The Global Battle over Subsidies for Money-Losing Airlines

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from Wolf Street:

The US and EU slug it out with the United Arab Emirates and Qatar.

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.

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