Emirates Fires Back at Subsidy Accusations

Emirates, Government Regulation

When American, Delta, and United first released the details of their investigation into the finances of Emirates, Etihad, and Qatar, I figured the case against Emirates was the weakest. For that reason, it’s no surprise that Emirates has been the most vocal and forthcoming in defense of itself. Last week, the airline put out a couple hundred pages attempting to debunk every claim with a streak of anger embedded as well. It’s a fun read.

Emirates Gets Mad

As a brief refresher, the big US carriers (led by Delta) were tired of seeing Middle East carriers bombard the US with flights. So they hired a forensic accounting team to go out and hunt down financial details for these airlines. The result was the uncovering of billions of dollars in subsidy. That led the US carriers to ask the US government to enter into consultations with the UAE and Qatari governments to discuss the open skies agreements between the countries.

The case against Etihad and Qatar seemed to be much more substantial. After all, Emirates has been around for longer and does put out audited financials every year. It also has its home in Dubai, a much better market than Abu Dhabi or Doha.

Some of the things that were pointed out as being subsidy to Emirates weren’t very convincing. For example, talk about lower airport fees is just how that country wants to operate. It’s hard for me to imagine that this issue, while clearly an advantage, is actually a subsidy that should go away.

But there were a couple of things that really caught my eye as seeming more substantial. As I wrote back in March

For Emirates, the biggest chunk that was found was $2.4 billion in fuel hedges that went south. The government just assumed those losses. The rest of the substantiated claims are pretty weak, though there is a lot of unknown here. Emirates is owned by the government and has a lot of sister companies. While the airline does put out audited financials, it doesn’t say whether the transactions between Emirates and its sister companies are at arm’s length. In other words, we don’t know if they’re getting below market price, but the assumption is they are.

Emirates attacked both of those points head-on.

Regarding the fuel hedging losses, Emirates says that the US carriers have “misinterpreted Emirates’ financial reporting of its fuel hedging activity, mischaracterized the facts of the fuel hedging contracts, and misunderstood the terms of Emirates’ 2009 transaction with its parent company.” (You can read this on page 8 of the report (page 25 of the PDF).)

Once you get beyond all the bluster, Emirates makes the point that these were all paper losses and it decided to transfer that to the government so that it didn’t distort its results. That seems silly to me. After all, US carriers just report two sets of financials. They give the standard results and then results excluding special items. So it’s not like this would somehow mislead investors. So while this motivation does seem a bit questionable (says the guy without much international accounting knowledge), it distracts from the real point.

According to Emirates, these were paper losses that were eventually erased when fuel prices went back up again. In the end, it says the government made $100 million on all this. The main allegation that needed to be refuted, however, was that if Emirates hadn’t moved its hedging contracts to the government, it would have been forced into insolvency. If you read through all the documents, Emirates makes a pretty solid case for why that wouldn’t have been the case.

Take a look and see what you think, but while there do seem to be some questionable moves here, it’s hard to come away from this thinking Emirates would have been in danger of shutting down. And it’s now in the past anyway.

The other issue, however, seems to be more clear. The US carriers were emphatic that because Emirates didn’t declare in its financial statements that transactions entered into with related parties were done on regular, commercial terms (at arm’s length), that meant the airline was getting a break on these deals. (Read this one on page 17 of the report (page 34 of the PDF).)

Emirates says that it doesn’t have to declare that, so it didn’t bother with the added expense and complexity to have that put in its audited financials. So what did it do now? It went back to its auditor, PwC, and had the company do the audit. Financials for 2014 and 2015 now show that transactions with related parties were done at arm’s length.

Does this mean all is above board? Well, groups in the US still want Emirates to open its books to prove it, but you’d think this would at least appease quite a few doubters.

In the end, I still think the US carriers are wasting their time going after Emirates. The problem is that Emirates poses the greatest threat to the US carriers, so of course they want the airline included. But Emirates has long appeared to be a much more viable organization than the other two. I have a hard time seeing how this fight against Emirates ends well for the US carriers.

[Original water photo, original buoy photo, and original shark photo via Shutterstock]

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39 comments on “Emirates Fires Back at Subsidy Accusations

  1. Thanks for keeping us posted on this “feud” with an imparcial approach. However what confuses me the most with Emirates is that if there model is so sustainable and profitable why don’t other airlines copy it? I mean if Emirates can achieve this level of profit, service and network span without subsidies, what specific advantages or traits (besides labour costs as we all know) do they possess that prevents other carriers from successfully using this model. Shouldn’t all airlines do it if it works for EK? Or is their model even different in any way to others?

      1. That is a major factor but there should be more. Why didn’t MEA, Royal Jordanian, Oman Air, Saudia or even EgyptAir master the same model if they are all located in the same region? Imagine if Hawaiian did the same on the trans-Pacific routes, we can’t they?

          1. Wow, quite an unnecessary stop when you see it that way! Thanks, i’ve actually never used Great Circle Mapper before.

        1. EgyptAir tried this a little by adding some more Africa flights and other routes but then Arab spring happened so that impacted transfer traffic, they pulled down a lot of capacity they had just put up, and for a while, you could get some great deals flight via Cairo. The other MEA carriers are too small and would get clobbered if they tried now, I think Oman Air and Saudia are focused on serving their local markets instead of transfer traffic.

          Don’t forget too that Emirates’ plan and Etihad/Qatar is basically the classic hub strategy but amped up far more than anyone thought possible. The classic hubs are pretty much maxed out, Heathrow, CDG, Frankfurt, AMS, Chicago, JFK, NRT and even HKG. Even if one of the legacy carriers wanted to emulate Emirates completely, they would need the airport infrastructure/slots to do it.

          Also, it took a while for each carrier (well maybe not Etihad) to build up traffic at the hub and only now can they fly to really far places such as Seattle and Atlanta.

          And don’t forget the ME3 are serving a lot of markets the US carriers don’t or fly them more frequently. I’ve had friends who have taken LAX-DXB-Accra or BUF-JFK-DXB-Johannesburg because of price/connection times are better than say BUF-ATL-Johannesburg or LAX-JFK-Accra

    1. Lukeg71 – As Oliver says, location is a big part of it. But you also do need a government that sets rules to encourage this kind of thing. Having low airport fees, easy entry requirements, an interest in open skies, and more will help. Saudia never had a chance with its government. Others probably didn’t have the wherewithal. As for Emirates, it needed government backing in the beginning for sure. It eventually turned profitable. Could that happen to Qatar and Etihad? I suppose, but it’s a much tougher battle for them.

      1. It seems that their success is just as much political as it is economical. For one the UAE is one of the most liberal middle-eastern socities. Thanks for the clarity. I wonder if the US3 or EU3 could convince their governments to assist and back them, after taxing and penalising them for years….although most of them have open skies and reasonable airport fees already, so it seems location (and possibly labour) play major roles

      2. The U.S. government really should have “negotiated” 5th freedom rights with Iraq. Then UA/AA/Delta could set up a connecting hub in Baghdad and compete with ME3.

        Sure, they might need to equip their aircraft with anti missile technology ;)

        1. Maybe they’d do better off in the Kurdish North.. Or perhaps make an agreement with Kuwait..

          Or perhaps they should just lash several retired aircraft carriers in the Persian Gulf and start a floating hub.. If the weather is bad they can move it around.

    2. With even less accounting experience, what am I to believe? After considering the data available to me, I conclude two things: 1) Qatar is a very aggressive carrier, both in business practices and route expansion and 2) Delta and the other U.S. carriers are crying over sour grapes (spilled milk) because developing some of the foreign routes that they covet requires more investment that they are willing to spend. As much as I’d like to support our carriers, they cannot and will not match the services offered by the better Gulf carriers, so they scream sour grapes. I do NOT believe that the major Gulf carriers are using untoward subsidies, but their operating costs are obviously less than our carriers. Many factors involved, one perhaps being better, more effective management! (Duh?) Gulf carriers still manage to attract flocks of ex-pat flight and cabin crews, so their practices cannot be that horrible, especially for the flight crews. Just like in the days before deregulation of the U.S. domestic air market, the competitive edge usually goes to the carrier with the best customer service and in-flight services. Qatar and the others do it; Delta and their peers probably could, but will not. As a general thing, the Gulf carriers do an excellent job and with grace – and for about the same price. Delta and her sister carriers simply do not, again all for about the same price. The choice is not difficult. What am I missing?

      1. BTW, Singapore Airlines does something similar. It attracts a low cost base from nearby countries. Most of cabin crew are on a 5 year contract and then most are never renewed. It still pays much better than what is available locally in southeast asia. Gulf carriers probably do something similar. None of this seniority business in American carriers. Union rules probably means that poor service providers can’t get fired.

        1. And management rules mean that experience counts for nothing.

          Which it doesn’t if all that’s important is handing out the tea and cakes. Agreed.

          Mind you, if something bad happens 35000 feet up and the cabin crew are close to panic as happened recently on an Emmyrats flight. Ah well, you gets what you pays for. I’m sure that management have calculated that the costs of a fatality once in a blue moon are outweighed by the lower salaries.

  2. Emirates flies from 10 US cities and every flight has to connect in Dubai. If your final destination is Europe or far east Asia I don’t see how it makes any sense to fly any of the ME carriers. To places like BKK it makes more sense, depending on where you are, but unless you are specifically heading to the middle east I just don’t get it. To top it off I’ve heard mixed reviews of the ME carriers. From those that have ridden up front nothing but accolades but those in back haven’t said anything spectacular.

    Are the US airlines grasping at straws, probably, but at the end of the day I’d probably fly them over Emirates just because I don’t want to waste a pile of time flying to Dubai just to get to London.

    1. If you live East of the Mississippi and are flying to “far East Asia” why wouldn’t you fly through the Middle East? It’s about the same distance and only requires one connection..most of the time. At one point I was flying IAD to various destinations in Asia about twice a month and Emirates was almost always the best (quickest and cheapest) option. Not to say I wouldn’t take Cathay Pacific when they were cheaper.

        1. But, none of the US3 airlines would sell you a ticket to Hyderabad. They might sell you a ticket using their partners, but they would not be flying there. That’s why I don’t get why the US3 are acting this way.

      1. I get the point your making, but not quite… The distance really depends on the Great Circle Route, so despite East Asia being 180 degrees on the other side of the planet, flying over the north pole might take less time. For instance, hopping on Hainan from BOS – PEK saves you ~4000 miles over BOS – DBX – PEK. BOS -JFK – PEK is also a savings of about ~3000 miles.

        Despite all of this, I travel BOS – SIN a lot and we have fare restrictions to only do trans-pac. That, I don’t know why.

      2. I see your point and since I live in a city without Emirates service but with direct flights to NRT on a US3 airline it’s always faster for me to one stop it in Japan to anywhere in Asia. I suppose in those 10 cities that Emirates does serve the US3 are a lot more cranky.

    2. Until I flew EVA’s Royal Laurel Class last year, my Economy flight on Emirates was the best international flight I had start to finish (better than flying Biz on ANZ seven years ago). Their on board service was solid (it was Economy after all) but the on the ground service at both SFO and DXB were superior to anything I’ve ever experienced in the states by far.

  3. Would the U.S. carriers open their books if someone from another country asked? Why should they care what another government does with a business in that country. And the U.S. Government isn’t about to rattle around in this when they need as much of the middle east on their side. They wouldn’t risk having the U.S. military/CIA kicked out of the UAE and/or Qatar. The U.S. carriers need to stop acting like babies and fix their own operations to better compete or just focus on their strong markets to make them better.

    1. Why should they care what another government does with a business in that country. And the U.S. Government isn’t about to rattle around in this when they need as much of the middle east on their side. They wouldn’t risk having the U.S. military/CIA kicked out of the UAE and/or Qatar. The U.S. carriers need to stop acting like babies and fix their own operations to better compete or just focus on their strong markets to make them better.

      The answer is global politics. In one sense or another the US has it’s hands in nearly every country in that part of the world for better or worse. You don’t think the CIA doesn’t have intel on any of these countries & the businesses that operate within them?

  4. All this bluster is meant to distract us from the ongoing DOJ investigation into collusion at the “US3.” I have no sympathy for DL/AA/UA and hope this dispute with EK goes away.

  5. I agree that the case against Emirates was the weakest all along, and that Emirates’ defense seems legit. But the US bilateral agreement in question is with the UAE–not with the emirate of Abu Dhabi or the emirate of Dubai. So adding Emirates into the original complaint makes sense, because any remedy will effect Emirates along with Etihad.

    What’s confusing to me is that Emirates seems to be focusing all this vitriol at the US3, whereas they should be absolutely furious about the massive subsidies that have gone to Etihad and Qatar to compete directly in Emirates’ key markets. And maybe that’s going on behind closed doors–Emirates and Dubai leaning on Qatar and Abu Dhabi to stop the subsidies–in which case this might end up a win for the US3 even without US government involvement.

  6. Thanks for the post. Whether I agree or disagree with you, whatever, you consistently do a terrific job laying out these stories, clearly, concisely, and what I find, logically. Much appreciation to you.

    As an American, of couse, I side with the US carriers on most everything. Of course, I will never forget how the US carriers attacked each other, unfairly I say, going back to Pan Am vs. all the other US competition. But blame, all around.

    Now, we have the Norwegian and the Emigrates, et.al. situations. Again, I believe a little of the blame on both sides.

    The US airlines surely are making money and I guess are paying big money to their lobbying association, Airlines for America. As they were previously called, the Air Transport Association, I find much of what they say a lot of hot air, but that’s what their members want. They sure are advertising on TV and radio in the DC area, like I haven’t seen in years! (Didn’t they have a Super Bowl ad earlier this year?) What message they are trying to float, it’s a little murky for me. But, it’s the airlines’ money (actually, I’m paying for the ads through high fares), so whatever.

    As to the subject matter affecting me, it’s fares, what I think are extremely high fares in the North Atlantic markets. Well, yeah, the to-Oslo and Stockholm markets aren’t that bad, but everywhere else, WOW! Should they be as high as they are? Is this legalized collusion at work? Sure, just what the traffic will bear, you say. OK.

    Anyway, keep us informed–your opinions as well–as I know you will. Thanks.

  7. I still don’t get all this back and forth. The US3 and ME3 don’t really compete all that much. If I needed to fly from SFO – SEZ, none of the US3 will get me there, but I can take EK with one stop service. If I need to go from SFO – SYD or SFO – LHR, I have a choice of carriers to take me non-stop and the ME3 make no sense. There are very few places other where I would have to make a decision between the US3 and the ME3.

  8. Since the U.S. carriers can only fly to AUH/DXB/DOH and the M.E. carriers are flying to a number of U.S. cities, maybe the airlines and their alliance partners need to ramp up service to India and the surrounding area which must be the big issue I’m thinking.

    1. Not sure about others, but LH for one has ramped down service to India compared to a few years ago.

  9. Given the difference in size (# airports, net of people), why did the U.S. sign an open skies agreement with the UAE in the first place?

    1. Oliver – The US took the position long ago that it supported open skies agreements pretty much across the board. In some cases, that means it’s with a small country but in other cases it’s with a large country. The policy is across the board and doesn’t pick and choose.

  10. Ha…if you look at the route map comparison between EK and other airlines, you see that EK wasn’t entirely accurate in terms of noting all the US carrier’s international routes. For example, just looking at United, EK appears to have forgotten a bunch of routes from the Guam hub including…

    Japan (all routes)

    They also forgot all the routes between HNL and Japan.

    You can see for yourself here:


  11. What a petty dispute by the US3 when they offer mostly below average service and are colluding to inflate fares through the goog old fashioned method of winks ;)

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