Global Airline Issues

            Two long-haul foreign carriers that receive government subsidies that have begun to take hold of large stakes in the industry are Emirates and Qatar Airways. Emirates is based out of Abu Dubai and Qatar is based out of Doha Qatar. These two airlines are also apart of the Gulf carriers. These Gulf carriers have been utilizing government subsides to provide an advantage against the other carriers, such as the United States carriers. This is against the Partnership for Open and Fair Skies, which works to provide a fair playing field for competition in the aviation industry.

The Gulf carriers such as Emirates, Quarter Airways, and Eithad Airways have been on the receiving side of large government subsidies that have increased their market share. “Emirates confirmed that it allowed its parent company, the Investment Corporation of Dubai (ICD) to assume its fuel hedging contracts, explaining that it ‘had the option to pursue a different approach,’ one that made it unnecessary to report its hedging losses.” (PR Newswire, 2015).  This allows Emirates to increase the profit showing in their company’s books by basically removing losses from their books to their parent company. This provides an advantage by removing the risk it would normally experience in the market. Additionally, the United Arab Emirates built a $7.6 billon terminal for Emirates at Dubai International Airport. This terminal is in a class by itself. The new terminal is an impressive 11 floors, and provides luxury services such as a full service spa and fine dining. (PR Newswire, 2015).  Along with Emirates, Qatar Airways received an advantage in the industry by receiving government subsidies. “Qatar Airways confirmed it received free land worth $452 million from the government of Qatar. Its submission to the U.S. government clearly states that ‘the State provided Qatar Airways with parcels of land to ensure that the carrier had enough real estate for office and residential space’” (PR Newswire, 2015). Additionally, “Qatar Airways, it is alleged, has received $7.7bn in interest-free loans from the Qatari government and $6.8bn in reduced debt-interest charges thanks to sovereign guarantees.” (R, 2015). This allows for Qatar Airways to grow beyond what it would have been capable within the regular constraints of the market. Lastly, Eithad Airways has “admitted that it sold its frequent flyer program to itself in 2013 in order to show a profit. According to its own 2014 financials recently uncovered in Hong Kong, Etihad sold its own cargo company to itself the following year to similarly show a profit – actions that a typical commercial enterprise would be unable to take.” (PR Newswire, 2015). These types of tactics employed by the Gulf carriers have created a slanted playing field that Jill Zuckman, chief spokesperson for the Partnership for Open & Fair Skies states, "It's urgent that the Obama administration take swift action and request consultations to end these trade violations before the Gulf carriers damage the U.S. aviation industry the same way they have devastated Europe's." (PR Newswire, 2015). The Gulf carriers will continue to utilize these unfair tactics until they are punished for doing so. Without having any repercussions, and with the large business advantages to receiving government subsidies, it is no wonder why the Gulf carriers are exploiting the weakness of the countries involved in the Partnership for Open & Fair Skies thus far.

            Not only have long-haul foreign carriers been receiving subsidies, they also have been able to make aircraft purchases below market value. Companies’ are able to purchase aircraft this cheap through the use of the Export-Import Bank. The Export-Import Bank only is meant to guarantee purchases for companies that do not have the adequate capital on hand. However, under scrutiny it has been discovered that this is not the case. Many of the companies utilizing the Export-Import Bank would be able to find commercial financing easily all over the world. However, “none of these carriers would have necessarily received terms as favorable as they did from the Export-Import Bank, which gives them a cost advantage relative to a scenario where the Export-Import Bank didn’t exist” (Bhaskara, 2014). This creates an operating cost that is lower than it would be without financing for long-haul flight carriers by the Export-Import Bank. “So in effect, the US government is subsidizing non-US airlines (in many cases) to compete directly with American carriers on long-haul routes.” (Bhaskara, 2014).

            Foreign long-haul carriers are able to utilize the Export-Import Bank to purchase wide-body aircraft at a lower cost. Also, foreign carriers such as the Gulf carriers are operating at a loss, and accepting subsidizes from their governments to increase profits. This is not a fair playing field because it is impossible to compete with someone who isn’t playing for the same goal as you. A company cannot compete with another company, if the second company does not wish to profit.

References

Bhaskara, V. (2014, September 2). The Fight Over the Export-Import Bank Has No Easy Answers. Retrieved from http://www.forbes.com/sites/airchive/2014/09/02/the-fight-over-the-export-import-bank-has-no-easy-answers/#71f5930a582d

 PR Newswire. (2015, August 27). Emirates Confirms Billions in Government Subsidy for Airport Terminal. Retrieved from http://www.prnewswire.com/news-releases/emirates-confirms-billions-in-government-subsidy-for-airport-terminal-300134208.html

R, M. (2015, March 6). Airline subsidies in the Gulf Feeling the heat. Retrieved from http://www.economist.com/blogs/gulliver/2015/03/airline-subsidies-gulf