Two of the Middle East’s most aggressively growing airlines said charges that they benefit from government subsidies, artificially low fuel prices, cheap airport facilities and preferential financing refuted these charges at the World Routes conference in Chicago this week.
Neither, however, addressed charges they unfairly benefit from US ExIm Bank funding, a particularly sensitive topic for Delta Air Lines which has been waging an effective campaign to cast doubt over the Depression-era institution intended to support US exports. Boeing is the largest user of ExIm financing and Emirates in particular has been an active participant in the program. Delta claims ExIm provides below-market rate fees and interest charges.
Officials of Etihad Airlines of Abu Dhabi and Emirates Airlines of Dubai each said the carriers pay market rates for fuel, airports and financing.
Kevin Knight, chief strategy and planning officer of Etihad, and Tim Clark, president of Emirates, said their carriers have to compete just as with any other airline.
“The mandate by our single shareholder,” said Knight, “is to be profitable. There is no free lunch.”
Knight said Etihad has advantages, however, in being a young carrier without built-in legacy costs and a nimbleness that gives it an advantage. The carrier has also taken a number of minority investments to give it access to local markets, a strategy that has drawn opposition in many regions, principally in Europe.
Knight decried a “resurgence of protectionism in the US and Europe.” This is “a dangerous development, not only of the airlines but also for global trade,” he said.
Emirates’ Clark, who has waged an aggressive counter campaign to Delta (without ever specifically naming the carrier), asked rhetorically, “Why would the US be concerned about what’s good for customers and the economy?” He said that many international destinations east of Dubai are not served by US carriers. “They have been starved for international service.”
Delta, however, dropped service to India, claiming it could not compete with a “subsidized” Emirates that benefited from cheaper ExIm financing for its Boeing 777-300ERs. Clark did not specifically address this complaint. Instead, he vowed that more US cities will receive Emirates service in the coming years.
Clark said that Emirates doesn’t get “interest free loans, fuel breaks” or other financial breaks. “There are no bank guarantees (from Dubai), no subsidies.”
How about taxes among those carriers? Their are dozens of ways to subsidize companies.. Excluding a few is only for PR.
The market the ME carriers serve is unsustainable, taking advantage of unprecedented regional growth, creating a mammoth hub and piggybacking on the Disney style fantasyland Dubai has become is a risky model.
When flying east or south from Europe I fly key Far East or European carriers. I distance myself from ME carriers for a host of reasons, not least service and connections, preferring direct routing rather than wandering aimlessly around DBX waiting for my connection.
Refreshingly many of the direct routes enable you to peer down on the various Emirate states, offering the satisfaction of knowing your flying and not stranded in the desert that DBX has become awaiting a connection, bliss….
Have they opeened the books to the public?
There are many ways to skin a cat. It is probably true that today they don’t receive direct subsidies but…
1. Much like how Airbus got off the ground, how much was spent to get these companies to their current “subsidy-free” status. Have they earned their cost of capital on all that money invested?
2. Dubai and Abu Dhabi have spent many billions of dollars building huge airports that serve as hubs for these carriers. Do landing and other ancillary fees cover the capital and operating costs of these behemoths? If not, then it is a subsidy to all carriers flying to those airports – with the lion’s share of the subsidy going to the hub carrier. Remember that many airports in Europe and elsewhere are for-profit businesses.
3. What is the price paid for jet fuel at these airports? If it is significantly below the price at other airports because the government subsidizes the price of fuel, it becomes a subsidy – available to all but benefiting primarily the hub carriers. Conversely, many western governments tax jet fuel, driving up its cost for legacy carriers.
4. If a government doesn’t impose income tax on domestic and/or foreign nationals (as is the case in much of the ME), then this is effectively a huge subsidy since employees really only care about after-tax earnings. These airlines would have to pay much higher salaries to attract pilots if their country had a 50% marginal tax rate on high income earners.
5. The Exim bank is a bit of a red herring – yes it is a “subsidy” to foreign buyers of Boeing aircraft, but is presumably available to all foreign carriers. Should it be discontinued? Yup, but that is another discussion.
Bruce: Your points 2 and 3 are addressed in Scott’s first sentence. Emirates have an interesting PDF available where get get a bit tetchy about the subsidy accusations: http://www.emirates.com/english/images/airlines%20and%20subsidy%20-%20our%20position%20new_tcm233-845771.pdf
Interesting nugget: Emirates claim Singapore have lower labour and jetfuel costs than they do.
The .pdf is interesting. It does effectively acknowledge that fees at DXB amount to a subsidy – cost of $35 per passenger vs. $126 at LHR. Jet fuel prices do seem close to world levels, though somewhat below the “west”.
Due to the massive glut of capital and low interest rates financially solid airlines have access to very cheap money. What is the credit rating of Delta Airlines?
The inability to compete against Emirates is also due to the very efficient aircraft fleet of EK, high number of seats, good load factors, on average medium distances (where payload reserves for cargo remain and aircraft require less fuel). So, EK is partly employing Low Cost Carrier tactics. And Delta is not the only legacy carrier having a hard time competing against it, and Delta’s fleet is a nice late 1990ies revival.
The Middle East Airlines hubs have a geographic advantage: their hubs are lying on the way between Europe and Asia. A hub somewhere in Kyrgyzstan would be located better. Istanbul is located right between Europa and Asia…
The Boeing mantra of connecting cities with the 787 directly needs too many aircraft in this case. With e.g. just three cities in Europa and Asia an airline would need 18 flight pairs to connect all cities. With a hub in between it is always just the number of cities you have to connect: 6.
One airline fills its 18 B787-8 on every connection while the other airline fills up its 6 A380. One airline is faster while the other is cheaper.
That 18 flights are only relevant if you connet the European and Asian cities by the hub – with dones not make any sense. Inner Asia and inner European flights will always be direct. So what you actually have his 9 direct flights between the three European and Asian cities instead of 6 over the hub. As much as passengers love to fly with the A380, many prefer the direct flight.
The big questions is if traffic grows so fast and so far that lots of A380s will be needed to service those direct connections. Whenever that comes about we will soon see the A380neo and maybe even the A380-900.