Emirates lashes back at the big 3 with a full-blown rebuttal

Months after Tim Clark, the president of UAE‘s Emirates airline, lashed out at a report compiled by US carriers that accused Gulf airlines of being recipients of billions of dollars in subsidies, Emirates has formally released a point-by-point rebuttal to the allegations.

Speaking in May at a seminar held on the sidelines of the Arabian Travel Market 2015, Clark had said he intended to put a “bulldozer” through the report with a “sledgehammer” reply. Now, the full document containing this reply (to US carriers’ 55-page white paper) has been released to the media and the public after an Emirates delegation briefed officials from the US Departments of State, Transportation and Commerce.

Here’s a verbatim summary of the rebuttal:

ALLEGATION – Emirates received fuel-hedging subsidies.

REBUTTAL – When oil prices plunged in 2008, Emirates transferred its fuel-hedging contracts to ICD to avoid a misleading picture of the airline’s true operating results due to unrealized, “mark to market” paper losses. In its non-GAAP financial reporting to investors in 2009, Delta took the same position to exclude “mark to market” losses from its operating results. All losses on the fuel-hedging contracts at maturity were ultimately paid using Emirates’ own cash resources. Emirates paid dividends to ICD to match all actual losses and continued to provide collateral in support of the fuel-hedging contracts. Emirates had sufficient cash and credit from its own financial resources to meet all obligations at all times. Sharp recovery in global oil prices meant paper losses under “mark to market” accounting never materialized. ICD ultimately made a profit on the transfer, receiving net fuel-hedging gains of $100 million, which would otherwise have gone to Emirates.

ALLEGATION – Emirates receives subsidies from related-party transactions.

REBUTTAL – Emirates’ related-party transactions are conducted on an arm’s length basis. Accounting standards do not require companies to declare whether related-party transactions are conducted at arm’s length, but Emirates has now made this declaration. This is stated in our 2014-15 financial statements, in respect of which our external auditor, PricewaterhouseCoopers, has issued an unqualified audit opinion.

ALLEGATION – Emirates indulges in ‘below market’ related-party transactions by purchasing jet fuel from affiliated supplier ENOC at Dubai International.

REBUTTAL – Emirates pays commercial rates for jet fuel in Dubai, purchasing from five suppliers: BP, Chevron, Emojet/Exxon, ENOC and Shell. A three-, six- and 12-month analysis (period ending February 2015) of prices paid by Emirates to its five suppliers in Dubai show that ENOC’s prices closely tracked those of the other four suppliers and are slightly higher on average. Emirates often pays less for its jet fuel at US airports than it does to ENOC and the other suppliers in Dubai.

ALLEGATION – Receipt of services from dnata at Dubai International.

REBUTTAL – The US legacy carriers’ allegations regarding dnata in their white paper are both unsubstantiated and false. Their claims are based solely on distorting a statement made by Emirates related to the arm’s-length price it pays dnata and unnamed, undocumented “confidential sources in Dubai” who claim that Emirates receives a 15 percent discount. The legacy carriers offer no additional evidence. dnata is a profitable, independently managed and professionally run ground handling company that provides no subsidy to Emirates. dnata in fact earns a higher rate of profit on its services to Emirates than from other airlines operating at Dubai International.

ALLEGATION – Emirates receives subsidies from Dubai International.

REBUTTAL – Dubai International’s airport charges are fully consistent with the US–UAE Open Skies Agreement. Under Open Skies, airports cannot charge fees that exceed costs but there is no floor on prices nor is a full cost recovery required. It is in fact common practice for airports and cities to incentivize airlines to operate, given the many knock-on economic benefits of air links for an airport and its surrounding community.

Dubai International airport (DXB) applies the same non-discriminatory user fees to all airlines, including Delta and United. Not charging transfer passengers is permitted by Open Skies and is practiced at other major international airports. Major Asian hubs such as Bangkok and Kuala Lumpur exempt transfer passengers from passenger service charges.

ALLEGATION – ‘Below market’ related-party transactions on sale and leaseback of aircraft with and sale of purchase rights to DAE.

REBUTTAL – Both transactions were at arm’s length. In the first transaction: the US legacy carriers based their erroneous conclusions on a report by Charles Anderson of Capital Trade Inc. That highly dubious report, based on no other evidence than DAE’s mention on its website of a contemporaneous sale and leaseback with Emirates, concluded that a gain of AED553.8 million ($150.8m) arising from aircraft sales reported in Emirates’ 2008 year-end financial statements was a subsidy in its entirety. That statement is groundless. The sale of 13 Airbus A330-200 aircraft that was reported in Emirates’ 2008 year-end financial statement was with two parties – Allco and DAE. Importantly, the sale price to both Allco and DAE is below the independent AVACs (Aircraft Value Analysis Company) appraised value of the aircraft. Emirates’ sale price to Allco is approximately 97 percent of the appraised value, while the sale price to DAE is 95 percent – comparable terms of sale, at arm’s length and on market terms.

In the second transaction: Also conducted at arm’s length, Emirates’ sale of purchase rights for 18 Boeing aircraft enabled DAE to receive the aircraft sooner, and at a comparable price due to Emirates’ position as a large purchaser of Boeing aircraft. Implying the transaction was somehow a subsidy to Emirates is wrong. In addition, Emirates agreed as part of the transaction to lease back certain of the aircraft and ultimately leased back 13 of the 18 aircraft from DAE at market rates, further underlining the commerciality of the overall deal for DAE.

ALLEGATION – Emirates receives subsidies due to UAE labor law.

REBUTTAL – Labor allegations are outside of the scope of the WTO and Open Skies Agreement. The US has always strongly objected to efforts to put labor practices under any international trade agreement as US labor laws depart from the International Labor Organization (ILO) conventions in numerous respects, including with regard to the ILO’s “right of association”. In fact the legacy carriers’ interpretation, if correct, would require legislative changes to US labor laws.

Emirates complies rigorously with applicable labor laws and has no restrictions on union membership for employees in the countries to which it operates from Dubai. To this point, Emirates negotiates with unions in 17 countries. Emirates is a progressive employer, providing benefits for staff which meet or exceed industry norms. Unlike the legacy carriers’ pension plans for their employees, which were cast off in Chapter 11 restructurings, Emirates has not walked away from its benefits obligations nor abandoned its retirees.

Emirates receives about 850 applications for each job opening, regardless of the position. In 2013-14 alone, more than 430,000 people from around the world applied to work for Emirates. Over 20% of employees have been with the company for more than ten years. Almost 3,000 employees have been with the company for 20+ years. 

In addition to the above rebuttals, the airline said in its response that, by flying 84 flights each week from nine USA gateways, it adds an estimated economic value of $2.9 million per annum to these regions and airports. It also claims to have provided over 775,000 feed passengers to US legacy carriers, producing $133m in financial benefits to them over the past five years. It also quotes aviation experts to assert that Emirates supports nearly 4,000 US jobs per daily round-trip service.

“The Big 3’s white paper is littered with self-serving rhetoric about ‘fair trade’, ‘level playing field’ and ‘saving jobs’, but their mess of legal distortions and factual errors falls apart at the slightest scrutiny. The allegations about Emirates receiving subsidies or competing unfairly are false,” said Clark. “What’s happening is that the legacy carriers, not satisfied with their protected domestic market, plus their anti-trust immunized global alliances – which let them collude on capacity and price with joint venture partners – are now flexing their lobbying muscle to further restrict valuable international air transport links for American consumers, communities and companies. The case put forward by Delta, United and American Airlines against Emirates is full of holes and if their protectionist campaign were to be successful, it will not end with just the Gulf airlines.”

A response from the Big 3 to this full-blown rebuttal is now awaited.