Europe's flag carriers attack Emirates' expansion, Canada blocks UAE airlines and dispute escalates
UAE's Ambassador to Canada Mohammed Abdullah al-Ghafli on 10-Oct-2010 expressed disappointment at Canada’s refusal to grant additional landing rights to UAE carriers adding that the decision would affect relations between the countries.The dispute escalated, as the UAE government imposed landing restrictions on Canadian official and military aircraft in the country. As Air Canada protects its commercial interests, Canadian consumer representatives said that "consumers are getting the raw end of the stick all the way along here."
Meanwhile, in what bears all the signs of a concerted attack on the Gulf airlines' expansion, European and US airlines have leapt to attack the use of Export Credit Agency funding in aircraft sales to those carriers, while also again raising old - frequently discredited - accusations of government subsidy of Emirates.
UAE carriers including Emirates and Etihad have been seeking from Canada new landing slots and added frequencies in at Toronto in addition to new routes to Calgary and Vancouver. The UAE contended that the existing frequencies permitted are not enough to cover demand. The 1999 agreement between UAE and Canada allows Emirates and Etihad to operate up to six times weekly to Canada.
The UAE Government says that with 27,000 Canadians living in the UAE and a significant trade relationship – the UAE is Canada's largest trade partner in the Middle East and North Africa – the existing allocation is not sufficient.
Transport and Air Canada concerned about impact of 6th Freedom Rights
However, Transport Canada and Air Canada opposed granting more slots on concerns that the UAE carriers would affect Air Canada’s traffic to cities such as Frankfurt, stating that Emirates would be able to pick up Canadian passengers and transport them to third countries with a stopover in Dubai (utilising 6th freedom rights), while the Canadian carriers would have no "reciprocal" benefit in the agreement. Air Canada added that in certain areas, such as Dubai, there is very little "originating traffic" that comes to Canada.
Air Canada CEO Calin Rovinescu added that the UAE carriers' expansion plans would harm the country’s airports and airlines, previously warning that Emirates wanted to “flood” Canadian airspace with seats to take more travellers and divert them through Dubai.
(Meanwhile, many of those travellers are being "diverted" instead through European hubs, where some connect on to Air Canada - which does not operate for example to India, the origin of much traffic, or are carried in similar, apparently inoffensive, 6th freedom style by European airlines.)
Canada's claims have been rejected by Emirates, which added that its study, released in late Sep-2010, estimated the growth which would result from the services could bring around USD480 million of added economic benefits and more than 2,800 jobs to Canada. Meanwhile, the Consumers' Association of Canada criticised the Canadian Government’s decision, stating allowing carriers from the UAE to expand in Canadian markets would be "very beneficial" to consumers.
Would Air Canada be affected? Emirates position on ‘Emirates and Canada’
Source: Emirates
The war of words over the UAE-Canada air traffic rights decision: Oct-2010
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Quote |
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"It is unfortunate that this process has been so protracted and frustrating. The UAE is disappointed that despite intensive negotiations over the last five years, the UAE and Canada have been unable to arrive at an agreement on expanding the number of flights between the two countries ... With 27,000 Canadians living in the UAE, and a significant trade relationship as well as 200 Canadian companies active in the UAE today, six flights per week does not service the economic needs of both countries or the potential for growth. "The UAE entered negotiations in good faith on the understanding that a solution would be reached and that constructive ideas would be brought to the negotiating table. The fact that this has not come about undoubtedly affects the bilateral relationship." |
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Emirates spokesperson |
“Emirates is confident our case for reasonable air access to Canada is overwhelmingly in the country’s national interest. The Emirates commissioned independent economic study by Intervistas rejects the notion that we could hurt Air Canada … Emirates is a fully commercial airline that is owned, like many airlines, by a government investment company, and is fully and independently audited, receives no subsidy or state and operates from Dubai under fully open skies. "We are disappointed by this response and are working hard to convince our many friends in Ottawa on the case for more business between Dubai and Canada via a progressive increase in services." |
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Air Canada CEO Calin Rovinescu |
"While its argument may be seductive, what Emirates' strategy will do is constrain the growth of Canadian airports by turning them from hubs into stubs at the end of a spoke that leads only to Emirates' hub in Dubai.” |
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Air Canada statement |
“Air Canada supports liberalisation in markets where such agreements benefit both sides, such as with the US and Europe, but opposes capacity dumping by state-owned airlines.” |
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Consumers' Association of Canada President Bruce Cran |
"We've got a situation where somehow diplomatic matters for Canada are being linked to the interest of Canada's major airline. It doesn't make sense at all. We're wondering when someone will step in and protect consumers' rights here … Consumers are getting the raw end of the stick all the way along here." |
Air Canada third largest carrier on Canada-Middle East sectors
Emirates and Etihad both offer more weekly frequency between Canada and the Middle East than Air Canada, with 31% and 24% capacity shares respectively compared with 22% capacity share for Air Canada.
Canada-Middle East capacity: Oct-2010
|
Carrier |
Number of Seats |
Percentage |
|---|---|---|
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1,467 |
31.00% |
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1,134 |
23.96% |
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1,055 |
22.29% |
|
|
597 |
12.61% |
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|
480 |
10.14% |
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|
Total |
4,733 |
100.00% |
UAE reacts as dispute escalates between UAE and Canada
Meanwhile, it was been reported in CBC News that Canada refused to grant more landing rights to the airlines because the UAE tried to "blackmail" it into doing so by using access to a key Dubai military base as a bargaining chip.
Following the Canadian decision, the UAE closed its airspace on 11-Oct-2010 to Canadian Defence Minister Peter MacKay and Chief of the Defence Staff General Walt Natynczyk who were returning from a three-day visit to Afghanistan. Canada is also being forced to vacate its military base Camp Mirage in the UAE following the failure of negotiations to expand aviation links between the two countries. This creates challenges for transporting equipment and troops to/from Afghanistan with the base being used to stage operations in Afghanistan. The government is now preparing to relocate the forces based in the UAE to an alternative base, with alternative destinations reportedly being considered in Cyprus, Kuwait, Jordan and Turkey.
Meanwhile, the UAE reportedly lobbied against Canada's bid for a UN Security Council seat. Canada pulled out of its request for a non-permanent Security Council seat after falling behind rivals in the first rounds of voting, in a major setback for the G-8 nation. Canadian Foreign Affairs Minister Lawrence Cannon's spokeswoman Catherine Loubier stated Mr Cannon spoke to his UAE counterpart this week and that the two "agreed that the bilateral relationship should remain strong and not be put at risk".
Emirates response – more aircraft and growth, with another 30 A380s expected
Emirates responded to the criticism in the only way it knows how, by ordering more aircraft and signalling its intention to continue on its expansion path.
President Tim Clark stated the carrier plans to have 120 A380s in service when it receives additional airport space at its Dubai home base adding that the carrier is also working with Boeing on the B777NG aircraft. Mr Clark added that the carrier would fulfil all its 90 orders so far for the A380 as the carrier expects to maintain its annual growth rate of 20% for the next five years. The carrier made an unexpected order for more of the aircraft in Jun-2010, lifting its orders of the A380 by a third, with the 120 aircraft target implying the carrier will make a further order for 30 A380s worth USD10 billion at list prices, increasing its A380 value to over USD40 billion.
Emirates hits back at Europe's ECA subsidy accusations
At the same time as the Canada-UAE dispute, Emirates President Tim Clark has been forced to hit back at its European rivals who are claiming the region's airlines have expanded through global subsidy.
Summarising an extremely complex and highly-disputed concept, US and European airlines in early Oct-2010 launched a campaign to amend the export-guarantee regime and the trans-Atlantic trade agreement that is behind the decision. The carriers argued that it enables cheaper government-backed aircraft financing available to rivals from countries including Gulf states. By mutual agreement, the facility is denied to carriers in countries where the aircraft are produced (to prevent subsidy of the home carriers, which would be inconsistent with the anti-subsidy provisions of the US-Europe aircraft manufacturing agreement).
The carriers’ have stated the so-called home country rule between Europe and the US means the nations have been “funding the expansion of Emirates” through export credit financing available to the Middle Eastern carriers.
The overall share of aircraft deliveries covered by government guarantees more than doubled to 34% in 2009, according to Airbus and Boeing. Air France added that the US Export-Import Bank arranged USD2.3 billion worth of financing agreement to Middle East airlines, a 200% increase from 2006 as export credit agencies stepped up assistance to foreign airlines during the global financial crisis. More than 100 airlines receive this sort of funding.
Mr Clarke dismissed the subsidy allegations as “nonsense”, adding that it finances only around 20% of aircraft through export credits. He stated Emirates would take advantage of export credit if it is provided, adding that it is up to the governments if they chose to support their industries. According to Emirates, in its "Subsidiary – Myths and Facts" document, of the USD22 billion in aircraft financing over the past 14 years, 13% (or USD2.9 billion) has come from US ExIm financing, with EU ECAs contributing 10% of the total financing amount (or USD2.3 billion), and that this ratio was “likely to remain in this range in the future”, according to the carrier.
Emirates aircraft funding: Sources of financials over the past 14 years
Source: Emirates in its Subsidy. The myths and facts about Emirates and our industry Document
This Emirates figure was supported by US Export-Import Bank Chairman and President Fred Hochberg who said: "A total of about 20% of the Emirates and Etihad fleets has been provided by export credit agencies both in Europe and the US. Some airlines have used us to a lesser extent and many have used us to a far greater extent. We exist to take out market distortion. The reason export-import banks exist is to level the playing field and to make it as easy for a company to sell overseas. We're committed to a market approach. There are a lot of countervailing forces in terms of the aircraft industry from the manufacturers to the airlines. The current issue is under discussion to find the most equitable way of dealing with it."
Emirates has the largest order book for widebody aircraft in the world and will require more than USD28 billion in financing through to 2017. Airbus and Boeing together have outstanding orders for 102 widebody aircraft from Qatar Airways, 59 from Etihad Airways and 175 from Emirates.
Middle East v Europe: Airline comments
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Comment |
Quote |
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Air France CEO Pierre-Henri Gourgeon called on the EU to curb the expansion of Gulf carriers, stating the region’s status as an air-travel hub is under threat. |
“Europe is at the crossroads of international air travel, and this is a role we need to value and defend. What we’re telling the authorities is that we need a strategy that gives us a chance to resist. “When you’re supported in this way you can offer the end product at very low prices. They don’t pay tax, they don’t even have a word for it.” |
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British Airways CEO Willie Walsh warned of the threat from Middle East carriers, stating Europe has failed to recognise the “significant threat” they pose. |
“We have been very slow in the UK and in Europe to recognise the new competitive threat. We should as Europe be concerned about what’s happening here. "These are our competitors. We’re financing our competitors by providing them with cheap access to capital. There’s something not right there. I do not take this threat lightly. I think this is a very significant threat. “Our ability to fund the acquisition of new aircraft is handicapped by the so-called ‘home-country’ rule. These guarantees are not operating in the way they were intended and we therefore urge the EU to amend the rules to remove the competitive distortions that have developed.” |
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Lufthansa CEO Wolfgang Mayrhuber stated the carrier views competition from Gulf airlines as a growing and serious threat to Lufthansa and other European carriers. |
"The three national airlines from the Gulf region [Emirates, Etihad Airways and Qatar Airways] are creating unbelievably huge capacity for aircraft and airports at enormous speed with pretty much inexhaustible financial means from oil sources." |
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The EC stated it aims to settle the matter through the Organisation for Economic Cooperation and Development. |
“The commission believes the solution to this issue will be found in the renegotiation of the OECD sector understanding on export credits for civil aircraft. The commission is working towards this goal on behalf of the EU member states but of course appreciates all dialogue with the relevant stakeholders.” |
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| Association of European Airlines |
Dismissed reports that European carriers had joined forces to prevent rivals in the Middle East from expanding in Europe. |
"Someone has concluded we are targeting airlines in the Gulf but that conclusion is not true. There are issues between some Gulf airlines and some governments in Europe and Canada over landing rights etc but that is a different matter. It's like someone putting two and two together and coming to a wrong answer." |
| Emirates | Emirates denied it has unfair competitive advantages, including government subsidy and preferential treatment at Dubai Airport. |
“To suggest that we get 100% support and the soft loans that come with that - according to them - is giving us a competitive advantage is nonsense but then most of those accusations are. Only 20% of our aircraft have been financed using export credit agency supported loans ... People who make statements need to check the facts, the veracity of what they are saying, to ensure they don’t make themselves look silly ... I have said ‘you prove a subsidy and I will resign the next day’. It is completely wrong. "When so many entities and economies around the world are being shored up by governments in order to survive, it is surprising to single out Emirates with unsubstantiated claims of being subsidised. We have grown without subsidy through the success of our commercially-driven business model and see no reason to apologise for what we have achieved ... Once again it is disappointing to see the head of a major European airline issuing factually incorrect and wholly misleading statements. The merger of Air France and KLM has created the most dominant carrier in Europe and the notion that Emirates is taking jobs away is ludicrous. “If they spend as much time running their business as they do trying to run us down they might make even more money. "We are an airline and these are government initiatives that have been in place for a very long time. If the governments decide to change the home rules it's up to them. To say we shouldn't take advantage of those is absolute nonsense. To say we are successful because we get cheap credit is complete nonsense. "We have grown without subsidy through the success of our commercially driven business model and see no reason to apologise for what we have achieved … In the coming months, we can expect a number of legal and underhand tricks on the part of European airlines, among others, to keep Gulf carriers out of their skies. Gulf countries must stand firm and work to ensure that the global aviation industry operates in a free market where companies and consumers can support those who best meet their needs.” |
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Etihad labelled recent criticism of Gulf carriers as "concerning". |
“Aviation is a tough business impacted by cycles and certainly by a range of challenges. This week we have seen the European (Association) of Airlines claim that the Gulf carriers have been given too many free kicks and should be reined in ... We have a clear commercial mandate. We are changing the game of aviation, that’s the nature of any business cycle, and certainly we believe we should be allowed to compete and not be penalised ... This talk coming out that the Gulf carriers should be contained is very concerning. I would argue that the only advantage I have is geography and I can’t argue about that, I didn’t make the world.” |
Dubai Airports CEO: how an airport should be run
UAE's Dubai Airports CEO Paul Griffiths also reacted to the "recent comments and media coverage emanating from France and Canada that inaccurately imply government subsidisation and preferential treatment of local carrier Emirates Airline".
Mr Griffiths stated: “The only thing Dubai is guilty of is providing an environment that actually supports aviation. Most governments around the world treat aviation as a pariah, choking its growth with costly, misdirected regulation, instead of adopting policies that recognise its considerable socio-economic benefits and support its sustainable growth. They then compound the problem with parasitic forms of taxation that usually flow straight out of the sector. In Dubai aviation is embraced as a strategic imperative. Another key to its success has been equal treatment of airlines. Dubai Airports and Dubai Air Navigation Services offer the same competitive rates and charges to all airlines. That, combined with the UAE’s open skies policy and the attractiveness of Dubai as a business and leisure destination, is why we have 130 airlines operating into one of the fastest growing airports in the world."
Emirates again denies fuel and airport charge subsidy allegations
Emirates also again denied claims by the European carriers that its fuel bills are subsidised, previously commenting: “Myths about Emirates access to free or discounted oil are often repeated, but in reality don’t stand up to scrutiny”. The carrier added that it “pays the full published landing charges at its main operational base, Dubai International Airport, and does not benefit from any form of volume related discounts.”
An even more obtuse argument against the Gulf carriers relates to he European carriers claim they are at a disadvantage to its Middle East competitors that receive low airport charges and fuel taxes at their respective home airports. Air France stated those benefits could generate EUR3 billion of operating income if applied to Air France-KLM.
European carriers concerned they could struggle to maintain efficient worldwide connections
European airlines are now concerned that they could struggle to maintain efficient worldwide connections as Middle Eastern carriers lure more passengers away with new destinations (and new aircraft) with the Europeans citing Emirates’ introduction of the Dubai-Manchester A380 service last month as an example of the carrier’s aggressive push into Europe.
The carriers added that it would progressively become more difficult to have enough passengers to offer the same frequency of services to other connecting hubs, such as Hong Kong, which would ultimately affect traffic through their respective European hubs. If left unchecked, the competitive imbalance between the Gulf and Europe will eventually lead to a mass shift in stopover traffic, and other economic activities, to Middle Eastern hubs, Air France warned.
The next two tables highlight the concerns that the carriers have: Emirates is the largest carrier not only on Middle East-Canada sectors, but also on both Middle East-US and Middle East-Europe routes, with Etihad Airways and Qatar Airways also among the five largest carriers on these routes.
US-Middle East capacity: Oct-2010
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Carrier |
Number of Seats |
Percentage |
|---|---|---|
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12,149 |
21.77% |
|
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8,025 |
14.38% |
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7,617 |
13.65% |
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6,797 |
12.18% |
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4,754 |
8.52% |
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4,592 |
8.23% |
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3,990 |
7.15% |
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2,400 |
4.30% |
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1,806 |
3.24% |
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1,806 |
3.24% |
|
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1,055 |
1.89% |
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819 |
1.47% |
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Total |
55,810 |
100% |
Europe-Middle East capacity: Oct-2010
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Carrier |
Number of Seats |
Percentage |
|---|---|---|
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97,200 |
20.77% |
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40,934 |
8.75% |
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34,036 |
7.27% |
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33,882 |
7.24% |
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26,156 |
5.59% |
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25,693 |
5.49% |
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16,343 |
3.49% |
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12,495 |
2.67% |
|
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11,893 |
2.54% |
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11,762 |
2.51% |
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10,281 |
2.20% |
|
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8,552 |
1.83% |
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8,064 |
1.72% |
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Other |
130,708 |
27.93% |
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Total |
337,291 |
100% |
Another concern for European airlines is that the bulk of long-haul premium travellers connecting via Europe are travelling to the Far East and to the Middle East, with much of this occurring on Middle Eastern carriers, with IATA commenting that connecting traffic through the region is also expected to continue to expand at a strong pace. Middle East markets have continued to show solid growth rates in premium passenger numbers, being one of the strongest regions throughout the global financial crisis.
Middle East premium revenue and premium traffic share (% of total): Jan-2008 to Jul-2010
Source: Centre for Asia Pacific Aviation and IATA
Emirates overtook Lufthansa, Air France, KLM and British Airways in 2009 as largest international airline
Emirates overtook Lufthansa in 2009 as the largest carrier on international flights, following a sixfold increase in traffic since 2000, when it ranked 24th. British Airways, the world’s largest international carrier in 2000, now stands fourth, according to IATA, with Air France and KLM in third and eight place respectively, although combined they would represent the world’s largest airline.
2009 rank of world’s largest 10 airlines by scheduled passenger-kilometres flown
Source: IATA
Middle East carriers face battering from all angles - except consumers
As they take on the mantle of the next generation of aviation, and Europe's reactive flag carriers seek to wind back the clock on liberalisation, Emirates and the other strong Middle East carriers are receiving a battering from all angles at present. Canada's refusal to grant additional landing rights represents a blow for the carrier, with the noise being made by Europe’s three major carriers also a concern and, as Emirates predicts, likely to continue.
The verbal war launched by the European carriers is occurring as they come under increasing pressure from their respective governments, as well as facing a battering from slumping premium traffic growth, increased taxes (such as departure and environment taxes) and what IATA has labelled a "mess" of an ATM system. Meanwhile, these carriers have been slow to seek additional access to the booming Middle East region.
The attacks on the UAE airlines hark back to the old style protectionist provisions of the 1940s bilateral system, where passengers are considered as items to be traded between flag carriers, and raise all the worst elements of nationalism and protectionism, again relegating the interests of travellers to a state of irrelevance. In the case of Air Canada, arguments about government subsidy have a particularly ironic ring, as the flag carrier was itself saved from bankruptcy last year only by a massive funds injection from the Canadian government.
Qantas CEO Alan Joyce also joined the fray, commenting that the Middle Eastern carriers struggle to compete on the highly competitive "kangaroo route" between Australia and Europe and have been forced to reduce capacity on the sectors as they are losing substantial amounts of money. He commented that Etihad was "losing a fortune" adding that "even Emirates are now struggling" to turn a profit (Emirates reports its first half financial results next week, with rumours of an even better result in 1H2010 than the USD1 billion profit it made last year).
All this means one thing: The world's carriers are now seeing the Middle East airlines as a mounting threat.
And that also suggests that consumers are benefiting greatly as a result of their expansion.