Monday, July 13, 2015

Emirates refutes US carriers' contentions of unfair subsidies

Emirates, one of three Persian Gulf airlines that have incurred the wrath of U.S. airline executives, has published a rebuttal to the American carriers’ claims that it is one of three Gulf carriers being subsidized by their governments and which are therefore engaging in unfair competition in the U.S. markets they serve.

The heads of the major U.S. airlines have been crying foul lately, claiming that Persian Gulf airlines Emirates, Etihad Airways and Qatar Airways enjoy an “unfair advantage” in the form of subsidies from their countries’ governments. The three U.S. “legacy carriers” issued a 55-page white paper that said, among other things, that the airlines’ three government owners have “fueled their operations and their rapid growth with over $40 billion in subsidies and other unfair government-conferred advantages in the last decade alone.”

An Emirates A380 in flight
Photo provided by Emirates
Emirates issued a 210-page document dated June 29 that contains a point-by-point rebuttal of the white paper’s claims, including assertions that Emirates benefits from UAE government subsidies in violation of the U.S.-UAE Open Skies Agreement. Those claims, it said, are without merit.

“Emirates is one of the world’s leading airlines precisely because Emirates does not depend on government subsidies, bail-outs, and bankruptcy laws, but operates as a consumer-focused, profit-driven, commercial enterprise,” the carrier said. “Emirates has earned a profit for twenty-seven straight years, because Emirates (1) is committed to world-class customer service, (2) is well-managed, and (3) has pioneered an innovative aviation model: long-haul to long-haul service that reduces costs and travel times and provides unrivaled global connectivity for international travelers, particularly in the heavily populated but underserved countries in the Indian Subcontinent and Africa.”

Emirates’s rebuttal points to numerous flaws in the arguments presented in the white paper, including misstatements of facts, conclusions based not on facts but mere assumptions, demonstrably inaccurate assertions and outright distortions, particularly with regard to the claim of government subsidies.

“Emirates has financed its growth from its own financial resources, reinvesting in its own business continuously and utilizing a wide range of external financing options available in the market,” the carrier said. It added that it continued to grow during the global financial crisis of 2007-2008, a time when government across the world were suffering, including the Dubai Government which was, very publicly, working through its own financial priorities and challenges.

“Emirates continued to grow throughout [that] period, a feat which would have been impossible if it was reliant on Dubai Government funds,” the carrier said, adding that each stage of its growth can be understood from the audited financial statements that Emirates has maintained from the date of its inception.

“There is no room in any of this for subsidy or unfair government benefits,” it concluded.

The airline also says the legacy carriers’ white paper fails to point out how, even if they did exist, subsidies violate the provision of the Open Skies agreement, which addresses “fair and equal opportunity” for carriers of both parties.

“Open Skies policy embraces goals such as greater competition, increased flight frequency, more consumer choice, promotion of business travel and tourism, improved service, and innovation,” Emirates asserted. “The Legacy Carriers have not even tried to argue that these goals of Open Skies have been harmed.”

Even with respect to harm to what Emirates calls the U.S. carriers’ narrow corporate interests, those carriers have failed to make a persuasive case.

“In no instance have they shown that they have suffered any adverse effect from any alleged subsidies, and they also have failed to show that they have been harmed by competition from Emirates,” it continued.

Customer service: the crux of the matter

On the web page where it presents its position, Emirates observes, “Isn’t it interesting – that in the entire 55-page white paper presented by the Big 3 US carriers, alleging that Gulf carriers are causing harm to America, there is only one reference to consumers?”

Many observers, including TheTravelPro, have made similar observations.

“At Emirates, we know that …[i]f we become complacent, and if we stop delivering the products and service that our customers expect, we will soon be out of business,” it said. “That is why we continually invest in modern and comfortable aircraft, invest in the latest amenities onboard, and recruit passionate and talented individuals from 160 nations to join our team.”

While Emirates’ rebuttal provided concrete examples of where the U.S. carriers’ position was flawed, I and others proffered similar observations about the importance of excellent service and how that was the more likely differentiator when it came to choosing one airline over another. Read my article on that topic here.

In a nutshell, the three Persian Gulf carriers at the center of this issue have been consistently rated among the world’s top airlines in the annual SKYTRAX awards. In the 2015 World Airline Awards, Qatar Airways was named the world’s best, while Emirates was No. 5 and Etihad Airways was No. 6. The highest-ranking U.S. airline in the top 100 carriers was Virgin Atlantic. Not one of the three legacy carriers, it ranked No. 26 in this year’s awards. Delta Air Lines (NYSE:DAL) ranked No. 45, United Airlines (NYSE:UAL) ranked No. 60 and American Airlines (NYSE:AAL) ranked No. 79.

Anecdotally, in many cases Emirates is serving markets that other carriers simply have not chosen to serve and they are prospering in part because of the airline’s astute assessment and capitalization of heretofore untapped markets. My home town of Seattle is an example.

Emirates’ first flight from Dubai (DXB) to Seattle-Tacoma International Airport (SEA) landed on March 1, 2012. It was the first non-stop from SEA to DXB and offered daily service connecting the two cities. Slightly more than three years later, Emirates added a second daily flight connecting the city pair. Clearly, its evaluation showed the demand was sufficient to support a second flight each day.

More to the point, however, no U.S. carrier proposed serving the same city pair, so I see no reasonable rationalization that Emirates is somehow diluting the market on that particular route. The same might be said for non-stop service between Orlando (MCO) and DXB, which is scheduled to start Sept. 1. As of the date of this mid-July posting, no other carrier offered non-stop service, so Emirates’ addition of that route is offering an option that no other carrier chooses to provide.

Though a total of 265 pages, the 55-page white paper and Emirates’ 210 page rebuttal make interesting reading. The white paper is available here, and Emirates rebuttal document is available here.

Emirates concludes its rebuttal with an assertion that I proffered at the conclusion of my June 25 opinion piece on the matter: “What the Legacy Carriers want is protection from competition ... so that they can continue to reduce flights, provide indifferent customer service and increase fees and fares, all without fear of competition in the marketplace.”

In my opinion, the U.S. legacy carriers need to put on their big boy pants, quit whining, and improve their service if they want to compete effectively. One of their number, United Airlines CEO Jeff Smisek, acknowledged as much during the company’s 3Q14 earnings call when he said, “The only way you can differentiate yourselves is through excellent customer service.”

Mr. Smisek, perhaps now you have a more complete understanding of just how prescient your comment was. If legacy U.S. airlines don’t differentiate themselves through excellent service the competition – either domestic or from abroad – will continue to eat their collective lunch. And that, I would submit, is as it should be.

Visit my main page at TheTravelPro.us for more news, reviews, and personal observations on the world of upmarket travel.

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