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.
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.