ATW Editor's Blog

Thoughts on Emirates’ subsidy filing to US government

by Karen Walker
Jun 30, 2015

Emirates Airline today submitted its long-awaited response to US airline allegations that it is subsidized by its government owner in ways that contravene the US-UAE Open Skies agreement. Here are some of my thoughts on Emirates’ document.

The full document was released to the media and public, and Emirates president Tim Clark held a media brief at the Washington National Press Club today. (ATW senior editor Aaron Karp attended and has provided a blog and news coverage; I’m on vacation this week and next …)

Clark and an Emirates delegation also met this week with officials at the US Departments of Commerce, State and Transportation, which are conducting a review of the subsidy allegations that are being made principally by American Airlines, Delta Air Lines and United Airlines against UAE carriers Emirates and Etihad Airways and Qatar-based Qatar Airways.

Emirates’ document comprises almost 200 pages, challenging each of the points made in a 55-page white paper commissioned by the three US carriers and released in early March.

Other carriers have submitted their responses, but Emirates’ filing is of keen interest for a few reasons. First, in my opinion, Emirates is the real target of the US campaign for several reasons: It is by far the largest of the Gulf carriers, the one that began the Gulf hub phenomenon; it is the world’s largest operator of A380s and 777s – giving it massive capacity; and, most significantly, it is the Gulf carrier that tiptoed (or waded, depending on your viewpoint) into the North transatlantic market in October 2013 when it launched the fifth freedom Dubai-Milan-New York route, a direct challenge to the traditional markets of legacy carriers in the US and Europe. 

I am pretty certain that the three US carriers are most focused on clipping Emirates’ wings, but in their campaign strategy decided to include Etihad and Qatar so as to make the total Gulf carrier alleged subsidy numbers look bigger. Lumping the three Gulf carriers together also has allowed the US campaign to refer to “Arab” airlines run by “Sheiks” and, if it succeeds, would come with the potential added benefit of curtailing the growth of Etihad and Qatar (at least in US markets) before they reach the size of Emirates.

Emirates’ response document does not contain any surprises. It is a more detailed, point-by-point counter to each of the US white paper allegations, but these are mostly fleshed out explanations of points that Clark and Emirates have made all along: an adamant denial that Emirates is subsidized, receives disproportionate benefits from Dubai International Airport, or is doing harm to the US carriers.

The most detailed of these counterpoints focuses on alleged fuel hedging subsidies; the Emirates document spells out transactions with Emirates’ parent Investment Corporation of Dubai (ICD) related to fuel hedging losses in the 2008/09 period when oil prices sank. Emirates acknowledges that its resulting hedging losses were transferred to ICD “so that non-realized, paper losses for fuel hedging contracts under ‘mark to market’ accounting did not present a misleading portrayal of Emirates’ operations”, but says that all actual payments on the contracts at maturity were ultimately paid using Emirates’ own cash resources and that neither ICD nor the Dubai government absorbed any losses.

Clark says in a statement released today with the filing, “to date we have paid our shareholder, the Dubai government, more than $3 billion in dividends. All of this is laid out in our financials, audited by Pricewaterhouse Coopers.”

The Emirates document also focuses on some of the side stuff that the US side has latched to its campaign, including trying to apply WTO anti-subsidy rules to Open Skies agreements. I’m not a lawyer, but this has always seemed to me a potential hole in the US carriers’ argument that they could and should have avoided; commercial aviation treaties are not governed by traditional trade agreements or the WTO and, because of the airline industry’s continued attachment to cabotage and ownership rules, doesn’t really desire to go that route. The US carriers are cherry-picking their “desires” from each set of rules, but the truth is that WTO rules are a moot point and for the most part US carriers and their labor groups would not support them.

Emirates, quite rightly, underscores this fact: “Much of the Big 3’s case rests on the legal premise that the WTO’s anti-subsidy rules apply to international aviation or is implicitly incorporated in the US Open Skies Agreements. This is fundamentally wrong. The WTO Agreement on Subsidies and Countervailing Measures (SCM agreement) does not apply to services, which are covered by a separate WTO Agreement, the General Agreement on Trade in Services (GATS). GATS explicitly excludes air transport services, and does not include rules on unfair subsidies.” 

In another legal counterpoint, Emirates says, “the Big 3 also build their case for a unilateral freeze on Article 11 of the Open Skies Agreement, but this is the wrong article. Article 11 (“fair and equal opportunity”) deals with access. Subsidies are addressed in Article 12 which sets out specific procedures for dealing with artificially low prices “due to direct or indirect governmental subsidy or support”. In addition, both Articles 11 and 12 prohibit unilateral actions with very limited exceptions that do not include subsidies.” 

This point allows Clark to address the broader issue of US government commitment to maintaining its Open Skies policy – one that, by all accounts, the US is indeed committed to. “By asking the US government to take unilateral action, the Big 3 are asking the US to breach its own negotiated international obligations. This would put in jeopardy America’s Open Skies relationships with 113 other countries, and all the significant public and competition benefits that the Open Skies program has generated,” Clark says.

Essentially, the Emirates document is part rebuttal of specific allegations made against the carrier; part a broader recap of the legal framework of Open Skies and aviation treaties; part a summary of the customer benefits that the Gulf carriers bring to US passengers (particularly those who want to get to the sub-Indian continent without inconvenient, long stop-overs through congested and strike-ridden European hubs); and part a reminder to the US government of the benefits that the three US carriers  have received via Chapter 11, consolidation, antitrust alliances etc., while not necessarily, in the eyes of some, delivering on the customer service promise.

Each of the US carriers has very smart legal and government affairs teams. But I think they will have a hard time unraveling Emirates’ document from a legal and policy perspective. And that’s why I wrote in an editorial during the very early days of this campaign that the three US majors should be careful what they ask for.

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