Will Gulf Carriers Triumph Over US Airlines In The Subsidy Row?

In a 2011 interview with Gulf Business, Qatar Airways CEO Akbar Al Baker responded to a subsidy allegation in the following lines: “American airlines get Chapter 11 protection. But if I go bankrupt (after the IPO), the state won’t support me, so what’s the problem?”

But Qatar Airways – which postponed floatation plans soon after the interview – and its Gulf peers are not publicly listed companies but closely guarded private firms with their respective governments owning a stake in them.

This also makes it harder for the big three in the Gulf to counter any allegations about unfair subsidies – especially the recent claims leveled at them by the three American carriers.

In a 40-page dossier that was recently submitted to the US government, Delta Air Lines, United Airlines and American Airlines have claimed that the three Gulf carriers have received government subsidies worth $40 billion.

These funds, they say, have helped the Gulf’s big three to rapidly expand their fleet and invest in super jumbo jets like the A380.

In addition, the US airlines have urged their government to revoke the Open Skies policy that it signed with the UAE and Qatar, saying that the agreement should not exist if the carriers are subsidised.

In response, Gulf airline chiefs have strongly refuted subsidy claims, with some opposing them more vehemently.

Dubai-based Emirates’ president and CEO Sir Tim Clark called the allegations “spurious, fallacious and malicious” while Etihad chief James Hogan has also bristled against what he termed “protectionist measures”.

True Or False?

But are the Gulf three and their US peers in such different playing fields, or is it just professional rivalry?

“The current playing field between the Gulf and US carrier is a result of the differing conditions in their respective home markets. These environments create natural advantages and disadvantages for carriers from both regions,” Simon Elsegood, senior analyst at Centre for Aviation (CAPA), told Gulf Business.

“The US carriers developed in a highly protected market, but the US has been one of the most competitive airline markets since deregulation in the 1970s. The US carriers want their international competitors to operate under conditions similar to their own.

“Meanwhile with different regulations in the UAE and Qatar and different market conditions, their airlines are naturally structured differently. Gulf carriers are state-owned and supported, but are also well run, have strong networks, modern fleets and excellent in-flight service and products,” he said.

Gulf carriers have used these advantages to build aviation hubs in their respective countries, attracting passengers from Europe and the US to Asia.
As a result, Elsegood points out that “economic and institutional conditions in the Gulf states work for airlines rather than against them”.

But another complication that fans the subsidy dispute is the definition of a level playing field for airlines in an increasingly competitive market.

“There are multiple components to a level playing field in the aviation sector,” Vinod Cartic, senior consultant, Business & Financial Services, Frost & Sullivan, told Gulf Business.

“The lack of level playing field is definite but these are due to multiple factors which cannot be accounted to the loosely labelled term ‘subsidy’ alone. Gulf airlines operate in a very favourable geography connecting the East and West. They also enjoy the privileges of a tax-free regime for salaried employees.

“It also has to be remembered that despite high capital costs, aviation is a service industry and more than 33 per cent of all revenue goes towards salaries. Cheaper salaries thereby enhance profitability, which is the key to the success of the capital-intensive aviation business. Hence, Gulf Airlines do enjoy an advantage. Subsidies, if any, would probably only point to a partial solution to the level playing field conundrum.”

Another argument lumped into the subsidy debate is the easy availability of funds to Middle East carriers, allowing them to expand at a rapid pace. But with each of their respective governments owning a stake in the big three, this particular allegation might be the hardest to prove.

Qatar’s Al Baker has said that all funds to his airline from its stakeholder, the Qatar government, are considered equity and not subsidy.

“In the aviation industry, cash is king as it provides airlines with greater buying power in terms of better fleet or faster growth through acquisitions. Airlines have the right to receive a capital infusion from existing or new shareholders, and also to access low interest or zero interest loans,” said Carctic.

But this doesn’t put Gulf airlines completely in the clear.

“Allegations from the American carriers on grounds of very low airport handling charges, which help bring ticket prices down, cannot be ignored. Also, charges related to highly subsidised fuel to Gulf carriers alone would need to be effectively countered.”

OPEN SKIES AND TRADE

Faced with an official probe into the latest report from their US rivals, Gulf carriers are taking the allegations seriously.

Delta CEO Richard Anderson’s latest comments about a potential change in pricing and capacity dumping show that the US carriers are also banking on some form of government action.

Experts are confident, however, that existing Open Skies agreements will weather the storm.

“Outside of Delta, American Airlines and United Airlines, there is strong support for open skies among other US airlines and travel associations,” said Elsegood.

“The subsidy argument is nebulous and US consumers are more concerned about air fares and convenience than the politics behind the airlines.”

Moreover, revoking the Open Skies could also upset the status quo that these countries share, he added. The UAE and Qatar are among the top clients of aviation giants such as Boeing and GE, an economic contribution that will not be overlooked by the US government.

But will the current round of accusations eventually hit trade and investment relations, especially between the US and its trade partner, the UAE.

“There is just too much momentum in these various aspects of the relationship to foresee a tangible hit on trade and investment between our two countries, and certainly too much at stake to compromise the bilateral relationship,” Danny Sebright, president of UAE-US Business Council, a Washington D.C- based business advocacy group told Gulf Business.

Although, it was clear which side of the debate he was on.

“That said, the UAE has been down this road before with the Dubai Ports World controversy. And if these protectionist policies that we’re seeing from the big three US airlines, not to mention the deliberate race-baiting that we’re seeing from Delta and others continues, the UAE could start to rethink some important aspects of its relationship with the US. And, for the reasons I just outlined, this is clearly not in America’s interest.”