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Subsidy. The myths and facts about Emirates and our industry Recent subsidy or support Alitalia

Subsidy. The myths and facts about Emirates and our industry

Recent subsidy or support

Alitalia benefits from state aid amounting to €700 million over seven years via a 2008 ‘Save Alitalia Decree’ passed by the Italian Government – which amongst other support mechanisms, imposes an airport tax of €3 per passenger on all airlines serving Italy.

JAL received ¥300 billion of fresh capital in early 2010 from the Japanese Enterprise Turnaround Initiative Corporation (a state-controlled investment fund), and an additional ¥600 billion line of credit from the government-owned Development Bank of Japan.

Emirates believes that the issue of ‘subsidy’ is a legitimate and important issue for any airline or multinational corporation.

• Emirates is the international airline of the United Arab Emirates and its main activity is the provision of commercial air transportation services.

 

Like other pro-competition and free-market voices in our industry, we are firmly and historically opposed to state aid for airlines. Such policies can only encourage inefficiency, discourage open markets and are ultimately not in the consumer interest.

It is therefore a concern to Emirates that unsubstantiated claims of subsidy against our organisation continue to be perpetuated by some competitors and from other quarters. Despite no evidence, an oft repeated myth can ultimately be accepted as conventional wisdom. This document therefore seeks to genuinely and credibly rebut these various allegations.

Let’s start first with what Emirates is, rather than what it is not. The Emirates Group consists of more than 50 specialist business units. At the heart of the group are Emirates Airline and Dnata.

• Dnata, the ground handling agent at Dubai International Airport, has grown into the biggest airport services provider in the Middle East and now has almost 30 related subsidiaries trading under its name around the world.

Emirates also provides external services like inflight catering, cargo, engineering and training - as well as being involved in hotel and resort developments. Crucially, all of these divisions are stand-alone profit centres with their own business plans, financial objectives and reporting structures.

This document tackles head-on the myths and the facts

related to government ownership and support, financial reporting, sources of finance, costs, landing fees and charges, the environment, oil, airport infrastructure and inter-carrier comparisons. We hope you find our transparency thought provoking.

The European Commission launched an investigation in February 2010 into a CZK 2.5 billion (€94 million)

A little history…

loan granted to CSA - Czech Airlines in 2009 by the state- owned entity Osinek a.s.

Aer Lingus

€200 million Irish Government capital injection in 1996.

Air France

€300 million and €580 million French Government capital injections in 1991 and 1992.

€3 billion French Government capital injection in 1994.

Alitalia

€1.5 billion and €1.2 billion Italian Government capital injections in 1997 and 2005.

British Airways

GBP160 million UK Government debt write-off pre-privatisation in 1981.

Concorde

US$3.5 billion development cost write-off by British and French Governments in the 1970s.

Iberia

€560 million Spanish Government capital injection in 1996.

Lufthansa

€800 million German Government contribution to Lufthansa pension fund in 1995.

Olympic Airways

€2.6 billion Greek Government accumulated debt write-off in 2008/09.

Qantas

AUD$1.4 billion Australia Government debt write-off in 1992.

TAP

€1.8 billion package of Portuguese Government aid measures in 1994.

  Myths vs facts “Spearheading the region’s development strategy, and emblematic of the economic success
 

Myths vs facts

“Spearheading the region’s development strategy, and emblematic of the economic success of the UAE, Gulf carriers benefit from financial support from their local state…” Air France Emirates is run as a fully commercial business, unlike many European carriers. It is certainly true that aviation is a key strategic policy and sector in Dubai, as it is in many countries like Singapore, Hong Kong, Malaysia or Germany - and that the Government of Dubai’s vision is to be a world leader in international aerospace. This comes through open skies policies, careful planning and pro-aviation policies (see pages one and eight).

“The Emirates Group…has limitless access to capital and state money is used to build infrastructure megaprojects ”

such as airports. Also, since there is no income tax, it is able to employ staff at a much lower cost

Pilots Association Emirates is the dedicated tenant of Dubai International Airport’s Terminal 3. However, Emirates did not fund the construction of the facility and pays for its usage in the form of airport landing charges and leases. In terms of the staff costs which Emirates bears, US$500 million alone in expatriate benefits per annum is a significant number and is evidence that although differently structured, our employee cost base is comparable to other international airlines (see pages one and seven).

Air Canada

“The government is helping finance Emirates’ wide-body aircraft orders.” Transport Canada Emirates operates on a wholly commercial basis and receives no funding or support for its aircraft orders from the Government of Dubai - facts corroborated by the world’s leading investment banks and finance companies. Rather, it is the commercial market which finances Emirates’ aircraft fleet, based on its confidence in our business model, strategy and long-term financial plan (see page three).

“(Emirates is) taking advantage of export credit guarantees to purchase the A380 they have ordered.“ Lufthansa Such export credit-backed funding is deliberately aimed at and used by numerous international airlines for aircraft orders - is an internationally accepted export driver for both EU Member States as well as the US. European credit agencies and represents only a relatively small proportion of Emirates’ total sources of financing (see page three).

“We have doubts on how Emirates can finance its A380s. Where are you going to get the money?” Leo van Wijk, Ex-CEO KLM Emirates sources finances in a fully transparent manner from commercial banks, bond issues, operating leases and via asset-backed debt, as well as from other non-conventional sources such as Islamic funding and from outside foreign investors. To date, US$22 billion has been raised from these sources (see pages three and four).

“(Dubai Government’s ownership of Emirates together with control over the airport authority, air navigation services, ground handling agent, leading hotel groups, etc.,) results in non-transparent structures which most likely lead to significant beneficial treatments of Emirates compared to other airlines.” Arthur D Little Consultancy Emirates is treated the same as every other airline operating at the Dubai International Airport in terms of airport and landing charges. Dubai has fully open skies. More than 130 international airlines today serve Dubai, suggesting that inter-airline competition is both robust and welcomed (see pages three and four).

“There are clear advantages based on the geographic location of Dubai - having some of the largest oil fields in its direct surroundings (i.e. lower transportation, distribution/storage/logistics and refining costs).” Arthur D Little Consultancy There is minimum oil refining capacity in the UAE/Dubai. Both oil and jet fuel prices are traded globally, so the jet fuel prices paid by Emirates in Dubai are similar to those paid anywhere in the world (see page six).

“Emirates is unfairly advantaged by the benefits of oil revenues.” Geoff Dixon, Ex-CEO Qantas Oil accounts for only 4% of Dubai’s GDP, a figure which goes down every year. Emirates pays the same market rates for jet fuel as Qantas and other international airlines around the world, as shown in our published accounts. If Mr Dixon means this is because the UAE benefits from oil, the same can be said of Australia and its uranium or natural gas or iron ore revenues (see page six).

“The infrastructure in Dubai in terms of taxes and conditions is better than in Europe, which gives Gulf carriers an edge. There is widespread concern that there is an uneven playing field.” German CAA Dubai’s investment in essential airport infrastructure for the future mirrors what cities such as Bangkok, Kuala Lumpur, Athens and Berlin have recently done - something which any growth-focussed city needs to do if it is looking ahead. The real uneven playing field though is between the aeropolitical protection often enjoyed by a carrier such as Lufthansa in Germany, compared to the fully open skies environment at Emirates’ base in Dubai

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(see pages seven and eight).

base in Dubai 2 (see pages seven and eight). “We know there has been clear evidence

“We know there has been clear evidence of a progression towards aeropolitical multilateralism in the past 20 years. More and more countries are recognising that liberal air access has a multiplier effect on their economics and protection of their national carriers no longer stacks up in the cost- benefit equation or serves their national interest. Unwittingly, they have been subsidising their national carriers through a fortress mentality of aeropolitical protection and the elimination of competition, and other primary sectors of their economies have suffered as a result.”

Tim Clark, President Emirates Airline

5th June 2010 “The charges of unfair competition from the likes of Lufthansa, Air France-
5th June 2010 “The charges of unfair competition from the likes of Lufthansa, Air France-

5th June 2010

“The charges of unfair competition from the likes of Lufthansa, Air France- KLM and Air Canada fail to stack up. Although it is government-owned, Emirates has been profitable in every year but one since it started. Its fast- growing fleet…is financed conventionally. It pays the same price for fuel as other airlines and the same fees at its home airport.“

Government ownership and support

Emirates is 100% owned by the Government of Dubai through its commercial investment arm, Investment Corporation of Dubai (ICD).

Emirates received US$10 million from the Government of Dubai in start-up seed capital in 1985 and US$88 million invested in infrastructure, which included two B727 aircraft and the Emirates Training College building. This has been more than covered by total dividend payments to the Government of Dubai, which have totalled US$1.75 billion to date. The Government of Dubai and the management of Emirates have consistently made it clear that Emirates is required to be self-sustainable and profitable.

Dubai’s corporate model has its origins in the city’s historic position as an entrepôt, which has free trade and competitive open markets at its core. Whilst there is a close relationship between the Government and many of Dubai’s strategic commercial entities, Dubai is at its essence driven by commercial entrepreneurial principles.

Each commercial entity is an independent company with its own profit targets and operational autonomy. Such a system is not dissimilar to the corporate structures followed in Asia for example by Singapore, Korea or Japan.

Annual Report 2008-2009 Transparent reporting Emirates is fully and independently audited to the highest international
Annual Report 2008-2009
Transparent reporting
Emirates is fully and independently audited to the highest international standards
by external auditors PricewaterhouseCoopers (PwC), as well as by auditors from the
Government of Dubai. The PwC audit is conducted in accordance with International
Standards on Auditing issued by the International Federation of Accountants.
Emirates’ accounts and annual reports have been published since 1993/94 and are
fully accessible on the internet at ekgroup.com.
The Emirates Group
Shaping Our World
Annual Report 2009 - 2010

Our accounts and annual reports have been reviewed and substantiated by leading analysts from major international investment banks

“An overview of the audited financial accounts contains no material surprises once one gets used to seeing consistent profits at an airline…Emirates’ key competitive advantage is its relative youth (the fleet and the company), the location and efficiency of the Dubai hub, and strong management.“ UBS

“We cannot find anything in Emirates’ accounts which indicates that the business is subsidised directly or indirectly or given any undue preferences”…“We are encouraged by the high level of disclosure that Emirates offers, even as an unlisted company.” JP Morgan

Most recently, our accounts revealed that Emirates was not immune from the harsh economic impacts of the financial crisis, by experiencing an 80% fall in net profits to US$268 million for the financial year 2008/09, and the Emirates Group as a whole also experiencing a 72% fall in net profits during the same period.

Sources of finance

Emirates has always raised funds on a commercial asset-backed basis. No financing has been obtained from Investment Corporation of Dubai (ICD) or the Government of Dubai at concessional rates. The Dubai government does not act as guarantor for any Emirates’ loans - unlike some in our region who benefit from sovereign debt guarantees.

Emirates has raised a total of US$22 billion to date for financing of new aircraft and other corporate finance requirements. Emirates finances its aircraft through a wide range of sources, including operating leases, EU/US Export Credit Agencies (ECAs)and commercial asset-backed debt as well as non-conventional sources such as Islamic funding and equity from Japanese and German investors (as part of tax-based cross border leveraged leases).

(as part of tax-based cross border leveraged leases). US$22 billion financed over the last 14 years

US$22 billion financed over the last 14 years

US$22 billion financed over the last 14 years

Export Credit Agencies are a legitimate and internationally accepted support mechanism to boost manufacturing sectors and exporters in Europe and the US. Emirates, like many other airlines, uses ECAs as part of its broad financing structure. EU/US export credit agencies have supported just over 20% of Emirates aircraft financing to date and are likely to remain in this range in the future.

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Cost base Emirates pays for the costs of its main headquarters, engineering hangars, Emirates Group

Cost base

Emirates pays for the costs of its main headquarters, engineering hangars, Emirates Group hotels and staff accommodation. There are no arrangements to use Dubai Government buildings or other properties free of charge.

Emirates is liable for all applicable taxes in all countries in its network. Like over 130 scheduled airlines (including some of our most vocal critics on the subsidy issue) operating at Dubai International Airport, Emirates is subject to a tax-free regime that prevails in the UAE and which existed before Emirates first started flying in 1985.

All Emirates staff are on the company payroll and are not classed as government employees. Emirates incurs significant social costs to attract and retain the high proportion of staff recruited from around the world (Emirates employs 156 nationalities) on

expatriate terms and conditions. On average every year, Emirates has to bear a total cost of over US$500

million for expatriate employee benefits - including

accommodation costs for employees and children’s education for management, pilots, engineers and other staff – costs which carriers such as Air France, Lufthansa and Qantas do not incur.

Emirates’ cost structure of 11 cents per available seat mile in 2009/10 is comparable to that of leading international airlines such as Singapore Airlines and Cathay Pacific, among others.

Unit cost comparison 2009-2010 35 30 27 25 20 15 15 14 23 12 11
Unit cost comparison
2009-2010
35
30
27
25
20
15
15
14
23
12
11
10
9
11
8
9
5
5
4
3
3
4
0
Emirates
Singapore
British
Cathay Pacific
Lufthansa
Airlines
Airways
Fuel
Excluding fuel
US cents per available seat mile

Source: Published financial reports year-ending 31 March 2010 for EK (Emirates Group); SQ (Singapore Airlines Group) and BA (British Airways Group) and Published financial reports year-ending 31 December 2009 for CX (Cathay Pacific Group); LH (The Lufthansa Group).

Landing fees and charges

Emirates pays the full published landing charges at its main operational base, Dubai International Airport, and does not benefit from any form of volume related discounts. It pays the same standard over-flight charges applied to other airlines across its network and the same airport handling fees to Dnata Airport Operations (an Emirates Group company and the ground-handling agent at Dubai International Airport), as would a similar high volume airline customer. Emirates is also subject to the same customs duties as all other airlines operating to and from Gulf Co-operation Council countries.

“Airport landing charges and fuel costs are about what one would expect for an airline of this size, while engineering and maintenance costs are low as a percentage of revenue (we suspect this reflects the young fleet which has an average age of about four years).” UBS

The chart to the right shows the total terminal, runway and passenger charges involved in landing a B777-300 at various major international airports around the world. From the sample, it is clear that the charges at Dubai International Airport are broadly comparable with other

major airports.

9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Dubai Singapore Mumbai Doha Bangkok Abu
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
Dubai
Singapore
Mumbai Doha
Bangkok
Abu
Dhabi
Kuala
Lumpur
Beijing
Istanbul Cairo
US$

OtherDoha Bangkok Abu Dhabi Kuala Lumpur Beijing Istanbul Cairo US$ Term in al and runway charges

Term in al and runway chargesDubai Singapore Mumbai Doha Bangkok Abu Dhabi Kuala Lumpur Beijing Istanbul Cairo US$ Other Passenger charges

Passenger chargesMumbai Doha Bangkok Abu Dhabi Kuala Lumpur Beijing Istanbul Cairo US$ Other Term in al and

Source: IATA

In 2006, Ryanair made an official complaint to the European Commission suggesting that the French Government policy of charging French domestic flights 50% less than those flights to other EU countries was a subsidy worth €1 billion to Air France-KLM between 2000 and 2006.

4

One alliance’s back story Some carriers make loud, or sometimes whispered, allegations about the sources
One alliance’s back story Some carriers make loud, or sometimes whispered, allegations about the sources
One alliance’s back story
Some carriers make loud, or sometimes whispered,
allegations about the sources of funding and level of
government involvement in other carriers, and most
of their chatter is directed at Emirates. As we said at
the beginning of this document, we think a debate on
state aid and subsidy is an important and welcomed
development. But it cannot apply for one and not all,
and must be fact-based. The table below shows the level
of government involvement in certain carriers within
Star Alliance - the most vocal on the subsidy soap box
- and details the types of support or subsidy benefitted
from in the past decade.
Airline
Government funding since 2000
Air Canada
CAD$250 million loan from the government owned Export Development Corporation in 2009, of which CAD$100 million
was from a special cabinet controlled EDC account.
Air New Zealand
NZ$885 million capital injection in 2001.
Asiana
110 billion Won loan (US$84 million) in November 2001.
Austrian Airlines
€500 million in state aid from the Austrian Government to cancel debts prior to September 2009 takeover by Lufthansa -
on the back of a €200 million loan from the Austrian Government.
Brussels Airlines
Loan of €125 million SN Airholding (stakeholder in SN Brussels Airlines) granted from Federal Investment Company in 2002.
Croatia Airlines
195 million Croatian Kuna (€27 million) in state aid between 2007 and 2009.
Scandinavian Airlines (SAS)
Seeking a new capital injection of around 4-5 billion Swedish Kroner (€550 million), half of which comes from the
Governments of Sweden, Norway and Denmark - following a similar injection in 2009 from the same sources.
Spanair
€50 million loan from the Catalan Government in 2010.
Swiss
US$1.5 billion state aid in 2002.
Environment
Recently, a number of EU carriers have been arguing
the case of ‘carbon leakage’, in a thinly-veiled attempt
to receive additional free allowances (subsidies) from the
EU as part of the Emissions Trading Scheme (ETS).
a pricing advantage by not facing EU ETS costs.
The resulting traffic going via Dubai would affect
the intercontinental market for passengers, result
in additional CO2 emissions and be economically
detrimental to EU airlines and EU hub airports.
A
group of aviation industry organisations even
commissioned a study which attempted to put the
case for carbon leakage - that the EU ETS would create
regional distortion by pushing passengers to fly via
non-EU destinations to avoid paying additional
ETS-related charges, with Dubai being often used to
argue the case. When studied more closely though, it is
clear that the actual passenger numbers in the examples
used to demonstrate such leakages/deviations via Dubai
are so small, that they are insignificant.
Amsterdam is however in reality a small player in a small
market: In 2008, over a third of passengers flying from
New York JFK to Bombay did so on direct services,
while less than 10% travelled on flights operated by all
EU carriers combined via their home hub airports and
less than 1% flew via Amsterdam. Only 8% of passenger
traffic arriving at EU airports from non-EU origins is
connecting to non-EU destinations.
For example, the report suggested that passengers
would prefer to fly from Charles de Gaulle to Beijing via
Dubai to avoid paying an estimated €6 ETS fee, despite
the fact that this would add a stopover and seven hours
to
their journey (instead of flying direct). In fact, of all
passengers carried by Emirates from Charles de Gaulle
in 2008, less than 2% were destined for Beijing.
In the same year, 81% of passengers travelled on
direct carriers, and 11% travelled on EU carriers via EU
intermediate airports.
This part of the report was dismissed by the European
Commission’s Transport and Energy Directorate General
(DG TREN) in 2009, when they stated that “the aviation
industry is not considered to be at risk of carbon
leakage”, and that EU carriers would not be eligible
for back-door subsidies in the form of additional free
emission allowances.
The report also suggested that for a one-way flight
from New York JFK to Bombay, a routing via Dubai,
as opposed to a flight over Amsterdam, would have
Emirates is a competitive, eco-efficient, non-EU airline
which is being forced to comply with an EU emissions
trading scheme. Comply we will, but to have certain
EU airlines accuse us of being government-subsidised
while they argued for emissions subsidies themselves,
is hypocritical and only encourages competitive
distortions.
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Emirates was also voted the “Best Airline Jet Fuel Department in the Middle East and
Emirates was also voted the “Best Airline Jet Fuel Department in the Middle East and
Emirates was also voted the “Best Airline Jet Fuel Department in the Middle East and
Emirates was also voted the “Best Airline Jet Fuel Department in the Middle East and

Emirates was also voted the “Best Airline Jet Fuel Department in the Middle East and Africa” by major fuel suppliers at the 2009 Armburst Jet Fuel Industry awards in London - the fourth consecutive year it has received this award.

6

Oil

Myths about Emirates access to free or discounted oil are often repeated, but in reality don’t stand up to scrutiny.

Airline Business recently carried an article that covered the issue of oil for Saudi Arabian Airlines. It said, “The problem for the government is that travellers in this oil-rich nation enjoy the benefits of cheap fuel, whether in the guise of subsidised air tickets or subsidised fuel for their cars. Saudi Arabian itself enjoys subsidised fuel prices too…In May the local, privately owned low-cost players Sama and NAS Air were given the fuel subsidy ”

Given Saudi Arabia is a neighbour of the UAE, is

it therefore reasonable to ask if we receive similar

government support? The answer is no. Emirates procures its fuel at market rates from multiple suppliers at all airports to which it operates, including, of course, Dubai International Airport (DXB).

Fuel is sourced from all five suppliers that serve Dubai International Airport: BP, Shell, Chevron, ENOC and Emojet – a joint venture between Emarat and Exxonmobil. Outside of Dubai, Emirates’ main fuel suppliers are also Exxonmobil, BP, Shell and Chevron.

But don’t just take our word for it. Emirates recently wrote to Shell, BP and Chevron asking them to verify our credentials as fully commercial clients with contracts on par with their other airline clients around the world.

Chevron - “…happy to confirm that our present contract and all our previous contracts covering jet fuel supply to Emirates Airline at Dubai have all been negotiated and agreed with the same considerations as for those jet fuel contracts with our other airline customers…with no free fuel and with no economic subsidy.”

BP -

at Dubai since 1985 through a commercial fuel supply contract which is competitively tendered periodically”.

have

been a supplier of jet fuel to Emirates

Shell - “Our contract with Emirates Airline is the result of

a fair negotiation process in line with the negotiations

that we have with other major customers…and the items invoiced are similar in type to those charged to our other customers…”

It is sometimes suggested Emirates receives very cheap

or subsidised fuel at Dubai International Airport. This

is wholly incorrect. The following chart shows fuel

prices paid by Emirates at major airports around the world relative to the price we pay in Dubai, along with

analysis of comparitive fuel costs.

Relative fuel prices paid by Emirates in 2009

102%

100% 99% 98% 96% 95%
100%
99%
98%
96%
95%

Dubai

Frankfurt

Hong Kong

London (LHR)

Los Angeles

Singapore

Emirates’ total operating costs

73%

71%

69%

65%

70%

27%

29%

31%

35%

30%

2005/06

2006/07

70% 27% 29% 31% 35% 30% 2005/06 2006/07 Fuel and oil expenditure 2007/08 2008/09 2009/10 Other

Fuel and oil expenditure

2007/08

27% 29% 31% 35% 30% 2005/06 2006/07 Fuel and oil expenditure 2007/08 2008/09 2009/10 Other expenditures

2008/09

2009/10

Other expenditures

In line with market prices, Emirates’ fuel cost per ATKM* decreased by 29.5% between 2008/09 and 2009/10 and comprises a significant 30% of its operating cost in 2009/10, up from 21% in 2004/05.

Airline unit cost break-up - fuel as a % of unit cost

71

%

70

%

67

%

7

2%

85

%

29

%

30%

33%

28%

15

%

Br itish

Emira tes

Singapore

Cathay

Lufthansa

Airway s

Airlines

Pacific

28% 15 % Br itish Emira tes Singapore Cathay Lufthansa Airway s Airlines Pacific Fuel Others

Fuel

28% 15 % Br itish Emira tes Singapore Cathay Lufthansa Airway s Airlines Pacific Fuel Others

Others

Analysis of the audited accounts for the last financial year reveal that in percentage terms, Emirates’ fuel bill is in line with what other major international airlines pay for fuel per annum.

Like many other airlines operating on a fully commercial basis, Emirates was not spared the pain and suffering resulting from the unprecedented volatility in oil prices during the last decade. In the financial year 2008/09, Emirates’ fuel expenditures escalated to US$3,925 million from US$891 million in 2004/05 – even with our fuel efficient fleet.

The below table provides evidence of the direct influence and close relationship between average jet fuel prices and Emirates’ expenditure on fuel and oil.

Year

Emirates’ fuel and oil expense per ATKM* (in US cents)

Average jet fuel prices** (in US cents per US gallon)

2005/06

9.3

170

2006/07

10.5

189

2007/08

13.6

223

2008/09

16.0

266

2009/10

11.4

176

Average annual change

+5%

+1%

*ATKM (Available tonne-kilometres) – overall capacity measured in tonnes available for carriage of passengers/cargo load multiplied by the distance flown

**Source: Energy Information Administration

Airport infrastructure     Airports around the world are funded in widely differing ways, with

Airport infrastructure

   

Airports around the world are funded in widely differing ways, with a variety of ownership structures and types of relationships to the ‘home’ carrier and respective national governments.

Dubai International Airport is part of Dubai Airports,

to the ‘home’ carrier and respective national governments. Dubai International Airport is part of Dubai Airports,

a

Dubai Government owned entity which has

 

responsibility for all operational and passenger

aspects of airport developments in Dubai. This includes Al Maktoum International Airport in Jebel Ali, which

is

being developed to cater for the future aviation and

 

logistics needs of Dubai. The recent opening of Terminal 3 at Dubai International Airport (for the dedicated use of Emirates) was part of a US$4.1 billion upgrade of facilities at the airport to enable it to handle close to 70 million passengers a year - up from its present capacity of about 30 million - and to free up space in adjoining terminals at the airport for other airlines.

the global economy. Recent examples include Chep Lap Kok in Hong Kong, Suvarnabhumi International Airport in Bangkok, Berlin Brandenburg International Airport, Kuala Lumpur International Airport, Incheon International Airport, Kanasi International Airport, Paris Charles de Gaulle, Athens International Airport, Oslo International Airport and Madrid Barajas International Airport.

It

is not uncommon for governments or state-controlled

 

entities around the world to help finance expansion of airport infrastructure, viewing them as key drivers for economic growth and essential for connectivity to

for economic growth and essential for connectivity to Nor is it unusual for an airline or

Nor is it unusual for an airline or its alliance grouping to have dedicated use of facilities at its home airport - British Airways at London Heathrow’s Terminal 5, Air France at Paris Charles de Gaulle and Lufthansa at Munich Terminal 2 (which it jointly financed) are notable examples. Lufthansa even owns 10% of Frankfurt International Airport.

While Emirates is a major carrier at Dubai, it is also worthwhile looking at some of the world’s other major airports and how their home carriers, and respective alliances, stack up in terms of market shares and the amount of competition they face.

 

Top 10

Airport

International Passengers

Home carrier share of flight departures - June 2010

Lead alliance share of flight departures - June 2010

 

Number of international carriers - 2010

world

2009

airports

(in millions)

 

1

London Heathrow

60.65

British Airways - 39%

oneworld - 45%

 

100

 

2

Paris Charles De Gaulle

53.01

Air France - 54%

Sky Team - 60%

 

122

 

3

Hong Kong International

44.98

Cathay Pacific - 29%

oneworld - 32%

 

83

 

4

Frankfurt International Airport

44.52

Lufthansa - 56%

Star - 74%

 

126

 

5

Amsterdam Schiphol

43.52

KLM - 54%

Sky Team - 63%

 

110

 

6

Dubai International Airport

40.10

Emirates - 47%

 

131

 

7

Singapore Changi Airport

36.09

Singapore Airlines - 27%

Star - 33%

 

70

 

8

Narita International Airport

30.89

Japan Airline - 17%

oneworld - 24%

 

70

 

9

Madrid Barajas

29.18

Iberia - 38%

oneworld - 44%

 

88

 

10

Bangkok Suvarnabhumi International

28.83

Thai Airways - 31%

Star - 39%

 

87

 

Other major airports

         
 

London Gatwick

28.70

British Airways - 21%

oneworld - 22%

 

62

 

Incheon

28.08

Korean Airlines - 35%

Sky Team - 43%

 

59

 

Munich Airport International

23.42

Lufthansa - 60%

Star - 73%

 

78

 

New York John F Kennedy

21.84

American Airlines - 17%

oneworld - 28%

 

84

 

Kuala Lumpur International

19.40

Malaysia Airlines - 32%

Star - 3%

 

58

 

Copenhagen Airport

17.62

SAS - 44%

Star - 57%

 

70

Source: ACI & OAG

 

7

© Emirates. 2010. All rights reserved.

© Emirates. 2010. All rights reserved. All Middle Eastern carriers are not the same The Middle

All Middle Eastern carriers are not the same

The Middle East region is not a single entity, nor are Europe, the Americas or Asia. However, it fits the objectives of some to classify the Middle East as one unit

- as if policies, governments, businesses and individuals are all alike across this diverse region. Putting all carriers from the region in one basket would be as incorrect as saying for example, that Ryanair is comparable to Alitalia, that JetBlue is like United or Tiger Airways is the same as Cathay Pacific.

like United or Tiger Airways is the same as Cathay Pacific. Emirates is proud of its

Emirates is proud of its heritage and home, whilst being very aware of the many other carriers based in the Middle East region which are forging their own futures - albeit often in very different guises. Unlike some though, Emirates operates on a commercial and profitable basis, flies in an open skies environment in Dubai, competes in highly competitive markets and receives no protection against competition.

The following quotes give a flavour of the very different positions of a few of the airlines from our own region.

• “We cannot expect to continue to receive government financial support and subsidy indefinitely… Gulf Air is not sustainable and is losing public money.” Samer Majali, CEO Gulf Air, August 2009

• “The problem for the [Saudi] Government is that travellers in this oil-rich nation enjoy the benefits of cheap fuel, whether in the guise of subsidised air tickets or subsidised fuel for their cars. Saudi Arabian [Airlines] itself enjoys subsidised fuel prices too.” Airline Business on Saudi Arabian Airlines, July 2009

Nor is debate on the subject of state aid and subsidies always limited to our region

• “In the US, the government continues to prop up the walking dead through the iniquitous Chapter 11, dragging the survivors inexorably into bankruptcy…” Martin Broughton, Chairman British Airways, 2005

• “

governments

have divested from the constant financial drain of national airlines, yet in South Africa our

government has recently invested in yet another one that is losing millions in taxpayers’ money.’’ Kulula Air, 2008

• “Alitalia’s latest €300m bailout makes a mockery of EU state aid rules. Propping up an inefficient national airline, which would have gone bankrupt long ago is simply illegal.” Ryanair, 2008

• “

without

this aid Alitalia would fall below the necessary capital requirements and would be required to declare

itself bankrupt… We strongly oppose this action, as it is not the first time Alitalia receives ‘life support’ by the Italian government thereby completely ignoring EU competition and state aid rules.” British Airways, Virgin Atlantic, Finnair, SAS, Iberia, and Tap Portugal in a joint letter to the European Transport Commissioner, 2008

To tax or not to tax: that is the question

Some competitors and a few governments raise the issue of Emirates not paying corporate tax in Dubai; a fiscal policy setting consistent across the Gulf region and in many others parts of the world. Other countries with low or no corporate tax rates include much of the Caribbean; Cyprus; various US States; Hong Kong; Liechtenstein; Macau; Mauritius; Macedonia; Monaco; Singapore and Switzerland. American Airlines famously moved from New York to Texas in 1979 to secure lower taxes. And of course foreign airlines operating out of Dubai do not pay corporate taxes on their Dubai-based operations and profits.

The more important element of any tax debate is the commercial reality of actual profitability and what taxes pay for and how they are collected. Airlines have to be profitable to pay taxes. Hence in 2009-10, a large number of airlines in Europe will not pay tax. Further, in most countries there is the ability to carry losses forward

to reduce future tax paid if profitability returns. So in

many cases over the past decade, airlines have paid no effective tax at all to their governments. Consider also that through consolidation, a handful of the dominant and giant airline multinationals can capture the losses of acquired entities in their balance sheets to reduce their taxation positions in their domiciled states.

The bigger point is why taxes are paid and what they are used for, namely the provision of social benefits. In Emirates case, a pilot is paid a package of which some 20-30% of additional benefits - due to the need to attract skilled expatriates - are met by the employer. It is a reasonable (albeit hypothetical) comparison to make that if an Air Canada pilot is paid $100, of which $30 is ‘lost’ (paid) in tax, equally an Emirates pilot paid $70 of which Emirates pays an additional $30 to provide their family’s healthcare, housing, transportation, education and pension needs (it is also why we attract so many highly skilled Canadian pilots).

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