United Arab Emirates” – runs to nearly 400 pages, including lengthy appendices and exhibits. It has been prepared by a special in-house team at Emirates led by Mr Clark, aided and advised by lawyers, accountants and industry experts.

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■ Emirates rebuttal

To view the document, click here.

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It takes on head-to-head the allegations of the “legacy carriers” – the US airlines American, Delta and United – that Emirates is in breach of open skies agreements, and highlights the “errors, misstatements and legal distortions” in the Americans’ case.

“The legacy carriers have no case against Emirates, but have sought to contrive one to secure government protection,” the document says.

Before dealing with specific allegations laid against the Arabian Gulf carriers, the Washington document argues that the legacy carriers’ case is flawed from the outset, on two counts: the US airlines have got the law wrong, and have failed to show that the global aviation industry is being harmed by the emergence of the Gulf airlines.

The document finds that the internationally recognised sanction against state subsidy – the World Trade Organization’s agreement on subsidies and countervailing measures – does not apply to services such as the aviation industry, which is explicitly excluded from its terms. Rules on unfair subsidies have not yet been drawn up under WTO guidelines, the document says.

Further, the document also argues that, even if the legacy carriers had been able to make a sound case in law against subsidies, they have still failed to show that alleged subsidies acted against the principles of open skies agreements.

“Open skies policy embraces goals such as greater competition, increased flight frequency, more consumer choice, improved service and innovation. The legacy carriers have not even tried to argue that these goals have been harmed. Even with respect to their own narrow corporate interest, the legacy carriers have failed to make a persuasive case.”

Here are the American carriers’ main allegations, followed by Emirates’ rebuttal to each claim:

Allegation: Emirates’ commercial success has been due to state subsidy

The Americans allege that Emirates has been shielded from financial reality by its parent, which has allowed it to expand market share in global markets – including the US – in contrast to other airlines that are bound by normal commercial standards.

Rebuttal: Instead of relying on government aid and other unfair practices, the document says, Emirates’ success over the past 30 years has been achieved because of “superior commercial performance” based on a revolutionary business model of long-haul flights and the unique geographic advantage of Dubai’s location.

It estimates that the total capital invested by the government of Dubai in the airline since its foundation in 1985 is $218 million. “This amount – minuscule for a business that earned $23.6 billion in revenue last year – has been repaid many times over through dividends.” The document estimates a total dividend payment of $3.36bn to the airline’s shareholder-owner, the government of Dubai.

This commercial success, the document says, is based on raising standards for passengers. “Emirates has transformed global flying from ordeal to delight for many modern air travellers, including business people who demand the highest standards of comfort, service and timeliness.”

Allegation: Emirates received fuel hedging subsidies

The US carriers allege that Investment Corporation of Dubai (ICD), the government investment fund that owns the airline, took on potentially loss-making fuel hedge contracts in 2008, saving Emirates from a potential multibillion dollar loss.

Rebuttal: The airline agrees that fuel hedging contracts were transferred to ICD to “avoid a misleading picture of the airline’s true operating results due to unrealised, mark to market paper losses”, a practice also undertaken by Delta, one of its accusers.

However, Emirates insists that all losses when the contracts matured were ultimately paid using the airline’s own resources. “Emirates paid dividends to ICD to match all actual losses and continued to provide collateral in support of the fuel hedging contracts,” the document says. It adds that Emirates had sufficient cash and credit from its own financial resources to meet all the losses, and that in any case, because of the sharp recovery in oil prices, there were no accounting losses. ICD ultimately made a profit of $100m on the transactions.

Allegation: Emirates receives subsidies from related party transactions

The legacy carriers claimed that Emirates unfairly benefited from transactions with Dubai energy companies, Dubai International Airport and other service providers at below market prices.

Rebuttal: Emirates insists that all its business with related parties is conducted on an “arm’s length” basis, which has been recognised in its annual financial statements and signed off by PwC, its auditors.

Allegation: Emirates receives cheap fuel from Enoc

The Americans claim Emirates benefited from being able to get subsidised fuel from the Emirates National Oil Corporation (Enoc), the Dubai energy retailer, at Dubai airport.

Rebuttal: The airline responds that it pays commercial rates for jet fuel to four suppliers as well as Enoc: BP; Chevron; Exxon; Shell. An analysis of prices paid by Emirates in the year to last February shows that Enoc prices closely tracked the others, and in fact were slightly higher on average. “Emirates often pays less for its jet fuel at US airports than it does to Enoc and other suppliers in Dubai”, the document says.

Allegation: Emirates gets below-market rates for services from dnata

The Americans claim that the airline gets a 15 per cent discount on ground services such as catering and baggage handling from dnata, also part of the Emirates holding group.

Rebuttal: The document says this allegation is “unsubstantiated and false”, based on a distortion of previous statements and unnamed “confidential sources in Dubai”. Dnata is a profitable, independently managed company that provides no subsidy to Emirates, and in fact earns a higher rate of profit on its services to Emirates than from other airlines operating at Dubai International Airport. An independent firm of accountants, Marks Paneth, confirmed this.

Allegation: Emirates receives subsidies from Dubai International Airport

Rebuttal: The document replies that under the open skies agreements, airports cannot charge fees that exceed costs but there is no floor on prices, nor is full cost recovery required. “It is common practice for airports and cities to incentivise airlines to operate, given the many knock-on economic benefits of air links for an airport and its surrounding community,” the documents says. DXB applies the same fees to all airlines, including Delta and United. Not charging transfer passengers is permitted under open skies and happens at other “hub” airports such as Bangkok and Kuala Lumpur.

Allegation: Emirates received a subsidy on aircraft transactions

The Americans say that Emirates got $151m from a sale and leaseback deal involving Dubai Aerospace Enterprises, which amounted to a “subsidy in its entirety”.

Rebuttal: Emirates’ Washington document states that the conclusion that aircraft transactions in 2008 were evidence of subsidy is “erroneous” based on a “highly dubious” report and “groundless”. The transactions were on market terms and at arm’s length. “Implying the transaction was somehow a subsidy is wrong.” It was a commercial deal at market rates, the airline insists.

Allegation: Emirates receives subsidies owing to UAE labour law

The legacy carriers complain that because trade unions are not allowed in the UAE, Emirates is able to benefit from a lower-paid workforce with more stringent working conditions.

Rebuttal: The Washington document notes that allegations concerning labour conditions are outside the scope of the open skies agreements and WTO rules, and that the US authorities have always argued to keep this status quo, as US labour laws depart from International Labour Organization conventions in numerous respects, including the “right of association” in trade unions.

Emirates points out that it places no restrictions on union membership in countries to which it has operations outside Dubai, and negotiates with unions in 17 countries.

The document also highlights the fact that the airline provides benefits for staff which “meet or exceed” industry norms, and that it has not “walked away from its benefits obligations or abandoned its retirees” as it claims US airlines have done under Chapter 11 bankruptcy restructuring.

The document also points out that Emirates receives an average of 850 applications for each job position advertised, and that more than 20 per cent of its employees have been with the company for more than 10 years.

fkane@thenational.ae

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