Global airlines lobby against regional players

Government-backed airlines across the Gulf have their rivals elsewhere in the world lobbying against them getting increased flights to those regions.
Carriers in the US and Europe have criticised Middle Eastern airlines for the level of state support by their government owners.
Carriers in the US and Europe have criticised Middle Eastern airlines for the level of state support by their government owners.

In the cut-throat world of global aviation, the airlines of the Gulf have few friends - except among their growing list of passengers. Airlines in Europe, North America and Asia have at one time or another sought to lobby their governments to reject proposals from Emirates Airline, Etihad Airways or Qatar Airways to increase flights to those regions.

The growth of these airlines during the downturn tells the story. According to the International Air Transportation Association (IATA), one of the primary reasons that Middle Eastern airlines fared well during the global downturn was because of their ability to capture market share from carriers in Europe, the Americas and Asia. This week, in the long-simmering dispute between the UAE and Canada, the issue is reaching boiling point.

Today's rare public announcement by Mohammed Abdullah al Ghafli, the UAE's Ambassador to Canada, that he was "disappointed" at the failure of five years of negotiations with the Canadian government, illustrates just how high the stakes are. The areas of disagreement between Middle East airlines and their global rivals are numerous. For years, airlines in the US and Europe have criticised Middle East carriers over the level of state support afforded to them by their government owners, often claiming they received unfair financial support and business-friendly regulatory environments such as the absence of corporate taxes.

And in a new twist, these US and European airlines are criticising the way their own governments help Middle Eastern airlines. European and US carriers say they are unable to take advantage of export credit guarantees that have been used by airlines in the Middle East and elsewhere to achieve cheap financing. This creates an uneven playing field in the ultra-competitive global aviation marketplace, they say.

In a quirk of international finance, airlines in the US and France, the home countries of Boeing and Airbus, respectively, are the only ones not entitled to export credit guarantees, financing instruments that can make bank loans cheaper and easier to arrange. Export credit assistance comes in the form of credit insurance or guarantees or, in rare cases, direct financial support. The list of neglected carriers includes some of the biggest heavyweights in international air travel such as Lufthansa, Air France and British Airways - all of whom have been battling Emirates Airline and other Gulf carriers as they try to build up their networks to capture international long-haul traffic.

"It's not a level playing field," says Andrew Crawley, the director of sales and marketing at British Airways. One example is Delta's recent financing of three new 777s from Boeing. Last year, it paid interest at 8.1 per cent over nine and a half years for its loans. The same year, Emirates also received three new 777s but arranged financing at just 3.46 per cent over 12 years under a deal backed by an export-import (Ex-Im) guarantee.

Emirates was also able to finance a higher percentage of the purchase price. More than a dozen European and US airlines are rallying to change the situation and have lobbied the US government, the EU and the Organisation for Economic Co-operation and Development (OECD), which created the rules on export credits and has taken up the issue of export credit rules. It may make a decision on a new approach this year.

Airlines in Asia, Africa and the Middle East "are growing their businesses at our expense", according to Mr Crawley. "We can't get access to cheap financing that others can, which is effectively a subsidy for airlines who are supposedly in a great state of financial health." These export credit agencies argue that aerospace is a vital industry that should be supported. "Aviation is one area where the US still has a competitive advantage and these are exactly the types of employment that we are looking to foster in the US," says Bob Morin, the vice president of the transportation division at Ex-Im Bank.

Because of the credit crunch of the past few years, export credit agencies have stepped in to fill the void left by banks. Ex-Im arranged US$8.6 billion (Dh31.58bn) in financing last year for 145 aircraft, double the usual amount. Its assistance with Boeing aircraft makes up 40 per cent of the bank's overall portfolio and includes $2.3bn to Middle East airlines, comprising 31 aircraft, says Mr Morin.

Ex-Im Bank lending to the Middle East is up 200 per cent from 2006, the lender says. The US Air Transport Association points out that eight of the top 10 overseas airlines benefiting from the loan guarantees serve US markets, including Air India, Emirates and Korean Air. Mr Morin's stance is diplomatic. "This is a complex issue that probably requires a nuanced solution," he says. "The government is doing what governments do all the time - reconcile issues and try to figure out what is best. In this case, there are international negotiations which make it much harder."

Tim Clark, the president of Emirates Airline, says export credits are "nice to have in your back pocket, in case all else fails. We don't always use it." Mr Morin, meanwhile, says airlines such as Emirates do not rely wholly on export credit guarantees. "To fund Emirates' fleet expansion plan there are always a fairly large slice of commercial banks, then unsecured debt, then Sharia, then export credit financing, then leases," he says.

"With Etihad, we did the first aircraft last year, so to suggest they have become a strong force in the airline industry because of export credits, well, we did one deal. And with Qatar Airways, we have never done any." This could change, however, amid the slow recovery of the global financial system and the huge anticipated demand in financing needs in the Gulf. Emirates, the world's biggest airline by international traffic, needs to spend more than $28bn to expand its fleet of wide-bodied airliners by 2017, almost double the sum it has raised since 1996.

Similarly, Etihad also has huge financing needs after making a 2008 order for up to 205 aircraft, worth $43bn if all options are exercised.

Published: October 11, 2010 04:00 AM


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