Federal Register / Vol. 60, No.

85 / Wednesday, May 3, 1995 / Notices

Carter Blvd., Suite 102, Ft. Worth, TX
76155
or other locally announced locations. In
addition, applications for economic
injury loans from small businesses
located in the contiguous counties of
Canadian, Cleveland, Kingfisher,
Lincoln, Logan and Pottawatomie in the
State of Oklahoma may be filed until the
specified date at the above location.
The interest rates are:
Percent
For Physical Damage:
Homeowners With Credit Available
Elsewhere.
Homeowners Without Credit Available Elsewhere.
Businesses With Credit Available
Elsewhere.
Businesses and Non-Profit Organizations Without Credit Available
Elsewhere.
Others (Including Non-Profit Organizations) With Credit Available
Elsewhere.
For Economic Injury: Businesses and
Small Agricultural Cooperatives
Without Credit Available Elsewhere.

8.000
4.000
8.000
4.000
7.125
4.000

The number assigned to this disaster

for physical damage is 276904 and for
economic injury the number is 850400.

(202) 3664870; or Patricia N. Snyder,

Office of International Law, Office of the
General Counsel, U.S. Department of
Transportation, 400 7th Street SW.,
Room 10105, Washington, DC 20590.
(202) 3669179.
SUPPLEMENTARY INFORMATION: This
statement of U.S. international air
transportation policy, which was
developed by the Department of
Transportation in consultation with the
Department of State and other executive
agencies, sets forth objectives and
guidelines for use by U.S. Government
officials in carrying out U.S.
international air transportation policy. It
was first published in the Federal
Register on November 7, 1994 to enable
interested persons to comment.1 On
January 6, 1995, the Department asked
for comments on a related report
prepared for the Office of the Secretary
titled A Study of International Airline
Code Sharing. 2 After reviewing the
comments received on the policy
statement and on the code sharing
study, the Department of Transportation
and other agencies have adopted the
following final international air
transportation policy statement.
United States International Air
Transportation Policy

FOR FURTHER INFORMATION CONTACT:

Introduction
The availability of efficient
international air transportation will
greatly enhance the future expansion of
international commerce and the
development of the emerging global
marketplace. Worldwide, travelers and
shippers are demanding more and better
quality service to more places. U.S. and
foreign airlines are responding to this
demand by expanding traditional forms
of service and by developing new and
innovative services. Increased demand
and the variety of carrier responses to it
challenge the existing
intergovernmental systems ability to
ensure the development of a
competitive air transportation system
that meets the needs of the rapidly
evolving, expanding and increasingly
integrated international aviation
marketplace. In many cases, existing
bilateral agreements impede the growth
of the marketplace.
We must address the challenges
presented by these rapid changes to
meet our future civil and military air
transportation needs, and to provide our
aviation industry with the environment

William Boyd, Office of International

Aviation, Office of the Assistant
Secretary for Aviation and International
Affairs, U.S. Department of
Transportation, 400 7th Street SW.,
Room 6412, Washington, DC 20590,

1 An earlier statement of international air

transportation policy and our request for comments
on the statement was published at 59 FR 55523,
Nov. 7, 1994.
2 Our request for comments on the code sharing
study was published at 60 FR 2171, Jan. 6, 1995.

(Catalog of Federal Domestic Assistance

Program Nos. 59002 and 59008).
Dated: April 26, 1995.
Bernard Kulik,
Associate Administrator for Disaster
Assistance.
[FR Doc. 9510805 Filed 5295; 8:45 am]
BILLING CODE 802501M

DEPARTMENT OF TRANSPORTATION
Office of the Secretary
[Docket No. 49844]
RIN 2105AC19

Statement of United States

International Air Transportation Policy
Office of the Secretary,
Department of Transportation.
ACTION: Notice.
AGENCY:

SUMMARY: This notice sets forth a

statement of U.S. international air
transportation policy.

21841

and the opportunities that will enable it

to grow and compete effectively in the
world market. This policy statement
outlines our approach to addressing
those challenges.
Our Goal
Safe, Affordable, Convenient and
Efficient Air Service for Consumers
As established in our last aviation
policy statement in 1978, our overall
goal continues to be to foster safe,
affordable, convenient and efficient air
service for consumers. We continue to
believe that the best way to achieve this
goal is to rely on the marketplace and
unrestricted, fair competition to
determine the variety, quality, and price
of air service. We believe that this
approach will provide consumers and
shippers with more and better service
options at costs that reflect
economically efficient operations and
work best to:
Expand the international aviation
market;
Increase airlines opportunities to
expand their operations;
Increase productivity and highquality job opportunities within the
aviation industry;
Address the nations defense air
transportation needs; and
Promote aerospace exports and
general economic growth.
Changing Environment
Growing economic interdependence
among nationsthe globalization of
the world economyhas expanded
demand for convenient, reliable and
affordable international air service.
Demand for international service is
growing faster than demand for U.S.
domestic service, and most major U.S.
airlines are now providing and planning
to expand international operations.
Between 1983 and 1993, the
international component of U.S.
airlines route networks, measured in
revenue passenger miles (RPMs), grew
from around 16% to over 27%. U.S.
airline revenues from international air
service nearly tripled from $6.3 billion
to $17.6 billion. Moreover, forecasts
indicate that U.S. carrier international
traffic, measured by RPMs, will increase
to almost one-third of their total system
traffic by the year 2000.
Just as important, the pattern of
demand for international service has
changed considerably. First, the regional
distribution of U.S. carriers
international revenues has changed
dramatically, as the primary focus of
carriers expansion moved beyond
Europe to meet new demand in the
emerging markets of Asia, the Pacific

21842

Federal Register / Vol. 60, No. 85 / Wednesday, May 3, 1995 / Notices

Rim and Latin America. In 1983, the

Atlantic accounted for 48% of our
carriers international revenues, while
the Pacific accounted for 32%. By 1993,
the Pacific had grown to 46% while the
Atlantic was only 37%. The fastest
growing sectors of the international
aviation market are new and relatively
undeveloped markets. During this same
period, revenues in the Pacific grew
286%, in Latin America 151% and in
Europe 116%. Second, from 1983 to
1993, the number of international
aviation city-pair markets in which U.S.
airlines participate has grown by more
than a third, reflecting the major
expansion of air service and carrier
networks throughout the world and the
increased dispersion of demand. Many
of these city-pair markets are relatively
small, generating only a few passengers
per day.
Towards a Globalized Aviation
Industry
The rapid growth of demand for
international air service and the wider
dispersion of traffic in city-pair markets
are primary factors influencing the
development of the air service industry.
Carriers are increasingly finding that
they cannot remain profitable unless
they can respond to this changed
demand. To compete effectively,
carriers today must have unrestricted
access to as many markets and
passengers as possible.
To meet demand and to improve their
efficiency, many carriers are developing
international hub-and-spoke systems
that permit them to combine traffic
flows from many routes (the spokes)
at a central point (the hub) and
transport them to another point either
directly or through a hub in another
region. Just as U.S. carriers developed
hub-and-spoke systems to tap the broad
traffic pool in the domestic market and
to provide the most cost-efficient service
for hundreds of communities that could
not support direct service, international
air carriers are developing world-wide
hub-and-spoke systems to tap the
substantial pool of international citypairs. Internationally, an even larger
portion of traffic moving over hub-andspoke systems will require the use of at
least two hubs (e.g., a hub in both the
U.S. and Europe for a passenger moving
from an interior U.S. point to a point
beyond the European hub). This
increases the complexity and
interdependence of the components of
the system (both the spokes and hubs)
and the importance of multinational
traffic rights to the success of the
system.
As a result, carriers wishing to
establish global networks require a

higher quality and quantity of

supporting route authority than they
have sought in the past. Airlines will
become increasingly concerned with
every market that enables them to flow
passengers over any part of their system
network. These airlines will be looking
for broad, flexible authority to operate
beyond and behind hub points, in
addition to the hub-to-hub market
between two countries. At present,
governments operating in a bilateral
context naturally focus on opportunities
for their respective carriers to serve the
local market between their two
countries. In a bilateral context, services
destined for or coming from third
countries receive less consideration. In
the future, governments will have to
adjust their focus to bargain for the
bundles of rights that will permit
airlines to develop global networks.
Carriers can either serve markets
themselves (direct service) or provide
service through commercial
arrangements with other carriers
(indirect service), whether on a
traditional interline connecting basis or
under a closer commercial agreement
between the carriers, such as code
sharing. Carriers will develop service
productssingle-plane, on-line
connecting, interline connecting, joint
servicethat respond to the preferences
of the traveling public as measured by
passenger willingness to pay for
differences in the quality of service and
that take into account their cost
structure and market strategy. To the
greatest extent possible, airlines should
be free to set prices and offer various
service products in response to
passenger preferences.
Significant challenges face carriers
wishing to develop international
networks using their own direct
services. They need:
Substantial access not only to key
hub cities overseas, but also through
and beyond them to numerous other
cities, mostly in third countries. This
type of access is not readily obtainable
in todays bilateral system of negotiating
air rights, since governments can only
exchange access rights to their own
countries and cannot, between
themselves, deliver access to third
countries, thus requiring piecemeal
negotiating efforts to build the necessary
package of rights;
Access to a large number of gates
and takeoff/landing slots, frequently at
some of the worlds most congested
airports. It may become increasingly
difficult for carriers to gain effective,
direct access to certain airport facilities,
including some in the United States;

Considerable financial resources to

establish and sustain commercially
successful overseas hub systems; and
The ability to obtain infrastructure
and establish market presence in a new
region quickly. Existing foreign
investment laws can effectively
preclude airlines from entering new
markets in one of the most efficient
means available: merger or acquisition.
Some carriers are taking on these
challenges directly and are striving to
develop their own global systems of
direct service. Other carriers have
chosen to side-step the obstacles,
turning instead to a new networkbuilding technique: Cross-border
marketing alliances that link traffic
flows between established hub-andspoke systems in key cities of the
Western Hemisphere, Europe and Asia.
Some of these alliances involve cross
ownership, while others do not. Under
this strategy, the linking of hubs
requires indirect market access through
code-sharing or other cooperative
marketing arrangements. Although code
sharing has become a widely-used
marketing device for airlines and is
currently the most prevalent form of
commercial arrangement, further
evolution of the industry and its
regulatory environment may lead to new
marketing practices that could
supplement or supplant code sharing.
Code sharing and other cooperative
marketing arrangements can provide a
cost-efficient way for carriers to enter
new markets, expand their systems and
obtain additional flow traffic to support
their other operations by using existing
facilities and scheduled operations.
Because these cooperative arrangements
can give the airline partners new or
additional access to more markets, the
partners will gain traffic, some
stimulated by the new service, and some
diverted from incumbents. In this way,
cooperative arrangements can enhance
the competitive positions of both
partners in such a relationship.
Increased international code sharing
and other cooperative arrangements can
benefit consumers by increasing
international service options and
enhancing competition between
carriers, particularly for traffic to or
from cities behind major gateways. By
stimulating traffic, the increased
competition and service options should
expand the overall international market
and increase overall opportunities for
the aviation industry. U.S. airlines
should be major beneficiaries of this
expansion and the concomitant
increased service opportunities, given
their competitive advantages.
Moreover, code sharing should also
enhance domestic competition. Many

Federal Register / Vol. 60, No. 85 / Wednesday, May 3, 1995 / Notices

international passengers traveling to or
from U.S. interior cities use domestic
services for some portion of their
international journey. Code sharing
should increase competition among
domestic carriers to carry those
passengers on the domestic segment of
their international journey.
Although we expect the expansion of
cooperative arrangements to be largely
beneficial, there may be some negative
effects. The greater traffic access of
participants may give them considerable
competitive muscle, and we may need
to watch for harmful effects on
competition. In addition, cooperative
arrangements may affect the availability
of civil aircraft to meet emergency airlift
requirements. Our national defense
establishment relies on U.S. civil
aircraft committed to the Civil Reserve
Air Fleet program to respond to
worldwide crises. As set forth in our
National Airlift Policy, the global
mobility needs of our national defense
establishment, and ensuring that the
nations defense air transportation needs
are met during peace and contingency
operations, are important
considerations.
Global systems and the growing use of
code sharing may put significant
competitive pressure on carriers whose
strategy does not include participation
in such systems or in code-sharing
alliances, or whose options to
participate may be limited due to the
lack of potential partners. Such carriers
will have to develop other commercial
responses to compete effectively. We
expect these pressures and responses to
lead to a restructuring of service and
airlines, similar to the U.S. domestic
experience in the 1980s. Overall, cities
and consumers will probably enjoy
improved service and access to the
international transportation system,
although some cities may have fewer or
less convenient service options in some
markets than they have today. Similarly,
although some airlines will grow and
prosper, others will not. Moreover, we
recognize that the balance of benefits in
any particular alliance will depend on
the specific structure of that
arrangement between the partners.
Overall, this evolution should expand
the level and quality of international air
service for consumers.
Code-sharing arrangements are
designed to address the preference of
passengers and shippers for on-line
service from beginning to end through
coordinated scheduling, baggage- and
cargo-handling, and other elements of
single-carrier service. However,
innovative service products, such as
code sharing, can only respond to
consumer preferences accurately, and

thereby enable the marketplace to

function efficiently, if consumers make
choices based on full information.
Therefore, we must ensure that airlines
give consumers clear information about
the characteristics of their service
product, and that consumers can
distinguish between code sharing and
other forms of service.
In addition to the two types of global
networks (sole-carrier systems and joint
carrier systems), there will continue to
be a role for air services outside of
global networks. The U.S. experience
with deregulation indicates thatabsent
legal barriers to entryspecialized
competitors will enter the market and
discipline the pricing and service
behavior of the larger network operators.
The introduction of technologically
advanced aircraft such as the B767, the
MD11 and the B777 make direct
service on longer or thinner routes
economically viable. Moreover, airlines
can viably serve heavily traveled routes
with point-to-point service.
In short, as indicated by our domestic
experience, a variety of service forms
global networks with carriers
participating either as the sole provider
or as participant in a joint network, and
regional niche carrierscan exist in the
international aviation market and the
competition among these services will
enhance consumer benefits through
efficient operations and low fares. Thus,
our international aviation strategy
should provide opportunities for all of
these forms of service so that we realize
the benefits from maximum competition
among them.
Our airlines are well positioned to be
primary participants in all aspects of the
future global marketplace. In recent
years, our largest domestic carriers have
become our primary international
carriers, replacing specialized
international operators. After operating
in a deregulated domestic market for
more than 15 years, our carriers have
developed operating efficiencies that
give them a cost advantage over their
major foreign competitors. Moreover,
the financial positions of our carriers are
improving due to their cost-cutting
measures and improving economic
conditions. Coupled with their cost
efficiencies, their improving financial
status will further enhance their
competitive capabilities. Over time,
however, trends toward privatization
and increased productivity of major
foreign competitors may affect the
current cost advantage U.S. airlines
enjoy. We must try to provide our
carriers with the flexible rights and
economic environment that will enable
them to respond to the dynamics of the
marketplace.

21843

Intergovernment Aviation Relations

International air services between two
nations have traditionally been
conducted pursuant to bilateral
agreements. The U.S. National
Commission to Ensure a Strong
Competitive Airline Industry and the
European Unions Comite des Sages for
Air Transport have both recognized that
the bilateral system is limited in its
ability to encompass the broad,
multinational market access required by
the new global operating systems.
Consequently, progress in developing
global networks has been and will be
extremely fragmented and may preclude
or limit the development of efficient
operations. We must consider
alternative forums for international
aviation negotiations and agreements in
which we can obtain the necessary
broad access rights. We should examine
the feasibility of achieving multilateral
air service agreements among trading
partners. Although such negotiations
may be more complex and difficult
because of the number of parties
involved, they should be undertaken
when they present a reasonable prospect
for further liberalization.
Moreover, some governments are
taking steps to enhance their airlines
positions both by restricting the
development of new, competitive
services and by trying to overcome,
through government fiat, their carriers
cost disadvantages that make it difficult
for them to compete against U.S. airlines
in a free market. These efforts underlie
many of the disputes we face in
international negotiations today.
Such countries are responding to the
highly competitive integrated and global
air transportation market, in which their
airlines may not be fully prepared to
compete. Most foreign airlines are only
beginning to adapt to the more
competitive operating environment
through such mechanisms as
streamlining costs and realigning their
operations to achieve greater
productivity and operating economies.
For state-owned airlines, privatization is
an important initial step as it will lead
those airlines to develop cost-efficient
operations and, in the longer term, to
expand their markets. These
governments also may be reacting to the
U.S. airlines recent operating successes
in the international aviation market,
which are largely attributable to the U.S.
airlines productivity and competitive
gains.
Some national governments continue
to give their national airlines financial
aid. Some also distort the marketplace
by permitting their national airlines to
maintain ground-handling and other

21844

Federal Register / Vol. 60, No. 85 / Wednesday, May 3, 1995 / Notices

monopolies, by denying airlines access

to necessary airport facilities, or by
allowing user fees that equalize cost
differentials between carriers. These
actions distort competition and deprive
the aviation system and consumers of
the benefits that greater cost efficiency
and lower prices would encourage. In
the long run, these efforts will work
against the overall best interest of the
world economy. Moreover, they will be
unsuccessful in providing long-term
protection against the developing global
aviation systems because no individual
government can control all facets of its
airlines marketplace.
U.S. Objectives
We have outlined above our
expectations about the future of the
world air transportation industry and
the role of U.S. airlines. We expect that
international operations will depend
more on traffic flows from multiple
countries. In light of our goals, recent
developments in the market and
industry, and the positions and actions
of our trading partners, we have
designed our international aviation
strategy to meet the following
objectives:
Increase the variety of price and
service options available to consumers.
Enhance the access of U.S. cities to
the international air transportation
system.
Provide carriers with unrestricted
opportunities to develop types of
service and systems based on their
assessment of marketplace demand:
These opportunities should include
unrestricted rights for airlines to
operate between international
gateways by way of any point and
beyond to any point, at the discretion
of airline management. Carriers
should be able to pursue both direct
service using their own equipment
and indirect service through
commercial relationships with other
carriers;
Service opportunities should not be
restricted in any manner, such as
restrictions on frequencies, capacity
or equipment, so that carriers may
provide levels of service
commensurate with market demand;
Carriers ability to set prices should
also be unrestricted to create
maximum incentives for cost
efficiencies and to provide consumers
with the benefits of price competition
and lower fares; and
These opportunities should apply not
only to scheduled passenger services,
but also to cargo and charter
opportunities, because of their
growing importance to the worlds
economy. We have long recognized

the significant differences among

these types of operations. In
particular, air cargo services have
specific qualities and requirements
that are significantly different from
the passenger market. We will
continue to follow our longstanding
policy of seeking an open, liberal
operating environment to facilitate the
establishment and expansion of
efficient, innovative and competitive
air cargo services.
Recognize the importance of
military and civil airlift resources being
able to meet defense mobilization and
deployment requirements in support of
U.S. defense and foreign policies.
Ensure that competition is fair and
the playing field is level by eliminating
marketplace distortions, such as
government subsidies, restrictions on
carriers ability to conduct their own
operations and ground-handling, and
unequal access to infrastructure,
facilities, or marketing channels.
Encourage the development of the
most cost-effective and productive air
transportation industry that will be best
equipped to compete in the global
aviation marketplace at all levels and
with all types of service:
Infrastructure needs should be
addressed and unnecessary regulatory
barriers eliminated.
Privately held airlines have better
incentives to reduce costs and
respond to public demand. Therefore,
as we have in the past, we will be
supportive of governments wishing to
privatize their airlines so that their
privatization efforts will be
successful; and
Reduce barriers to the creation of
global aviation systems, such as
limitations on cross-border
investments wherever possible.
Plan of Action
We recognize that considerable time
and effort will be required to achieve an
open aviation regime worldwide. We
can get there by making a concerted
effort to eliminate the obstacles to that
regime and by taking a more strategic
and long-term approach to our overall
international aviation policies. At a
minimum, we must increase our focus
on emerging markets and their
contribution to global networks; build a
coalition of like-minded trading
partners committed to the principles of
free trade in aviation services; work
closely with our trading partners to
address their concerns; develop new
incentives for encouraging market
reform, such as increased opportunities
for cross-border investment in airlines;
and devise alternatives to the bilateral

aviation system for achieving our

objectives. We are launching our new
initiatives to create freer trade in
aviation services by taking the following
steps:
Extend invitations to enter into
open aviation agreements to a group of
countries that share our vision of
liberalization and offer important flow
traffic potential for our carriers even
though they may have limited Third and
Fourth Freedom traffic potential. This
would assist the development of global
systems and increase the momentum for
further worldwide liberalization.
Give priority to building aviation
relationships between the United States
and potential growth areas in Asia,
South America and Central Europe. This
recognizes the importance of these
trading partners and the need to provide
air transportation to support those
developing trade markets. It will also
make available new markets to build
global networks.
Renew efforts to achieve liberal
agreements with trading partners with
which our aviation relationships lag
behind those of our general trade
advancements, as we have done
successfully with Canada.
Emphasize the importance of sound
economic analysis based on sufficient
data in developing policies and
strategies for achieving our overall
aviation goals. This will enable us to
remain focused on the overall strategic
objectives, understand developments in
the industry and market, and plan for
the future.
Seek changes in U.S. airline foreign
investment law, if necessary, to enable
us to obtain our trading partners
agreement to liberal arrangements to the
extent it is consistent with U.S.
economic and security interests.
Increase our efforts to reach out to
Congress and constituent groups, such
as consumers, corporations with
international perspectives (aircraft
manufacturers, telecommunications,
travel and tourism industries), cities,
airports, airlines, labor and travel agents
to learn their anticipated needs over a
35 year period. This will provide us
with valuable information for
developing our positions, as well as
enlisting their support in pushing for
greater liberalization.
Establish stronger connections
among U.S. government agencies whose
functions are to promote U.S. business
and trade interests (e.g., Departments of
Commerce, State, and Transportation,
Office of the United States Trade
Representative, and the Export/Import
Bank) as well as the Department of
Defense, to ensure that we share a single
vision of the future global marketplace

Federal Register / Vol. 60, No. 85 / Wednesday, May 3, 1995 / Notices

while meeting national security
requirements.
Given the diverse positions of our
trading partners and their varying
degrees of willingness to liberalize
aviation relations, we must also have a
strategy for dealing with countries that
are not prepared or willing to join us in
moving quickly to an unrestricted air
service regime. Our approach is a
practical one: It proposes to advance the
liberalization of air service regimes as
far as our partners are willing to go, and
to withhold benefits from those
countries that are not willing to move
forward. Specifically, we will pursue
the following strategy:
1. We will offer liberal agreements to
a country or group of countries if it can
be justified economically or
strategically. We will view economic
value more broadly than we have in the
past, in terms of both direct and indirect
access and in terms of potential future
development. Moreover, there may be
strategic value in adopting liberal
agreements with smaller countries
where doing so puts competitive
pressure on neighboring countries to
follow suit.
2. We recognize that some countries
believe that they can resist the trend of
economic forces and continue to control
access to their markets tightly. We
believe that they cannot, and that
attempts to do so will ultimately fail.
Nevertheless, we will work with these
countries to develop alternatives that
address their immediate concerns where
this will advance our international
aviation policy objectives. We will
examine alternative approaches that
may include departing from established
methods of negotiation (perhaps
negotiations with two or more trading
partners); trying to develop service
opportunities for the foreign airline to
make service to the U.S. more
economically advantageous for it; and
continuing our efforts to help those
governments and their constituencies
appreciate the benefits that unrestricted
air services can bring to their economies
and industries.
While we work with such countries,
we can consider, in the interim,
transitional or sectoral agreements.
Transitional agreementsUnder this
approach, we would agree to a specified
phased removal of restrictions and
liberalization of the air service market.
This approach contemplates that both
sides would agree, from the beginning,
to a completely liberalized air service
regime that would come into effect at
the end of a certain period of time.
Sectoral agreementsTraditionally,
aviation agreements have covered all
elements of air transportation between

two countries. However, as a first step,

we can consider agreements that
eliminate restrictions only on services
in specific aviation sectors, such as air
cargo or charter services.
3. For countries that are not willing to
advance liberalization of the market, we
will maintain maximum leverage to
achieve our procompetitive objectives.
We can limit their airlines access to the
U.S. market and restrict commercial
relations with U.S. airlines. When
airlines request authority to serve
restricted bilateral markets that is not
provided for under an international
agreement, we will consider their
requests on a case-by-case basis in light
of all our policy objectives, including,
inter alia:
Whether approval will increase the
variety of pricing and service options
available to consumers;
Whether approval will improve the
access of cities, shippers and travelers to
the international air transportation
system;
The effect of granting code-sharing
authority on the Civil Reserve Air Fleet
program;
The effect of the proposed
transaction on the U.S. airline industry
and its employees. In this regard, we
will ascribe greater value to codesharing arrangements where U.S.
airlines provide the long-haul
operations. We will also recognize the
greater economic value of such
arrangements where the services
connect one hub to another; and
Whether the transaction will
advance our goals of eliminating
operating and market restrictions and
achieving liberalization.
If aviation partners fail to observe
existing U.S. bilateral rights, or
discriminate against U.S. airlines, we
will act vigorously, through all
appropriate means, to defend our rights
and protect our airlines.
Conclusion
We are living through a period in
which international aviation rules must
change. Privatization, competition, and
globalization are trends fueled by
economic and political forces that will
ultimately prevail. Governments and
airlines that embrace these trends will
far outpace those that do not. The U.S.
government will be among those that
embrace the future.
Authority citation: 49 U.S.C.40101, 40113,
41102, 41302, and 41310.

21845

Dated: April 25, 1995.

Patrick V. Murphy,
Acting Assistant Secretary for Aviation and
International Affairs, Department of
Transportation.
[FR Doc. 9510584 Filed 5295; 8:45 am]
BILLING CODE 491062P

[Docket No. 50315]

Study of Gambling on Commercial

Aircraft
Office of the Secretary,
Department of Transportation.
ACTION: Notice of request for comments
on study of gambling on commercial
aircraft.
AGENCY:

This notice sets forth the

elements of an ongoing study of
gambling on commercial aircraft. This
notice is being published to provide
interested persons an opportunity to
provide comments on specific questions
important to the study.
DATES: Comments must be received no
later than May 31, 1995.
ADDRESSES: Comments should be sent to
the Docket Clerk, Docket 50315,
Department of Transportation, 400 7th
Street SW., Plaza 401, Washington, DC
20590. To facilitate consideration of the
comments, we ask commenters to file
eight copies of each comment. We
encourage commenters who wish to do
so also to submit comments to the
Department through the Internet; our
Internet address is
dot dockets@postmaster.dot.gov.1
However, at this time the Department
considers only the paper copies filed
with the Docket Clerk to be the official
comments. Comments will be available
for inspection at this address from 9:00
a.m. to 5:00 p.m., Monday through
Friday. Commenters who wish the
Department to acknowledge the receipt
of their comments should include a
stamped, self-addressed postcard with
their comments. The Docket Clerk will
date-stamp the postcard and mail it back
to the commenter.
FOR FURTHER INFORMATION CONTACT:
James H. New, II, Office of Planning and
Special Projects, Office of the Secretary,
U.S. Department of Transportation, 400
7th Street SW., Room 9215A,
Washington, DC 20590, (202) 3664868.
SUPPLEMENTARY INFORMATION: This
study, which is mandated by 49 U.S.C.
41311, requires the consideration of,
among other things, the safety and
competitive implications of gambling on
commercial aircraft. Before this study is
SUMMARY:

1 Our X.400 e-mail address is S=dotdockets/

OU1=qmail/O=hq/p=gov+dot/a=attmail/c=us.

Evidence of Actionable Government Subsidies

Received by Etihad Airways, Qatar Airways, and Emirates Airline
January 25, 2015

Charles L. Anderson

Table of Contents
I.

Introduction ...................................................................................................................... 1

II.

Summary of Findings ....................................................................................................... 2

a.

Etihad Airways .......................................................................................................................... 3

b.

Qatar Airways............................................................................................................................ 4

c.

Emirates Airlines ....................................................................................................................... 5

d.

Designation of Air Transport Sectors as Strategic Industries.................................................... 6

III.

Methods Used to Identify and Quantify Actionable Subsidies ........................................ 7

a.

Reason for Applying World Trade Subsidy Analysis ............................................................... 7

b.

The Three Part Test for Identifying Actionable Subsidies ........................................................ 8

c.

Basic Principle of Subsidy Quantification ................................................................................ 8

IV. Etihad Airways............................................................................................................... 11

a.

Introduction ............................................................................................................................. 11

b.

A Note on Sources for Etihad.................................................................................................. 12

c.

Equity Infusions ...................................................................................................................... 13

d.

Shareholder Loans ................................................................................................................... 25

e.

Debt Forgiveness ..................................................................................................................... 30

f.

Government Grants ................................................................................................................. 34

g.

Government Assumption of Promotional Sponsorship Costs ................................................. 35

h.

Exemption from Indirect Airport Taxes .................................................................................. 37

i.

Purchases of Goods and Services For Less than Adequate Remuneration ............................. 38

j.

Tax and Import Duty Exemptions ........................................................................................... 41

k.

Etihad Future Capital Commitments ....................................................................................... 42

V.

Qatar Airways ................................................................................................................ 44

a.

Introduction ............................................................................................................................. 44

b.

A Note on Sources for Qatar ................................................................................................... 44

c.

Shareholder Loans through 2008............................................................................................. 46

d.

Debt Forgiveness ..................................................................................................................... 52

e.

Grants and Non-monetary Contributions ................................................................................ 55

f.

Government Loan Guarantees ................................................................................................. 56

g.

Land Purchases For Less than Adequate Remuneration ......................................................... 61

h.

Exemption from and/or Rebates of Indirect Airport Taxes ..................................................... 63

i.

Provision of Airport Revenues with Little or No Corresponding Expenses ........................... 65

j.

Provision of Monopoly Right to Distribute Alcohol in Qatar for Less than Adequate
Remuneration .......................................................................................................................... 68

k.

Debt Forgiveness in the Form of Write-offs of Long Term Liabilities ................................... 69

l.

Purchases of Goods and Services for Less than Adequate Remuneration .............................. 70

m.

Qatar Airways Future Capital Commitments .......................................................................... 70

VI. Emirates Airline ............................................................................................................. 72

a.

A Note on Sources for Emirates .............................................................................................. 73

b.

Assumption of Jet Fuel Hedging Contracts (Debt Forgiveness) ............................................. 75

c.

Provision of Airport Terminals for Less than Adequate Remuneration .................................. 80

d.

Exemption from Indirect Airport Taxes .................................................................................. 84

e.

Purchases of Goods and Services for Less than Adequate Remuneration .............................. 86

f.

Emirates and Dubais Future Capital Commitments.............................................................. 91

List of Exhibits........................................................................................................................ 93
Appendix 1: Gulf Airlines Financial Benefits from Restrictive Labor Practices .................. 95
Appendix 2: Value of Emirates Income Tax Exemption ...................................................... 97
Appendix 3: Government Capital Contributions Treated as Equity Infusions ....................... 98

ii

Evidence of Government Subsidies

Received by Etihad Airways, Qatar Airways, and Emirates Airline

Capital Trade, Incorporated

I.

Introduction
Three Gulf state long-haul airlines Etihad Airways (Etihad), Qatar Airways (Qatar

Airways) and Emirates Airline (Emirates) have expanded rapidly since 2004. This massive
growth in international air travel capacity would not have occurred but for US $36.6 billion 1 in
subsidies received and an additional $4.2 billion in known commitments for future subsidies.
These government subsidies, including equity infusions, interest-free loans, loan guarantees, debt
forgiveness, cash grants, free land, tax exemptions, and purchases of inputs for less than
adequate remuneration, constitute subsidies under internationally-accepted trade rules. The
benefits received by the three Gulf airlines are of such a magnitude and nature that they harm
competitors and distort trade flows in international air travel.
This report documents the nature and magnitude of the subsidies that these three Gulf state
airlines have received. We base our analysis primarily on information obtained from public
sources in particular the three airlines own audited financial statements and government public
bond offerings. Using this information, we have conducted an analysis to determine whether

Unless otherwise noted, all values in this report are shown in U.S. dollars.

each type of identifiable government assistance to the airlines meets the conditions for an
actionable subsidy; i.e., a subsidy that is considered unfair under international trade norms and
is potentially subject to countervailing action by international trading partners. We then
quantify, when possible, the magnitude of the benefit using methodologies commonly employed
in international trade subsidies analysis.
II.

Summary of Findings
Table 1 summarizes the type and magnitude of actionable subsidies received by the three

Gulf airlines between 2004 and 2014 that we have identified to date:
Table 1: Summary of Actionable Subsidies Received and Committed
In million US$
Govt Equity Infusions
Govt Loans at Preferential Rates
Govt Loan Guarantees
Debt Forgiveness/Fuel Hedging
Grants
Provision of Airport Terminal
Facilities for LTAR
Provision of Other Goods and
Services for LTAR*
Passenger Fee Exemptions and
Credits
Provision of Airport Revenues
Assumption of Promotional
Expenses
Total Received
Additional Subsidies Committed
*Less than adequate remuneration

Etihad
6,291
1,375

Qatar

1,392

Combined
6,291
1,993
6,809
14,781
133
1,104

452

1,855

2,307

616

871

1,988

618
6,809
7,756
22

4,630
111

501

Emirates

2,395

215

640
13,548
4,172

16,488

155
640
6,513

36,550
4,172

The three airlines also have been the beneficiary of bans on labor unions, resulting in an
estimated savings in labor costs of $3.1 billion between 2004 and 2013 2. In addition, during this
time period, Emirates has benefited from as much as $4.6 billion in UAE income tax
exemptions 3. A brief summary of the benefits receive by each of the three airlines follows:
a. Etihad Airways
Since 2004, Etihad has received $13.5 billion in actionable subsidies, in the following forms:
Government Equity Infusions: $ 6.3 billion in equity infusions made on noncommercial terms between 2007 through 2013.
Government Interest-Free Loans: $1.4 billion in avoided interest.
Debt Forgiveness: $ 4.6 billion in interest-free government loans that have been made
for which there is no reasonable expectation of repayment.
Grants: $111 million in outright, non-repayable grants.
Exemptions from Airport Taxes: $501 million attributable to the governments
exemption of connecting passengers fees at Abu Dhabi Airport.
Government Assumption of Promotional Expenses: The Government of Abu Dhabi
Executive Council reportedly paid $640 million on behalf of Etihad for naming and
promotional rights for Manchester City Football Club.
There is also evidence that Etihad receives substantial benefits from the government in the
forms of:

Airport infrastructure and other air transport support services for less than
adequate remuneration

Exemptions from other taxes and duties

Labor benefit calculations are included in Appendix 1 to this report.

Income tax exemption benefit calculations are included in Appendix 2 to this report. Etihad and Qatar also
are exempt from income taxes; however, their lack of positive earned income on their financials suggests that the
exemption to date has bestowed minimal financial contributions to their core airline operations.
3

In addition, the Government of Abu Dhabi has committed to provide Etihad with an
additional $4.2 billion in future capital infusions beyond the amounts listed above. Finally, the
combination of Etihads commitment as of March 2013 of at least $34.6 billion in future
expenditures for new aircraft and other capital investments, and their poor historical financial
performance, portends the need for substantial additional government subsidies in the coming
years.
b. Qatar Airways
Since 2004, Qatar Airways has received $16.5 billion in actionable subsidies in the following
forms:
Government Interest Free Loans: $618 million in avoided interest.
Debt Forgiveness: $7.8 billion in government loans, shareholder advances and in kind
contributions that are never expected to be repaid.
Government Loan Guarantees: At least $6.8 billion in lowered borrowing costs
attributable to government guarantees on loans extended by third parties.
Grants: $22 million in outright, non-repayable grants and other non-monetary
contributions.
Free Land: Government bestowal of free land valued at $452 million.
Provision of Airport Revenue Streams: $215 million in benefits between 2006-2014.
Airport Tax Exemptions and Rebates: $616 million in benefits attributable to the
governments exemption of passenger fees.
Like Etihad, Qatar Airways also may receive substantial benefits from the government in the
form of airport infrastructure and services for less than adequate remuneration. The Qatari
government has also come up with other creative ways to funnel cash to its state airline, such as
bestowing upon Qatar monopoly rights to sell alcoholic beverages within the emirate.

Notwithstanding its weak performance record, Qatar Airways, too, has committed to capital
expenditures of almost $40 billion, which strongly portends the need for additional government
assistance in the future.
c. Emirates Airlines
We conclude that between 2004 and 2014, Emirates has received at least $6.5 billion in
actionable subsidies, in the following forms:
Debt Forgiveness in the Form of Government Assumption of Fuel Hedging Contract
Obligations: an estimated $2.4 billion in costs avoided by virtue of the governmentowned parent companys assumption of obligations associated with fuel hedging
contracts.
Provision of Airport Terminal Facilities and Services for Less than Adequate
Remuneration: $1.4 billion discount over 10 years, calculated as the difference
between the total operational and financing costs incurred by the Government of Dubai to
construct and operate terminals for Emirates exclusive use and Emirates payments for
use of those facilities.
Exemption from Airport Taxes: $871 million attributable to the governments
exemption of connecting passenger fees payments.
Provision of Other Goods and Services for Less than Adequate Remuneration: $1.9
billion in lowered input costs associated with purchases of airline support services from
related parties for less than adequate remuneration.

In addition, Emirates commitment of least $75 billion in future expenditures for new aircraft
and other capital investments, as well as billions of dollars in commitments by the government to
fund additional airport capacity in Dubai, strongly suggests that substantial additional
government subsidies will be needed in the coming years to meet the governments goal of
obtaining a major share of global international travel services.

d. Designation of Air Transport Sectors as Strategic Industries

The generous benefits bestowed on these three airlines by their respective host governments
reflect the high priority assigned by the rulers of Dubai, Qatar, and Abu Dhabi t0 the
development of their air transport sector. The strategic plan of Dubai Airports Company clearly
enunciates the special status accorded this industry:
In the Middle East, governments' supportive approach to aviation as a key driver of
economic diversification and social development has led to significant investment in
long range aircraft and infrastructure to exploit the Middle East's geocentric location
to tap into emerging markets 4.
In 2010, 3azba reported that Sheikh Mohammed bin Zayed al Nahyan, a key figure in
guiding Abu Dhabi's economic planning, stated that Etihad is "one of the principal veins of the
country's national economy" and praised its contribution to promoting and strengthening the
UAE and Abu Dhabi regionally and internationally 5.
In a recent bond offering statement, Emirates describes its government-bestowed preferred
status as well as its close relationship to the state air transport authorities:
Notwithstanding that the [Emirates] Group is a separate commercial enterprise
operated independently of the Government of Dubai, its interests are closely aligned
with the interests of the Government of Dubai and it benefits from strong
relationships with regional air transportation regulators, Dubai Airports (which
operates and manages both DIA and AI Maktoum International Airport) and Dubai

Connecting the world today & tomorrow: Strategic Plan 2020, Dubai Airports at 19, available at
http://www.dubaiairports.ae/docs/default-source/Publications/dubai-airports---strategic-plan-2020.pdf?sfvrsn=0 (last
visited 14 Jan 2015).
5
Available at: http://www.3zba.com/vb/archive/index.php/t-64020.html. (last visited 14 Jan 2015.)

Aviation City Corporation (which owns both DIA and AI Maktoum International
Airport), which is wholly owned by the Government of Dubai. 6
Repeated statements of commitment such as these are not just government rhetoric. Perhaps
most telling, the multi-decade commitments by the governments of Abu Dhabi and Qatar to
provide ongoing financial support for Etihad and Qatar Airways, respectively, in order to keep
these enterprises operating as going concerns demonstrate the centrality of the air transport
sector to the governments economic development strategies. Notwithstanding their relatively
small domestic populations of approximately 2 million each (including guest workers), all three
Gulf governments have targeted their aviation sectors for massive growth, and have backed up
their sectoral development objectives with substantial capital and operational assistance.
III.

Methods Used to Identify and Quantify Actionable Subsidies

a. Reason for Applying World Trade Subsidy Analysis

In international trade law, the provision of government subsidies per se is not considered a
violation of the rules of international commerce. Only subsidies that meet certain conditions are
deemed to be harmful and potentially actionable by an aggrieved state. If the subsidies are
found to be actionable and are not eliminated, the aggrieved state can respond by imposing
compensatory duties or take certain other measures.
While air transport services are not subject to conventional international trade law
conventions for countervailing injurious subsidies, we believe that it is useful to use these
standards to assess the legitimacy of the government support that has been provided to the three
Gulf airlines. These standards are widely recognized as distinguishing legitimate government
6

Emirates Bond offer prospectus issued on 1 February 2013 for notes due in 2025, at 88.

economic activity from unfair intervention in markets that cause trade distortions and economic
injury to international competitors.
b. The Three Part Test for Identifying Actionable Subsidies
To determine whether a specific government support program constitutes an actionable
subsidy, we have followed the three-part test set forth in the World Trade Organizations
Agreement on Subsidies and Countervailing Measures (the SCM Agreement) and as
implemented in the national trade laws of many WTO members, including the U.S., as codified
in Title VII of the Tariff Act of 1930 (Title VII). For each potentially actionable government
support program, we apply the following three-part test:
1) Did the government provide a financial contribution (Financial Contribution)?
2) If yes, then did the Financial Contribution confer a benefit on the recipient?
(Benefit)
3) If yes, then was the program under which the financial contribution was provided
specific to an enterprise or industry? (Specificity)
If the answers to all three questions are yes, then we deem the subsidy to be actionable
and quantify the total amount of the subsidy using standard international trade law
methodologies.
c. Basic Principle of Subsidy Quantification
The fundamental guide for subsidies quantification under international trade law is the free
market commercial benchmark. In other words, the magnitude of the benefit from an actionable
subsidy is the difference between any consideration that the recipient returned to the government
for the financial contribution and what the recipient would have paid to receive the same

financial contribution from a private, commercial actor, such as a bank, a services provider, or an
investor 7. The principle behind the use of a private actor standard to quantify subsidies is that it
captures the magnitude of the distortion in markets created by selective government
intervention 8. In the few cases where there is no known private sector benchmark for a particular
program, following standard international subsidy conventions, we rely on a cost-to-thegovernment standard.
As set forth in the next three sections of this report covering Etihad, Qatar Airways, and
Emirates, the Gulf state governments have repeatedly provided massive financial contributions to
their flag carriers on terms that would not have been available to their national flag carriers in
commercial markets. Each of the three airlines has received billions of dollars in government
benefits that constitute actionable subsidies under international trade law.
* * * * *
We do not believe that the estimates provided in this report encompass all of the subsidies
received by the Gulf state airlines. The almost complete lack of official government reports that
identify and quantify support provided to the airlines and their supporting industries make it
impossible to conduct a full subsidy review using public sources alone. The details of off-the-

See, e.g., World Trade Organization, Canada Measures Affecting the Export of Civilian Aircraft, Report
of the Panel, WT/DS70/R, 14 April 1999; paras 9.112-3 at 176; affirmed, by Appellate Body, at Paras V.9
8
See, e,g,, Identifying and Measuring Subsidies Under the Countervailing Duty Law: An Attempt at
Synthesis, Alan F. Holmer, Susan A. Haggerty, and William D. Hunter, in The Commerce Department Speaks on
Import and Export Administration, 1984, Practicing Law Institute, Volume One at 301, 304: Subsidies distort the
market process and cause a misallocation of resources in favor of the product under consideration by artificially
increasing revenues or decreasing costs. It is this distortive aspect of the selective treatment that is the essential
element of a subsidy. Therefore, we ask what are the normal, marketplace costs and prices, the benchmarks, the
firm would face?

book government support, such as the reported Abu Dhabi payment of Etihad corporate
sponsorship fees, or Dubais assumption of Emirates fuel hedging losses, are shielded from
public view. Further complicating this subsidy analysis is the fact that each of the three stateowned Gulf airlines is part of a larger state- owned air transport ecosystem. The web of
interlocking business relationships and related party transactions among airlines, airport
authorities, aviation fuel providers, catering companies, leasing companies, duty free shops,
repair and maintenance operations, and other support services represents a major obstacle to a
complete subsidies analysis for each of the three airlines. In addition, complete sets of financial
statements for the airlines and all of the related party providers of goods and services, including
standard disclosures on related party transactions, are not available. Despite major gaps in the
public record, the information available demonstrates the breathtaking level of government
subsidies that benefit the three Gulf airlines.

10

IV.

Etihad Airways
a. Introduction

Etihad, which commenced operations in 2003, is the youngest of the three Gulf carriers that
are the subject of this report. Since Etihads inception, the Government of Abu Dhabi has
supplied almost all of the airlines capital needs. In the company financial statements, direct
government capital injections into the state-owned airline have been labelled as share capital
increases and loans from the shareholder. Notwithstanding these generous government cash
infusions, Etihad, as shown in Table 2 below, has incurred massive operating losses in almost
every year of its existence 9:
Table 2: Etihad Financial Results
Thousand US$
2004

Revenue
86,247

2005
2006
2007
2008
2009
2010
2011
2012
2013

291,114
784,604
1,525,846
2,453,533
2,274,585
2,972,290
3,827,043
4,304,000
4,933,000

Net Income Accumulated Losses

Source
(108,375)
(108,375)
2005 F/S at 4-5*
(220,720)
(699,403)
(638,339)
(610,890)
(925,225)
(462,014)
(82,676)
(67,000)
(684,000)

(329,095)
(1,028,431)
(1,666,770)
(2,280,684)
(3,247,428)
(3,841,661)
(3,827,938)
(3,788,000)
(4,487,000)

2005 F/S at 4-5*

2007 F/S at 2-3
2007 F/S at 2-3
2008 F/S at 2-3
2009 F/S at 2&4
2010 F/S at 2&4
2011 F/S at 2&4
2012 F/S at 2&4
2013 F/S at 2&4

* 2004 and 2005 values converted at AED 3.67325 per US$ as shown in Exhibit 1.
9

Source: Etihad financial statements, for fiscal years ending 2004 through 2013. Note that, for the reasons
discussed in Section IV.c.iv.2, below, the net income and total accumulated losses included in Table 2 excludes the
$724 million gain from the disposal of Etihad Guest, although it does include "comprehensive income" items for
2010-2013. Moreover, the table above does not include Etihads share of losses in its foreign airline subsidiaries.
Had such losses been included, as shown in Exhibit 2, Etihad would have had an additional $135 million in losses
in 2013 alone.

11

Indeed, Etihads operating performance and financial condition has been so poor that, despite
being in existence for over ten years, the airline has only been able to achieve the status of a
going concern; that is, an enterprise that is likely to remain in business in the foreseeable
future, by obtaining explicit commitments by the government to cover the airlines financial
obligations 10. Etihad continues to carry substantial negative retained earnings on its balance
sheet: as of the end of 2013, the amount totaled minus $3.763 billion.11 To put it plainly, the
available public information provides compelling evidence that without subsidies and
government guarantees, Etihad would not be in existence.
b. A Note on Sources for Etihad
Etihad is not a public company and does not publish any financial statements or summary
information showing its balance sheet or profit and loss results. However, certain jurisdictions in
other countries that are home to Etihad overseas operations require an annual filing of an audited
parent company financial statement. These financial statements are available to the public and
in some cases include notes. From these jurisdictions, we have been able to obtain Etihad
financial statements for every year between 2004 and 2013, with the exception of 2006 12. In
WTO and Title VII cases, audited financials are considered to be fundamental source documents
for valuing subsidies, particularly capital contributions, such as equity, loans, and loan
guarantees.

10

See Note 2.a. in Etihads financial statements for 2008 through 2011, Note 2.b. and the auditors opinion in
Etihads financial statement for 2012, and Note 2.1 of the Etihad financial statements for 2013.
11
See Etihad 2013 financial statement, at 4.
12
The most important 2006 information needed for the capital subsidies analysis, however, is included in the
prior year figures in the 2007 financials.

12

Another important source of information for Etihad is a leaked 2010 Booz Allen PowerPoint
report on Etihad financing strategies. 13 Because the Booz Allen PowerPoint appears to have
been prepared for the Crown Ruler of Abu Dhabi, we have assumed that the financial data and
other information presented therein are accurate and are derived from actual Etihad data.
c. Equity Infusions
Over the past decade, the Government of Abu Dhabi has disbursed or committed over $10
billion in direct subsidies to Etihad in the form of equity infusions. Table 3 below lists equity
infusions received by Etihad as of the end of March 2014, and additional capital that has been
committed by government but not disbursed:
Table 3: Government Equity Commitments and Infusions

Thousand US$
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2004-2014 Total
2007-2014 Total

Equity/Capital
Infusions Committed
54,436
81,655
1,238,977
5,272,841
3,504,000
10,151,909
10,015,818

Equity Infusions
Disbursed
54,436
81,655
1,238,977
575,845
330,765
1,247,842
438,672
1,242,000
1,217,000
Unknown
6,427,192
6,291,101

Source
2005 F/S, Note 18
2005 F/S, Note 18
2007 F/S, Note 16
2007 F/S, Note 16
2008 F/S, Note 21
2009 F/S, Note 20
2010 F/S, Note 20
2011 F/S, Note 22
2012 F/S, Note 22
2013 F/S, Note 18.1
2013 F/S, Note 2.1

Between 2004 and 2013, Abu Dhabi provided Etihad with equity infusions of $6.4 billion.
As of the end of 2013, the government had committed to provide Etihad with an additional $3.5
13

This report can be found on the internet at

http://images.smh.com.au/file/2014/05/22/5445995/etihad.pdf?rand=1400723164129 (last visited 14 Jan 2015).

13

billion in capital in an unspecified form sometime in the future 14. During this time period,
Etihad received no equity infusions from private investors: 100 percent of its shares continue to
be held by the state.
Equity infusions are included among the types of financial contributions that can constitute
subsidies under the SCM Agreement and the U.S. countervailing duty law. 15 Article 14(a) of the
SCM Agreement lays out the standard for determining whether or not a government equity
infusion confers a benefit:
[G]overnment provision of equity capital shall not be considered as conferring a benefit,
unless the investment decision can be regarded as inconsistent with the usual investment
practice (including for the provision of risk capital) of private investors in the territory of
that Member.
Mirror language for identifying actionable equity infusions appears in the U.S. implementing
regulations for Title VII 16.
In cases such as this, where there is no private commercial investor benchmark, then under
WTO and U.S. subsidy rules the investigating authority determines if the company was
equityworthy, i.e., whether a private investor examining the firm at the time of the equity
infusion would have concluded that the firm was likely to generate a reasonable rate of return
within a reasonable period of time 17. Under international trade law, the private investor standard
is that of a potential investor who must decide among the alternative investment choices in that
country if the purchase of equity at the stated terms is reasonable. In making this determination,
14
15
16
17

See: Etihad 2013 financial statement, Note 2.1 at 9.

771(5)(D)(i).
19 CFR 351.507(a)(1).
19 CFR 351.507(a)(4).

14

investigating authorities place principal emphasis on the recent financial performance of the
company as derived from its financial statements. Other factors are also considered, such as
market projections, strengths and weaknesses of competitors in the industry, relative riskiness of
the industry in question, and general supply and demand conditions within the market segment 18.
If, after weighing this evidence, an investigating authority concludes that a reasonable private
investor would not have made the equity infusion, the company is deemed unequityworthy. In
such cases, the magnitude of the subsidy is deemed to be equal to the cash value of the equity
infusions 19. Thus, equity infusions to unequityworthy companies are treated as cash grants.
i.

Financial Contribution

Equity infusions are specifically listed as one of the direct transfers of funds that constitute
financial contributions under Article 1.1(a)(1)(i) of the SCM Agreement and Section
771(5)(D)(i) of Title VII.
ii.

Benefit

Where the government is the sole shareholder and where a reasonable private investor would
not have made the investment at the stated terms, equity infusions provide a direct benefit to the
recipient in the amount of total cash value of the equity received (see Section IV.c.iv., below, for
an assessment of the direct benefit received by Etihad). In addition, equity infusions can provide
a substantial secondary benefit to the recipient in that they strengthen the companys balance
sheet, thus enabling the company to raise additional capital and purchase fixed assets from other
suppliers on better terms than it otherwise would have been able to obtain.
18
19

19 CFR 351.507(a)(4)(A).
19 CFR 351.507(a)(6).

15

iii.

Specificity

There is no evidence that the governments equity infusions into Etihad were anything other
than stand-alone financial contributions to a particular enterprise. That is, the equity infusions
were not made under a general law available to a broad group of industries in Dubai or the UAE.
In international trade subsidies law, such stand-alone contributions by their very nature are
considered to meet the specificity requirement, as the number of users of the program is limited
to certain enterprises 20. Under U.S. countervailing duty law, for example if a benefit is found to
be bestowed on a limited number of users, the Commerce Department finds that it meets the
specificity criteria, and no further analysis of the distribution of benefits under the program is
required 21.
In addition, as noted in Section II above, ample information exists that the Government of
Abu Dhabi considered airlines to be a strategic industry, and therefore targeted companies
within this industry for substantial support. Benefits that are limited to industries that are
deemed strategic also meet the condition of specificity under U.S. countervailing duty law 22.

20

See, Article 2.1(a) of the SCM Agreement, which states: Where the granting authority, or the legislation
pursuant to which the granting authority operates, explicitly limits access to a subsidy to certain enterprises, such
subsidy shall be specific.
21
19 CFR 351.502(a). See also, Preamble to the U.S. Department of Commerce Countervailing Duties;
Final Rule, 63 FR 65348, 65355-6 (November 25, 1998).
22
See, e.g., Issues and Decision Memorandum for the Final Determination in the Countervailing
Duty Investigation of Dynamic Random Access Memory Semiconductors from the Republic of Korea
(June 23, 2013) at 13; available at: http://enforcement.trade.gov/frn/summary/korea-south/03-15793-1.pdf (last
visited 14 Jan 2015).

16

iv.

Quantification of the Benefit

1. Background

Etihad received approximately $136 million in initial start-up capital in 2004 and 2005.
There is very little (if any) precedent in international subsidies analysis on how initial capital
infusions for start-up companies should be treated. Virtually all instances of equity infusions
assessed under international subsidy law relate to established companies in mature industries and
rely heavily on metrics of financial performance in the three or so years immediately preceding
the infusion. Given that Etihad had no operational record at the time these initial infusions were
made, we could not calculate the historic financial ratios that typically are the foundation of a
determination of equityworthiness under international trade law. Therefore, to be conservative,
we have not treated the equity infusions received in 2004 and 2005 as actionable subsidies. We
note, however, as shown in Exhibit 1, Etihads financial ratios in that period were dismal. In
addition, as noted in more detail below, at the time these initial equity infusions were made,
Etihad was entering a niche in the international air transport sector that already was being
serviced by two other companies.
As Table 3 illustrates, a second, much more substantial phase of government equity
infusions occurred in 2007 and 2008, when the Government approved two additional tranches of
equity ($1.24 billion in 2007 and $5.27 billion in 2008) that increased the airlines total
capitalization by nearly 5,000 percent. Etihad received the entirety of the 2007 infusion that
year, and drew down the 2008 commitment between 2008 through 2013. As explained below,
we find that the entire $6.4 billion conferred a benefit on Etihad, and thus constitute subsidies.

17

2. Assessment of Etihads Equityworthiness

To assess the equityworthiness of the infusions committed in this time period, we are able to
rely on the traditional prior three year analysis of financial ratios. As shown in Exhibit 1, and as
summarized below, virtually all of Etihads financial ratios were extremely poor, and
dramatically so during the three year periods preceding 2007 and 2008, when the Government of
Abu Dhabi committed the bulk of the second phase equity infusions:
Summary of Etihad Financial Ratios

Negative Net Income: In each year from 2004 to 2008.

Negative Equity, Return on Equity, and Debt to Equity Ratio: In each year from
2004 to 2008.

Negative Working Capital: And thus negative working capital to total asset and sales
to working capital ratios.

Extremely Poor Current and Quick Ratios: From 2004 to 2006, these ratios ranges
from 0.34 to 0.46indicating that Etihad was short of liquidity needed to cover
current payment obligations.

Substantial Negative Operating Cash Flows: In 2006 and 2007, Etihad had
substantial negative operating cash flows, another clear indicator that the airline was
unable to cover its costs and financial obligations through its operating activities.
Annual injections of new capital from the government were needed to keep the
company afloat.

Large Accumulated Losses: By 2006 and 2007, Etihad had amassed accumulated
losses of $1.028 billion and $1.667 billion, respectively. These accumulated losses
represented approximately 62 percent and 47 percent, respectively, of the total funds
(equity and shareholder loans) provided by the Government of Abu Dhabi through
2006 and 2007.

Negative Returns on Equity: During the 2004 to 2007 period, the average return on
equity for similarly-placed airlines was approximately 9.2 percent 23. For UAE
businesses, the average return on equity was 14.7 percent 24.

23

The control group of similar airlines included those that had in excess of 15 wide body aircraft sometime
after 1980 and usable publicly available data from Capital IQ. In addition to airlines meeting these criteria, we

18

These extremely poor financial ratios by themselves provide substantial evidence that the
Government of Abu Dhabis capital infusions were not commercially sound investments.
Indeed, the repeated capital infusions by the government appear to have been motivated
primarily by the need to cover Etihads continuing substantial operating losses, thereby allowing
the company to continue be classified as a going concern. As the now-expired dark amber
provisions of the SCM Agreement illustrate, there is substantial multilateral support to the notion
that cash to cover operating losses is a particularly distortive type of subsidy. 25
While we believe that Etihads equityworthiness is most appropriately assessed at the time
that the equity infusions were committed (i.e., primarily in 2007 and 2008) rather than in the
subsequent years when these commitments were drawn down, a review of the firms financial
ratios between 2008 through 2012 provides little reason to believe that a reasonable private
investor would have found Etihad to be equityworthy in those later years. As shown in Exhibit
1, while the annual injections of new capital and shareholder loans slightly improved Etihads
liquidity position in the years between 2008 and 2013, the bulk of the improvement in Etihads
ratios was a mirage generated largely by the continuing government capital injections, as well as
the reclassification starting in 2010 of Etihads shareholder loans from the long-term liability to
equity sections of the balance sheet (discussed in more detail in Section IV.d below). This
accounting reclassification allowed Etihad to show non-negative equity and, thus, slightly

added JetBlue, which was a relatively contemporaneous start-up operation with a substantial fleet and route
structure. See Exhibit 3 for the other airlines control group data.
24
See Exhibit 4 for contemporaneous UAE company data.
25
See SCM Agreement, Art. 6.1(c) (subsidies to cover operating losses deemed to cause serious prejudice).

19

positive debt to equity and equity to total assets ratio beginning in 2010. Without this accounting
reclassification, Etihads debt/equity ratios would have remained negative. Etihad continued to
show negative net income in each of these years (with a concomitant increase in the firms
accumulated losses) and continued to produce negative operating cash flow in all but one year
(2011). This failure to produce positive operating cash flow meant that Etihad was unable to
cover its ongoing operations, let alone to make the necessary capital investments to support its
growing operations without continuous injection of government funds.
As indicated above, a note in Etihads 2013 financial statement indicates that the
Government of Abu Dhabi has agreed to continue its support of Etihad well into the future by
approving an additional US$3.5 billion in shareholder funding. This additional commitment,
too, appears to be inconsistent with commercial considerations. While Etihads 2013 unadjusted
financial statement shows a positive net income, this result is driven solely by the recording of a
one-time $724 million gain in other income. This $724 million consists of $700 million from the
sale of ownership in its loyalty awards program, and a booked $24 million gain on the sale of
these same assets 26. The financials indicate that Etihad sold half of the interest in the program
(valued at $350 million) to a newly-formed Etihad subsidiary (Etihad Guest L.L.C.). That same
amount is listed in the financials as an accounts payable to Etihad by its own new subsidiary 27.
Etihad sold the remaining 50 percent to a company called Global Loyalty Company 28. We
have not been able to find this company in any of the standard financial reporting services data.
However, the entire $700 million sales price is listed under related party transactions, meaning
26
27
28

Etihad 2013 financial statement, at 2 and Note 6 at 31; Note 13.4(e) at 39; Note 22(a) at 47.
See Etihad 2013 financial statements, Note 22(b) at 48.
Id., at Note 13.4(e) at 39.

20

that the other party purchasing the loyalty rewards program is an Etihad affiliate 29. Further,
there is no evidence in the financials or other public sources that Etihad actually received the
$350 million nominally paid for half of the interest in the loyalty awards program 30.
In addition, to the questionable sale of its loyalty program to affiliates, Etihad overstated its
net income by leaving out its share of losses associated with its shareholdings in other airlines,
including Air Berlin, Virgin Australia, Aer Lingus and Jet Airways. Had Etihads losses in its
investments in its partner airlines been reported in its financial statement, as shown in Exhibit 2,
the airline would have had an additional $135 million in losses in 2013 alone.
After adjusting Etihads financial results to remove the questionable sale of its loyalty awards
progam and adding in its share of the losses of its affiliated airlines, Etihads net loss for 2013 is
$797 million, and its accumulated losses over its first 10 years of operations (2004-2013) are
nearly $4.6 billion. This represents 42 percent of the total capital ($6.4 billion in direct equity
and $4.6 billion in shareholder loans) provided by the firms sole shareholder, the Government of
Abu Dhabi.
Over this same time period, for UAE businesses, as shown in Exhibit 4, the average return
on equity over this time period was 8.7 percent. As another point of comparison, as shown in
Exhibit 3 the median return on equity for similar airlines was over 5 percent, with the mean
return on equity exceeding 10 percent if one excludes the global financial crisis year of 2008.
29

Id., at Note 22(a) at 47.

Presumably, if Etihad had received the $350 million from Global Services Company, it would have
shown up in the cash flow statement under Proceeds from disposal of property plant and equipment. The detail
for this amount of $1,019 million, as shown in Note 11 of the 2103 Etihad financial statements (at 33-34) consist
almost entirely of aircraft. The remaining line items are too small to include a $350 million payment.
30

21

Given the disparity in returns between Etihad and other UAE firms, as well as its poor
performance compared to other airlines, it is reasonable to conclude that a private investor with
multiple options for investing its capital in the UAE would not have invested in Etihad.
In assessing the commercial soundness of the equity commitments, we have also considered
certain forward-looking factors, as a private investor would have done at the time of each
additional commitment. One factor that a private investor would have considered in assessing a
possible equity investment into Etihad was the recent past general performance of airlines
industry. We acknowledge that airlines traditionally have been risky investment choices. In the
first half of the 2000s, the financial condition of the global airlines industry was especially poor.
The industry was saddled with substantial excess capacity and experienced occasional
bankruptcies 31. The woeful state of the worlds airline industry in this time period would not
have been a factor favoring a commitment of a stream of substantial start-up capital extended
over many years.
However, even in a declining market, there can be successful start-ups that identify a niche
that is not being served, or a business model that is superior to those on offer from existing
suppliers. In the first decade of the 21st century, private investors considering an investment into
a start-up Middle Eastern long haul carrier would have taken into account the fact that Etihad
was pursuing a very specific airline business model (a Middle East-based international carrier
focused on long haul routes using wide body aircraft) already being pursued by two other major
31

See, e.g., Pricewaterhousecoopers, Aviation finance: Fasten your seatbelts, January 2013, at 14, available
at http://www.pwc.com/gx/en/aerospace-defence-and-security/publications/aviation-finance-fasten-yourseatbelts.jhtml (last visited 14 Jan 2015). From a position of modest profitability in 2000, the global commercial
airline industry swung to losses in excess of 5 billion from 2001 through 2004. Global industry losses continued
through 2005.

22

state-backed entities Emirates and Qatar Airways. Emirates is based less than 130 kilometers
from Etihads home airport while Qatar Airways home base in less than 320 kilometers away.
At the time that Etihad was founded in 2003, both Emirates and Qatar Airways already had
substantial existing or planned capacity 32. While private investors may have found the level of
risk associated with this niche strategy to be acceptable for the first or most efficient enterprise,
those private investors would have recognized that the niche was probably too small to support
multiple parties. Such a minor niche market with established players would have been perceived
by private investors to be hostile to an unsubsidized start-up. As the last to the party, Etihad
undoubtedly would have had an especially difficult time persuading private investors to provide
it with equity financing.
Another major factor supporting the conclusion that Etihad was not equityworthy is an
analysis of the tolerance of private investors for losses in start-up airlines. Most start-up airlines
during this period began to report positive retained earnings, or at least positive net income, after
a just a few years of operations. For example, contemporaneous start-up airlines JetBlue and
Vueling achieved positive net income in their second and fifth years of operations,
respectively33. Air Asia X took more time to reach this critical financial threshold 10 years 34.
By contrast, as shown in Exhibit 1, Etihad has had substantial negative retained earnings over
32

In 2003, Emirates had revenues of AED 9.61 billion ($2.62 billion), was operating 46 aircraft (2003 annual
report at 40) and was on target to have a fleet of more than 100 aircraft by 2010 (2003 annual report at 11). Qatar
Airways had revenues of QR 1,534,736,000 (approximately US$424 million) . ( Qatar Airways 2003 financial
statement at 2) and 21 aircraft, with a substantial number of additional aircraft on order. ( Qatar Airways 2003
financial statement at 11-12)
33
See Exhibit 5. JetBlue commenced operations in 2000, had its first positive net income in 2001, and
positive retained earnings by 2002. Vueling commenced operations in 2004, and had positive net income in each
year from 2008 through 2013; and positive retained earnings by 2012.
34
Id.

23

the entirety of its existence, failing to produce any significant net income in any year to offset
these massive losses accumulated over the prior years. Given the inherent riskiness of the
market, private investors would not have tolerated such losses indefinitely. The experience of
other failed airlines in this period, including Kingfisher and Air India (both of which were
pursuing a somewhat similar business model of offering premium service), are telling 35.
Other salient factors in our equityworthiness analysis include:
1)

Notwithstanding the massive government support and statements of commitment,

no private investors purchased Etihad equity during that time period. Further,
Etihad received no long-term term loans from commercial sources between 2004
and 2012 36.

2)

Etihad continued to have massive negative retained earnings throughout this period
and, from at least 2008 onwards 37, absent the explicit guarantees of government
financial support, would not have been classified as a going concern 38.

For all of the reasons cited above, we find that Etihad was unequityworthy from 2007
onwards. Accordingly, the Government of Abu Dhabis equity infusions during that time period
conferred benefits on the company, and thus constituted subsidies.
To calculate the benefit from these equity infusions, we treated the cash payments as grants
received in the year of receipt, which is the U.S. Department of Commerces method pursuant to
35

Kingfisher operated from 2003 through 2013. http://en.wikipedia.org/wiki/Kingfisher_Airlines (last visited

14 Jan 2015). AirIndia is still operational, although clearly had substantial difficulties in 2007-2011, with positive
EBITDA beginning in 2013.
36
From 2004 through 2010, the only bank financing showing up on Etihads balance sheets are listed as
bank overdrafts. No term loans are listed as outstanding as of the end of 2011; while short term loans only are
listed at the end of 2012.
37
See Exhibit 1.
38
The going concern statement is found in Note 2.a. to the Etihad financial statements of 2008 through
2012. In each year, the note cites additional capital and government commitment in the language stating that the
financials are being prepared on a going concern basis. Because the going concern issue is more relevant to the
creditworthiness analysis, it is discussed in more detail in Section IV. d.iv.2., below.

24

Title VII for calculating the benefit of equity infusions to unequityworthy companies for which
no private investor benchmark is available 39. As shown in Table 3 above, using these valuation
methods, we calculate the total actionable equity infusions received by Etihad to date as $6.3
billion. An additional $221 million from the 2008 commitment has not been disbursed as of the
end of Etihads 2013 fiscal year. Finally, at the beginning of 2014, the Government of Abu
Dhabi committed an additional $3.5 billion in future capital infusions, the precise form not being
disclosed. For purposes of this report, we are classifying these additional capital infusions as
equity.
d. Shareholder Loans
At the same time that it was making massive equity injections into Etihad, the Government of
Dubai was also providing its airline with substantial loans. Article 14 (b) of the SCM Agreement
establishes criteria for determining whether government loans confer a benefit on the recipient:
[A] loan by a government shall not be considered as conferring a benefit, unless there is
a difference between the amount that the firm receiving the loan pays on the government
loan and the amount the firm would pay on a comparable commercial loan which the
firm could actually obtain on the market. In this case the benefit shall be the difference
between these two amounts.
The government loans to Etihad were interest free, and came with very lengthy and even
indefinite grace periods before commencement of repayment. The government reportedly
required no performance covenants and allowed its loans to be subordinate to all other Etihad
financial obligations 40. On their face, these generous terms are inconsistent with commercial

39
40

19 CFR 351.507(a)(6).
See, e.g., Etihad 2008 financial statement, Note 23 at 27.

25

considerations, as no private lender would provide a borrower with subordinated debt at zero
interest, long or indefinite grace periods for principal repayment, and set no financial
performance parameters to protect its interests.
The magnitude of the benefit from these interest free loans is measured by calculating the
amount the company would have paid to receive a comparable loan from a commercial lender 41.
The cost of the commercial loan, in the form of the required interest rate, is a function of a
private creditors assessment of the borrowers level of risk of default, or the companys
creditworthiness at the time the loan is made 42. Thus, the benchmark interest rate is the rate
that a company of comparable creditworthiness could expect to pay to a domestic commercial
lender. If a company is deemed uncreditworthy, a private investor will require an interest rate
that incorporates a sizeable risk premium 43.
i.

Financial Contribution

Government loans are specifically included among the types of direct transfers of funds
that constitute financial contributions under Article 1.1(a)(1)(i) of the SCM Agreement and
section 771(5)(D) (i) of Title VII. Accordingly, the Government of Abu Dhabis loans to Etihad
constitute financial contributions.

41

771(5)(E)(ii); 19 CFR 351.505(a)(1).

19 CFR 351.505(a)(4).
43
19 CFR 351.505(a)(3)(iii). The U.S. methodology we used here is a conservative measure of the subsidy
benefit compared to methods used by some other WTO Member states. The EU, for example, treats loans provided
to uncreditworthy firms as grants (i.e., the entire cash value of the loan is considered a subsidy benefit).
Countervailing Duties; Final Rule, 63 Fed. Reg. 65,348, 65,365 (November 25, 1998): Finally, two commenters
noted that the European Union (EU') takes a tougher stance on government loans to uncreditworthy borrowers by
treating the entire loan as a grant when the recipient company's financial position is so weak that it could not have
obtained a commercial loan, and implied that the Department should follow the EU's example. . . . We have not
adopted the suggestion that we follow the EU's practice of treating loans to uncreditworthy firms as grants.
42

26

ii.

Benefit

Interest free loans provide a benefit to the recipient in the form of generous repayment terms
and reduced interest costs.
iii.

Specificity

There is no evidence that the governments interest free loans to Etihad were anything other
than stand-alone financial contributions to a particular enterprise considered to be part of a
strategic industry. As explained in Section IV.c.iii above, such stand-alone contributions to
specific enterprises meet the specificity requirement. In addition, as noted in Section II above,
ample information exists that the Government of Abu Dhabi considered airlines to be a
strategic industry, and therefore targeted companies within this industry for substantial
support. Benefits that are limited to industries that are deemed strategic meet the condition of
specificity under U.S. countervailing duty law.
iv.

Quantification of the Benefit

1. Background

Etihad received interest free government loans in all but one year between 2004 and 2013. In
the earlier years, the notes to the financial statements indicate that the terms of the loans had not
been finalized 44. Because no prior three year track record of Etihads performance in 2004 and
2005 is available, we have no data to rely upon to determine the airlines creditworthiness during
that period. Therefore, to be conservative, we have assumed that Etihad had an average credit
rating during that period and have used a published commercial borrowing rate for the UAE to

44

See Etihad financial statements for 2005 (Note 16, at 16), 2007 (Note 18, at 25).

27

value the benefit 45. Based on this conservative approach, the total value of foregone interest for
this initial period is $54 million.
2. Assessment of Etihad Creditworthiness
For loans received from 2006 onwards, we were able to assess the creditworthiness of Etihad
using the same type of standard financial ratio analysis that is used by the U.S. Department of
Commerce in Title VII proceedings. Much of the discussion in Section IV.c.iv., above,
regarding Etihads equityworthiness is also relevant to the assessment of its creditworthiness. In
particular, and as shown in Exhibit 1, Etihads basic ratios during this period were extremely
poor. To summarize, from 2006 to 2009 Etihad had substantial and increasing net losses in each
year; a negative times interest earned; negative or extremely low working capital ratios in each
year; quick and current ratios well below 1.0 in two of these years; increasing negative retained
earnings; negative debt to equity ratio; negative equity to total assets ratio; and negative return
on equity ratio. By contrast, between 2004 and 2009, comparable airlines on average had
positive net income and positive equity, with an average return on equity of 7.9 percent (after
excluding the financial crisis year of 2008); were able to meet their interest payments with their
income with an average times interest earned ratio of 1.51; had total sales were 81 percent of
total assets on average compared with 30 percent for Etihad; and had total equity accounted for
over 24 percent of total assets 46.

45

For this analysis, we used published annual average lending rates for the UAE. Sources for these rates are
included in Exhibit 6.
46
See Exhibit 3.

28

Also relevant to the Etihad creditworthiness analysis is the virtual absence of any nongovernment commercial long-term loans doing this period 47, as well as the repeated statements
indicating that the companys ability to be rated a going concern was dependent on explicit
government statements of financial support. Etihads 2010 audited financial statement, for
example, contains the following statement 48:

The apparent inability of Etihad to be classified as a going concern absent explicit

government support is especially probative with respect to the companys lack of
creditworthiness. According to the on-line Business Dictionary, {a} going concern is the only
type of business banks lend{s} money to, and suppliers extend credit to 49. Under IFRS
accounting rules (the basis for preparing Etihads financial statements) 50, the absence of a going
concern finding implies that the auditors have significant doubt that the company can continue
operating over the next twelve months 51. Thus, the implication of the going concern language

47

Etihad did receive some financing from commercial sources in the form of aircraft leasing. However,
because aircraft leases are collateralized with an asset that is easily retrievable and sellable, it does not carry with it
the same level of risk as traditional debt financing.
48
Etihad 2010 financial statement, Note 2(a) at 9.
49
See http://www.businessdictionary.com/definition/going-concern-principle.html (last visited 14 Jan 2015).
50
See, e.g., Etihad 2013 financial statement Note 2.4, at 10.
51
See Interpretation and Application of International Financial Reporting Standards, 2014 ed., Wiley,
Appendix A, Disclosure Checklist, at 952-3.

29

in the financial statements is that without government commitment, Etihad would not have been
able to obtain commercial lending.
For all of these reasons, we find that Etihad was uncreditworthy between 2006 and 2010.
Accordingly, to calculate the interest rate benefit for loans to an uncreditworthy company, we
used the standard U.S. Department of Commerce formula developed for Title VII proceedings 52.
We believe that this benchmark for a loan to an uncreditworthy is conservative because it
assumes a default probability of 65 percent (based on published Moodys bond ratings), whereas
Etihads default rate, in the absence of government support, was closer to 100 percent 53. Even
using this conservative measure, the total value of foregone interest for this period was $1.321
billion. Adding to this amount the benefit of $54 million in interest free loans during the years
in which we conservatively assumed Etihad was creditworthy (2004 and 2005) generates a total
benefit from the interest-free loans, during the time between when they were granted and when
the Government of Abu Dhabi effectively forgave them in 2010 (as discussed in the next
section), of $1.375 billion. These loan benefit calculations are shown in Exhibit 6.
e. Debt Forgiveness
A fundamental change in the terms and classification of the shareholder loans appear in
Etihads 2010 financial statement. In its 2009 financial statement Etihad described its loans from
its shareholder as repayable in 20 installments beginning in 2027 54. In its 2010 financial
statement, the fixed repayment schedule disappeared from the note and was replaced with the
52

19 CFR 505(a)(3)(iii).
The near certainty of default is based on the reliance on expressions of additional government support in
order to classify Etihad as a going concern. The implication of the auditors statements is that, without
government support, Etihad would go bankrupt sometime in the foreseeable future.
54
See Etihad 2009 financial statement, Note 22, at 29.
53

30

following:

From a subsidy evaluation perspective, the key elements of this note are: 1) from 2010
onwards, Etihad was no longer under any contractual obligation to repay the loans in the
foreseeable future 55; and 2) the shareholder loans were reclassified from debt section of the
balance sheet to the equity section. These key elements were repeated in the companys
financial statements for 2011, 2012, and 2013 56.
Under the methodology used by the U.S. Department of Commerce for valuing benefits from
debt (which has been upheld by the WTO), loans which have been restructured give rise to a new
subsidy as of the date of restructuring. If there is no foreseeable repayment date, such loans are

55

See Etihad 2010 financial statement, Note 22, at 30.

See Etihad 2011 financial statement, Note 24, at 27; Etihad 2012 financial statement, note 24, at 30; Etihad
2013 financial statement, note 18,2, at 42.
56

31

treated as debt forgiveness at the time of restructuring 57. Thus, from 2010 onwards, we have
treated all Government of Qatar shareholder loans or advances as forgiveness of debt 58.
i.

Financial Contribution

Government debt forgiveness is an assumption of a company cash payment obligation and

therefore is a direct transfer of funds, under Article 1.1(a)(1)(i) of the SCM Agreement and
section 771(5)(D)(i) of Title VII.
ii.

Benefit

Debt forgiveness provides a benefit to the recipient in the form of the forgone principal and
any accrued interest up until the time of forgiveness. In addition, loan forgiveness can provide a
substantial secondary benefit to the extent that it strengthens the recipients balance sheet and
enables the company to raise additional capital from other sources.
iii.

Specificity

57

See Certain New Pneumatic Off-the-Road Tires From the Peoples Republic of China: Final Affirmative
Countervailing Duty Determination and Final Negative Determination of Critical Circumstances, 73 Fed. Reg.
40,480 (July 15, 2008) and accompanying Issues and Decision Memorandum at Comment E.7 at 117:. {D}ebt
forgiveness is a separately defined financial contribution from loans and, as such, is a new countervailable event at
the point of the debt forgiveness. . . . {C}onsistent with the Departments regulations regarding loans and debt
forgiveness, at the point when there is no reasonable expectation that a loan will be repaid, the Department may find
that the loan is forgiven and treat the forgiven amount as a grant at the point of loan forgiveness. See also, Japan
Countervailing Duties on Dynamic Random Access Memories from Korea, World Trade Organization, Report of
the Panel, WT/DS336/R (13 July 2007), paras 7.442; See, also, Issues and Decision Memorandum for the Final
Determination in the Countervailing Duty Investigation of Dynamic Random Access Memory Semiconductors from
the Republic of Korea (June 16, 2013) at 22; available at: http://enforcement.trade.gov/frn/summary/korea-south/0315793-1.pdf (last visited 14 Jan 2015).
58
We note that even if we were to consider these financial instruments as loans to a creditworthy company,
repayable beginning in 2027 in 20 equal installments, the net present of the interest forgiveness would be $6.4
billion, which is higher than the face value of the loans that is being used to quantify the subsidy) based on our
estimates. See Exhibit 8. The high net present value of these shareholder loans is a function three variables: 1) zero
interest; 2) the incredibly generous grace period before initial payment and long repayment periods, together
extending as long as 42 years, and 3) the risk premium a private lender would require for extending a loan with such
generous repayment terms to an airline. For purposes of this analysis, we used a discount rate of 9 percent, which is
conservative given the level of risk. These calculations show that, even if the principal were full repaid 30 years
from now, the time value of the money received under this program is substantial.

32

There is no evidence that the governments forgiveness of loans to Etihad were anything
other than stand-alone financial contributions to a particular enterprise. As explained in Section
IV.c.iii above, such stand-alone contributions to specific enterprises meet the specificity
requirement. In addition, as noted in Section II above, ample information exists that the
Government of Abu Dhabi considered airlines to be a strategic industry, and therefore targeted
companies within this industry for substantial support. Benefits that are limited to industries that
are deemed strategic meet the condition of specificity under U.S. countervailing duty law.
iv.

Quantification of the Benefit

We have treated the principal value of all government shareholder loans from 2010 onward
as forgiven debt. The total value of this subsidy is as follows:
Table 4: Etihad Debt Forgiven
Million US$
Debt Forgiven
Source
2010
3,012.3*
2010 F/S, Note 22
2011
447.1
2011 F/S, Note 24
2012
155.0
2012 F/S, Note 24
2013
1,016.0
2013 F/S, Note 18.2
Total
4,630.4
* 2010 value is the amount of shareholder loans received from 2004-2010 and
outstanding as of 2010.

In addition to the $4.63 billion in forgiven loans to date, an additional $583 million in
shareholder loans has been committed by the government but had not been disbursed as of
March 31, 2013 59.

59

See Etihad 2013 financial statement, Note 2.1, at 9

33

f. Government Grants
In 2008, Etihad received an outright grant from the Government of Abu Dhabi of $111
million for its role in the development of Abu Dhabi as a destination for tourism and commerce
in a campaign called Abu Dhabi to the World 60.
i.

Financial Contribution

Outright government grants, with no strings attached, are perhaps the purest form of
actionable subsidy under international trade law. Government grants are specifically included
among the types of direct transfers of funds that constitute financial contributions under
Article 1.1(a)(1)(i) of the SCM Agreement and section 771(5)(D)(i) of Title VII.
ii.

Benefit

A grant provides a benefit to the recipient in the form of cash received. In addition, grants
can provide a substantial secondary benefit to the extent that they strengthen the recipients
balance sheet and enable the company to raise additional capital from other sources.
iii.

Specificity

There is no evidence that the governments grant was anything other than a stand-alone
contribution to a specific enterprise. As explained in Section IV.c.iii. above, such stand-alone
contributions to specific enterprises meet the specificity requirement. In addition, as noted in
Section II above, ample information exists that the Government of Abu Dhabi considered airlines
to be a strategic industry, and therefore targeted companies within this industry for substantial

60

See Etihad 2008 financial statement , Note 8 at 21.

34

support. Benefits that are limited to industries that are deemed strategic meet the condition of
specificity under U.S. countervailing duty law.
iv.

Quantification of the Benefit

The amount of the subsidy to Etihad was $111 million, the face amount of the grant.
g. Government Assumption of Promotional Sponsorship Costs
A leaked internal study prepared by Booz Allen in 2010 includes the following note
indicating that the Executive Council of Abu Dhabi covers the cost of Emirates sponsorship
of the Manchester City Football Club:

Elsewhere, it has been reported that Manchester City sold its stadium naming and jersey
advertising rights to Etihad for 400 million (or around U.S. $640 million, at prevailing
exchange rates at the time of the announcement) 61. Thus, in paying for these rights, the
government provided Etihad with a service (promotional activities) for no consideration.
Article 14(d) of the SCM Agreement lays out the standard for determining whether or not a
government provision of a good or service confers a benefit:
[T]he provision of goods or services or purchase of goods by a government shall not be
considered as conferring a benefit unless the provision is made for less than adequate
remuneration, or the purchase is made for more than adequate remuneration. The
61

See Manchester City bank record 400m sponsorship deal with Etihad Airways, The Guardian, 8 July
2011, available at: http://www.theguardian.com/football/2011/jul/08/manchester-city-deal-etihad-airways (last
visited 14 Jan 2015).

35

adequacy of remuneration shall be determined in relation to prevailing market conditions

for the good or service in question in the country of provision or purchase (including
price, quality, availability, marketability, transportation and other conditions of purchase
or sale).

i.

Financial Contribution

The Executive Councils assumption of this promotional cost is a financial contribution

because it is a provision of goods and services within the meaning of Article 1.1(a)(1)(iii) of the
SCM Agreement and section 771(5)(D) (iii) of the Title VII.
ii.

Benefit

Etihad received valuable promotional support from this government contribution. This
assumption of an Etihad operating expense provides a benefit in the form of the cash that Etihad
would otherwise have had to pay itself. In addition, this government assistance provides a
substantial secondary benefit to the extent that it strengthens the recipients balance sheet and
enables the company to raise additional capital from other sources.
iii.

Specificity

There is no evidence that the governments assumption of this expense was anything other
than a stand-alone gift to a specific enterprise. As explained in Section IV.c.iii. above, such
stand-alone contributions by their very nature meet the specificity requirement. In addition, as
noted in Section II above, ample information exists that the Government of Abu Dhabi
considered airlines to be a strategic industry, and therefore targets companies within this
industry for substantial support. Benefits that are limited to industries that are deemed
strategic meet the condition of specificity under U.S. countervailing duty law.

36

iv.

Quantification of the Benefit

The total value of the subsidy is the cost assumed by the government for the sponsorship,
$640 million.
h. Exemption from Indirect Airport Taxes
Etihads home hub, Abu Dhabi International Airport (AUH), charges (including security
fees) are $21.78 per local departing passenger 62. However, connecting passengers are exempt
from passenger fees 63. Outside of the Gulf States that are the subject of this study, the universal
exemption from passenger fees for connecting passengers (at airports that charge fees for other
passengers) is highly unusual 64. Even if connecting passengers are not making full use of arrival
or departure facilities, they nevertheless use airport facilities and services, including runways and
terminals, security, control tower and baggage handling, as well as requiring the airport to
operate larger terminal facilities, including passenger holding areas. Thus, connecting passenger
fees are an important source of revenues used by airport authorities throughout the world to pay
for facilities and services.
i.

Financial Contribution

Because the exemption is established by government decree, it represents a direct financial

contribution from the government to the beneficiary airlines in the form of a foregoing of a tax
revenue that is otherwise due, under Article 1.1.(a)(1)(ii) of the SCM Agreement and section
771(5)(D) (ii) of Title VII.

62

Gulf Airport Subsidies, Daniel M. Kasper, Compass Lexecon, ( Jan 16, 2015), (Kasper), Appendix C, at
viii (included at Exhibit 9 of this report).
63
Id. at vi.
64
Id., at 9.

37

ii.

Benefit

Since airlines are responsible for paying the passenger fees, an airline will receive a benefit
in the form of tax payments to the government.
iii.

Specificity

Although all airlines using AUH to connect passengers benefit from this fee exemption, the
exemption is de facto specific to Etihad because Etihad accounts for 88 percent of all connecting
passengers at AUH 65.
iv.

Quantification of the Benefit

A recent study by the aviation economics practice of the consulting firm Compass Lexecon
calculated the benefit from this program. To estimate the benefit, Compass Lexecon
conservatively assumed that a reasonable rate for a connecting passenger would be 50 percent of
the departing passenger fee 66. Using this as the non-subsidized connecting passenger fee
benchmark, Compass Lexecon applied this amount to its estimate of the total number of Etihad
connecting passengers at AUH between 2005 and 2014 to derive a total benefit of $501
million 67.
Other Potential Subsidies
i. Purchases of Goods and Services for Less than Adequate Remuneration
As noted above, Etihads financial statements have stated for many years that the company
purchases goods and services from other government-owned or controlled suppliers. Among the
65
66
67

Id., Appendix C, at vi.

Id., Appendix C, at viii.
The calculations are shown at Kasper, Appendix C at ix.

38

most important of those suppliers are the Abu Dhabi National Oil Company, Abu Dhabi Catering
Company, and the Abu Dhabi Airports Company, which operates five airports, including
Etihads hub. Etihads home hub, Abu Dhabi International Airport, is in the midst of a major
expansion, reportedly costing $6.8 billion 68. A recent study by Compass Lexecon demonstrates
that airport charges at AUH are among the lowest in the world 69. These low fees and high
government costs suggest that Etihad is receiving an additional benefit in the form of receipt of
airport-related services for less than adequate remuneration.
The financial statements filed with local regulatory authorities are audited by an international
accounting firm. However, the auditors opinion letter for Etihad includes the following caveat,
which basically states that the financials are prepared for internal management purposes only 70:

This is an unusual disclaimer for a formal financial statement prepared by an international

public accounting firm and suggests that the statements may not represent the complete picture
of the true financial condition of Etihad and its closely related affiliates. Among other things, the
financial statement does not adhere to International Financial Reporting Standards (IFRS)

68

See Government of Abu Dhabi website, General Secretariat of the Executive Council, ADAC Invests
AED 3 Billion by the End of the Year, available at:
https://gsec.abudhabi.ae/Sites/GSEC/Navigation/EN/MediaCentre/government-news,did=146190.html (last
visited 30 Sep 2014)
69
See Kasper, at 15.
70
See, e.g., Etihad 2013 financial statement, auditors opinion letter, at 1.

39

principles for consolidating the results of affiliated parties 71. The results of Etihads investments
in other entities (principally failing airlines in other countries) are not reported in the available
financials 72. In addition, as set forth in Section IV.i. below, Etihad does not provide complete
disclosure regarding the arms length nature of its transactions with related goods and services
providers. Thus, these audited financials, while useful for purposes of valuing capital subsidies,
do not provide a complete basis for assessing all subsidies particularly purchases of goods and
services for less than adequate remuneration which Etihad may have received.
While the version of Etihads financial statements we have obtained contain substantial
detail, they are virtually bereft of any meaningful information on related party transactions.
According to its 2013 financial statement, Etihad purchases substantial goods and services from
other entities owned or controlled by the government, including aviation fuel, aircraft
maintenance services, landing and parking rights, handling, in-flight catering, aircraft operating
leases, airport and lounge leases 73. Collectively, these related party purchases are significant:
they represent almost 30 percent of Etihads total operating expenses 74. In addition, Etihad
engages in substantial financial transactions with related government entities, including leasing
companies 75.
The amount of subsidization realized through these procurements and financial transfers may
also be significant: while Etihads financial statements state explicitly that Etihad purchases from
71

See, e.g., Etihad 2013 financial statement, Note 2.4, at 10.

If Etihad had treated the results of its affiliates performance as an equity investment, Etihads losses would
have increased by approximately $135 million in 2013. See Exhibit 2.
73
See, e.g., Etihad 2013 financial statement, Note 22(a), at 47.
74
See Exhibit 10.
75
See Etihad 2013 financial statement, Note 22(a) at 47.
72

40

government-owned infrastructure-related entities on an arms length basis, it does not include a

similarly straightforward statement with respect to the prices it pays for its procurements from
related parties for aviation fuel, in-flight catering, aircraft maintenance, handling and landing and
parking, describing them instead as being based on list prices that are at agreed rates 76. The
absence of a clear arms length pronouncement makes it difficult to assess whether the
company is receiving additional government benefits in the form of purchases for less than arms
length prices (or in subsidy parlance, for less than adequate remuneration), but the inference that
can be drawn from the lack of a positive statement is that the company is receiving such benefits.
However, the financials do not contain enough information to calculate an estimate of the
subsidy from non-arms length purchases from affiliated goods and service providers.
j. Tax and Import Duty Exemptions
A review of an unofficial translation of the Amiri decree which established Etihad Law No. 1
of 2003 indicates that Etihad may receive substantial additional benefits in the form of indirect
tax and import duty exemptions. Article 11 of the decree states that Etihad Airways "or any
body affiliated or dealing directly therewith shall be exempted from all the taxes and duties
including:
1. Income taxes and customs duties imposed on all purchases thereof including aircraft,
goods, materials, equipment, machinery, devices and spare parts imported to achieve the
company's purposes and all other materials necessary to the use thereof or for sale on
board of its aircraft or distributed for publicity purposes whether imported in the name of
the company or any affiliates, contractors or subcontractors.
2. Any taxes resulting from the sale or transfer of ownership of quotas of the company or
the quotas or shares of any other affiliates.
76

Id.

41

3. Any taxes resulting from the dividends of the company's partners or the partners of any
affiliate thereof. 77
Tax and import duty exemptions are financial contributions, in the form of tax revenues
foregone, as defined by Article 1.1(a)(1)(ii) of the SCM Agreement and Section 771(5)(D) (ii) of
Title VII. Furthermore, they clearly provide a benefit to the recipient in the form of forgiveness
of taxes and duties payment obligations. Finally, these exemptions are specific to a particular
industry, as they are established by special decree that applies only to Etihad. However, using
the information available to us, we have not been able to calculate the level of this subsidy.
k. Etihad Future Capital Commitments
In the past five years, Etihad has been on an aircraft ordering spree that will ensure a need for
substantial additional government capital commitments over the upcoming years. As of
September 17, 2014, Etihad had 169 wide body aircraft on order, and options or letters of intent
for another 56, with list prices totaling $70.9 billion 78. During fiscal 2013 alone, Etihads future
capital commitments increased from $11.2 billion to $34.6 billion, or an additional $23.4 billion
from a company that has no equity79. Given its weak balance sheet, it is almost certain that
Etihad will need substantial additional capital beyond the $4.3 billion in commitments not yet
received in order to fund its planned aircraft purchases and route expansion. To gain access to
aircraft lease markets or other capital financing, the Abu Dhabi government most likely will have
to inject more capital into Etihad, or take the Qatar route (discussed in Section V.f. below) and
guarantee Etihads financial obligations. In sum, if Etihad persists in its pursuit of aggressive
77
78
79

Amiri decree establishing Etihad Law No. 1 of 2003.

See Exhibit 11.
See Etihad 2013 financial statement, Note 24 at 49.

42

growth, its need for government support will continue and likely increase from the already
substantial level provided to date.

43

V.

Qatar Airways
a. Introduction

Throughout its existence, Qatar Airways has relied primarily on the government for its
substantial capital needs, The Qatari government has provided its airline with support primarily
in the forms of 1) interest free loans with no repayment obligations; 2) cash injections that
effectively were grants; 3) guarantees on loans provided by third parties; 4) land at no cost; 5)
exemptions from, and rebates of, indirect airport taxes; and 5) conferral of significant streams of
revenue from non-airline related activities, including airport operations and alcohol sales and
distribution. As shown in Exhibit 12, notwithstanding massive government support, Qatar
Airways has reported either marginal profits or operating losses since 2004.
Like Etihad, Qatar Airways has received explicit statements of government support,
including an open-ended government commitment to fund Qatar Airways obligations as they
fall due, in order to be classified as a going concern, i.e., likely to stay in business over the
foreseeable future 80. In other words, Qatars audited financial statements suggest that, but for
the explicit sovereign guarantee, Qatar Airways would not continue to exist as a going
concern.
b. A Note on Sources for Qatar
Qatar Airways is not a public company and does not publish any financial information
showing its balance sheet or operating results. However, certain jurisdictions in other countries
80

See, e.g., Qatar Airways 2009 financial statement, Note 2, at 9.

44

that are home to Qatar Airways overseas operations require an annual filing of an audited parent
company financial statement. These financial statements are available to the public and in
some cases include notes. From these jurisdictions, we have been able to obtain versions of
Qatar Airways financial statements for every year between 1995 and 2014.
For the years 1996 through 2006 and 2010 through 2013, Qatar Airways has not submitted
the official audited financial statements to these jurisdictions, but instead has filed speciallyprepared financial statement summaries 81. These financial statement summaries do not
contain all of the information disclosed in typical official audited financial statements 82. As
discussed in more detail below, particularly with respect to those for the most recent years 83, the
decision on what to exclude from the financial statement summaries appears to have been
motivated at least in part by a desire not to disclose government subsidies 84.
The copy of the Qatar Airways 2014 financials used to prepare this report does appear to be
the official audited version and contains detailed notes, auditors opinion, and required
disclosures.
Notwithstanding these gaps in the record, the financials we have reviewed contain a wealth
of information on the types and magnitude of support provided by the government on Qatar
Airways over the past 17 years. In particular, the financial statements for the years 2007 through
81

A summary of the Qatar Airways financials used in this study is included at Exhibit 13.
See, e.g., the statement in the Auditors Report to the Board of Directors of Qatar Airways Q.C.S.C on the
2013 Summary Consolidated Financial Statements at1: The summary consolidated financial statements do not
contain all of the disclosure required by International Financial Reporting Standards.
83
The Auditors Reports for the Summary statements for 2010 through 2013 are all dated August 26, 2014.
84
Missing from the Summary financial statements are disclosures on the terms of the shareholder
loans/advances, grants, and detailed notes on other sources of revenue that have been directed to Qatar Airways by
the government, including revenues from airport operations, alcohol distribution, and tax credits.
82

45

2009 (the most complete audited financials available to us) demonstrate a myriad of methods
used by the government to channel cash and non-cash benefits to its flagship airline.
While Qatar Airways financial statement contains substantial detail about its financing, the
report has no information on transactions between the airline and related parties.

That such

transactions exist is evident from their disclosure in the sections of the financials on accounts
payable and accounts receivable 85. In its 2012 summary consolidated financial statement, Qatar
Airways indicates that it is using the government supplier/purchaser exception allowed under
IFRS for not providing information on the arms length nature of related party transactions 86.
The absence of detail for purchases of goods and services from related parties makes it difficult
to assess the extent to which the company is receiving additional subsidies in the form of
purchases for less than adequate remuneration. Another important source of information for
Qatar Airways is public offerings for government bonds. These bond offering confirm
statements in the audited financials indicating that the Qatari government regularly provides
sovereign guarantees to commercial banks that lend money to Qatar Airways.
c. Shareholder Loans through 2008
In a 2006 interview, Qatars CEO Akbar Al Baker stated that I never borrow from the state,
the state does not subsidize the airline. 87 An analysis of the Qatar Airways financials,

85

See, e.g., Qatar Airways 2012 financial statement at Note 14, at 27; Note 23 at 30.
Id., Note 3.3 at 11.
87
See Total Control: Interview with Qatar Airways Akbar Al Baker, Flight International (Mar. 2006).
Similarly, in a November 2011 speech, Al Baker described the allegation that Qatar is subsidized as crap and
asserted that:
86

There is a level playing field; we operate as a business the same way they operate as a business, he
told Arabian Business in May. I know they [European airlines] are always crying wolf that Gulf carriers are
subsidised by the state. Subsidised no, but supported yes.

46

however, shows that Qatar Airways has been borrowing heavily from the state on clearly
subsidized terms for many years.
Qatar Airways financial statements show that, in most years since 1998, the Government of
Qatar provided its flag carrier with some form of debt financing, either classified upon
disbursement as either loans or shareholder advances. As shown in Table 5, between 1998 and
2008, Qatar Airways received $1.517 billion in cash that was classified originally as shareholder
loans:
Table 5: Shareholder Loans Received, 1998 to 2009
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Total

Amount (US$)
19,230,769
19,009,066
36,171,703
39,455,769
9,718,407
54,733,516
595,911,813
742,303,022
1,516,534,065

Source
1998 F/S at 2
2000 F/S at 2
2001 F/S at 2
2002 F/S at 3
2003 F/S at 3
2004 F/S at 3

2007 F/S at 4
2008 F/S at 4

Note 22 of the airlines 2007 financial statement (which was the first time that the Qatar
Airways financial disclosed the terms of this financing) indicates that these loans were at zero
interest, with no set repayment schedule. Note 22 in the 2008 financial statement repeated those

See Talk of unfair subsidies is crap, says Al Baker, arabianbusiness.com, November 15, 2011, available at:
http://www.arabianbusiness.com/talk-of-unfair-subsidies-is-crap-says-al-baker-430018.html (last visited 14 Jan
2015).

47

terms, and further stated that management believes that the loan will have to be repaid when
sufficient funds are available for settlement. In the following year (2009), the relevant note
(number 23) stated that the outstanding government loan balance had been reported under the
equity section of the balance sheet, as the settlement of these obligations is neither planned nor
likely to occur in the foreseeable future. Thus, consistent with their treatment by Qatar Airways
(which has been blessed by their auditors), we treated these capital contributions as loans
through 2008.
i.

Financial Contribution

Government loans are specifically included among the types of direct transfers of funds
that constitute financial contributions under Article 1.1(a)(1)(i) of the SCM Agreement and
section 771(5)(D) (i) of Title VII. Accordingly, the Governments loans to Qatar are financial
contributions.
ii.

Benefit

Interest free loans provide a direct benefit to the recipient in the form of the foregone interest
payments.
iii.

Specificity

There is no evidence that the Government of Qatars interest free loans to Qatar Airways
were anything other than stand-alone financial contributions to a particular company. As
explained in Section IV.c.iii. above, such stand-alone contributions meet the specificity
requirement. In addition, as noted in Section II above, ample information exists that the
Government of Qatar considered airlines to be a strategic industry, and therefore targeted

48

companies within this industry for substantial support. Benefits that are limited to industries that
are deemed strategic meet the condition of specificity under U.S. countervailing duty law.
iv.

Quantification of the Benefit

1. Background

As shown in Table 6 above, Qatar Airways received interest free loans from the Government
of Qatar totaling $ 1.517 billion between 1998 and 2008. Thus, the benefit is the difference
between a zero interest loan and the interest rate Qatar Airways would have paid commercial
lenders. The benchmark interest rate is dependent upon the creditworthiness of Qatar Airways at
the time the Government committed the funds.
2. Assessment of Qatar Airways Creditworthiness
For all of the years during that period, we were able to assess the creditworthiness of Qatar
Airways using standard financial ratios calculated from its unadjusted financial statements. As
shown in Exhibit 12, and as summarized below, even using the unadjusted financials, the ratios
were extremely poor:
Summary of Qatar Airways Financial Ratios

Negative Net Income: In every year but three from 1995 to 2009.

Negative Equity, Return on Equity, and Debt to Equity Ratio: In each year from
1996 to 2008, except for 2005.

Negative Working Capital: In each year from 1995 to 2009 (and thus negative
working capital to total asset and sales to working capital ratios).

Extremely Poor Current and Quick Ratios: In every year from 1995 to 2009, these
ratios were well below the standard 1.0 benchmark, ranging from 0.28 to 0.62
through 2008indicating that the firm was unsurprisingly short of liquid funds to
cover upcoming obligations in each of these years.

49

Large Accumulated Losses: Qatar Airways accumulated substantial losses

throughout its existence, due to its inability to produce any positive net income
through 2003 and only inconsistently thereafter.

Negative Returns on Equity: During the 2004 to 2007 period, the average return on
equity for similarly-placed airlines was approximately 9.2 percent 88. For Qatari
businesses, the average return on equity was 12.6 percent 89.

Like those for Etihad, Qatar Airways financial ratios show some improvement in the later
years under consideration (2011 and after). However, much of that improvement is misleading,
as it is the result of the reclassification of shareholder loans to equity (discussed in Section V.d.
below), as well as substantial government cash infusions through other mechanisms (discussed in
Sections V.i. and V.j. below). In every year since 2000 at least, it appears that the Qatari
government has kept its commitment to provide sufficient funds for Qatar Airways to continue
operations through a number of revenue streams that total in the multiple millions of dollars,
including receipts from airport operations and alcohol sales. If those revenue streams from noncore operations were excluded, Qatar Airways financial performance and specifically, its cashbased financial metrics would be much worse 90.
Other factors informing our creditworthiness analysis included the virtual absence of any
non-government-guaranteed commercial long-term loans doing this period, as well as the
auditors repeated statements that the companys ability to be rated a going concern was
dependent on explicit and unlimited government guarantees to make funds available to the

88

See Exhibit 3 for comparable airline company data.

See Exhibit 4 for Qatar company data.
90
For example, as shown in Exhibit 13, between 1996 and 2014, Other Income and Other Operating
Income typically exceeded total reported profits (or losses). While some of these revenues may have corresponding
expenses in the Qatar Airways financials, some clearly do not. Thus, without these activities, Qatar Airways
financial performance would be much worse.
89

50

Company to allow it to meet its liabilities as they fall due. For example, the 2009 Qatar
financial statement contains the following passage 91:

This statement (or one very similar to it) appears in all of the Qatar Airways financial
statements from 1996 through 2013. Like Etihad, Qatar Airways in recent years has prepared its
financials in accordance with IFRS. These accounting standards do not allow a going concern
finding if there is significant doubt that the company will cease operating sometime within the
following twelve months 92. In light of these factors, we find that Qatar Airways was
uncreditworthy between 1998 and 2010 93. Accordingly, to calculate the interest rate benefit for
loans to an uncreditworthy company, we used the standard U.S. Department of Commerce
91

Qatar Airways 2009 financial statement, Note 2, at 9.

See Section IV.d.iv. 2. above for a further discussion of the going concern standard under IFRS.
93
Even though we are calculating the subsidies received by Qatar Airways from 2004 onwards, we are
making creditworthiness determinations from 1998 onwards, as benefits from pre-2004 loans carry into the post2004 period, assuming commercial repayment terms. Since creditworthiness determinations are made at the time
the loan is received, we need to analyze creditworthiness in the earlier years.
92

51

formula developed for Title VII countervailing duty proceedings. The total value of foregone
interest between 2004 and 2009 was calculated as $618 million. These calculations are shown in
Exhibit 14.
d. Debt Forgiveness (Shareholder Loans and Advances, 2009-2014)
The Qatar 2009 financial statement contains a fundamental change in the description of terms
of the shareholder loans. The document states:

As this excerpt demonstrates, from March 31, 2009, the shareholder loans were no longer
payable upon demand, but at the option of the company94. Further, as the government was not
expecting payment in the foreseeable future, the loans were reclassified to the equity section of
its balance sheet. While the notes indicate that the advances might potentially be converted to
share capital sometime in the future, such reclassification did not occur at the time of the change
in terms. Thus, at the time of announcement of the new terms, the government obtained no
additional rights to dividends. Moreover, any future reclassification would provide no additional
call on the companys assets or results, as the Government of Qatar was the companys sole
shareholder. In 2011, the shareholder loans received prior to that year were moved to the legal
reserve account in the equity portion of the balance sheet and specifically described as a share

94

Qatar Airways 2009 financial statement, Note 23 at 30.

52

premium arising from conversion of shareholder advances. 95 Thus, there is no doubt that in
2011, the 1996 through 2010 shareholder advances were re-characterized as not likely to be
repaid any time in the foreseeable future. At that point, any prior fixed repayment obligations
associated with the shareholder loans disappeared. Even as late as the end of 2014, the pre 2011
shareholder advances continued to be classified somewhere between debt and equity, obligating
Qatar Airways to pay neither dividends nor interest, nor return any of the principal 96.
Additional government cash infusions received between fiscal years 2011 through 2014
continued to be described in the summary financials as shareholder advances. Sometime
before the end of 2014, the 2011-14 shareholder advances, were converted to equity, and new
shares were issued 97. Therefore, we have treated all infusion of shareholder advances from 2009
through 2014 as debt forgiveness, as any repayment obligations either disappeared or never
existed, and no additional equity shares were issued at the time of disbursement 98.
i.

Financial Contribution

95

Qatar Airways 2011 financial statement, Statement of Changes in Equity, at 7. As part of this
recharacterization, Qatar Airways issued one additional share to the government. See Qatar Airways 2014 financial
statement, Note 17(a) at 41. We do not consider the issuance of one share to be equivalent to a debt to equity
conversion.
96
See Qatar Airways 2014 financial statement at 5.
97
Id., The Consolidated Statement of Cash Flows (at 7) shows the 2014 cash disbursement of
QR3,616,700,00 going into the company under shareholder advances. This amount, plus the QR8,316,722,000
balance in prior year shareholder advance account (See Balance Sheet at 5), equals the QR 11,933,422,000 in
shareholder advances that was converted to additional share capital prior to the end of fiscal year 2014. See
Consolidated Statement of Changes in Equity at 8; Note 17 at 41.
98
In light of the nature of these infusions as neither debt nor equity, imposing no obligations on the recipient,
they could arguably also be treated as grants. If these funds were treated as equity infusions rather than debt
forgiveness, we believe that the subsidy amount would be the same. See Appendix 3 for an alternative analysis of
the 2010 to 2014 cash disbursements by the Qatari government as equity. In short, because Qatar Airways clearly
was unequityworthy during this period, and since there were no private investor share purchases, then, consistent
with U.S. countervailing duty law, the subsidy benefit would be the face value of the infusions, or the same value of
the subsidy if they were treated as a grant.

53

Government debt forgiveness is considered a direct transfer of funds under Article

1.1(a)(1)(i) of the SCM Agreement and section 771(5)(D) (i) of Title VII, and thus constitutes a
financial contribution.
ii.

Benefit

Debt forgiveness provides a direct benefit to the recipient in the form of the forgone principal
repayments. In addition, loan forgiveness can provide a substantial secondary benefit to the
extent that it strengthens the recipients balance sheet and enables the company to raise
additional capital from other sources.
iii.

Specificity

There is no evidence that the governments forgiveness of its loans to Qatar Airways were
anything other than stand-alone decisions with respect to a particular company. As explained in
Section IV.c.iii. above, such stand-alone contributions to companies deemed strategic by the
government meet the specificity requirement. In addition, as noted in Section II above, ample
information exists that the Government of Qatar considered airlines to be a strategic industry,
and therefore targeted companies within this industry for substantial support. Benefits that are
limited to industries that are deemed strategic meet the condition of specificity under U.S.
countervailing duty law.
iv.

Quantification of the Benefit

Pursuant to Title VII, the U.S. Department of Commerce treats government loans that have
no foreseeable repayment date as debt forgiveness. Thus, we have classified the principal value

54

of all government shareholder loans from the date of forgiveness forward as forgiven debt. The
total value of this subsidy is as follows:
Table 6: Forgiven Shareholder Loans
Million US$
Amount Forgiven ($m)
Source
2009 *
3,251.7
2009 F/S at 4 and Note 23
2010
1,226.3
2010 F/S at 5
2011
1,193.8
2011 F/S at 5
2012
811.1
2012 F/S at 5
2013
279.9
2013 F/S at 5
2014
993.6
2014 F/S at 7
2009-2013 Total
7,756.4
Note: Values converted at QR 3.64 QR to the dollar.
* 2009 value is the amount of shareholder loans outstanding as of that year, including
balance from prior years.

If the loans disbursed prior to 2004 are excluded, the total amount of forgiven debt in 2009 is
$3.128 billion, and the total for 2009-2013 is $7.633 billion 99.
e. Grants and Non-monetary Contributions
In 2013 and 2014, Qatar reported a total of $22 million in other income for route subsidies
and incentives 100.
i.

Financial Contribution

Grants are a direct transfers of funds, and are identified as such in Article 1.1(a)(1)(i) of the
SCM Agreement and section 771(5)(D)(i) of Title VII. Accordingly, the $719 million grant
constituted a financial contribution.
99

See Table 5 above, showing total shareholder loan disbursements prior to 2004 of $123.6 million.
See Qatar Airways 2014 financial statement, Note 6, at 28 (sum of current and prior year amounts of QR
40,316,000 and QR39,842,000, respectively converted at QR3.64 to the dollar). These contributions may have been
received in prior years as well; however, the prior year financials do not contain as much detail.
100

55

ii.

Benefit

A grant or non-monetary contribution provides a benefit to the recipient in the form of the
value of cash or in-kind goods or services received with no corresponding repayment obligation.
In addition, grants can provide a substantial secondary benefit to the extent that it strengthens the
recipients balance sheet and enables the company to raise additional capital from other sources.
iii.

Specificity

There is no evidence that the governments grant and non-monetary contributions to Qatar
Airways were anything other than stand-alone contributions to a specific enterprise. As
explained in Section IV.c.iii above, such stand-alone contributions to specific enterprises meet
the specificity requirement. In addition, as noted in Section II above, ample information exists
that the Government of Qatar considered airlines to be a strategic industry, and therefore
targeted companies within this industry for substantial support. Benefits that are limited to
industries that are deemed strategic meet the condition of specificity under U.S. countervailing
duty law.
iv.

Quantification of the Benefit

The total grant received was $22 million.

f. Government Loan Guarantees

Table 7 shows the $7.7 billion in term loans received by Qatar Airways between 1998 and
2010 from non-Qatari government lenders:

56

Table 7: Non-Qatari Government Term Loans Obtained by Qatar Airways

Year
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Total

Loans Received $ Million

$6.12
$3.26
$8.55
$75.01
$179.33
$528.97
$493.72
$449.88
$817.02
$2,058.66
$1,339.71
$1,397.50
$319.74
$7,677.46

Source
1998 F/S at 4
1999 F/S at 4
2000 F/S at 4
2001 F/S at 4
2002 F/S at 4
2003 F/S at 4
2004 F/S at 4
2005 F/S at 4
2006 F/S at 4
2007 F/S at 4-5
2008 F/S at 4-5
2009 F/S at 4-5
2010 F/S at 4-5

In every year since 1998, the Government of Qatar has explicitly or implicitly guaranteed
term loans received by its flag carrier. Qatar Airways 2007 financial statement was the first
time that the airlines financials disclosed any detail on the term loans it carried on its balance
sheet. Note 23 indicated that most of the loans are secured by mortgages over assets and/or
guarantees given by the Government of the State of Qatar 101. Note 23 in the companys 2008
financial statement and note 24 in its 2009 financial statement repeated the same terms. This
language indicates that at least some of Qatar Airways term loans are backed by an explicit
government guarantee.
Furthermore, a comparison of term loan balances disclosed in Qatar Airways financial
statements with the guaranteed debt identified in Government of Qatar bond offerings reveals
that the government granted explicit government guarantees to Qatar Airways on virtually all
term loans outstanding in 2009, 2010, and 2012:
101

Qatar Airways 2007 financial statement, Note 23 at 22

57

The Government of Qatar secured $4.86 billion in Qatar Airways loans as of December
2008, according to its bond offering dated 3 April 2009 102. As of March 2009, Qatar
Airways balance sheet listed $4.65 billion in term loans 103.

The Government of Qatar secured $4.95 billion in Qatar Airways loans as of March
2010, according to its bond offerings dated 31March 2010 and 30 November 2010 104. As
of March 2010, Qatar Airways balance sheet listed $5.04 billion in term loans 105.

The Government of Qatar secured $3.74 billion in Qatar Airways loans as of March
2012, according to its bond offering dated 16 July 2012 106. As of March 2012, Qatar
Airways balance sheet listed $3.95 billion in term loans 107.

In addition, even if some of the term loans listed on the Qatar Airways balance sheet are not
explicitly guaranteed by the Government of Qatar, the debt is implicitly guaranteed by the
going concern commitments laid out elsewhere in the Qatar financial statements. Those
conditions specifically note that the shareholders (i.e., the Government of Qatar) have promised
to continue to make funds available to the Company to allow it to meet its liabilities as they fall
due. This open-ended commitment, repeated year-in and year-out in financials that are
necessarily reviewed by potential lenders to inform their decision whether and under what terms
to extend loans or credit to Qatar Airways, amounts to an implicit guarantee of all of Qatar
Airways debt obtained from commercial sources.
Article 14 (c) of the SCM Agreement establishes the rules for determining whether
government loan guarantees provide a benefit to the recipient:
102

Qatar Bond Offering, 3 April 2009, at 69.

Qatar Airways 2009 financial statement at 4, sum of non-current and current portions of term loans
(QR14,732,241,000 and QR2,183,610,000), converted at QR 3.64 to the dollar).
104
Qatar Bond Offerings, 30 November 2011, at 86.
105
Qatar Airways 2010 financial statement at 5-6, sum of non-current and current portions of term loans
(QR15,740,358,000 and QR2,609,456,000), converted at QR3.64 to the dollar).
106
Qatar Bond Offering, 16 July 2012, at 109.
107
Qatar Airways 2011 financial statement at 5-6, sum of non-current and current portions of term loans
(QR13,664,060,000 and QR2,156,447,000), converted at QR3.64 to the dollar).
103

58

[A] loan guarantee by a government shall not be considered as conferring a benefit,

unless there is a difference between the amount that the firm receiving the guarantee pays
on a loan guaranteed by the government and the amount that the firm would pay on a
comparable commercial loan absent the government guarantee. In this case the benefit
shall be the difference between these two amounts adjusted for any differences in fees;
Equivalent language is found at section 771(5)(E)(iii) of the Title VII.
i.

Financial Contribution

Government loan guarantees are a potential direct transfers of funds, and are specifically
identified as such in Article 1.1(a)(1)(i) of the SCM Agreement and section 771(5)(D)(i) of Title
VII. . Accordingly, the Government of Qatars guarantees of Qatar Airways term loans
constituted financial contributions.
ii.

Benefit

Government-provided loan guarantees provide a benefit to the recipient in the form of lower
interest payments, i.e., the difference between a commercial interest rate and the interest rate
provided on the government-guaranteed loan, adjusted for any difference in fees. As described
in detail below, the Government of Qatars loan guarantees significantly reduced the amount that
Qatar Airways would have paid on its term loans without the government guarantees. Therefore,
they conferred benefits on Qatar Airways, and thus constituted subsidies.
iii.

Specificity

There is no evidence that the governments guarantees of Qatar Airways term loans were
anything other than stand-alone financial contributions to a specific enterprise. As explained in
Section IV.c.iii. above, such stand-alone contributions to specific enterprises meet the specificity
requirement. In addition, as noted in Section II above, ample information exists that the

59

Government of Qatar considered airlines to be a strategic industry, and therefore targeted

companies within this industry for substantial support. Benefits that are limited to industries that
are deemed strategic meet the condition of specificity under U.S. countervailing duty law.
iv.

Quantification of the Benefit

As shown in Table 7 above, Qatar Airways received guarantees from the Government of
Qatar on loans totaling $7.67 billion between 1998 and 2010. There is no evidence that Qatar
Airways received any commercial loan guarantees during that time period. Moreover, there is no
indication that the government received any fees in exchange for the provision of the loan
guarantees, which would typically be assessed by private guarantors. Finally, the company
would not have had access to commercial loan guarantees in any event because it was
uncreditworthy at the time. Therefore, we calculated the benefit as the difference between what
Qatar Airways would have paid (in terms of interest) for a non-guaranteed loan and what it
actually paid for the debt backed by the Government of Qatars guarantees.
The benchmark interest rate is determined by an assessment of Qatar Airways
creditworthiness in each year in which guaranteed loans were received. As set forth in Section
V.c.iv. above, we found Qatar Airways to be uncreditworthy from 2004 to 2010, i.e., no
reasonable commercial lender would have provided credit to Qatar Airways at the time.
To calculate the interest rate benefit for guaranteed loans received in years Qatar was found
to be uncreditworthy, we used the methodology employed by the U.S. Department of
Commerce 108. As noted in Section IV.d.iv. above, this formula conservatively measures the

108

19 CFR 351.505.(a)(3)(iii).

60

benefit for a company that was effectively bankrupt in the absence of additional government
support. The total value of foregone interest between 2004 and 2014 was calculated as $6.8
billion. These calculations are shown in Exhibit 16. We believe that this estimate is extremely
conservative, in that it assumes zero benefit for any new loan guarantees provided after fiscal
year 2010. Moreover, it excludes any benefit from government loan guarantees related to leasebuyback arrangements involving Special Purpose Companies (SPCs) that are closely affiliated
with Qatar Airways 109.
g. Land for Less than Adequate Remuneration
Qatar Airways 2005 balance sheet lists a government grant of $710,000, 110 which elsewhere
is described as the value of land gifted by the government 111. In addition, a note to the
companys 2011 cash flow statement identifies a non-monetary contribution, identified as three
plots of land, from the Government of Qatar of $451.6 million 112. The amount was booked in
the equity section of the balance sheet as a capital reserve 113.
Article 14(d) of the SCM Agreement lays out the standard for determining whether or not a
government provision of a good or service confers a benefit:
[T]he provision of goods or services or purchase of goods by a government shall not be
considered as conferring a benefit unless the provision is made for less than adequate
remuneration, or the purchase is made for more than adequate remuneration. The
109

See Qatar Airways 2014 financial statement, Note 23(a), at 43 (disclosing the existence of Qatari
government guarantees on mortgage loans received by SPCs). The government guaranteed mortgage loans
referenced in the note are carried on Qatar Airways balance sheet.
110
Qatar Airways 2005 financial statement at 3 (QR2,583,000, converted at QR3.64 to the dollar)
111
Id., Note 4, at 14.
112
Qatar Airways 2011 financial statement at 7 (QR 1,643,816,000, converted at QR3.64 to the dollar); and
Qatar Airways 2012 financial statement Note 10, at 25. These parcels of land reportedly were disposed by Qatar
Airways in 2013. See Qatar 2014 financial statement, Note 10(c), at 33.
113
See Qatar Airways 2011 financial statement at 5.

61

adequacy of remuneration shall be determined in relation to prevailing market conditions

for the good or service in question in the country of provision or purchase (including
price, quality, availability, marketability, transportation and other conditions of purchase
or sale).
v.

Financial Contribution

The governments bestowal of free land is a financial contribution because it is a provision of

goods and services within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement and
section 771(5)(D) (iii) of the Title VII.
vi.

Benefit

This assumption of a Qatar Airways capital expense provides a benefit in the form of the
cash that the airline would otherwise have had to pay for the land. In addition, this government
assistance provides a substantial secondary benefit to the extent that it strengthens the recipients
balance sheet and enables the company to raise additional capital from other sources.
vii.

Specificity

There is no evidence that the governments assumption of this expense was anything other
than a stand-alone gift to a specific enterprise. As explained in Section IV.c.iii. above, such
stand-alone contributions by their very nature meet the specificity requirement. In addition, as
noted in Section II above, ample information exists that the Government of Qatar considered
airlines to be a strategic industry, and therefore targets companies within this industry for
substantial support. Benefits that are limited to industries that are deemed strategic meet the
condition of specificity under U.S. countervailing duty law.

62

viii.

Quantification of the Benefit

The total value of the subsidy is the cost assumed by the government for the sponsorship,
$452 million.
h. Exemption from and/or Rebates of Indirect Airport Taxes
Doha International Airport (DOH) in Doha charges a passenger fee, established by
government decree, of $10.98 per local departing passenger 114. However, connecting passengers
are exempt from all passenger fees 115.
In many airports outside the U.S., fees are set lower for connecting passengers compared to
departing passengers 116. However, outside the UAE and Qatar, a complete exemption from fees
for connecting passengers (at airports that charge fees for other passengers) is highly unusual 117.
Even if connecting passengers are not making full use of arrival or departure facilities, they
nevertheless use airport facilities and services, including runways and terminals, security, control
tower and baggage handling as well as requiring the airport to operate larger terminal facilities,
including passenger holding areas 118. Thus, connecting passenger fees are an important source
of revenues used by airport authorities throughout the world to pay for facilities and services.
In addition, as shown in Exhibit 13, the Qatar Airways financial statements for 2006 through
2014 lists a Passenger Tax credit, which is referred to in later years as a Tax Release. In these
years, the total value of the tax credits is $129 million 119. The fact that it is listed as an other

114
115
116
117
118
119

Kasper, Appendix C, at 9..

Id., at 9.
Id., at 10.
Id., at 28-9.
Id. at 30.
See Exhibit 13 (468,229 thousand converted at QR 3.64 to the dollar).

63

income item indicates that it is a refund of Passenger Taxes that were assessed and paid, and not
an exemption. Therefore, this appears to be an additional indirect tax subsidy.
i.

Financial Contribution

Because the exemption is established by government decree, it represents a direct financial

contribution from the government to the beneficiary airlines in the form of a foregoing of a tax
revenue that is otherwise due, under Article 1.1.(a)(1)(ii) of the SCM Agreement and section
771(5)(D) (ii) of Title VII.
ii.

Benefit

Since airlines are responsible for paying the passenger fees, an airline will receive a benefit
in the form of tax payments to the government.
iii.

Specificity

Although all airlines using DOH to connect passengers benefit from this fee exemption, the
exemption is de facto specific to Qatar Airways as it accounts for 98 percent of all connecting
passengers at DOH 120.
iv.

Quantification of the Benefit

To estimate the benefit, based on other airport fee levels, Compass Lexecon conservatively
assumed that a reasonable rate for a connecting passenger would be 50 percent of the departing
passenger fee 121. Using this as the non-subsidized connecting passenger fee benchmark,
Compass Lexecon applied this amount to its estimate of the total number of Qatar Airways
connecting passengers at DOH in each year from 2004 through 2014 to derive a total benefit
120
121

Id., Appendix C at v.
Id., Appendix C at viii.

64

over this time period of $487 million 122 Combined with the $129 million tax credit discussed
above, the total benefit from this program is $616 million.
i. Provision of Airport Revenues with Little or No Corresponding Expenses
On June 1, 2006, the Qatari Civil Aviation Authority (a branch of the government) appointed
Qatar Airways as the manager and operator of Doha International Airport. According to its
FY2007 financial statement (for the year ending March 31, 2007), as a result of this change,
Qatar Airways booked QR 147million ($40 million) in Other Income related to Doha
International airport operations 123. According to the note in the financial statement, the revenues
were intended to cover management and operations backdated to 1 April 2001. The identifiable
airport revenues, by year, are as follows:
2007
2008
2009
2013
2014

Amount (QR)
QR 50 million
QR 68 million
QR 82 million
QR109 million
QR 121 million

Amount $
$13.7 million
$18.7 million
$22.5 million
$30.0 million
$33.2 million

Source
2008 F/S, Note 31 at 34
2008 F/S, Note 31 at 34
2009 F/S, Note 32 at 34
2014 F/S, Note 6 at 28
2014 F/S, Note 6 at 28

Over these five years, the total management fee revenues received by Qatar from its CAA for
airport operations were $118.1 million for an average of $23.6 million. Between FY 2009 and
2012, it is not possible to determine the airport revenues received by Qatar Airways, as the notes
to the financials laying out these revenue streams are not available. The financials for these

122

Id., at ix.
Qatar Airways 2007 financial statement Note 31, at 26. Note that the QR 147 million reported in Note 31
does not easily reconcile to the detail for the total of QR 231 million in Other Income shown in Note 8 at 16. As
shown in the financials from 2007 through 2009, the amounts seem to be split in the financials into different
categories, including: airport development fee (DIA), car park income (DIA), rental income (DIA), infrastructure
facility income, and management fees. See Exhibit 13.
123

65

years, however, do show substantial Other Income still being recorded in the profit and loss
statement.
While transferring the airport revenues to Qatar Airways, per se, is not a subsidy, this action
can result in an unfair financial benefit if the full amount of corresponding expenses both
operating and capital are not also assumed by the recipient. Based on an analysis of its
financial statements, it appears that Qatar Airways did not assume any additional expenses of
operating and financing Doha International at the time it was assigned the revenue stream. On
the operating cost side, since the revenue is being reported in the income statement under Other
Income, then, according to the matching principle in accounting, any costs assumed by Qatar
for DHX management and operations should be reported in a line item labelled Other
Expenses. There is no such category of expenses shown in the Qatar Airways financial
statement 124. Nor is there any evidence in the financial statement that Qatar Airways assumed
any of the capital costs associated with financing Doha Airport 125. For example, if Qatar
Airways had assumed the capital costs for the airport in June 2006, then one would expect a
substantial increase in building, furniture, vehicles and office equipment on the balance sheet and
a corresponding increase in depreciation for those categories. A review of the Property, Plant
and Equipment note to the FY2007 financial statement does not show these increases 126.
Moreover, the financials do not show a corresponding increase in general expenses, nor does it

124

Id., at 3
Id.,Note 23 at 22. The note on term loans indicates that almost all of the outstanding debt is to finance
aircraft and spare engines.
126
Id., Note 12 at 18. While the assumption of airport capital expenses would entail a major increase in these
items during the fiscal year, the PPE table for FY2007 shows only minor increases in building and furniture,
vehicles, ground and office equipment.
125

66

show a major increase in other operating expenses 127. Thus, it appears that Qatar Airways is
receiving the revenues for operating the airport, while incurring very little, if any of the airport
operating and financial expenses.
The ex post assignment of revenues back to 1 April 2001 also calls into question the
commercial validity of this action. Either Qatar Airways was performing these services from
that date and receiving no compensation, or received compensation for services it did not
perform. The former seems highly unlikely. Overall, the sudden appearance of a backdated
revenue stream for managing and operating the airport, with no corresponding increase in
expenses, appears to be a means of providing a government subsidy to Qatar Airways.
i.

Financial Contribution

The excess revenues are a form of grant. Grants are considered a direct transfer of funds
under Article 1.1(a)(1)(i) of the SCM Agreement and section 771(5)(D) (i) of Title VII.
ii.

Benefit

Grants provide a direct benefit to the recipient in the form of the revenues received. In
addition, grants can provide a substantial secondary benefit to the extent that it strengthens the
recipients balance sheet and enables the company to raise additional capital from other sources.
iii.

Specificity

There is no evidence that the governments transfer of airport revenue streams to Qatar
Airways were anything other than a stand-alone benefit provided to a specific enterprise. As
explained in Section IV.c.iii. above, such stand-alone contributions to specific enterprises meet
127

Id., Note 5, at 15. Operating expenses in that year grew only in proportion to operating revenue (which
excluded airport operations). Moreover, there is no new category listed for airport operating costs.

67

the specificity requirement. In addition, as noted in Section II above, ample information exists
that the Government of Qatar considered airlines to be a strategic industry, and therefore
targeted companies within this industry for substantial support. Benefits that are limited to
industries that are deemed strategic meet the condition of specificity under U.S. countervailing
duty law.
iv.

Quantification of the Benefit

Pursuant to Title VII, the U.S. Department of Commerce quantifies the benefit of grants at
their face value. To value the total benefit between 2004 and 2013, we relied on the available
disclosures in the financials. In 2007, Qatar Airways appears to have received a one-time
payment of QR 97 million ($26.6 million) in 2006/7 to cover the period 1 April 2001 through
March 31 2006 128. The average payment for years 2007 through 2009 and 2013 to 2014 was
$23.6 million. Because we lack detailed notes to the financials for years 2008 through 2013, we
used the average revenue the years for which detailed financials are available. Therefore, the
total benefit is as follows:
One-time payment in 2007

$26.6 million

Payments for 2007 through 2014:

$23.6 million x 8 years =

$188.8 million

Total benefit, 2007 through 2014:

$215.4 million

Other Potential Subsidies

j. Provision of Monopoly Right to Distribute Alcohol in Qatar for Less than
Adequate Remuneration

128

QR 147 million (total payment per 2007 financials) minus QR 50 million (2007 payment, per 2008
financials).

68

Since the turn of the millennium, the Government of Qatar has granted to its airline the
exclusive rights for the distribution of alcohol. A division of Qatar Airlines, the Qatar
Distribution Company, is the sole license holder for the legal retail sale of alcoholic
beverages in Qatar 129. Press reports indicate that alcoholic beverages in Qatar are highly
priced and thus, given the absence of multiple distribution tiers, extremely profitable to
Qatar Airways 130. While Qatar enjoys the excess rents from the monopoly granted by the
government, there is no evidence that it pays any fee for this right. Thus, this right is a
potentially actionable subsidy that takes the form of the provision of a service (alcohol
distribution rights) for less than adequate remuneration a benefit that is multiplied by the
government by the bestowal of monopoly rights.
The available evidence does not allow for the calculation of the precise benefit from this
program. However, in the years between 2007 and 2009, the Qatar Airways financial
statements disclosed total revenues from the sales of Duty Free and Beverages totaling
over $500 million 131. Assuming a profit rate of 20%, this program could have provided
Qatar Airways with a benefit over those three years alone of an additional $100 million.
k. Debt Forgiveness in the Form of Write-offs of Long Term Liabilities
In the years in which it filed complete financial statements, Qatar Airlines reported in Other
Income in its annual profit and loss statements write-offs of long-standing liabilities that were
no longer required. Between 2006 and 2013, the amount written off totaled $35 million 132.

129
130
131
132

See: http://www.qatarairways.com/us/en/group-companies.page (last visited 14 Jan 2015).

See: http://www.qatarvisitor.com/residents/buying-alcohol (last visited 14 Jan 2015).
See calculations in Exhibit 13.
Id.

69

Because the detail on Other Income is not broken out in prior and subsequent year financials, it
is not possible to assess the total amount written off in the past ten years.
The financials do not contain any additional information on what these write-offs are or the
identity of the beneficiary of the liabilities. However, the description suggests that some entity
was withdrawing its claim as the beneficiary of long-term liabilities held by Qatar Airways.
Long-term liabilities typically are loans or other forms of capital. To the extent that these writeoffs were of liabilities for which the government was the creditor, then these would amount to
debt forgiveness and constitute additional countervailable subsidies.
l. Purchases of Goods and Services for Less than Adequate Remuneration
Qatar Airways financial statements indicate that the company may be purchasing goods and
services from other government-owned or controlled suppliers.

However, since we lack

information on the terms and conditions on which Qatar Airways obtained these goods and
services, we have not been able to quantify these benefits.

m. Qatar Airways Future Capital Commitments

70

In its 2014 financial statement, Qatar Airways discloses total capital commitments of $39.6
billion 133. As of mid-2014, Qatar Airways had 155 widebody aircraft on order with options or
letter of intent of another 127, with list prices totaling $84.2 billion 134. While Qatar Airways is
not paying list prices, the above numbers demonstrate the magnitude of the capital commitments.
Given its thin capitalization and the long history of reliance of government loans and guarantees
to meet its capital needs, it is difficult to see how Qatar Airways will be able to realize its
expansion plans without future government subsidies.

133
134

Id., Note 30 at 46.(QR 144,019,368,000 converted at QR 3.64 to the dollar).

See Exhibit 11.

71

VI.

Emirates Airline

Emirates was founded in 1985 by the Dubai government. In 2008, the government
transferred its shares in Emirates to the state-owned Investment Corporation of Dubai (ICD).
Thus, in one form or another, Emirates has been wholly owned by the government since its
inception.
The Government of Dubai has long considered air transport to be a priority sector for
Dubais overall economy. Dubais state industrial policy is reflected by his Highness Sheikh
Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler
of Dubai, in his introductory message in the 2014 Emirates annual report:
The aviation sector is a strategic pillar for the UAE economy without which tourism
and trade cannot flourish, and the Emirates Group plays a vital role in this ecosystem 135.
In a recent bond offering statement, Emirates describes its special status:
Notwithstanding that the Group is a separate commercial enterprise operated
independently of the Government of Dubai, its interests are closely aligned with the
interests of the Government of Dubai and it benefits from strong relationships with
regional air transportation regulators, Dubai Airports (which operates and manages
both DIA and AI Maktoum International Airport) and Dubai Aviation City Corporation
(which owns both DIA and AI Maktoum International Airport), which is wholly owned by
the Government of Dubai 136.
This 2005 bond offering also stated: "The rapid growth of Emirates in recent years, and
projected growth in future years, is in part attributable to Government policy for the development

135
136

Emirates 2014 annual report at 1.

Emirates Bond offer prospectus issued on 1 February 2013 for notes due in 2025, at 88.

72

of Dubai 137. The publicly released strategic plan of Dubai Airports Company echoes this
special status:
In the Middle East, governments' supportive approach to aviation as a key driver of
economic diversification and social development has led to significant investment in long
range aircraft and infrastructure to exploit the Middle East's geocentric location to tap
into emerging markets 138.
As set forth below, consistent with these policies favoring its air transport sector, the
Government of Dubai has intervened in capital markets to shield Emirates from major financial
losses, and has provided the airline with substantial support in the form of infrastructure, goods
and services for which Emirates has paid its government less than adequate remuneration.
a. A Note on Sources for Emirates
Of the three major Gulf state long haul carrier included in this study, Emirates is the only one
that has published its financial statements. However, those financial statements provide only a
partial picture of government support provided to Emirates and the air transport sector. Emirates
and airport services provider dnata are part of the so-called Dubai, Inc. group of affiliated
companies, and Emirates published financial statements suggest that the airline likely receives
subsidies through its dealings with these related parties. According to the IMF, Dubai Inc.
dominates the Dubai economy through the three major holding companies: Dubai Holding
(owned by Dubai's ruler, Sheikh Mohammed bun Rashid AI Maktoum), Dubai World (owned by
the government), and the Investment Corporation of Dubai (also owned by the government). 139
Emirates' close relationship with the Government of Dubai and Dubai Inc. is exemplified by the
137
138
139

Id.
"Connecting the world today and tomorrow: Strategic Plan 2020," Dubai Airports Company, at 19..
IMF, United Arab Emirates: 2009 Article IV Consultation - Staff Report; Public, at 39.

73

multiple directorships held by Emirates chairman Sheikh Ahmed Bin Saeed AI Maktoum
("Sheikh Ahmed"), uncle to the ruler of Dubai, in both government and government-owned
companies. Besides Emirates, Sheikh Ahmed serves as chief executive for the following entities
that have oversight or provide goods or services to the flagship airline of Dubai 140:
dnata: Air service provider, including cargo, ground handling and catering
Dubai Airports: owner and operator of Dubai International (DXB) and Dubai World
Central (DWC)
Emirates National Bank of Dubai (ENBD)
Dubai Aerospace Enterprise/DAE Capital: aircraft leasing and aircraft maintenance and
repair
Dubai Civil Aviation Authority: oversees civil aviation in Dubai.
Sheikh Ahmed also serves on the board of the Emirates parent, ICD, and a number of
government councils, including the Economic Development Committee (Chairman), Dubai
Executive Council (Second Vice Chairman), Dubai Supreme Fiscal Committee (Chairman). 141
Emirates financial statements disclose that Emirates purchases significant amounts of goods
and services from related parties 142. However, there is no statement in the note on related party
transactions that these purchases of goods and services are provided upon arms length terms;
such statements are typical when clarifying that related party transactions are at arms length.

140

See, e.g., The Emirates Group, His Highness Sheikh Ahmed bin Saeed Al Maktoum, available at:
http://www.theemiratesgroup.com/english/our-company/leadership/hh-sheikh-ahmed-bin-saeed-al-maktoum.aspx
(last visited 15 Jan 2015).
141
142

Id.
See, e.g., Emirates 2014 annual report at 103.

74

The amounts of goods and services that Emirates purchases from each affiliated entity are also
not disclosed, making even an estimate of the magnitude of these potential subsidies impossible.
Another important source of information for Emirates are public bond offerings to raise
funds for Dubai airport expansion. These offerings provide insight into the revenues and costs
associated with operating the governments two airports.
b. Assumption of Jet Fuel Hedging Contracts (Debt Forgiveness)
In 2009, Emirates financial viability was threatened by massive losses from complicated
hedging contracts it had entered into to protect itself from volatility in jet fuel prices. Although
the information about the event is incomplete, Emirates financial statements indicate that the
Government of Dubai granted a multi-billion dollar subsidy to the airline by stepping in and
shielding its airline from these massive losses.
Oil prices were extraordinarily volatile in the 2008-09 time period, hitting a record high of
$147 per barrel in July 2008, with analysts predicting that prices might ultimately exceed $200.
But the analysts were wrong, and airlines that had hedged against these anticipated increases
took enormous losses when prices sharply declined instead, falling below $40 by February 2009.
Air France and KLM, for example, reported fuel hedging losses of 1.35 billion in their 2008-09
and 2009-10 financials 143.
When Emirates fiscal year began on April 1, 2008, it held fuel price contracts with a
notional value of $4.13 billion an enormous position, higher even than its $3 billion fuel costs
143

Air France-KLM 2008-09 Annual Report (English) version at 60 (fuel hedging losses equals 78% of the
total 911 million in financial costs= 711 million) and Air France-KLM 2009-10 annual report at 56 (637 million
in pre-2009 fuel hedging losses booked 2009/10 fiscal year).

75

for the previous year. 144 According to the financial statements, the contracts leveraged the risk
to Emirates in the case of oil price declines. 145 Thus, like other airlines, Emirates should have
reported massive losses when prices subsequently crashed. 146 And indeed, according to one
published account, the counterparties to the contracts made a $4 billion margin call a demand
for additional cash from the airline to cover its heding losses. 147 At the time, Emirates did not
have $4 billion in cash and would have had to declare bankruptcy or restructure, as it would have
been in violation of its other debt covenants. 148
Instead, Emirates novated (i.e., transferred) its fuel hedging contracts to its parent, the
Investment Corporation of Dubai (ICD). 149 Although the description of the transaction in the
financial statements is extraordinarily vague (among other matters, they do not explain exactly
when, how or why the novation took place), it is clear that the airline had already lost $428
million by the time the ICD stepped in to take over the contracts and shield Emirates from any
further losses 150. It is also clear that the value of the companys outstanding fuel hedging

144

See Emirates 2009 annual report at 61 (fuel costs of AED 14,443 million, converted at AED 3.6725 to the
dollar) and 103 (fuel price contracts notional principal amounts outstanding as of the end of FY 2008 of AED
15,180,000 thousand, converted at AED 3.6725 to the dollar).
145
Id. at 108.
146
At a 65 percent loss rate, Emirates would have incurred a loss of $2.7 billion. See Section VI.b.iv. below.
147
Kate Kelly, The Secret Club that Runs the World, at 80 (2014). Kelly reports that Emirates was using
exotic forms of hedging instruments that effectively protected the company from unanticipated changes in jet fuel
prices as long as prices stayed within a fairly broad but fixed band. That strategy backfired spectacularly in
2008-09.
148
Emirates 2009 annual report at 73. As of the end of March 31, 2009, Etihad had $1.24 billion in cash
(4,549,439 AED converted at 3.6725 AED to the dollar). Emirates substantial leasing and other commercial bank
borrowing undoubtedly included covenants requiring the company to have positive levels of cash on hand.
149
Emirates 2009 annual report, Note 34, at 103 (stating that [d]uring the year, the majority of Emirates fuel
hedging contracts have been novated to the parent company).
150
See Emirates 2009 annual report at 72 (other gains and losses of AED 1,572,361,000 or $428 million), and
Note 7 at 86.(identifying fuel costs derivatives as the source of the other gains and losses).

76

contracts plunged from $4.13 billion at the start of the fiscal year to just US$1.5 million at the
end of the year 151.

The financial statements also disclose that the ICD provided $1.6 billion in letters of credit to
Emirates during the fiscal year. 152 Although the financial statements fail to explain the purpose
of the letters of credit, it is likely that the ICD provided them to help satisfy the $4 billion margin
call discussed above. As noted above, given its limited cash on hand, Emirates could not have
made the payment itself without calling into question its ability to continue as a going concern.
The ICDs takeover of Emirates obligation under the hedging contracts and the provision of
the letter of credit eliminated Emirates need to deposit substantial cash with the counterparty to
cover its potential losses, and also shielded the airline from further losses as the hedging
contracts expired. Neither Emirates nor the Government of Dubai has released any information
151

Id., Note 32 at 103 (FYE 2009 fuel price contracts notional value of AED 5,600 thousand, converted at
AED 3.6725 to the dollar)
152
Id. at 105 (Note 34, Related party transactions, item (vi))(AED 5,887,819 thousand converted at AED
3.6725 to the dollar). The statements disclose another $250 million in letters of credit in the following fiscal year.
Emirates 2010 financial statement at 84 (Note 36, Related party transactions, AED 918 million converted at AED
3.6725 to the dollar).

77

on these transactions, including the reasons for the novation, the impact on Emirates if the
novation had not taken place, the total cost that the Government incurred as a result of the
novation or the full benefit to Emirates.
i.

Financial Contribution

By agreeing to the novation of the hedging contracts, the Government of Dubai assumed the
obligations that Emirates owed to its counterparty. Thus, this action is a form of debt
forgiveness, i.e., a government assumption of a companies cash payment obligation.
Government debt forgiveness is considered a direct transfer of funds under Article 1.1(a)(1)(i) of
the SCM Agreement and section 771(5)(D) (i) of Title VII.
ii.

Benefit

The assumption of the hedging contracts conferred several benefits on Emirates. First, the
novation apparently eliminated the immediate need for the posting of a cash deposit for the
counter-partys benefit, reportedly in the neighborhood of $4 billion. Second, the transfer of the
obligation meant that the government ultimately absorbed the losses associated with the hedging
contracts, as the contracts came due. To the extent that the losses exceeded the amount
deposited, this represents an additional benefit. Finally, the novation had substantial
implications for Emirates financial well-being. By assuming this obligation, the government
eliminated the need for Emirates to post a major financial loss at the end of its fiscal year. Such
a loss would have entailed additional capital costs to Emirates, as it would have been in violation
of covenants in its borrowing and leasing contracts. Without government assumption, the airline

78

could have faced calls by financial institutions for repayment, leading possibly to bankruptcy, or
at a minimum costly debt restructuring.
iii.

Specificity

There is no evidence that the governments assumption of Emirates hedging contract

obligations was anything other than a stand-alone policy decision with respect to a specific
enterprise. As explained in Section IV.c.iii. above, such stand-alone contributions to specific
enterprises meet the specificity requirement. In addition, as noted in Section II above, ample
information exists that the Government of Dubai considered airlines to be a strategic industry,
and therefore targeted companies within this industry for substantial support. Benefits that are
limited to industries that are deemed strategic meet the condition of specificity under U.S.
countervailing duty law.
iv.

Quantification of the Benefit

As noted in Section VI.b.iii. above, the benefit is equal to the value of the obligation at the
time of the assumption by the government. Because none of the parties involved in this
transaction has disclosed the value of the obligation, we have estimated the subsidy by applying
to the total value of Emirates hedging position on March 31, 2008 the average loss on hedging
contracts incurred by other airlines during this period that can be calculated from publicly
available financial statements, less the fuel hedging losses reported in the 2009 Emirates annual
reports 153. Using this method, we calculate a benefit of $2.4 billion 154. This estimate is slightly

153

A number of airlines hedged fuel jet purchases in 2008-09, and incurred substantial losses when prices
dropped in 2009. A few U.S. airlines, including Delta, United, and American, disclosed sufficient detail in their
financial statements to calculate the losses as a percentage of their hedging positions.

79

less than the $2.8 billion midpoint between the $1.6 billion letter of credit provided to Emirates
and the $4 billion margin call discussed above.
c. Provision of Airport Terminals for Less than Adequate Remuneration
The Government of Dubais goal of growing Emirates into a mega international long haul
carrier connecting passengers travelling to and from Europe, Asia, and North America through
the Middle East necessitates huge investments in airport capacity, far beyond levels needed to
serve direct travel to and from the UAE. Since the mid-1980s, the Government of Dubai has
invested multiple billions of dollars in runways, taxiways, terminals, and other air transport
infrastructure, initially at Dubai International (DXB), and more recently, at the recently opened
Dubai World Central (DWC). The accompanying Compass Lexecon report, Gulf Airport
Subsidies, describes in detail some of the subsidies bestowed by the Dubai government on Dubai
through the mechanism of artificially low airport user fees 155.
i.

Financial Contribution

The conventional method of financing airports is to set user charges (principally landing fees
and commercial lease rates for gates, lounges, concessions and other retail establishments) at
levels sufficient to generate enough revenue to cover both airport operating and capital costs.
Indeed, regulations in the U.S. and the EU require that airports generally charge user fees that are
sufficient to cover costs, partially so as not to unfairly compete with each other 156. Thus, a

154

The calculations are shown in Exhibit 17. We have not reduced subsidies received by Emirates by their
dividend payments; as such payments are not recognized as offsets to subsidies under international trade law. See
Preamble to the Commerce Department Regulations on Valuing Subsidies, 63 FR 65348, at 65372 and 65374-5
(November 25, 1998)
155
See Exhibit 9.
156
See Kasper at 7-8 and 16.

80

financial contribution is bestowed by a government if it sets user fees at such low levels that they
generate a shortfall between total revenues collected and total airport costs 157. The governments
partial assumption of this operational cost is a financial contribution because it is a provision of
goods and services for less than adequate remuneration within the meaning of Article
1.1(a)(1)(iii) of the SCM Agreement and section 771(5)(D) (iii) of Title VII.
ii.

Benefit

As noted above, an airline receives a benefit when it avails itself of dedicated (i.e., not
general) infrastructure provided by the government without paying adequate remuneration in
exchange for such use.
iii.

Specificity

While government provision of general infrastructure does not bestow an actionable subsidy,
this form of support can give arise to an unfair benefit if the infrastructure is limited to an
industry, or disproportionately benefits a specific enterprise or enterprises 158. However, for this
analysis, we have not considered potential benefits from common airport infrastructure
(runways, taxiways, towers, etc.), which likely are disproportionally received by Emirates (and
thus potentially an actionable subsidy), but have focused this analysis only on Terminal 3 and
157

Under U.S. international trade law, a cost to the government standard can be used to measure the benefit
from sales of goods and services for less than adequate remuneration if there is no commercial benchmark. See
Preamble to the Commerce Department Regulations on Valuing Subsidies, 63 FR 65348, at 65378 (November 25,
1998): Where the government is the sole provider of a good or service, and there are no world market prices
available or accessible to the purchaser, we will assess whether the government price was set in accordance with
market principles through an analysis of such factors as the governments price setting philosophy, costs (including
rates of return sufficient to ensure future operations), or possible price discrimination.
158
One example of such a benefit that was found to be actionable under U.S. countervailing duty law was the
government reimbursement to lumber companies to cover the cost of road building. See Softwood Lumber Subsidies
Report to the Congress, U.S. Department of Commerce (June 2014), at 13-14, available at:
http://enforcement.trade.gov/sla2008/reports/Softwood-Lumber-Subsidies-Report-2014-06-16.pdf (last visited 15
Jan 2015).

81

Concourse 2, as well as Concourse A, of DXB 159. These terminal facilities are used almost
exclusively by Emirates. Because the benefits effectively is limited to one enterprise,
considered to be in an industry designated by the government as strategic, as explained in
Section IV.c.iii. above, the specificity requirement is met.
iv.

Quantification of the Benefit

Dubai Airports Terminal 3 (and the attached Concourse 2), the largest terminal in the world,
opened in 2008 at a cost of $4.5 billion. Concourse A (specially designed for Emirates A380s),
a part of Terminal 3, was completed in 2013 at a cost of $3.2 billion. In total, the Government of
Dubai has spent $7.8 billion for terminal facilities that are for Emirates near-exclusive use 160.
In 2004, the Government of Dubai issued trust certificates for the principal purpose of raising
funds for the construction of Terminal 3. The 2004 prospectus describing the trust certificates
stated that the revenues from the airport had not been sufficient to recover the capital costs
incurred to build and update the airport 161. Thus, the statement provides compelling evidence
that these terminals represent a subsidy to Emirates, equal to its share of the difference between
the total operating and financing costs for these facilities and the total revenues received by the
airport authority from all sources.
As mentioned, the total cost to the government for providing these Emirates specific facilities
are equal to the total operating costs plus the total costs to finance their construction. To
estimate the cost of financing these two airport expansions, Compass Lexecon used the stipulated
159
160
161

Kasper. at 20.
Id.
Id., at 15.

82

profit rate of 6.45 percent, as set forth in the Government of Dubai prospectus for 10 year
Sukuk medium term $650 million fixed rate certificates (an offering that was used to finance
airport construction) 162 as a measure of the financial interest rate that the market would have
required for this financing. The term was set at 20 years, an estimate of the average useful life of
a terminal 163. Using these parameters, Compass Lexecon calculated an average annual
financings cost (interest plus principal) of $705 million164.
To estimate the revenue surplus over operational costs generated by user fees, Compass
Lexecon relied on the annual revenue and expense reported by the Dubai Department of Civil
Aviation for the period 2006 through 2013. The average annual surplus of revenues over
expenses during that time period was $102 million 165. In other words, on average, each year,
fees and leases generated $102 million in revenues over operational expenses that would have
been available for paying the airport capital expenses. Because the Government of Dubai had
other capital expenses besides those related to Terminal 3, Compass Lexecon conservatively
allocated three quarters of the amount as an offset to the cost of financing the Emirates-specific
terminal facilities. The total terminal subsidy for 2013, therefore, would be $705 million minus
$121 million, or $584 million 166.
However, since low airport user fees can also benefit non-aeronautical users (e.g., retailers,
restaurants, concessions, etc.) that lease space, a portion of the benefit should be allocated to the
non-aeronautical terminal users. To estimate the potential benefit flowing to the non-airlines
162
163
164
165
166

Id., at 22. A profit rate in Sukuk financing is equivalent to an interest rate in conventional financing.
Id.
Id., at 23.
Id., at 23-25.
Id., at 26.

83

businesses, Compass Lexecon relied on the average proportion of non-airline business revenue to
total airport revenue for twenty-one large airports, which is around 50 percent 167. In other
words, Compass Lexecon assumed that any subsidy from lower fees equally benefited all airport
terminal users.
In sum, for 2013, 50 percent of $584 million is $292 million, which is the estimate of the
annual subsidy received by Emirates in the form of airport terminal user fees for less than
adequate remuneration 168. The benefit was estimated by Compass Lexecon to be $1.392
billion 169.
d. Exemption from Indirect Airport Taxes
Dubai World Airport charges a passenger fee (including a security fee), established by
government decree, of $21.78 per local departing passenger 170. However, connecting passengers
are exempt from all passenger fees 171. The exemption applies even if the passengers leave the
airport premises and return within 24 hours 172.
In many airports outside the U.S., fees are set lower for connecting passengers compared to
departing passengers 173. However, outside the UAE and Qatar, a complete exemption from fees
for connecting passengers (where there are fees for other passengers)is highly unusual 174. Even
if connecting passengers are not making full use of arrival or departure facilities, they
167
168
169
170
171
172
173
174

Id., at 26-7.
Id., at 28.
Id., Appendix B at v.
Id., at 28-9.
Id.
Id. at 29 (footnote 49).
Id., at 28-29.
Id. at 9.

84

nevertheless use airport facilities and services, including runways and terminals, security, control
tower and baggage handling, as well as requiring the airport to operate larger terminal facilities,
including passenger holding areas 175. Thus, connecting passenger fees are an important source
of revenues used by airport authorities throughout the world to pay for facilities and services.
i.

Financial Contribution

Because the exemption is established by government decree, it represents a direct financial

contribution from the government to the beneficiary airlines in the form of a foregoing of a tax
revenue that is otherwise due, under Article 1.1.(a)(1)(ii) of the SCM Agreement and section
771(5)(D) (ii) of Title VII.
ii.

Benefit

Since airlines are responsible for paying the passenger fees, an airline will receive a benefit
in the form of lower tax payments to the government.
iii.

Specificity

Although all airlines using DXB to connect passengers benefit from this fee exemption, the
exemption is de facto specific to Emirates because Emirates accounts for approximately 91
percent of all connecting passengers at DXB 176. In addition, as noted in Section II above, ample
information exists that the Government of Dubai considered airlines to be a strategic industry,
and therefore targeted companies within this industry for substantial support. Benefits that are
limited to industries that are deemed strategic meet the condition of specificity under U.S.
countervailing duty law.
175
176

Id. at 29-30.
Id., at 30.

85

iv.

Quantification of the Benefit

To estimate the benefit, based on other airport fee levels, Compass Lexecon conservatively
assumed that a reasonable rate for a connecting passenger would be 50 percent of the departing
passenger fee 177. Using this as the non-subsidized connecting passenger fee benchmark,
Compass Lexecon applied this amount to its estimate of the total number of Emirates connecting
passengers at DXB in 2013 to derive an annual benefit of $248 million 178. To avoid double
counting, Compass Lexecon calculated the impact of the imputed additional passenger fees on
the estimate of total Terminal User Fee benefits calculated in Section VI. c. above. The offset is
equal to $103 million, giving an annual net benefit from this program of $145 million179. The
estimate for this program for the period 2004 to 2014 is estimated by Compass Lexecon as $871
million. 180

e. Purchases of Goods and Services for Less than Adequate Remuneration

As noted above, for many years, Emirates annual reports have stated that the company
purchases goods and services from government-owned or controlled suppliers 181. Among the
probable related suppliers are dnata (cargo, ground handling and catering), DAE Capital (aircraft
leasing ), Dubai Airports (landing and facilities leasing), Dubai Aerospace Enterprise (aircraft
maintenance and repair). The identities of the affiliated suppliers, however, are not disclosed in
Emirates financials. Collectively, for FY 2014, Emirates reported related party purchases
177
178
179
180
181

Id., at 32.
Id.
Id., at 33.
Id., Appendix B at v.
See, e.g., Emirates 2014 annual report, Note 37, at 103.

86

totaled AED 8,066 million, or over 10 percent of its total reported operating costs of AED
78,376 million182. The identities of the specific affiliated companies and what the goods and
services they supply, however, are not identified in the notes to the financials.
As the following excerpt from Emirates FY 2014 financial statements demonstrates,
Emirates does not assert that it transacts with its related parties on arms length terms:

Emirates failure to make such an assertion is significant, as international accounting

standards state that a company should not do so unless it can substantiate that it transacts at

182

Id., and at Note 7, at 79.

87

arms length. 183 Given the financial statements silence on this point, it is reasonable to assume
that Emirates does not transact with its related parties on arms length terms.
i.

Financial Contribution

A financial contribution is bestowed by a government if it sets its prices for goods and
services for less than market prices. The governments provision of goods and services for less
than adequate remuneration within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement
and section 771(5)(D) (iii) of Title VII.
The market price standard is analogous to the arms length standard in accounting. The
Emirates annual reports lack the standard disclosure on related party purchases indicating that
these transactions are at arms length. 184 While, under IFRS, Emirates technically may not be
required to make such a pronouncement for transactions with government-owned or controlled
entities, the fact is that many companies do so, in order to provide potential investors with
assurance that financials are not being inflated by non-arms length transactions. 185 If Emirates
absence of an arms length statement is based on government ownership of suppliers, then it is in
violation of IFRS even more stringent rules for disclosing information related to such

183

IAS 24, 23. In addition, International Standards on Auditing (ISA) 550 (Related Parties) 24 notes that if
management has made an assertion in the financial statements to the effect that a related party transaction was
conducted on terms equivalent to those prevailing in an arms length transaction, the auditor shall obtain sufficient
appropriate audit evidence about the assertion. In the case of Emirates, its financial statements do not make such an
assertion, so the auditors would not be required to evaluate such an assertion in the course of their audit.
184
See, e.g., Emirates 2014 annual report, Note 37, at 103.
185
For example, Etihad, which prepares its financial statements in compliance with IFRS, have some form of
arms length pronouncement related to purchases from government owned entities. See Etihad 2013 financial
statement, Note 22(a) at 46-7.

88

transactions. 186 Thus, the absence of an affirmative arms length statement or any other
supplementary information on related party transactions implies that purchases are not at arms
length prices.
ii.

Benefit

As noted above, an airline receives a benefit when it purchases goods or services from
government-owned or controlled entities at below-market prices.

iii.

Specificity

There is no evidence that the governments provision of airline support goods and services
were anything other than stand-alone decisions with respect to a specific enterprise. As
explained in Section IV.c.iii. above, such stand-alone contributions meet the specificity
requirement. In addition, as noted in Section II above, ample information exists that the
Government of Dubai considered airlines to be a strategic industry, and therefore targeted
companies within this industry for substantial support. Benefits that are limited to industries that
are deemed strategic meet the condition of specificity under U.S. countervailing duty law.
iv.

Quantification of the Benefit

Because Emirates does not disclose the identity of its related party suppliers or the specific
goods and services purchased, it is not possible to calculate the precise amount of the benefit.
One way of establishing the benefit magnitude is to estimate the percentage below market prices
186

IFRS 24 requires, among other things, that in the case the related party is government owned, the name of
each government related entity be disclosed, along with the nature and amount of each individually significant
transaction.

89

Emirates pays to related party suppliers, and apply that percentage to all related party purchases.
To calculate the percentage discount, we used the following information.

In its 2008 annual

report, Emirates reported other income of AED 553.8 million ($151million) as well as AED
720.4 million ($196 million) related to gains on the sale and leaseback of aircraft and the sale of
purchase rights to certain aircraft 187. Elsewhere in the financials are listed transactions for Sale
of assets, and Sale of purchase rights in assets, respectively, to unnamed company or
companies under common control 188. In that year, DAE Capital, an affiliated leasing company,
announced that it had concluded the following two transactions with Emirates: 1) the purchase
and leaseback of eight A330-200 aircraft 189; and 2) the rights to purchase 18 freighter aircraft (10
Boeing 747-8F and eight 777F) 190. Connecting the dots, it appears that $350 million in other
income in that year was generated entirely from generous payments received by Emirates from
companies under government control. These transactions improved Emirates cash flow and
financial performance at the expense of other government-controlled entities.
The $151 million gain reported by Emirates is simply a reduction in its aircraft expenses.
These expenses were absorbed by a related party. We divided this gain by the total estimated
value of the eight aircraft at issue to arrive at a 16.7 percent discount rate. We applied this
discount rate to the total of related party purchases for the past ten years to arrive at a subsidy
total of $1.9 billion. These calculations are shown in Exhibit 18.

187

Emirates 2008 annual report, Note 5 at 84.

Id.,Note 33, at 103.
189
http://www.daecapital.com/en/aboutus/key-milestone.html (last visited 15 Jan 2015).
190
http://uk.reuters.com/article/2008/07/16/airshow-boeing-freighters-idUKL1675332120080716 (last visited
15 Jan 2015.)
188

90

We believe that these estimates are conservative in that all purchases from related parties
may not be disclosed in the Emirates financials. For example the related party purchase total for
the Emirates 2014 financials of AED 8,066 million ($2.2 billion) may exclude jet fuel purchases
from affiliates. Elsewhere in its financials, Emirates reports AED 30,685 million in total jet fuel
purchases for FY 2014, a figure that dwarfs total reported related party purchases 191. Since
virtually all of its flights either originate or terminate in DHX, the lions share of Emirates fuel
purchases must be made in Dubai. The Emirates National Oil Company (ENOC), owned by
Emirates parent, the ICD, is a significant supplier of jet fuel in Dubai. In bond offerings in 2013,
Emirates listed ENOC as among its fuel suppliers 192. Moreover, an ENOC press release from
2008 states that ENOC is the largest supplier of jet fuel to Emirates in Dubai 193. To the extent
that Emirates may be purchasing substantial portions of its fuel from its sister company (directly
or indirectly), it does not appear to be reporting such transactions under the related party
disclosure note.
f. Emirates and Dubais Future Capital Commitments
Emirates 2014 annual report indicates that the airline is committed to capital investments
totaling AED 277 billion ($75 billion), principally for aircraft 194. This amount is up from AED
151 billion ($41 billion) at the end of its fiscal year 2013. Emirates has placed orders for 292
wide body aircraft and options for another 70, with list prices totaling $136.2 billion195. As these

191
192
193
194
195

Emirates 2014 annual report, Note 7, at 79

Emirates Bond Prospectus, U.S. $750,000,000, 4.5 percent. Notes due 2025, dated February 1, 2013, at 80.
http//:www.enocaviation.com/enoc_aviation/News.aspx (last visited August 1, 2013) .
Emirates 2014 annual report, Note 31, at 98.
See Exhibit 11.

91

aircraft are delivered, competition in the Middle East long haul market will increase, as Etihad
and Qatar add to their wide body fleets and chase the same customers.
In addition, the Government of Dubai has made major commitments to expand airport
facilities so that Emirates can operate these additional aircraft. As recently as September 8,
2014, the government announced a major expansion program, costing $32 billion, to raise
capacity at the newly opened Dubai World Central (DWC) to 120 million passengers by 2022 196.
Eventually, DWC will be able to handle 100 A380s simultaneously and have the capacity to
serve 120 million passengers annually197. Emirates is scheduled to transfer all of its operations
to the new airport.
Thus, the conditions for continuing, and perhaps even increasing need for government
support are recognizable.

196

gulfnew.com, $32b Dubai World Central development will take airport to 120m passenger capacity,
September 8, 2014, available at http://gulfnews.com/business/aviation/32b-dubai-world-central-developmentwill-take-airport-to-120m-passenger-capacity-1.1382441 (last visited 15 Jan 2015).
197

Id.

92

List of Exhibits
1. Etihad Financial Data and Ratio Calculations
2. Additional Etihad Losses If Investments In Partners Were Reported
3. Comparable Airline Financial Data and Ratio Calculations
4. UAE and Qatar Industry Financial Data and Ratio Calculations
5. Retained Earnings of Start-up Airlines
6. Etihad Shareholder Loan Benefit Calculations
7. UAE Commercial Borrowing Rates and Weighted Average Loan Terms
8. Present Value of Etihad Interest Free Shareholder Loans
9. Gulf Airport Subsidies, by Daniel M. Kasper, Compass Lexecon
10. Etihad Related Party Purchases
11. Orders, Options and Letters of Intent To Purchase Gulf Carriers
12. Qatar Airways Financial Data and Ratio Calculations
13. Qatar Airways Summary of Financial Statements
14. Qatar Airways Shareholder Loan Benefit Calculations
15. Qatar Commercial Borrowing Rates
16. Qatar Airways Loan Guarantee Benefit Calculations
17. Emirates Calculation of Benefits from Government Assumption of Fuel Hedging
Losses

93

18. Emirates Estimate of Benefit from Purchases of Goods and Services at LTAR
Calculations
19. Benefit From Restrictive Labor Practices
20. Emirates Income Tax Exemption Calculation

94

Appendix 1: Gulf Airlines Financial Benefits from Restrictive Labor Practices

Under U.S. trade law, denying workers the right of association or the right to organize and
bargain collectively is "unreasonable" conduct that can provide a basis for the imposition of trade
sanctions 198. All three Gulf airlines that are the subject of this report benefit from restrictive
labor practices. Emirates and Etihad benefit from such unreasonable conduct, as trade unions are
illegal in the UAE 199. In Qatar, trade unions are effectively illegal in its transportation sector 200.
Effective bans on unions are partially responsible for the Gulf carriers' extremely low labor
costs and provide them with a substantial, government-conferred advantage. An in-depth
empirical analysis by Stephen B. Jarrell and T. D. Stanley demonstrated that the mid-point of the
gap between union and non-union wages was 10.65 percent. Thus, for purposes of this study, we
have assumed that the three Gulf airlines labor costs are 10.65 percent lower than they would
be, absent the laws prohibiting unions.

198

19 U.S.C. 24ll(d)(3)(B)(iii)(I)-(II). The United States recently initiated a trade action against Bahrain for
limitations the government placed on freedom of association in 2011; by contrast, the UAE and Qatar do not allow
unions at all.
199
U.S. Department of State, 2012 Human Rights Report for the United Arab Emirates, at 30.
200
U.S. Department of State, 2013 Human Rights Report for Qatar, at 21.

95

Using the three airlines annual labor costs over the past 10 years, as reported in their annual
reports, we estimate the potential cost savings as follows:

Etihad

$246 million

Qatar Airways

$984 million

Emirates

$1,878 million

Total:

$3,108 million

The calculations are shown in Exhibit 19.

96

Appendix 2: Value of Emirates Income Tax Exemption

For the past ten fiscal years, Emirates has reported positive net income. However, income
earned in its home country of Dubai is exempt from corporate income taxes. Under Dubais
corporate tax regime, tax rates are calculated on a sliding scale up to a maximum of 55% 201.
Based on Emirates reported pre-tax earnings, the Governments decision not to enforce the law
with respect to Emirates saved the airline somewhere between $190 million and $511 million in
fiscal year 2013-2014 alone. Total benefits to Emirates over the past ten years could be as high
as $4.6 billion over the past 10 years. 202 Calculations of this potential tax benefit are shown in
Exhibit 20.

201

Taxation in the United Arab Emirates, Galadari and Associates, available at

http://www.galadarilaw.com/uploads/brochures/172113_Tax.pdf (last visited 15 Jan 2015).
202
As shown in Exhibit 20, this figure nets out taxed paid in other jurisdictions.

97

Appendix 3: Government Capital Contributions Treated as Equity Infusions

Up through fiscal year 2008, Qatar Airways reported annual shareholder cash injections as
long term loans. Thus, for purposes of this report, we have treated these cash injections using
subsidy methodologies that are consistent with how the contributions are classified for financial
reporting purposes. In its 2009 financial statements, Qatar Airways moved new shareholder
advances out of the long term liabilities segment of the balance sheet and into the equity
segment. However, up through 2013, the new contributions were not classified as shareholder
capital, but as reserves. These new contributions were not accompanied by the issuance of new
shares. In its 2014 financial statement, Qatar Airways changed its reporting practices once
again, transferring the 2009-2014 shareholder advances to equity and issuing new shares.
Because the capital contributions made by the Qatari government between 2009 through
2014 fall appear to fall somewhere between forgiven debt and equity, we present this alternative
analysis of this potential subsidy, treating them as equity infusions. As set forth below, we find
that these contributions constitute actionable subsidies, if treated as as equity infusions. The
magnitude of the subsidy is the face value of the contributions equivalent to the subsidy value
if they were treated as forgiven debt or grants.

98

i.

Background on Equity Infusions

Equity infusions are included among the types of financial contributions that can constitute
subsidies under the SCM Agreement and the U.S. countervailing duty law. 203 Article 14(a) of
the SCM Agreement lays out the standard for determining whether or not a government equity
infusion confers a benefit:
[G]overnment provision of equity capital shall not be considered as conferring a benefit,
unless the investment decision can be regarded as inconsistent with the usual investment
practice (including for the provision of risk capital) of private investors in the territory of
that Member.
Mirror language for identifying actionable equity infusions appears in the U.S. implementing
regulations for Title VII 204.
In cases such as this, where there is no private commercial investor benchmark, then under
WTO and U.S. subsidy rules the investigating authority determines if the company was
equityworthy, i.e., whether a private investor examining the firm at the time of the equity
infusion would have concluded that the firm was likely to generate a reasonable rate of return
within a reasonable period of time 205. Under international trade law, the private investor
standard is that of a potential investor who must decide among the alternative investment choices
in that country if the investment at issue is reasonable. In making this determination,
investigating authorities place principal emphasis on the recent financial performance of the
company as derived from its recent financial statements. They also consider other factors, such
as market projections, strengths and weaknesses of competitors in the industry, relative riskiness
of the industry in question, and general supply and demand conditions within the market
203
204
205

771(5)(D)(i).
19 CFR 351.507(a)(1).
19 CFR 351.507(a)(4).

99

segment 206. If, after considering all of these factors, an investigating authority concludes that a
reasonable private investor would not have made the equity infusion, the company is deemed
unequityworthy. In such cases, the magnitude of the subsidy is deemed to be equal to the cash
value of the equity infusions 207. In essence, the equity infusions are treated as grants.
ii.

Financial Contribution

Equity infusions are specifically listed as one of the direct transfers of funds that constitute
financial contributions under Article 1.1(a)(1)(i) of the SCM Agreement and Section
771(5)(D)(i) of Title VII.
iii.

Benefit

Where the government is the sole shareholder and where a reasonable private investor would
not have made the investment, equity infusions provide a direct benefit to the recipient in the
amount of total equity (cash) received (see Section V.a. of this Appendix, below, for an
assessment of the direct benefit received by Qatar Airways). In addition, equity infusions can
provide a substantial secondary benefit to the recipient in that they strengthen the companys
balance sheet, thus enabling the company to raise additional capital from other private sources on
better terms than it otherwise would have been able to obtain.
iv.

Specificity

There is no evidence that the governments equity infusions into Qatar Airways were
anything other than stand-alone financial contributions to a particular enterprise. That is, the
equity infusions were not made under a general law available to a broad group of industries in
206
207

19 CFR 351.507(a)(4)(A).
19 CFR 351.507(a)(6).

100

Qatar. In international trade subsidies law, such stand-alone contributions by their very nature
are considered to meet the specificity requirement, as the number of users of the program is
limited to certain enterprises 208. Under U.S. countervailing duty law, for example if a benefit is
found to be bestowed on a limited number of users, the Commerce Department finds that it
meets the specificity criteria, and no further analysis of the range of distribution of benefits under
the program is required 209.
In addition, as noted in the body of this report, ample information exists that the Government
of Qatar considered airlines to be a strategic industry, and therefore targeted companies within
this industry for substantial support. Benefits that are limited to industries that are deemed
strategic meet the condition of specificity under U.S. countervailing duty law 210.

208

See, Article 2.1(a) of the SCM Agreement, which states: Where the granting authority, or the legislation
pursuant to which the granting authority operates, explicitly limits access to a subsidy to certain enterprises, such
subsidy shall be specific.
209
19 CFR 351.502(a). See also, Preamble to the U.S. Department of Commerce Countervailing Duties;
Final Rule, 63 FR 65348, 65355-6 (November 25, 1998).
210
See, e.g., See, e.g., Issues and Decision Memorandum for the Final Determination in the Countervailing
Duty Investigation of Dynamic Random Access Memory Semiconductors from the Republic of Korea
(June 23, 2013) at 13; available at: http://enforcement.trade.gov/frn/summary/korea-south/03-15793-1.pdf (last
visited 14 Jan 2015).

101

v.

Quantification of the Benefit

As the following table illustrates, between 2009 and 2014, the Qatari government provided
capital contributions totaling $6.2399 billion. As explained below, the entire amount conferred a
benefit on Qatar Airways, and thus constitutes subsidies.
Year
2009
2010
2011
2012
2013
2014
2009-2014 Total

Amount (Million US$)

1,735.2
1,226.3
1,193.8
811.1
279.9
993.6
6,239.9

Source
2009 F/S at 6
2010 F/S at 5
2011 F/S at 5
2012 F/S at 5
2013 F/S at 5
2014 F/S at 5

To assess the equityworthiness of the infusions committed in this time period, we are able to
rely on the traditional prior three year analysis of financial ratios. As shown in Exhibit 12, and
as summarized below, virtually all of Qatars financial ratios were extremely poor, and
dramatically so during the three year periods preceding 2009 through 2014, when the
Government of Qatar committed the bulk of the second phase equity infusions:
Summary of Qatar Airways Financial Ratios

Negative or Marginally Positive Net Income: In each year from 2006 to 2014.
Moreover, the company reported losses in each year back to its inception in 1995.

Negative or Marginally Positive Returns on Equity: Other than one year (2005)
which is a statistical anomaly, Qatar Airways reported negative or only marginally
positive returns on equity in every year since its inception. The transfer of
shareholder loans to equity, while improving Qatar Airways creditworthiness, had a
major negative impact on its equityworthiness, as it diluted its return on equity ratio.

102

Negative or Marginally Positive Working Capital: And thus negative or extremely

low working capital to total asset and sales to working capital ratios.

Extremely Poor Current and Quick Ratios: From 2007 to 2014, these ratios were
well below the standard 2.0 benchmark.

Consistent Accumulated Losses: By 2006, Qatar Airways had amassed accumulated

losses of $271 million. Accumulated earnings remained negative through 2014,
notwithstanding massive amounts of annual revenues reported as other income in
the Qatar Airways financial statement.

These poor financial ratios by themselves provide substantial evidence that the Government
of Qataris capital infusions were not commercially sound investments that could expected to
earn an acceptable rate of return within a reasonable period of time.
As shown in Exhibit 12, the bulk of the improvement in Qatar Airways ratios was a mirage
generated largely by the reclassification starting in 2009 of shareholder loans from the long-term
liability to equity sections of the balance sheet (discussed in more detail below). This accounting
reclassification allowed Qatar Airways to show non-negative equity and, thus, slightly positive
debt to equity and equity to total assets ratio beginning in 2009.
Over this same time period, for Qatari businesses, as shown in Exhibit 4, the average return
on equity over this time period was in the double digits. Between 2004 and 2013, the median
return was 14.3 percent. As another point of comparison, as shown in Exhibit 3 the median
return on equity for similar airlines was over 5 percent, with the mean return on equity exceeding
10 percent if one excludes the global financial crisis year of 2008. Given the disparity in returns
between Qatar Airways and other Qatari firms, as well as its poor performance compared to
other airlines, it is reasonable to conclude that a private investor with multiple options for
investing its capital in the Qatar would not have invested in the airline.

103

In assessing the commercial soundness of the equity commitments, we have also considered
certain forward-looking factors, as a private investor would have done at the time of each
additional commitment. One factor that a private investor would have considered in assessing a
possible equity investment into Qatar Airways was the recent past general performance of
airlines industry. Airlines traditionally have been risky investment choices. In the first half of
the 2000s, the financial condition of the global airlines industry was especially poor. The
industry was saddled with substantial excess capacity and experienced occasional
bankruptcies 211. The woeful state of the worlds airline industry in this time period would not
have been a factor favoring a commitment of a stream of substantial start-up capital extended
over many years.
However, even in a declining market, there can be successful start-ups that identify a niche
that is not being served, or a business model that is superior to those on offer from existing
suppliers. In the first decade of the 21st century, private investors considering an investment into
a start-up Middle Eastern long haul carrier would have taken into account the fact that Qatar
Airways was pursuing a niche business model (a Middle East-based international carrier focused
on long haul routes using wide body aircraft) already being pursued by two other major statebacked entities Emirates and Etihad. Emirates is based less than 400 kilometers from Qataris
home airport while Etihads home base in less than 320 kilometers away. At the time these
capital contributions were made, both Emirates and Qatar Airways already had substantial
211

See, e.g., Pricewaterhousecoopers, Aviation finance: Fasten your seatbelts, January 2013, at 14, available
at http://www.pwc.com/gx/en/aerospace-defence-and-security/publications/aviation-finance-fasten-yourseatbelts.jhtml (last visited 14 Jan 2015). From a position of modest profitability in 2000, the global commercial
airline industry swung to losses in excess of 5 billion from 2001 through 2004. Global industry losses continued
through 2005.

104

existing or planned capacity. While this niche strategy may have appeared to be financially
viable for the first, or the most efficient party, a private investor would have understood that the
market was too narrow to support multiple parties and certainly would be hostile to an
unsubsidized start-up. As second to the party, Qatar Airways undoubtedly would have had an
especially difficult time persuading private investors to inject equity.
Another major factor supporting the conclusion that Qatar Airways was not equityworthy is
an analysis of the tolerance of private investors for losses in start-up airlines. Most start-up
airlines during this period began to report positive retained earnings, or at least positive net
income, after a few years of operations. For example, contemporaneous start-up airlines JetBlue
and Vueling achieved positive net income in their second and fifth years of operations,
respectively212. Air Asia X took more time to reach this critical financial threshold 10 years 213.
By contrast, as shown in Exhibit 12, Qatar Airways had substantial negative retained earnings
for many years prior to the contributions in questions, failing to produce any significant net
income in any year to offset these losses accumulated over the prior years. Given the inherent
riskiness of the market, private investors would not have tolerated such losses indefinitely. The
experience of other failed airlines in this period, including Kingfisher and Air India (both of
which were pursuing a somewhat similar business model of offering premium service), are
telling 214.

212

See Exhibit 5. JetBlue commenced operations in 2000, had its first positive net income in 2001, and
positive retained earnings by 2002. Vueling commenced operations in 2004, and had positive net income in each
year from 2008 through 2013; and positive retained earnings by 2012.
213
Id.
214
Kingfisher operated from 2003 through 2013. http://en.wikipedia.org/wiki/Kingfisher_Airlines. (last
visited 14 Jan 2015). AirIndia is still operational, although clearly had substantial difficulties in 2007-2011, with
positive EBITDA beginning in 2013.

105

Other salient factors in our equityworthiness analysis include:

3)

No private investors purchased Qatar Airways equity during that time period.
Further, Qatar Airways received no non-guaranteed long-term term loans from
commercial sources between 2004 and 2012 215.

4)

Absent the explicit guarantees of government financial support, Qatar Airways

would not have been classified by its auditors to be a going concern.

For all of the reasons cited above, we find that Qatar Airways was unequityworthy from 2009
onwards. Accordingly, the Government of Qatars equity infusions during that time period
conferred benefits on the company, and thus constituted subsidies.
To calculate the benefit from these equity infusions, we treated the cash payments as grants
received in the year of receipt, which is the U.S. Department of Commerces method pursuant to
Title VII for calculating the benefit of equity infusion to an unequityworthy company for which
no private investor benchmark is available 216. Thus, if these cash contributions are treated as
equity, the total actionable equity infusions received by Qatar Airways to date is $6.2 billion.

215

As set forth in Section V.f. above, it appears that all of Qatars term loans were guaranteed, either explicitly
or implicitly, by the Qatari government.
216
19 CFR 351.507(a)(2)-(6).

106

GULF AIRPORT SUBSIDIES

Daniel M. Kasper
January 25, 2015

I.

QUALIFICATIONS
1. I am a Senior Consultant for Compass Lexecon. I have over 30 years of
consulting experience at Compass Lexecon, LECG, Coopers & Lybrand,
L.L.P., and Harbridge House, Inc. My work has dealt extensively with
issues involving economics, finance, competition and competition policy in
the airline and aerospace industries. I have also served for a total of ten
years on the faculties of the Harvard Business School and the University of
Southern California School of Business Administration.
2. Between 1979 and 1983, I served at the United States Civil Aeronautics
Board (CAB), first advising the Vice-Chair of the Board on all matters
pending before the agency and then as the Director of International
Aviation. In the latter capacity, I was the Boards primary advisor and chief
line officer for all matters involving international aviation.
3. In 1993, I was one of 15 members of the National Commission to Ensure a
Strong and Competitive Airline Industry, a body created by Congress and
appointed by the President and the Congressional leadership to evaluate and
make recommendations on how to improve the performance of the U.S.
airline and aerospace industries. In addition, I have served as a consultant to
the U.S. Departments of Transportation, State and Defense on various
aviation industry matters, and have also testified as an expert on airline and
aviation industry matters before courts and federal administrative agencies,
as well as legislative bodies and antitrust authorities both in the United
States and abroad.

I earned my M.B.A. and J.D. degrees from the

University of Chicago. My curriculum vitae is attached to this report as

Appendix D.

4. I was assisted in the preparation of this report by Dr. Eric Amel and other
members of the staff at Compass Lexecon.

II. OVERVIEW
5. Airport-related costs are a significant component of an airlines costs. As
shown in Exhibit 10 below, for the U.S. network carriers, landing fees alone
average 8% of airlines expenses (excluding fuel).

Airport costs are

particularly important at the airlines hub airports. Large international

network carriers operate banks of flights into and out of so-called hub
airports wherein addition to transporting passengers traveling to/from the
hub airport citythey also connect passengers traveling between two other
cities. These hub-and-spoke networks allow carriers to compete against
each other by moving passengers between thousands of city-pairs.
Passengers flying between different countries (international passengers)
typically have a choice among many different airlines, which are often
based in different countries. These airlines can conveniently transport the
passengers to their final destinations via connecting flights over their
respective hub airports. As a result, the cost to an airline of operating at its
principal hub airport(s) is a crucial factor in determining a carriers
competiveness for international passengers.
6. Actions taken by a government to subsidizeand therefore reducethe
costs of using its national airlines principal hub airport can thus provide a
disproportionate and substantial cost advantage to the national airline versus
its competitors. That is, if, as a result of funding provided by the state, an
airport sets its fees and charges at levels below its costs, then an airline that

operates a hub at that airport will have a competitive advantage over airlines
that do not operate at hubs receiving comparable state subsidies. 1
7. Based on an analysis of the available data, the fees and charges at three of
the major Gulf area airportsDubai International (DXB), Hamad
International Airport (DOH) in Doha, 2 and Abu Dhabi International
Airport (AUH) appear to be substantially less than would be required
for these airports to cover their costs. 3 Each of these airports has undertaken
substantial and expensive expansions over the past few years, and each
serves as the sole hub airport for one of the fastest growing global network
carriers: Emirates Airline (Emirates) in DXB, Qatar Airways (Qatar) in
DOH, and Etihad Airlines (Etihad) in AUH. Exhibit 1 shows the growth
in available seat miles (ASMs 4) for these three state-owned carriers.
Collectively, the three have grown by over 2,100% since 1998, and Emirates
alone has grown by over 1,400% and is now the largest carrier in the world
as measured by international ASMs. 5

As described in greater detail below, because a substantial proportion of an airlines operations are to/from
their hub airport(s), any cost advantages resulting from airport subsidies (in the form of lower costs) accrue
almost entirely to the carriers with a hub at that airport even if all carriers using the subsidized airport pay
the same fees.

Hamad International Airport replaced Doha International Airport in April 2014, but for consistency DOH
refers to both airports.

For major airportsincluding major international gatewaysin the United States and most other
developed countries, the revenues generated from fees paid by airport users (including airlines, vendors,
passengers, etc.) are typically sufficient to cover the costs of operating, maintaining, modernizing, and
undertaking major construction projects (including new terminals, runways, etc.).
4

An ASM is a standard airline industry measure of capacity defined as one seat flown one mile.

Source: OAG.

EXHIBIT 1: CAPACITY GROWTH OF EMIRATES, QATAR, AND ETIHAD

600

Emirates

Average Daily ASMs (Millions)

500

400

300

Qatar

200

Etihad

100

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: OAG.

8. By building and subsidizing the use of large and costly airports designed to
serve as international connecting hubs, the Gulf states have tilted the playing
field in favor of their flagship airlines and against U.S. (and other
international) carriers in the competition for passengers traveling not only
to/from each Gulf carriers respective home city, but also those passengers
traveling to/from destinations throughout the world. Although neither the
finances of the Gulf State airports that serve as the hubs for the three
carriers, nor the finances of the carriers themselves are transparent, we found
strong evidence that the fees these airports charge for use of their facilities
are not only well below those charged at other large international hub
airports, but are also insufficient to cover the costs of operating and
financing these facilities. Indeed, the costs of operating aircraft to and from
these large, modern airports are the lowest of all major hub airports in the
world by a wide margin (see Exhibit 7 below). As a result, the Gulf State
4

carriers global hubbing operations at these airports derive substantial and

disproportionate benefits from the airport subsidies provided by their
respective governments. 6 These subsidies have enabled Gulf airlines to add
more capacity than they would have added if the airport fees charged for the
use of their respective hub airports had been sufficient to cover those
airports costs. As a result, the airport subsidies have made it possible for the
Gulf state carriers to transport substantial volumes of connecting traffic, at
least some of which would not have been economical absent the state
subsidization of their hub airport facilities.

(i) Despite the lack of financial transparency at the Gulf State airports, an
analysis of the available data points to two substantial and quantifiable
subsidies enjoyed by Emirates at DXB.
9. None of the three Gulf carrier hub airports publishes detailed financial
statements. Nonetheless, at least two major subsidies arising from Emirates
use of DXB can be quantified. 7 The first subsidy results from the financing
of the construction of Terminal 3 (including Concourse 2 and Concourse
A)facilities for which Emirates is the only airline user. 8 Between 2008 and
2013, these facilities were constructed at a total cost of $7.8 billion.
However, the fees paid to the airport by Emirates, plus fees generated by
non-airline users (e.g. concessions, car rentals, etc.), are insufficient to cover
the costs of these facilities. As a result, the provision of airport facilities and
services effectively serves as a subsidy to Emirates. Since over 70% of the
passengers that Emirates carries to and from DXB are making connections
6

As discussed below, 93% of Emirates flights are either to or from DXB, 98% of Etihads flights are either
to or from AUH, and 95% of Qatar Airways flights are either to or from DOH.

It is possible that other airport-related subsidies exist. However, because of the opaque nature of the
financial information for DXB, I have not attempted to quantify other possible subsidies.

Recently Emirates joint venture partner, Qantas, has started to make limited use Terminal 3 as well.

at DXB en route to/from other international destinationsincluding points

in the United States 9it is clear that these subsidies lower Emirates costs
relative to U.S. and other airlines competing for the same international air
traffic.
A second state funded airport subsidy to Emirates results from the structure
of the passenger fees at DXB. Like most large airports, DXB charges a
passenger fee. Unlike most other large hub airports, however, this fee is not
levied on connecting passengers. 10 Since most of Emirates passengers
make connections at Dubai, and since Emirates is the only carrier with a
significant volume of connecting traffic at Dubai, the existing passenger fee
structure disproportionately benefits Emirates. In short, by setting user fees
so low that they are insufficient to cover the airports costs, the government
of Dubai gives Emirates a competitive advantage over U.S. and other
international airlines for the connecting traffic flows that account for the
bulk of Emirates passengers. 11 I estimate that the two airport subsidies were
worth a total of $437 million to Emirates in 2013. To put that figure in
perspective, it represents 38% of Emirates fiscal year 2014 profits. 12 These
airport subsidies overwhelmingly accrue to the benefit of Emirates, lowering
its operating costs and enabling Emirates to add capacity that it would not
have added absent the subsidies. This, in turn, enables Emirates to capture
traffic that would otherwise have been carried by U.S. (or other)
unsubsidized carriers. The lack of transparency with regard to the finances
9

Source: MIDT, 2013.

10

Connecting passengers are those staying in Dubai less than 24 hours. Source: IATA Airport, ATC, and
Fuel Charge Monitor. Dubai also charges a $1.36 security charge fee per departing local passenger and a
$1.36 development fee per local arriving passenger.

11

Etihad at AUH and Qatar at DOH also benefit from a similar passenger fee subsidy. Appendix C
estimates the value of the passenger fee subsidy to each of these airlines.

12

Source: Emirates Group Annual Report, 2013-2014.

of DXB and related entities makes it impossible to determine if Emirates

also benefits from other airport subsidies.
10. The remainder of this paper is organized as follows. Section III is a brief
review of the basics of airport finance. Section IV outlines the impact of
airport costs on airline competition. Section V contains the calculations of
the subsidies from Dubai to Emirates for 2013. Section VI contains the
conclusions.

The appendices include an estimate of total subsidy for

Emirates for 2004 through 2014, as well as 10-year passenger fee subsidy
estimates for Qatar and Etihad.

III.

BASICS OF AIRPORT FINANCING

11. With a few notable exceptions, most large airports are owned by national,
state or local governmental entities. 13

Because of the monopolistic

characteristics of large airports, they are generally subject to regulation,

particularly regarding rates and charges. While the nature of the regulations
varies, airports in the United States, 14 the EU, 15 and many other countries
are generally expected to be self-financing that is, earn revenues from
landing fees, passenger fees, leasing, and other user charges sufficient to
cover operating and capital costs. 16 Likewise, airports generally cannot use

13

See Peter Belobaba, Amedeo Odoni, and Cynthia Barnhart, eds., The Global Airline Industry, Wiley,
2012, p. 367. A number of airports, particularly in the United States, are managed by autonomous
governmental airport authorities (e.g., airport authorities), and the privately owned airports are subject to
the same regulations as the publicly owned airports.
14

See U.S. Department of Transportation, Federal Aviation Administration, FAA Airport Compliance
Manual, effective September 30, 2009, page. 17-1.

15

See Official Journal of the European Union, Information and Notices, Volume 57, 4 April 2014.

16

See also Anming Zhang and Yimin Zhang, Airport charges, economic growth, and cost recovery,
Transportation Research Part E 37 (2001) 25-33, p. 1, airports should in principle be managed on cost
recovery or financial break-even. Another key component in most airport regulation is balancing the
relation between the airlines and the airports to make sure that airports do not abuse their monopoly/market
power by charging excessive fees to airport users

state aid for the purpose of keeping fees low to unfairly compete against
other airports. 17

On the contrary, large airports are expected (and/or

required) to set fees and charges that are neither discriminatory nor
excessive and that are sufficient to recover the costs of building and
operating the airport.

(i) Airport Revenues

12. Airports generate revenues from a variety of sources that can be broadly
categorized as aeronautical and non-aeronautical. Aeronautical revenues are
those obtained from fees and charges paid by the airlines and other aircraft
operators. These fees include aircraft landing fees (which are typically
based on the weight of the aircraft), rental fees paid by airlines for the use of
various airport facilities (including terminals, ticket counters, gates, office
space, clubs, baggage sorting, ramp space, etc.), aircraft parking fees (for
aircraft left on the ground for more than a specified time), and per passenger
fees.
13. Most large airports also charge a per passenger fee that is sometimes added
to the price of the airline ticket on flights using the airport. The primary
passenger fee at U.S. airports is known as the Passenger Facility Charge
(PFC), which is collected from passengers by the airlines at the time of
ticket purchase. 18 By law, all passengers arriving at an airport in the United
States pay the same PFC whether they are beginning or ending their trip at
the airport (i.e. local passengers) or are making a connection at the
17

See Commission Decision of 12 February 2004 concerning advantages granted by the Walloon Region
and Brussels South Charleroi Airport to the airline Ryanair in connection with its establishment at
Charleroi, Official Journal of the European Union, 30.4.2004.

18

In the United States, PFCs are used for targeted projects and are not included in the operating revenues.
See Order 5500.1, Passenger Facility Charge, Department of Transportation, Federal Aviation
Administration, August 9, 2001.

airport. 19 At international airports, however, the level of the passenger fee

usually varies depending on whether the passenger is local or connecting.
Exhibit 2 shows local and connecting passenger fees for international
connecting traffic at the primary hub airports of major international airlines
and the three Gulf carriers. 20 As shown in the Exhibit, all of these airports
except the non-Gulf airports charge a passenger fee for both local and
connecting passengers.
EXHIBIT 2: PASSENGER FEES AT MAJOR HUB AIRPORTS

Airport

Departing Local
Passenger Fee
(USD)

Connecting
Passenger Fee
(USD)

Primary Hub Carrier

$66.82
$33.40
$32.20
$20.60
$20.48
$20.42
$20.42
$15.85
$10.98

$50.13
$17.17
$19.14
$8.65
$10.29
$0.00
$0.00
$7.17
$0.00

British Airways
Lufthansa
Air France-KLM
Air France-KLM
Japan Air Lines
Etihad
Emirates
Singapore Airlines
Qatar

$4.50
$4.50
$4.50

$4.50
$4.50
$4.50

Delta
American
United

International Airports:
LHR: London, United Kingdom
FRA: Frankfurt, Germany
CDG: Paris, France
AMS: Amsterdam, Netherlands
NRT: Tokyo, Japan
AUH: Abu Dhabi, United Arab Emirates
DXB: Dubai, United Arab Emirates
SIN: Singapore, Singapore
DOH: Doha, Qatar
U.S. Airports:
ATL: Atlanta
DFW: Dallas/Ft.Worth
ORD: Chicago, IL

Source: IATA Airport, ATC, and Fuel Charges Monitor: Passenger Fees, as of July 2014.
Notes: Excludes taxes and security fees. International airports passengers fees are the fees for international passengers when
there is a distinction. U.S. Airports are passenger fees are passenger facility charges (PFCs).

14. In addition to aeronautical revenue, airports derive significant revenues from

non-aeronautical sources. These include facility rental payments and other
fees from restaurants, hotels, duty free shops, car rental operators, as well as

19

Connecting passengers are limited to paying PFCs at two connecting airports in each direction (for a
round trip itinerary). Source: Order 5500.1, op. cit. Source: IATA Airports.

20

I have included both CDG and AMS for Air France-KLM as they both represent significant European
hub airports.

revenues generated by automobile parking facilities, taxi and limousine

operators, and other concessionaires. At large international airports, these
non-aeronautical fees can be substantial.

Exhibit 3 shows the non-

aeronautical share of fees at representative major hub airports. As can be

seen, there is a wide range of non-aeronautical revenue contributions, with
the average slightly less than 50% for these airports.

Non-Aeronautical Revenue as a Percentage of

Total Airport Revenue

EXHIBIT 3: NON-AERONAUTICAL AIRPORT REVENUE AS A PERCENTAGE OF TOTAL

AIRPORT REVENUE

80%

60%

72% 70%

67%

63% 62%
60% 58%
50% 49%
47% 47% 45%

40%

42%

Average = 46.0%
39%

36%

31% 29%
27%

24% 24% 22%

20%

0%

Notes: Data for domestic airports is from 2013 with the exception of ORD (2012). Data for foreign airports is from 2012. U.S. Airports
revenue includes Passenger Facility Charges.
Sources: DOT CATS: Report 127, 2013. Air Transport Research Society, 2014 Airport Benchmarking Report: Information Package.

(ii) Airport Expenses

15. An airports expenses include both the costs incurred for the day-to-day
operations of the airport as well as the costs of longer term projects. The
10

day-to-day operations include landside operations (terminals, ground access,

airport roadways, vehicle parking, cargo commercial facilities cargo,
catering, etc.), while the airside operations cover the portion of the airport
dedicated to aircraft including the runways, taxi ways, towers, etc. Airside
facilities must be maintained and operated on a year round basis, typically
between 18 and 24 hours per day. The cost of an airports longer term
projects covers the expense of capital projects such as constructing and
modernizing terminals, runways, airport infrastructure, etc.
16. Airports must raise capital to finance the costs of constructing and
modernizing their facilities.

These costs can be substantial, potentially

running into the billions of dollars. Exhibit 4 below shows a few recent
examples of large airport capital projects.
EXHIBIT 4: SELECTED MAJOR AIRPORT CAPITAL PROJECTS
Airport
ATL: Atlanta
BOS: Boston
LHR: London, United Kingdom
SIN: Singapore, Singapore
ORD: Chicago, IL

Project
Terminal for International Passengers
Terminal A
Terminal 2
Terminal 3
New Runway

Cost (Millions USD)

$1,400
$350
$3,900
$1,400
$1,300

Operational
2012
2005
2014
2008
2013

Sources:
1: NY Times.com: Airport Focus on the Ground, June 14th, 2012
2: Airporttechnology.com: Logan International Airport Expansion, Boston, MA, United States of America, 2014
3: FT.com: Milestone for Heathrow Terminal 2 Revamp, February 17th, 2012
4: Changi Airport Group: Changi Airports Development: Terminal 3, April, 2010
5: Chicago Tribune.com: Perfect Weather to Open New Runway at OHare, October 17th, 2013

17. Financing large airport projects generally involves the issuance of debt
(bonds) backed by the revenues from the airport. In the United States these
bonds are usually General Aviation Revenue Bonds (GARBs) which
contain covenants that mandate a ratio of airport revenues to debt coverage
that compels the airport to generate enough net revenue (i.e., revenue

11

remaining after operating expenses are paid) to more than cover the annual
bond costs in order to avoid being in default. 21
18. For example, Exhibit 5 shows Net Revenues Available for GARB Service
for Atlantas Hartsfield International Airport (ATL) for 2012 and 2013
(the debt has a required coverage ratio of 1.2 22). In 2013, the airport had
total outstanding debt of $3.2 billion.23 The total net revenues in 2013 from
airport operations (excluding PFCs) were $266.7 million, 24 while the
general revenue debt obligation was $157.2 million, resulting in an actual
coverage ratio of 1.7. That is, the airport generated more than enough debt
coverage (i.e., revenue over annual debt costs) to meet its debt service
requirements.

21

For example, for Atlanta Hartsfield-Jackson International Airport [a]ll of the bond ordinances require
the maintenance of sinking funds to provide for to provide for debt service on the related bonds. The
ordinances also require the Department to maintain a ratio of Net Airport Revenue to Aggregate Debt
Service, as defined, of at least 120%. Hartsfield-Jackson Atlanta International Airport, Comprehensive
Annual Financial Report for the Year Ended June 30, 2013, p. 31.
22

See Footnote 21.

23

Includes GARB and PFC debt (i.e., debt that is backed by PFC revenue).

24

PFCs are used for targeted projects and are not included in the operating revenues. See footnote 18
above.

12

EXHIBIT 5: ATL NET REVENUES ($000)

2012
Revenues:
Operating revenues- receipts from customers and tenants
Investment Income
Total Revenues
Operating expenses:
Payments to suppliers for goods & services
Payments to or on behalf of employees
Other payments
Additions from CIP reconciliations
Total operating expenses
Net revenues
General revenue bond debt service requirements
General revenue bond debt paid from PFC revenues
General revenue bond debt paid from net revenues
Debt service coverage on general revenue bond debt service paid from net service

2013
400,193
6,901
407,094

484,946
12,219
497,165

134,631
74,917

155,482
74,959
230,441
266,724
157,237
157,237
1.70

$
$
$

209,548
197,546
125,366
8,300
117,066
1.69

Sources: City of Atlanta, Department of Aviation

2006 represents a six-month period beginning January 1, 2006 and ending June 30, 2006

Source: Hartsfield-Jackson Atlanta International Airport 2013 CAFR, P. 50.

Note: Original chart covers years 2004 to 2013 and is titled Net Revenues Available for General Aviation Revenue Bonds Debt Service.
All numbers are in thousands.

(iii) Gulf Airports Do Not Appear to Cover their Costs

19. Despite the limited information the Gulf State airports make available
regarding their airports finances, there is good reason to believe that they do
not generate sufficient revenues to cover their costs. One compelling piece
of evidence is that, notwithstanding the large capital expenses each has
incurred over the past ten years, the Gulf state airports charge extremely low
landing fees. Exhibit 6 shows a partial list of recent major capital projects at
the three Gulf state airports. These projects involve large capital expenses
that would have to be recovered by user fees and charges if the airports were
covering these capital costs.

13

EXHIBIT 6: MAJOR CAPITAL PROJECTS IN DUBAI, DOHA, AND QATAR

Airport
DXB: Dubai, United Arab Emirates

Country
Dubai

Project
Terminal 3, Concourse 2

Cost (Millions USD) Operational

$4,500
2008

DXB: Dubai, United Arab Emirates

Dubai

Concourse A

$3,300

2013

AUH: Abu Dhabi, United Arab Emirates

Abu Dhabi

Terminal 3

$272

2009

AUH: Abu Dhabi, United Arab Emirates

Abu Dhabi

Midfield Terminal

$6,800

2017

DOH: Doha, Qatar: Doha International

Qatar

Terminal B

Not Available

2011

HIA: Doha, Qatar: Hamad International

Qatar

New Airport

$17,500

2014

Sources:
1: Dubai International Airport.com: Fact Sheets, Reports, and Statistics, April 13th, 2014
2: Dubai International Airport.com: Fact Sheets, Reports, and Statistics, April 13th, 2014
3: CAPA Centre for Aviation: Abu Dhabi International Airport: Operations Launched at Terminal 3, April 23rd, 2009
4:Construction Week Online.com: New Abu Dhabi Terminal to Open Q3 2017, July 3rd, 2013
5: OnlineQatar.com: Latest Qatar News: Doha International Airport Unveils Brand New Terminal B for International
Carrier, June 21st, 2011
6: ArabNews.com: New Qatar Airport to Open Next Week, April 25th, 2014

20. But, as shown in Exhibit 7, the landing costs at these airports (including
both passenger charges and weight based landing and take-off fees) are
extremely low. That is, notwithstanding the fact that the Gulf state airports
have undertaken huge capital projects in the past few years, their landing
fees are the lowest of all the major hub airports in the world.
EXHIBIT 7: AIRPORT CHARGES AT MAJOR HUB AIRPORTS ($000)

Airport Charges (per Operation), Boeing 777300ER (Thousands)

Average of Non-Gulf Airports:

15.1
$40
$35

34.2

$30
$25
$20

24.7

23.0

22.0

20.9
17.1 17.0 16.4
16.1 15.8

$15

Average of Gulf
Carrier Hub
Airports: 3.7

14.9 14.7 14.1

13.9 13.9 13.6 13.3
12.6
10.1

$10

8.2

$5

7.8

6.8

6.8

5.2

3.8

$0

Sources: RDC Aviation Ltd.

Notes: Assumes MTOW of 351.5 tons, seating capacity of 358, load factor of 80%, 65% connecting passengers, and 3 hours park time.
Airport charges include: landing and runway charges, parking and ramp fees, infrastructure/passenger fees, departure and arrival
taxes, security fees, APHIS fees, customs and immigration fees, and other misc. fees.

14

3.8

3.5

21. By itself, the combination of low charges and expensive capital projects is
compelling evidence that the Gulf States are providing substantial subsidies
to their flag airlines by absorbing airport costs.

But, in addition, the

government of Dubai has explicitly acknowledged that DXB does not cover
its costs:
DCA [Department of Civil Aviation] revenues are sufficient to
pay for its operating expenses, generating an annual cash
surplus. However, the surplus cash flows are not adequate to pay
for the high capital expenditure, which is incurred continually to
expand and upgrade the DIA 25
22. Finally, information regarding the revenues and expenses at DXB made
available in certain bond prospectuses (see Exhibit 12 below) shows that the
surplus of revenue over operating expenses shown is far too low to cover the
airports major capital expenses incurred for the two large projects described
in Exhibit 6.
23. This situation is in marked contrast to other large international hub airports,
particularly in the United States and the EU. Although national regulations
covering airports differ somewhat, large airports are typically required to be
self-sustaining. In the United States, for example, Federal Aviation
Administration (FAA) rules require large airports to be as self-sustaining
as possible. 26 In addition, as discussed above, bond covenants require an
25

Preliminary Offering Circular (Subject to Completion) Dated 10 October 2004, Government of Dubai,
Trust Certificates due 2009, p. 54. Further, the airport has stated that Dubai Airports focus on
developing non-aeronautical revenue streams is fundamental to ensuring sustained corporate stability as
well as reducing dependence on government funding. (Emphasis added). Source: Dubai Airports
Review 2012.
26

U.S. Department of Transportation, Federal Aviation Administration, FAA Airport Compliance Manual,
effective September 30, 2009, page 17-1. The FAA does offer grants for some airfield projects. However,
the grants are generally not offered for terminal projects and other projects that directly benefit airlines, and

15

airports revenue to exceed its costs by a specified multiple. As a result,

these airports set their rates and charges at levels that will cover both
operating costs and debt coverage. 27 Similarly, EU guidelines governing
airport financing generally disallow state aid to large airports. 28
Consequently, airport fees and charges are set so that the revenues generated
by an airport cover both its operating and capital costs.

IV.IMPACT OF AIRPORT SUBSIDIES ON COMPETING AIRLINES

24. A primary way that airlines compete for passengers is by offering a schedule
of flights that allows passengers to make connections over the airlines hubs
on routes between thousands of city-pairs. The competition among airlines
is especially intense for passengers flying between different countries
(international passengers). Exhibit 8 shows the percentage of international
passengers flying to/from each carriers largest hub who are making
connections at that hub. As the Exhibit illustrates, for most of these carriers
a large majority of these carriers international passengers are connecting
over their hubs. As a result, an airline that enjoys significantly lower costs
at its hub airport(s) has a significant competitive advantage over other
international airlines when competing for these passengers.

the grants are funded from the aviation trust fund which is itself financed by fees on airlines. See FAA
Overview: What is AIP? at http://www.faa.gov/airports/aip/overview/.
27

When airport bonds are issued by a municipality, the bonds are backed by the airport revenues which
effectively require the airport to charge sufficient fees to cover its operating and debt service costs.
28

See Official Journal of the European Union, Information and Notices, Volume 57, 4 April 2014. For
example, airports with annual passenger traffic above 5 million are usually profitable and are able to cover
all of their costs, except in very exceptional circumstances, (p. C99/20) and airports with annual
passenger traffic above 3 million are usually profitable at operating level and should be able to cover their
operating costs. C99/24.

16

Percent of International Passengers at

Hub Airports Making Connections at Hub

EXHIBIT 8: PERCENTAGE OF INTERNATIONAL PASSENGERS AT HUB AIRPORTS

MAKING CONNECTIONS
100%
90%
80%

83.1%

82.1%

80.0%

70%

75.9%

74.8%

71.0%
57.5%

60%

54.4%

50%

50.8%

46.4%

40%
25.5%

30%
20%
10%
0%

Source: MIDT FYE July 2014.

Notes: Passengers on itineraries between two different countries. Largest hub shown. Passengers on single marketing
carrier. American includes US Airways. British Airways includes Iberia and Vueling. Lufthansa includes Lufthansa,
Austrian, Swiss International, Brussels, and Germanwings. Singapore Airlines includes Scoot and Silk Air.

25. While many large international carriers provide connections over multiple
hubs, each of the three Gulf carriers connects its passengers over a single
hub. Thus, as shown in Exhibit 9, over 90% of each Gulf carriers flights
are either to or from their home state hub, a substantially higher percentage
than for the other large international airlines (with the exception of
Singapore). Hence, the low airport costs at their hubs benefits nearly all of
the Gulf State carriers operations and confers a substantial advantage on
Gulf carriers in the competition for international connecting traffic.

17

Percent of Operations To/From Carriers

Largest Hub

EXHIBIT 9: PERCENTAGE OF EACH CARRIERS DEPARTURES AT ITS LARGEST HUB

100%

98%

95%

94%

93%

90%
80%
70%
60%
50%

40%

40%

38%

36%

36%
29%

30%

24%

23%

20%
10%
0%

Source: OAG, 2014.

Notes: Largest hub shown. American includes US Airways. British Airways includes Iberia and Vueling. Lufthansa includes
Lufthansa, Austrian, Swiss International, Brussels, and Germanwings. Singapore Airlines includes Scoot and Silk Air.

26. The potential impact of Gulf state airport subsidies on their flag carriers
cost structures can be seen from an analysis of airport costs as a proportion
of total airlines cost. As shown in Exhibit 10, total airport costs as a
percentage of airline operating costs (excluding fuel)

29

constitute close to

8% of the operating expenses for the U.S. airlines. In contrast, airport costs
constitute only 3.3% of Emirates total expenses. 30

29

The U.S. carriers show Landing Fees and Other Rentals while Emirates shows Landing and Parking.
However, in the Emirates financial statements there appears to be no other line item that would include
other airport rentals, making it likely that Emirates is reporting the full airport costs. The other Gulf
carriers do not release the information needed to include them in this analysis.
30

Emirates is the only Gulf carrier to release financial statements with sufficient information to calculate
this percentage.

18

EXHIBIT 10: LANDING FEES AS A PERCENTAGE OF OPERATING COSTS (EXCLUDING

FUEL)
Landing Costs as a Percentage of
Operating Costs Excluding Fuel

9%

8.5%

8.1%

8%

7.3%

7%
6%

US Carrier
Average 8.0%

5%
4%

3.3%

3%
2%
1%
0%

United

American*

Delta

Emirates

* Includes US Airways.
Source: 2013 carrier annual reports.
Notes: Emirates represents Landing and Parking fees. The U.S. carriers are Other Rent and
Landing Fees. United includes regional lift. American, Delta and US Airways are mainline
only.

V. ESTIMATING THE EMIRATES AIRPORT SUBSIDY AT DXB

27. In the case of DXB, two major subsidies that directly benefit Emirates have
been estimated. The first arises from the state financing for the construction
of the two major airport facilities that benefit only Emirates. The second
subsidy derives from the structure of the airport passenger charges. Both
subsidies serve to lower Emirates cost of competing against other airlines

19

for international passengers.

This section contains the estimate of the

Emirates subsidy for 2013. 31

(i) Terminal 3 and Concourse A Subsidy

28. In 2008, Terminal 3 (which includes Concourse 2) was opened at DXB at a
cost of $4.5 billion. 32 Terminal 3 is the largest terminal in the world, and
Emirates is the only airline to use it. Concourse A, which was specifically
designed for Emirates new fleet of widebody, double-decker, Airbus
A380s, was added to Terminal 3 in 2013. Concourse A cost $3.3 billion
and, like Terminal 3, is used only by Emirates. 33 Taken together, a total of
$7.8 billion of terminal and concourse space has been opened since 2008 for
the exclusive use of Emirates.
29. As noted above (see paragraph 21) the government of Dubai previously
acknowledged that the revenues from the airport were not sufficient to cover
the capital costs that had been incurred at that point to build and maintain
the DXB. Further, in the same document the government acknowledged that
it makes up the difference between the capital costs of the airport and the
airport revenues that remain after covering the airports operating
expenses. 34 Any shortfall in revenues compared to the operating and debt

31

2013 is the last year for which I have been able to obtain the reported airport financial results required to
calculate the subsidy. The DXB surplus revenue for 2014 in Appendix C is based on an estimate of DXBs
2014 results.
32

Source: Dubai International Airport.com: Fact Sheets, Reports, and Statistics, April 13th, 2014.

33

Source:
Dubai
International
Airport,
Fact
sheets,
Reports
&
Statistics,
http://www.dubaiairport.com/en/media-centre/facts-figures/pages/factsheets-reports-statistics.aspx?id=10.
Emirates JV partner Qantas uses a gate in Concourse A. See footnote 8.
34

However, the surplus cash flows are not adequate to pay for the high capital expenditure, which is
incurred continually to expand and upgrade the DIA and had been primarily financed by the
Government[emphasis added]. Preliminary Offering Circular (Subject to Completion) Dated 10 October
2004, Government of Dubai, Trust Certificates due 2009, p. 54.

20

service costs for the terminal and concourses that is funded by the
government amounts to a subsidy for the users of these facilities. Since
Emirates is the only aeronautical user of Terminal 3/Concourse A, it is the
sole airline beneficiary of these subsidies. Hence, any subsidy for Terminal
3 and Concourse A directly and overwhelmingly benefits Emirates. The
subsidies are particularly beneficial for Emirates in competing for
connecting traffic against airlines that do not receive comparable subsidies
at their hub airports.
30. Three steps are required to estimate the size of the annual subsidy to
Emirates arising from the Terminal 3 subsidy. First, it is necessary to
determine the annual debt payments required to cover the annual financing
costs for Terminal 3. The annual payment is determined by using the
interest rate and the term of a bond issue for the $7.8 billion that would pay
for the costs of constructing Terminal 3/Concourse A.

Second, it is

necessary to determine the amount of DXBs debt service costs that could
be paid from the surplus of DXBs revenues after paying operating costs.
Subtracting this amount from the annual debt service cost leaves the annual
subsidy to users of Terminal 3, i.e., the annualized portion of the
construction costs that is paid by the government. Third, it is necessary to
determine the portion of the subsidy that is appropriately allocated to
Emirates.

21

a) Step 1: Estimating the Annual Debt Service

31. The estimated annual debt service is the annual payment that would be
required on a $7.8 billion bond. 35

The two key variables required to

calculate the annual payment are the interest rate that would be demanded
by lenders and the term for the borrowing (i.e., the years required to pay the
bond).

The interest rate 36 on a bond used to finance the projects is

determined by estimating the rate that investors would have required to

finance a very large capital project at DXB. In 2012, the Government of
Dubai issued a 10-Year Sukuk Medium Term $650 Million Fixed Rate
Certificate (as part of a Notes Issuance Program allowing up to $5 billion in
notes to be used to fund the expansion of Dubai International Airport). 37
These bonds contained a stipulated profit rate for investors of 6.45%. 38
For the subsidy estimate, we therefore used an interest rate of 6.45%. 39
32. A term of 20 years was used for the period of the bond amortization. This
would be typical for large airport project bonds and is a reasonable estimate
of the amount of time before a large commercial terminal would require
significant capital improvements and/or replacement with a newer

35

This would be the annual interest charge plus an annual payment to a sinking fund for the principal
repayment.
36

The interest rate used is the yield to maturity, which would be the interest rate for a bond issued at par.

37

Government of Dubai U.S. $5,000,000,000 Dubai DOF Sukuk Limited, Trust Certificate Issuance
Programme, Base Prospectus Date 24 April 2012.
38

Sukuk bonds do not pay interest, and instead use a stipulated profit rate. See, for example, Amana Bank,
Sukuk: Shariah Guidelines for Islamic Bonds, January, 2012, p. 31.
39

The government of Dubai does also issue some non-Sukuk bonds. I was able to get information on two
which each had greater than 10 year maturities (DUGB 5.591 06/22/2021 Govt and DUGB 7.75
10/05/2020 Govt). For the period October 2010 (when the data begins) through December 2012, the
average yield to maturities on these were 6.4%. Source: Bloomberg.

22

terminal. 40 At an interest rate of 6.45%, the annual payment (covering the

amortization of principal over the 20 years plus interest) on a 20 year bond
would be $705 million. 41
EXHIBIT 11: CALCULATION OF ANNUAL PAYMENT
Capital Cost (millions)
Interest Rate
Years Of Payment
Annual Payment (millions)

$7,800
6.45%
20
$705

Note: Assumes equal annual payment (including coupon and

sinking fund payments).

b) Step 2: Estimating Airport Revenue Available to Pay Terminal 3

Debt
33. Any revenues that DXB generates in excess of its operating costs would be
available to help pay the debt service obligations. Hence, the subsidy would
be the portion of annual debt service obligations that could not be covered
by the available excess revenue and would therefore be paid by the
government.

Although DXB does not issue financial statements, the

Government of Dubai has revealed some details about the revenues and
expenses generated by the airports proprietor, the Department of Civil
Aviation (DCA). 42 According to the government, the revenues of the
DCAA [Dubai of Civil Aviation Authority] principally comprise fees
collected including fees for aircraft landings, parking fees, passenger

40

The average term of debt at Chicago OHare (ORD) which is undergoing a major modernization
program, is 17.8 years (measured at issuance and weighted by the principal). Source: Bloomberg.
41

The $705 is the 20-year annual payment that has a present value of $7,800 million at an interest rate of
6.45%.
42

See Base Prospectus Dated 21 January 2013, p. 75

23

service fees and aerobridge charges.

43 44

Exhibit 12 shows the operating

revenues and expenses for the Department of Civil Aviation from 2004
through 2013. 45 The difference between operating revenue and operating
expenses is the surplus revenue that would potentially be available for
bond payments. Note that the subsidy estimate is based on a year (2013)
with very high operating profits (i.e., profits excluding borrowing costs) for
the airport.

43

Base Prospectus Supplement Dated 27 September 2010 To the Base Prospectus Dated 28 October
2009, p.25. The revenues and expenses are booked for the Department of Civil Aviation, while in 2009
the DCAA was noted to be the governing body which oversees the activities of Dubai International
Airport (Ibid, p.25). Comparisons with a 2004 prospectus (Preliminary Offering Circular (Subject to
Completion) Dated 10 October 2004, Government of Dubai, Trust Certificates due 2009) show that the
revenue and expenses that had been booked under Airport Operations were later booked under
Department of Civil Aviation. The government subsequently created the Dubai Airport Company (DAC)
to manage the operation and development of the Dubai Airports (see Base Prospectus Dated 21 January
2013, p. 75). However, comparison of DCA revenues before and after the creation of the DAC shows
that there has been no change in the reporting of the airport financials through the DCA.

44

In 2004, besides the Airport Operation, the DCA income also included in its income revenue from Dubai
Duty Free and Emirates Dividend, and in fact stated that The Government has earmarked cash flows being
generated from DCAs Airport Operations, Duty Free net cash flows, Emirates dividends and Airport
service fee for repayment of DCAs borrowings undertaken to finance the expansion of DIA with shortfalls
if any, to be met by the Government. (Preliminary Offering Circular (Subject to Completion) Dated 10
October 2004, Government of Dubai, Trust Certificates due 2009, p. 55). However, the income from
Duty Free is an income from another business that is owned by the government and does business at the
airport. Thus, income from duty free sales is not income from the airport itself. Similarly, the dividend
from Emirates is a payment to the owners of Emirates is not a payment for airport use. Indeed, the
prospectus itself notes that The Government has also made arbitrary allocation of funds to DCA through
dividend payments by Emirates for financing the DIA expansion program. P. 55.
45

I have been unable to obtain DCAs 2014 financial information.

24

EXHIBIT 12: DCA REVENUES AND EXPENSES ($MILLIONS)

2004
2006
2006
2007
2008
2009
2010
2011
2012
2013

Revenue Expense
$137
$95
$223
$159
$223
$159
$351
$207
$389
$315
$528
$450
$641
$506
$720
$589
$785
$656
$839
$677

Average

Excess
Revenue
$43
$64
$64
$144
$74
$78
$135
$130
$129
$162
$102

Sources: Base Prospectus Dated 21 January 2013, pages

99 and 101; Base Prospectus Supplement Dated 27
September 2010 To The Base Prospectus Dated 28
October 2009, pages 45 and 46; Government of Dubai
Prospectus Dated 14 April 2008, pages 55 and 56.

34. It is important to recall that the $7.8 billion represents only the Terminal
3/Concourse A debt, and not all of the debt of the airport. Like other
airports, DXB has also undertaken airport capital projects for building and
maintain common use facilities (e.g., for runways, taxiways, towers, internal
roadways). An unsubsidized airport would have taken on debt for many or
most of these projects, which would result in additional obligations on the
surplus revenue. Since DXB does not make detailed balance sheets or
financial statements publicly available, it is not possible to determine
directly what percent of the surplus revenue would be used to pay the
Terminal 3 debt. Since the capital expenses incurred to develop Terminal 3
were so large, I have assumed that a large percentage (75%) of the surplus
cash would be used to pay down the portion of airport debt incurred to build

25

Terminal 3. 46 Thus, of the $162 million in DCA surplus revenues in 2013,

$121 million would be available to help defray the $705 million annual debt
service obligations for Terminal 3. The difference between the $705 million
annual debt service and the $121 million available from the airports
revenue surplus is $584 million (see Exhibit 13). This is the amount of the
Terminal 3 costs paid by the government rather than the airport users, and
constitutes a direct financial benefit and subsidyto those users.
EXHIBIT 13: CALCULATION OF THE TOTAL TERMINAL 3 SUBSIDY
Base (2013)
Terminal 3/Concourse A Annual Subsidy
Cost of Terminal 3/Concourse A
Years to Repay
Interest Rate
Annual Capital Cost
DCAA Surplus Cash
Share of Surplus Revenue Used to Pay Terminal 3
Debt

$7,800

[A]
[B]

20
6.45%
$705
$162

[C]

75%

DCAA Surplus Cash Available to Pay Terminal 3 Debt

[D] = [B] x [C]

$121

Total Airport Subsidy

[E] = [A] - [D]

$584

Notes: Millions of dollars.

c) Step 3: Estimating the Share of Subsidy to Aeronautical Users

35. The final step in determining the magnitude of the Terminal 3 subsidy to
Emirates is to determine what portion of the overall Terminal 3 subsidy of

46

The greater the portion of surplus revenues used to pay the Terminal 3 debt, the lower is the estimated
portion of capital costs that would need to be funded by the government. Therefore, the most conservative
assumption would be that 100% of the surplus revenue would be used to pay the Terminal 3 debt. As
shown in Footnote 58 below, increasing the proportion to 100% does not substantially change the analysis.
However, given that Emirates has 62% of the departing seats from DXB, and given the number of capital
projects that airports must undertake, it seems far more likely that the actual percentage of surplus revenues
available to pay airport capital costs would be lower than 75%. Hence, my analysis probably overstates the
governments capital cost contribution.

26

$584 million should be allocated to the airlines and other airport users.
Although Emirates is the only airline tenant of Terminal 3, non-airline users
(e.g., concessions/airport shops) also utilize airline terminals and generate a
significant share of a large airports revenues. Likewise, the responsibility
for paying the airport capital costs is typically allocated among airlines and
other users of terminal facilities in proportion to the amount and quality of
the space required to accommodate each type of user.

It is therefore

possible that non-aeronautical users might benefit from some portion of the
Terminal 3 subsidy. Thus, if the airport raised its fees sufficiently to
eliminate the subsidy, the fees for these other users might increase as well.
36. Given the lack of financial information with respect to DXB, I have used the
percentage of airport revenues generated by non-aeronautical users at other
large hub airports serving international connecting passengers as a guide for
allocating the subsidy at DXB.

Exhibit 3 (above) shows that, for a

representative set of large hub airports, non-aeronautical revenues range

between 22% and 72% of total airport revenues with an average of close to
50%. For purposes of analysis, I therefore assumed that Emirates and nonairline users benefit equally from DXBs below-cost pricing (i.e., allowing
use of terminal or other airport facilities at rates below their full costs). 47

(ii) Total Emirates Terminal 3 Subsidy

37. The derivation of the final Terminal 3 subsidy to Emirates is shown
graphically in Exhibit 14. With a 6.45% interest on a 20 year $7.8 billion
bond, the annual payment (interest and principal) would be $705 million.
47

Since Terminal 3 was built primarily to benefit Emirates and to bolster Emirates ability to compete for
international passengers, it is quite likely that the fees and charges would be structured such that Emirates
was the primary beneficiary of the subsidy. Therefore, the case where only 25% of the subsidy benefits
flow to non-aeronautical users (i.e. 75% of the benefit goes to aeronautical users, principally Emirates) is
also analyzed in Section VI.

27

Assuming that 75% of DXBs $162 million surplus revenue is used to pay
the Terminal 3 debt means that $121 million/year would be used for this
purpose. This then leaves a total annual subsidy of $584 million (i.e., the
amount of the debt service paid by the government rather than airport users).
On the assumption that Emirates and non-aeronautical users benefit equally
from the subsidy, the estimated 2013 subsidy to Emirates for Terminal 3
facilities is $292 million.48
EXHIBIT 14: CALCULATION OF EMIRATES 2013 SUBSIDY WITH 6.45% INTEREST ON A
20 YEAR BOND
$800

$705

$700

Millions $USD

$600

-$121

$584

$500
$400
$300

-$292

$292

Less 50% Share of

Subsidy to NonAeronautical Users

Emirates Estimated
Terminal 3 Subsidy
Assuming 50% Goes to
Emirates

$200
$100
$0
Annual Capital Cost at Less DCAA Surplus Cash
6.45% for 20 Years
Used For Terminal 3
Bonds

Total Subsidy to All

Terminal 3 Users

(iii) Passenger fee subsidy

38. The second airport subsidy benefiting Emirates results from the structure of
the passenger fees at DXB. Like all major international airports, DXB
charges a passenger fee. The primary passenger fee at DXB is $20.42 USD

48

Depending on the contractual terms between Qantas and Emirates, it is possible that a small amount of
Emirates subsidy could benefit Qantas, which is Emirates joint venture partner. However, Qantas
currently only has about 2% of the departures of Emirates. Source: OAG.

28

per local departing passenger. However, no passenger fee is charged for

connecting passengers. 49

Exhibit 15 shows the passenger fees for the

international airports from Exhibit 2, ranked by the percent of the primary

carriers international passengers making connections (see Exhibit 8
above 50). Although Emirates (along with the other Gulf airports) has among
the highest percentage of international connecting passengers, they have no
connecting passenger fee. However, the average connecting passenger fee
at the non-Gulf major hub airports is 53.9% of their local passenger fees.
EXHIBIT 15: PASSENGER FEES AT MAJOR INTERNATIONAL HUB AIRPORTS

Airport

Departing Local
Passenger Fee
(USD)

Connecting
Passenger Fee
(USD)

$10.98
$20.42
$33.40
$20.42
$20.60
$32.20
$15.85
$66.82
$20.48

$0.00
$0.00
$17.17
$0.00
$8.65
$19.14
$7.17
$50.13
$10.29

Connecting Fee as a
Percentage of
Departing Passenger
Fee
Primary Hub Carrier

Percent of Primary Hub

Carrier's International
Passengers Making
Connections

International Airports:
DOH: Doha, Qatar
AUH: Abu Dhabi, United Arab Emirates
FRA: Frankfurt, Germany
DXB: Dubai, United Arab Emirates
AMS: Amsterdam, Netherlands
CDG: Paris, France
SIN: Singapore, Singapore
LHR: London, United Kingdom
NRT: Tokyo, Japan

0.0%
0.0%
51.4%
0.0%
42.0%
59.4%
45.2%
75.0%
50.2%

Average of Airports With Connecting Fee

Qatar
Etihad
Lufthansa
Emirates
Air France-KLM
Air France-KLM
Singapore Airlines
British Airways
Japan Air Lines

83.1%
82.1%
75.9%
71.0%
67.3%
57.5%
50.8%
46.4%
25.5%

53.9%

Source: IATA Airport, ATC, and Fuel Charges Monitor: Passenger Fees, as of July 2014; MIDT, full year ending July 2014.
Notes: Excludes taxes and security fees. International airports passengers fees are the fees for international passengers when there is a
distinction. British Airways includes Iberia and Vueling. Lufthansa includes Lufthansa, Austrian, Swiss International, Brussels, and Germanwings.
Singapore Airlines includes Scoot and Silk Air.

39. Accommodating connecting passengers requires the airport to build and

operate larger terminal facilities, including passenger holding areas, than
would be required to handle only local traffic. Thus, not charging any fee
for connecting passengers, particularly when the airport is not generating

49

Connecting passengers staying in Dubai less than 24 hours. Source: IATA Airport, ATC, and Fuel
Charge Monitor. Dubai also charges a $1.36 security charge fee per departing local passenger and a $1.36
development fee per local arriving passenger.

50

AMS is also included in Exhibit 15, as, although it is the smaller of Air France-KLMs hubs, it is an
important European hub airport for connections.

29

enough revenue to cover its full cost (including the added cost required to
handle connecting traffic), amounts to a significant subsidy to the airlines
(e.g., Emirates at DXB) transporting those connecting passengers. 51
40. The benefits to Emirates of Dubais subsidization of connecting passengers
at DXB is made clear in Exhibit 16, which shows that 91% of the passengers
connecting at DXB are flying on Emirates, and that 71% of Emirates
passengers at DXB are making connections. 52 Since Emirates is competing
with many other international carriers for these connecting passengers (i.e.,
on routes where the other airlines are connecting over their hubs or flying
the passengers nonstop), the passenger fee structure at DXB confers almost
exclusively on Emirates a significant cost advantage against other carriers
(including U.S. carriers) in competing for international passengers.

51

The same situation exists for Qatar (at AUH) and Etihad (at DOH), and the estimate of the value of the
connect passenger fee subsidies to these carriers is shown in Appendix C.
52

While Exhibit 16 shows that United connected 25% of its passengers traveling to or from DXB, 95% of
these passengers connected to/from Uniteds continuing flight between DXB to DOH, a flight which was
discontinued in September 2014 (source: OAG and MIDT).

30

EXHIBIT 16: CONNECTING PASSENGERS AT DUBAI FOR LARGEST CARRIERS

100%

91.1%

90%

87.7%

Connecting Passengers at DXB

80%
70%

71.0%

60%
50%
40%

36.3%

30%

25.4%

20%
10%

4.9%

0%

1.8%

0.1%

0.0% 0.0% 0.0% 0.0%

0.2% 0.3% 0.0% 0.0%

Percent of Total DXB Connecting Passengers

0.0%

0.0%

0.0%

0.0%

0.0%

0.0% 0.0%

Percent of Carriers' Passengers At DXB That Are Connecting

Source: MIDT, FYE July 2014.

Notes: Connecting passengers for passengers connecting on the same marketing carrier. Includes largest ten carriers by passengers at
Dubai plus Delta, United, Lufthansa, British Airways, and Air France. Nine-five percent of Uniteds connecting passengers are
connecting to/from their continuing flight from DXB to DOH, which will be discontinued in September 2014 (source: OAG and MIDT).

41. Estimating the size of the passenger fee subsidy to Emirates requires two
steps.

The first step is to estimate the additional passenger fees that

Emirates would have to pay if DXB charged a fee for connecting

passengers. This amount represents the value of the connecting passenger
fee subsidy by itself. However, since a higher connecting fee would also
generate higher airport revenues that could be used for debt service
payment, it would lower the Terminal 3 subsidy discussed above.
Therefore, the second step is to calculate the impact the extra revenue would
have on the airport funds available to pay the Terminal 3 debt.

31

a) Step 1: Additional Passenger Fees with a Connecting Passenger Fee

42. To estimate the impact of adding a connecting passenger fee, it is necessary
to determine what the airport would charge for connecting passengers if it
were to impose such a fee. As is shown in Exhibit 15 above, the ratio of
connecting passenger fees to local passenger fees averaged 53.9% for the
non-Gulf airports. To be conservative, however, I have assumed that the
connecting passenger fee at DXB would be 50% of the local passenger fee
of $21.78 at DXB, which would result in a connecting passenger fee of
$10.89 per connecting passenger. 53
43. The total connecting passenger fee revenue generated by this charge would
therefore be the $10.89 multiplied by the number of connecting passengers
at DXB.

Exhibit 17 shows the estimated revenue from the connect

passenger fee in 2013. The first column shows the estimated number of
connecting passengers at DXB, both for Emirates alone and for the airport
as a whole.

The second column shows the hypothetical connecting

passenger fee. The final column shows the additional airport revenues that
would be generated by passenger charges (i.e., the connecting fee multiplied
by the number of connecting passengers). The result $248 million per year
is the passenger fee subsidy to Emirates before netting the impact of the
extra revenue on the airports ability to pay its debt for Terminal 3.

53

The DXB local departing passenger fee of $20.42 in Exhibit 15 does not include a $1.36 security fee.
However, an examination of security fees at other airports shows that they generally are applied to both
local and connecting passengers. Therefore, this calculation assumes that a connecting fee at DXB would
be 50% of the departing fee including security fee.

32

EXHIBIT 17: INCREASED PAYMENT FROM CONNECT FEES (2013)

Emirates
All Carriers (Including Emirates)

Connecting
Passengers
(millions)
22.8
25.2

Connecting
Passenger Fee
$10.89
$10.89

Connecting
Passenger
Revenue
(millions)
$248
$274

Sources: MIDT; IATA Airport.

Notes: Connect passenger charge assumed to be 50% of current local departing passenger charge. Local departing passengers pay
80 AED (USD 21.78), which is composed of a 75 AED Passenger Charge and a 5 AED as Security Charge.

b) Step 2: Accounting for the Impact on the Terminal 3 Subsidy

44. As shown in Exhibit 17, the addition of a connecting passenger fee would
have generated an additional $248 million in annual revenues for DXB in
2013. This would increase the airports surplus revenue that could be used to
pay down the Terminal 3 debt, and would effectively decrease the Terminal
3 subsidybecause more surplus revenue would have been available to pay
the Terminal 3 debt had there been a connecting passenger fee. Therefore,
the passenger fee subsidy to Emirates needs to net out this impact. Exhibit
18 shows that while Emirates airport costs at DXB would have been $248
million higher had they paid the connecting passenger fee, that would also
have decreased the Terminal 3 subsidy by $103 million (due to the resulting
increase in DXBs surplus revenues), and therefore, the estimated net annual
passenger fee subsidy if there had been a connecting passenger fee would
have been $145 million. 54

54

Appendix A contains the calculation of this impact.

33

EXHIBIT 18: NET IMPACT OF CONNECTING PASSENGER SUBSIDY

Total Passenger Fee Subsidy to Emirates
Impact onTerminal 3 Subsidy
Net Passenger Fee Subsidy to Emirates

Dollars (millions)
$248
-$103
$145

Sources: MIDT 2013; IATA Airport; Dubai DXB.

Notes: Assumes connect passengers pay $10.89 (50% of local passenger fees).

VI.TOTAL EMIRATES AIRPORT SUBSIDY

45. The net impact of the two airport subsidies for 2013 is shown in Exhibit
19. 55 The first subsidy is the Terminal 3 subsidy. The $7.8 billion cost of
Terminal 3 leads to an annual debt payment of $705 million. If 75% of the
airports surplus revenue is used to pay this debt and 50% of the subsidys
benefit accrues to Emirates, the annual Terminal 3 subsidy to Emirates is
$292 million.56
46. The second subsidy is the connect passenger fee subsidy. If DXB had been
charging a connecting passenger fee equal to 50% of the current local
departing passenger fee, then Emirates would have paid an additional $248
million in 2013.

Since a connecting passenger fee would also have

generated $274 million in added revenue that the airport could have used to
pay down its debt, it would also have reduced the Terminal 3 subsidy by
$103 million. The combination of the Terminal 3 and connect passenger
subsidies would therefore be the sum of: (a) the Emirates airport subsidy
($292 million), (b) the Emirates passenger fee subsidy ($248 million), and
55

The estimated per year subsidies for 2004-2014 are shown in Appendix C.

56

As shown in Exhibit 20, if Emirates share of the Terminal 3 subsidy benefits was 75% rather than 50%,
Emirates Terminal 3 subsidy would amount to $438 million rather than $292 million in the Base case.

34

(c) the impact of the latter on the former (-$103 million), for a total subsidy
of $437 million in 2013.

EXHIBIT 19: NET IMPACT OF DUBAI INTERNATIONAL SUBSIDIES TO EMIRATES (2013)

Base (2013)
Terminal 3/Concourse A Annual Subsidy
Cost of Terminal 3/Concourse A
Years to Repay
Interest Rate
Annual Capital Cost
DCAA Surplus Cash
Share of Surplus Revenue Used to Pay
Terminal 3 Debt
DCAA Surplus Cash Available to Pay Terminal
3 Debt
Total Airport Subsidy

[A]
[B]
[C]

Share of Subsidy to Aeronautical Users

Subsidy

$7,800
20
6.45%
$705
$162
75%

[D] = [B] x [C]

$121

[E] = [A] - [D]

$584

[F]

50%
$292

[G] = [E] x [F]

Connect Passenger Fee Annual Subsidy (Connect Fee at 50% of Local Departing Fee)
Emirates Gross Passenger Fee Subsidy
Gross Passenger (All Carriers) Fee Increase
With Added Passenger Fee
Increase Used for Terminal 3 Debt
Decrease in Emirates Terminal 3 Subsidy
Net Emirates Passenger Fee Subsidy
Total Terminal 3 and Connect Fee Annual
Total Annual Subsidy

[H]

$248

[I]

$274

[J] = [C] x [I]

[K] = [J] x[F]
[L] = [H] - [K]

$206
$103
$145

[G] +[L]

$437

Notes: Millions of dollars.

47. The $437 million subsidy is a Base case. Exhibit 20 shows the impact of
changing one of the key assumptionsthe assumed share of subsidy going
to aeronautical users of the airport. The Base case assumes that the share of
the subsidy going to non-aeronautical users is 50%, which is roughly the
same as the share of revenues obtained from non-aeronautical users in the
35

large international hub airports (see Exhibit 3 above). Since Terminal 3 was
built for the exclusive use of Emirates, however, it is possible indeed,
likely that the subsidies were also structured primarily to benefit
Emirates. 57 As shown in Exhibit 20, if Emirates share of the Terminal 3
subsidy benefits was 75% rather than 50%, Emirates Terminal 3 subsidy
would amount to $438 million rather than $292 million in the Base case. At
the same time, changing the allocation from 50% to 75% will impact the
interaction of the two subsidies. Exhibit 20 shows that the net impact of
allocating 75% of the Terminal A subsidy to Emirates is to increase
Emirates 2013 subsidy from $437 million in the Base case to $532
million.58

57

The Chairman and Chief Executive of Emirates is also the Chairman of the Dubai Airports.

58

Because interest rates vary, I have also done a sensitivity analysis on the effect of changing the assumed
interest rate. For example, if the interest rate was 5.0% rather than 6.45%, the total annual subsidy would
decrease from the $437 million base case to $397 million. Another sensitivity analysis was done for the
assumption that 75% of the airports surplus revenue goes to pay the Terminal 3 debt. It showed that even
in the unlikely event that 100% of surplus revenue went to pay the Terminal 3 debt, the impact would only
be to lower Emirates total annual subsidy from the $437 million in the base case to $382 million and from
$532 million to $450 million in the alternative case.

36

EXHIBIT 20: SENSITIVITY OF SUBSIDY ESTIMATES

Terminal 3/Concourse A Annual Subsidy
Cost of Terminal 3/Concourse A
Years to Repay
Interest Rate
Annual Capital Cost
DCAA Surplus Cash
Share of Surplus Revenue Used to Pay
Terminal 3 Debt
DCAA Surplus Cash Available to Pay Terminal
3 Debt
Total Airport Subsidy

Base (2013)

Alternate

$7,800
20
6.45%
$705
$162

$7,800
20
6.45%
$705
$162

75%

75%

[D] = [B] x [C]

$121

$121

[E] = [A] - [D]

$584

$584

[F]

50%
$292

75%
$438

[A]
[B]
[C]

Share of Subsidy to Aeronautical Users

Subsidy

[G] = [E] x [F]

Connect Passenger Fee Annual Subsidy (Connect Fee at 50% of Local Departing Fee)
Emirates Gross Passenger Fee Subsidy
Gross Passenger (All Carriers) Fee Increase
With Added Passenger Fee
Increase Used for Terminal 3 Debt
Decrease in Emirates Terminal 3 Subsidy
Net Emirates Passenger Fee Subsidy
Total Terminal 3 and Connect Fee Annual
Total Annual Subsidy

[H]

$248

$248

[I]

$274

$274

[J] = [C] x [I]

[K] = [J] x[F]
[L] = [H] - [K]

$206
$103
$145

$206
$154
$94

[G] +[L]

$437

$532

Notes: Blue shaded numbers show where assumptions differ from Base case. Millions of dollars.

37

APPENDIX A: ACCOUNTING FOR THE IMPACT OF A CONNECT PASSENGER FEE ON

THE TERMINAL 3 SUBSIDY

48. Two subsidies to Emirates were evaluated above, the Terminal 3 subsidy
and the connect passenger fee subsidy. There is an interaction between
the two that needs to be accounted for in determining the total subsidy to
Emirates. For example, Exhibit 19 shows that the Terminal 3 subsidy is
worth $292 to Emirates, and the passenger fee subsidy (by itself) is worth
$248 million to Emirates. However, Exhibit 19 also shows that the two
subsidies together are worth $437 million to Emirates, $103 million less
than the sum of the two subsidies individually. This appendix goes
through the calculation of the $103 million difference.
49. The basic reason that the two subsidies combined are valued at less than
the two subsidies individually is because, as shown in Exhibit 19, adding a
connect passenger fee would increase the revenue available to the airport
by $274 million, and some of this could be used to pay the Terminal 3
debt. The interaction between the two subsidies is shown in Exhibit 21.
The annual debt payment is $705 million (see Exhibit 11 above). The
surplus revenue available to pay debt was $162 million in 2013 (see
Exhibit 12 above). A connecting passenger fee of $10.89 per passenger
would have added an additional $274 million in revenue to the airport in
2013 (see Exhibit 17) increasing the surplus revenue to $436 million.
Assuming that 75% of the surplus revenue is used to pay the Terminal 3
debt, the amount available to pay the Terminal 3 debt would have
increased by $206 million if a connecting passenger fee were added.
Assuming that 50% of the subsidys benefits accrue to Emirates, the
Terminal 3 subsidy to Emirates would decrease by $103 million (from
$292 million to $189 million) if a connect passenger fee was instituted. In
i

short, while the connect passenger fee would cost Emirates $248 million,
the combined cost of the connect passenger fee subsidy and the Terminal 3
subsidy would be $103 million less than the sum of the two subsidies
alone because charging a connect passenger fee would generate more
surplus revenue that DXB could use to pay down the Terminal 3 debt. 59
EXHIBIT 21: IMPACT ON TERMINAL 3 SUBSIDY OF ADDITION OF CONNECTING
PASSENGER FEE (MILLIONS)
2013 Allocation of Profits/Potential Subsidy
Reduction

With Current
Fees

If Through
Passengers are
Charged Connect
Fee

Change

Base Annual Capital Cost at 6.45% for 20 years

[A]

$705

$705

DCAA Surplus Revenue

[B]

$162

$436

Share of Surplus Cash Used for Terminal 3 Debt

[C]

75%

75%

Surplus Cash Used for Terminal 3 Debt

[D] = [B] x [C]

$121

$327

$206

Total Terminal 3 Subsidy Assuming 75% Is Used To

Pay Terminal 3 Bonds

[E] = [A] - [D]

$584

$378

-$206

Share of Subsidy to Emirates

[F]

50%

50%

Total Terminal 3 Subsidy to Emirates

[G] = [F] x [E]

$292

$189

$274

-$103

Sources: MIDT 2013; IATA Airport; Dubai DXB press releases; Base Prospectus Dated 21 January 2013, pages 99 and 101.

59

The primary reason that the Emirates Terminal 3 subsidy is not reduced dollar for dollar by revenue
generated from the increase in Emirates connect fees is that the additional surplus revenues resulting
from a connect passenger fee are applied to the entire airport debt, not just that for Terminal 3. As a
result, the subsidy reduction resulting from connect fee revenue benefits all airport users, not just
Emirates.

ii

APPENDIX B: EMIRATES AIRPORT SUBSIDY FOR 2004 THROUGH 2014

50. In Section VI, I estimated the total Emirates subsidy to be $437 million
(for the Base case) in 2013. This appendix estimates the subsidy for 2004
through 2014. 60 The methods and assumptions are identical to the
calculations in Section VI.
51. Exhibit 22 shows the estimated airport subsidies for Emirates for 2004
through 2014.

The exhibit has three parts, showing the Terminal

3/Concourse A subsidy, the connect passenger fee subsidy, and the total
subsidy accounting for the impact of adding passenger fees on the
Terminal 3/Concourse A subsidy.
52. The top panel of Exhibit 22 shows the Terminal 3/Concourse A subsidy.
Terminal 3 was opened in 2008 at a cost of $4.5 billion to build. Hence,
the subsidy for Terminal 3 starts in 2008. Using the same assumptions as
above (i.e. interest rate of 6.45% for 20 years) the annual debt payment
(including principal repayment) for Terminal 3 debt would be $407
million starting in 2008. Concourse A opened in 2013 at a cost of $3.3
billion leading to an annual debt payment of $298 million starting in 2013.
The calculation of each years DCA Surplus Cash is from Exhibit 12
above. Assuming that 50% of the subsidy goes to the non-aeronautical
users of Terminal 3/Concourse A, the total Terminal 3/Concourse Annual
Subsidy grew from $176 million in 2008 to $289 million in 2014.

60

I was unable to obtain DCAA surplus revenue information for 2014. Therefore, I have assumed that
DCAAs surplus revenue in 2014 increased from 2013, the same rate as departing seats increased
(5.44%). Source: OAG.

iii

53. The second panel of Exhibit 22 shows the gross Connect Passenger Fee
subsidy. The passenger fee was 30 AED per passenger from 2004 through
2008, increasing to 75 AED in 2009. A 5 AED security fee has been in
effect since 2009. 61 At the legally set exchange rate, this put the passenger
fee at $8.17 through 2008 increasing to $21.78 in 2009. Assuming that the
connect passenger fee would be set at 50% of the local passenger fee,
gives a connect fee of $4.08 through 2008 increasing to $10.89 in 2009.
Finally, multiplying the connect passenger fee by the estimated Emirates
connecting passengers 62 gives gross passenger fee subsidy growing from
$24 million in 2004 to $273 million in 2014.
54. The third panel of Exhibit 22 adjusts the passenger fee for the impact on
the Terminal 3/Concourse A subsidy. 63 Since there was no Terminal
3/Concourse A subsidy from 2004-2007, the impact on that subsidy is zero
for these years. The impact increases from $20 million in 2008 to $112
million in 2014, leading to a net passenger fee subsidy increasing from
$24 million in 2004 to $161 million in 2014.
55. Finally, the total subsidy is the sum of the Terminal 3/Concourse A
subsidy and the net passenger fee subsidy, which increases from $24

61

I have not found documentation on the security fee prior to 2009 and so, to be conservative, have
assumed that there was none before 2009.

62

The methods of estimation are identical to discussed above (see Section V(iii) above), except that prior
to 2008 I do not have MIDT data and so instead estimate connecting passengers. I use the ratio of MIDT
connect passenger to total passengers reported in the annual reports in 2008 and apply that ratio to the
reported total passengers in the Emirates annual reports for each year.

63

See Appendix A.

iv

million in 2004 to $449 million in 2014, with a ten year total of $2.26
billion. 64
EXHIBIT 22: EMIRATES AIRPORT SUBSIDY, 2004-2014
2004
Terminal 3/Concourse A Annual Subsidy
Total Cost of Terminal 3
Total Cost of Concourse A
Cost of Terminal 3/Concourse A
Years to Repay
Interest Rate
Annual Capital Cost Terminal 3
Annual Capital Cost Councourse A
Annual Capital Cost
DCAA Surplus Cash
Share of Surplus Revenue Used to Pay Terminal 3 Debt
DCAA Surplus Cash Available to Pay Terminal 3 Debt
Total Airport Subsidy
Share of Subsidy to Aeronautical Users
Emirates Terminal 3/Concourse A Annual Subsidy

2006

2007

2008

2009

2010

2011

2012

2013

2014

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500
$3,300
$7,800

$4,500
$3,300
$7,800

Total (2004 2014)

20
6.45%
$0
$0
$0
$43

20
6.45%
$0
$0
$0
$122

20
6.45%
$0
$0
$0
$64

20
6.45%
$0
$0
$0
$144

20
6.45%
$407
$0
$407
$74

20
6.45%
$407
$0
$407
$78

20
6.45%
$407
$0
$407
$135

20
6.45%
$407
$0
$407
$130

20
6.45%
$407
$0
$407
$129

20
6.45%
$407
$298
$705
$162

20
6.45%
$407
$298
$705
$170

75%
$32
$0
50%
$0

75%
$91
$0
50%
$0

75%
$48
$0
50%
$0

75%
$108
$0
50%
$0

75%
$55
$352
50%
$176

75%
$59
$348
50%
$174

75%
$101
$306
50%
$153

75%
$98
$309
50%
$154

75%
$97
$310
50%
$155

75%
$121
$584
50%
$292

75%
$128
$577
50%
$289

$1,392

[N] = ([L] x [M])

30
0
30
0.27
$8.17
50%
$4.08
5.92
$24

30
0
30
0.27
$8.17
50%
$4.08
6.85
$28

30
0
30
0.27
$8.17
50%
$4.08
8.28
$34

30
0
30
0.27
$8.17
50%
$4.08
10.02
$41

30
0
30
0.27
$8.17
50%
$4.08
10.73
$44

75
5
80
0.27
$21.78
50%
$10.89
12.96
$141

75
5
80
0.27
$21.78
50%
$10.89
16.21
$176

75
5
80
0.27
$21.78
50%
$10.89
17.56
$191

75
5
80
0.27
$21.78
50%
$10.89
20.08
$219

75
5
80
0.27
$21.78
50%
$10.89
22.76
$248

75
5
80
0.27
$21.78
50%
$10.89
25.09
$273

$1,419

[O]
[P] = ([L] x [O])
[Q] = [C] x [P]
[R] = [F] x [Q]
[S] = [N] - [R]

7.03
$29
$22
$0
$24

8.13
$33
$25
$0
$28

9.84
$40
$30
$0
$34

11.90
$49
$36
$0
$41

12.75
$52
$39
$20
$24

15.39
$168
$126
$63
$78

19.04
$207
$155
$78
$99

20.11
$219
$164
$82
$109

22.18
$241
$181
$91
$128

25.18
$274
$206
$103
$145

27.54
$300
$225
$112
$161

$871

[G] +[S]

$24

$28

$34

$41

$200

$252

$251

$264

$283

$437

$449

$2,264

[A]
[B]
[C]
[D] = [B] x [C]
[E] = [A] - [D]
[F]
[G] = [E] x [F]

Connect Passenger Fee Annual Subsidy (Connect Fee at 50% of Local Departing Fee)
Local Passenger Fee (AED)
Security Fee (AED)
Total LocalPassenger Fee (AED)
[H]
Exchange Rate
[I]
Local Passenger Fee ($USD)
[J] = [H] x [I]
Ratio of Connect Passenger Fee to Local Passenger Fee
[K]
Connect Passenger Fee ($USD)
[L] = [J] x [K]
Emirates Connect Passengers (millions)
[M]
Emirates Gross Passenger Fee Subsidy (millions $USD)
Impact of Connect Passenger Fee on Terminal 3 Subsidy
Total Airport Connect Passengers (millions)
Gross Passenger Fee Increase With Added Passenger Fee (millions $USD)
Increase Used for Terminal 3 Debt ($millions)
Amount Used To Pay Emirates Share of Terminal 3 Debt (millions $USD)
Net Emirates Passenger Fee Subsidy (millions $USD)
Total Terminal 3 and Connect Fee Annual Subsidy
Total Annual Subsidy (millions $USD)

2005

64

While the Terminal 3 subsidy starts with the opening of Terminal 3 in 2008, there is no reason to
believe that Emirates was not receiving subsidies on their old terminal space as well. Therefore, the fact
that no subsidy is shown prior to 2008 means that the 10-year estimate is conservative.

APPENDIX C: ETIHAD AND QATAR CONNECT PASSENGER FEE SUBSIDY

56. As with DXB, Etihads and Qatars hub airports (AUH and DOH,
respectively) do not have a connecting passenger fee despite having a
local passenger fee. As with Emirates at DXB, the fee structure at AUH
and DOH serves primarily to benefit Etihad and Qatar at each airport,
respectively. As shown in Exhibit 8 above, Qatar connects 83% of its
passenger at DOH and Etihad connects 82% at AUH. Further, as shown
in Exhibit 9 above, 95% of Qatars flights and 98% of Etihads flights are
to/from their hubs. Finally, Exhibit 23 shows that 88% of the passengers
that connect at AUH are on Etihad and 98% of passengers that connect at
DOH are on Qatar. 65 Hence, as with Emirates at DXB, since Etihad and
Qatar are competing with many other international carriers for these
connecting passengers (i.e., on routes where the other airlines are
connecting over their hubs or flying the passengers nonstop), the
passenger fee structure at AUH and DOH primarily serves to give Etihad
and Qatar a cost advantage against other carriers (including U.S. carriers)
for international passengers.

65

Of the 12.4% of connecting passengers at AUH not connecting on Etihad, the carriers with the second
and third most connecting passengers are Jet Airways India and Air Berlin, respectively, both carriers in
which Etihad has taken an ownership stake (see Etihad Airways Annual Report 2013, p. 9). Further, the
carrier of record for connecting passengers is the operating carrier on the longest leg. Indeed, nearly all
of the Jet Airways India and Air Berlin connecting passengers are, in fact, connecting onto Etihad flights.

vi

EXHIBIT 23: CONNECTING PASSENGER AT DOH AND AUH

Share of connecting passengers at the hub
airport traveling on the carrier

102%
100%

98.4%

98%
96%
94%
92%
90%

87.6%

88%
86%
84%
82%
80%

Connecting at DOH on Qatar

Connecting at AUH on Etihad

Source: MIDT FYE July 2014

57. While, unlike DXB, no financials for these two airports have been located
to definitively show that they lose money, given the similarly of their
landing fees to DXB (see Exhibit 7 above) it is probable that, like DXB,
these airports are supported by their governments. Hence, not only is the
passenger fee structure created to support their state owned airlines, but
the money allowing this fee structure is paid by the government.
58. The connecting passenger fee subsidy estimates are shown in Exhibit 24.
The method of calculating these subsidies is the same as was done for
Emirates in Section V above. 66 For Etihad, the local passenger fee was 30
AED per passenger from 2004 through 2008, increasing to 75 AED in

66

In the Emirates calculation, a second step was needed to consider how the extra revenue to the airport
of adding a connect passenger fee would impact the Terminal 3 subsidy. Because an estimate of a
terminal subsidy has not been made for Etihad or Qatar, this step is not needed here. It is not that there is
no terminal subsidy to either of these carriers, but, rather, that the lack of any airport financial statements
has not allowed the estimation of such subsidies.

vii

2009. A 5 AED security fee has been in effect since 2009. 67 At the legally
set exchange rate, this puts the passenger fee at $8.17 (USD) through 2007
increasing to $21.78 in 2007. Assuming that the connect passenger fee
would be set at 50% of the local passenger fee, gives a connect fee if
$4.08 through 2008 increasing to $10.89 in 2009. Finally, multiplying by
the estimated Etihad connecting passengers 68 gives a passenger fee
subsidy growing from $1.0 million in 2004 to $120.3 million in 2014, for
a total of $501 million.
59. Similarly, Qatar had a local passenger fee of 30 QAR from 2004 and
2005, increasing to 40 QAR in 2006. Using the same methodology as
above, Exhibit 24 shows that the Qater connect passenger fee subsidy
increased from $10.1 million in 2005 to $80.3 million in 2014 for a ten
year total of $487 million.

67

As with Emirates, I have not found documentation on the security fee prior to 2009 and so, to be
conservative, have assumed that there was none before 2009.

68

The methods of estimation are similar to that for Emirates. Prior to 2008 I do not have MIDT data and
so estimate connecting passengers based on the total passengers reported in the annual reports and the
ratio of connect passenger to total passengers reported in the annual reports for 2008.

viii

EXHIBIT 24: ETIHAD AND QATAR CONNECTING PASSENGER SUBSIDIES AT DOH

AND AUH
Etihad Airways at AUH
Local Passenger Fee (AED)
Security Fee (AED)
Total LocalPassenger Fee (AED)
Exchange Rate
Local Passenger Fee ($USD)
Ratio of Connect Passenger Fee to Local
Passenger Fee
Connect Passenger Fee ($USD)
Connect Passengers (millions)
Etihad Airways at AUH Gross Passenger Fee
Subsidy (millions $USD)
Qatar Airways at DOH
Local Passenger Fee (QAR)
Security Fee (QAR)
Total LocalPassenger Fee (QAR)
Exchange Rate
Local Passenger Fee ($USD)
Ratio of Connect Passenger Fee to Local
Passenger Fee
Connect Passenger Fee ($USD)
Connect Passengers (millions)
Qatar Airways at DOH Gross Passenger Fee
Subsidy (millions $USD)

[A]
[B]
[C] = [A] x [B]

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

30
0
30
0.27
$8.17

30
0
30
0.27
$8.17

30
0
30
0.27
$8.17

30
0
30
0.27
$8.17

30
75
75
75
75
75
75
0
5
5
5
5
5
5
30
80
80
80
80
80
80
0.27
0.27
0.27
0.27
0.27
0.27
0.27
$8.17 $21.78 $21.78 $21.78 $21.78 $21.78 $21.78

[D]

50%

50%

50%

50%

[E] = [C] x [D]

[F]

$4.08
0.2

$4.08
0.7

$4.08
2.0

$4.08
3.3

$4.08 $10.89 $10.89 $10.89 $10.89 $10.89 $10.89

4.3
4.5
5.0
5.6
7.1
8.9
11.0

[G] = ([E] x [F])

$1.0

$2.9

$8.1

$13.3

$17.4

[A]
[B]
[C] = [A] x [B]

30
0
30
0.27
$8.24

30
40
40
40
40
40
40
40
40
40
0
0
0
0
0
0
0
0
0
0
30
40
40
40
40
40
40
40
40
40
0.27
0.27
0.27
0.27
0.27
0.27
0.27
0.27
0.27
0.27
$8.24 $10.98 $10.98 $10.98 $10.98 $10.98 $10.98 $10.98 $10.98 $10.98

50%

50%

$48.7

50%

$54.1

50%

$61.2

50%

$76.9

50%

Total (2004 2014)

50%

$96.6 $120.3

[D]

50%

50%

50%

50%

50%

50%

50%

50%

50%

50%

50%

[E] = [C] x [D]

[F]

$4.12
2.5

$4.12
3.2

$5.49
4.3

$5.49
5.3

$5.49
6.4

$5.49
7.5

$5.49
9.3

$5.49
11.0

$5.49
12.7

$5.49
13.4

$5.49
14.6

[G] = ([E] x [F])

$10.1

$13.2

$23.5

$29.4

$35.2

$41.1

$51.0

$60.3

$69.6

$73.6

$80.3

$501

$487

Sources: Qatar and Etihad annual reports; MIDT; IATA.

Notes: Connect passengers for 2014 are full year ending November 2014. Annual connect passengers from MIDT for 2008-2014. For 2004-2007
annual connect passengers is the 2008 ratio of MIDT connecting passengers to total passengers in the 2008 carrier annual reports multiplied by the
total passengers in the carrier annual reports for the given year.

ix

APPENDIX D: CURRICULUM VITAE OF DANIEL M. KASPER

OFFICE:

Compass Lexecon
200 State Street
9th Floor
Boston, MA 02109
(617) 520-0260
E-mail: dkasper@compasslexecon.com

PROFESSIONAL EXPERIENCE:
Mr. Kasper has over 30 years of experience dealing with economic, regulatory and
competition policy issues involving the aviation industry. He also held high level
positions at the U.S. Civil Aeronautics Board and served on the U.S. National Airline
Commission His clients have included the U.S. Departments of Transportation, Defense
and State, as well (among others) major airlines and aerospace companies. In addition
to consulting, Mr. Kasper is an experienced expert witness who has testified in
numerous matters in the U.S. and Canada before legislative bodies (U.S. and Canada),
U.S. Executive Agencies (U.S. Department of Transportation, U.S. Department of
Labor, National Mediation Board), Presidential Emergency Boards, arbitration panels,
and courts in the United States and Canada on a range of transportation industry
economic issues.
March 2011-Present: Senior Consultant, Compass Lexecon, Boston, MA
At CompassLexecon, Mr. Kasper provides expert economic and financial analysis
of complex policy issues and legal disputes.
November 1997-February 2011: Managing Director & Head of the Transportation
Practice, Cambridge, MA Office, LECG (formerly, The Law & Economics Consulting
Group)
Mr. Kasper was the founding director of LECGs Cambridge office and head of
the firms transportation practice. LECG was a leading provider of expertise to
domestic and international clients in complex matters involving economics and
finance.

1993-1997: Partner and Chairman, Transportation Industry Program, COOPERS &

LYBRAND CONSULTING
Mr. Kasper joined Coopers & Lybrand in 1993 (when C&L acquired Harbridge
House, Inc.)and headed C&Ls Transportation Industry Program. He also directed
a number of engagements there involving domestic and international
transportation clients in both the private and public sectors. He also led a
Congressionally-mandated review of the Federal Aviation Administration's
performance and financial requirements.
1993: Member, National Commission to Ensure a Strong and Competitive Airline
Industry
In 1993, Mr. Kasper was appointed as one of fifteen voting members of the U.S.
National Airline Commission, which was created by an act of Congress to assess
the causes and potential cures for the economic troubles then plaguing the U.S.
airline industry. After conducting extensive public hearings and analyses, the
Commission submitted its Report and recommendations to the President and
Congress in September of 1993. These recommendations included a number of
proposed changes in Federal regulatory policy.
1983-1993: Vice President and Corporate Director, HABRIDGE HOUSE, Inc.
Mr. Kasper managed the firms transportation practice and was responsible for a
wide array of projects involving domestic and international transportation issues
affecting every mode of transportation. His clients included the U.S. Secretary of
Transportation (assistance in preparing the National Transportation Policy
Statement including analyses of issues affecting all transport modes) and the
Office of the Secretary of Defense (analysis of the Civil Reserve Air Fleet
Program).
1979-1983: UNITED STATES CIVIL AERONAUTICS BOARD
Director of International Aviation: Mr. Kasper served as Director of International
Aviation, the Boards primary advisor and chief line officer for all matters
involving international aviation. Mr. Kasper frequently represented the Board at
sub-Cabinet meetings and on inter-agency working groups responsible for
developing trade sanctions and other responses to international aviation disputes.
1976-1981: Faculty, HARVARD BUSINESS SCHOOL
While on the faculty of the Harvard Business School, Mr. Kasper focused on the
impact of alternative forms of government regulation on the management and
xi

performance of business organizations and on the study of national economic

policies and strategies. Mr. Kasper authored a number of case studies and articles
on various aspects of the transportation and telecommunication industries.
1971-1976: Faculty, UNIV. OF SOUTHERN CALIFORNIA SCHOOL OF
BUSINESS ADMINISTRATION
While at USC, Mr. Kasper developed, administered and taught courses dealing
with the control of business activities by means of direct government regulation,
the enforcement of private contracts, and through the use of tort law. His research
focused on the regulation of transportation, telecommunications industries and
workplace safety. He also served as a member of the Faculty Senate.
EDUCATION:
Bachelor of Arts, Political Science, University of Kansas
Masters in Business Administration, University of Chicago
Juris Doctorate, University of Chicago

xii

Sheikh Ahmed bin Saeed Al Maktoum & Emirates place in Dubai Inc.

Legend

Sheikh Mohammed
bin Rashid Al
Maktoum
(Ruler of Dubai)

Chairman

Sheikh Hamdan bin

Mohammed bin Rashid Al
Maktoum
(Crown Prince of Dubai)

Sheikh Ahmed
bin Saeed Al
Maktoum

Ruling Family

Industrial/Utilities

Government Entity or
Majority Government
Owned

Travel/Lodging
Government

Chairman

Investment/Holdings
Vice
Chairman

Infrastructure
Finance

Investment
Corporation of
Dubai (ICD)

Director

Chairman

(Dubais sovereign
wealth fund)

Deputy
Chairman

100%

President

100%

Chairman

Chairman

Dubai World
Trade Centre

Oversight

Oversight

Dubai Civil
Aviation
Authority

(aviation regulator)

Division

Chairman

100%

Dubai Holding
Commercial Operations
Group

Flydubai

DIFC Investments

(supplies fuel
to Emirates)

Chairman

89.72
%

100%

100%

Chairman

100%

Noor
Investment
Group
25%

Dubai
International
Capital
25%

Unknown

100%

Supreme Fiscal Committee

of the Government of Dubai

Jumeirah Emirates Dubai Holding

Towers
Investment Group

Jumeirah Group

100%

Department of
Oil Affairs

Oversight

(low-cost
carrier)

ENOC
Aviation

Chairman

(bailouts to governmentowned companies in financial

Istithmar World
trouble)

Unknown

79.63
%

Dubai
Financial
Markets

Emirates NBD
Bank

Dnata

Dubai Silicon
Oasis Authority

(monopoly ground
handler at Dubais
airports)

100%

23.3%

Shared Management

(helps fund airport

expansion)

(loans money to Emirates; 29.4%

buys Emirates bonds)

Emaar Properties
PJSC

100%
Unknown

Dubai Aerospace
Enterprise (DAE)

(leases aircraft to Emirates)

Dubai Airports
Company

(builds airport infrastructure; sets

airport fees and charges)

Economic
Development
Committee

Supreme
Committee
Dubai Events &
Promotions
Establishment

Dubai EXPO
2020 Higher
Committee

One and Only

Royal Mirage
Dubai

Park Hyatt
Hotel

Arabian
Adventures

Le Royal
Meridien Beach
Resort & Spa

Grosvenor
House West
Marina Beach

Ibis World
Trade Centre
Dubai Hotel

Millenium
Airport Hotel
Dubai

Dubai
International
Convention and
Exhibition
centre

Dubai Flower
Centre

Grosvenor
House Dubai

Borse Dubai

16.6%

Dubai Council
for Economic
Affairs

Vice Chairman

Noor Islamic Bank

Dubai Duty Free

Establishment

Chairman

Dubai Financial
Support Fund

55.6%

Unknown

Chairman

Other Hospitality/ Leisure Related

Chairmanships

Dubai
Executive
Council

Dubai Holding

Unknown

Chairman

Director

Supreme
Energy Council

Chairman

Board
Member

Chairman

Chairman

Chairman

Emirates
National
Oil
Company
(ENOC)

ENOC International
Sales Ltd

Chairman

Chairman

Majority
Shareholder

Chairman

Emirates