Air France-KLM: Information on claims raised about State-Owned Airlines in Qatar and the UAE

As a preliminary remark, Air France KLM would like to highlight its views regarding the regulatory framework in which airline competition ought to take place and which we believe to be the basic principles enshrined in the Bilateral Agreement signed between the European Union and the United States.

In particular it is Air France KLM's view that:

1. The European and the US Authorities have taken the approach that the aviation industry should normalize and that free and undistorted competition is the basis on which airlines ought to operate to the benefit of the travelling public. This in our view should translate in the fact that subsidies and State support should be eliminated unless appropriate justification exists;
2. The idea that open market access brings public benefits whatever the conditions applicable in the market simply does not hold true. State Aid and subsidies have the potential to distort competition to a significant extent. Consumers and labor alike will be severely penalized in the longer term. These notions are basic principles of the World Trade Organization (WTO) and the fact that Aviation is only partially covered under the General Agreements on Trade and Services (GATS) does not change in any way their general relevance;
3. It has been argued that few airlines worldwide could be immune to the accusation of State support. Suffice is to say that the order of magnitude identified in the cases at hand is such that this kind of argument becomes totally irrelevant. It is also worth noting that past support has, in most cases, taken place in a non-liberalized environment limiting its consequences on the market. Finally, it needs to be reminded that the degree of transparency as well as the regulatory framework existing and applicable both in Europe and the US appear sufficient to guarantee that airlines licensed in these jurisdictions compete in a globally fair and homogeneous environment;
4. The issue at hand should be considered for what it is namely a commercial dispute and we see no justification for broader economic, political or foreign policy considerations to be taken into account on both sides of the Atlantic.
5. States remain free to apply different policies than the ones being developed within the European Union or the United States of America when it comes to public intervention in the Aviation sector. However, in such circumstances, those very same States should accept that they cannot claim as legitimate the fact for them to benefit from the liberal environment prevailing there.
6. Finally, the carriers identified are without any doubt amongst the major world carriers and accordingly nothing can justify that they continue to benefit from any sort of preferential treatment from their States of origin (we are not talking here of the fiscal and social environment which are "natural" advantages which we do not call into question).

As explained below Air France KLM

(a) supports the views expressed in the document "restoring open skies : the need to address subsidized competition from state-owned airlines in Qatar and the UAE" presented by American Airlines (AA), Delta Airlines (DL) and United Airlines (UA) on January 28, 2015 that provides evidence of serious distortions of competition

(b) emphasizes that, unless the Department urgently takes measures, the US industry will in a few years be confronted with the situation that the EU industry is currently facing and;

(c) in order to efficiently respond to this systemic threat urges the Department to coordinate its action with its counterparts in Europe and other regions of the world to ensure the continuous implementation of fair competition in a liberalized market.

Being faced with the incredibly fast parallel expansion of Emirates, Etihad Airways and Qatar Airways (the Gulf carriers) in Europe for more than 10 years, Air France and KLM like other European carriers has repeatedly raised doubt as to the purely commercial basis underlying this unprecedented growth. These efforts have bumped into the thick veil of secrecy in which the operations of these carriers are shrouded and hence limited European carriers from providing the national and European regulators with all the evidences deemed necessary to justify immediate redress measures.

The comprehensive enquiry led by AA, DL and UA reveals the support that the Gulf carriers appear to have received from their respective States: based on conservative assumptions this amounts to a total of more than $40 billion over the last 10 years. These subsidies are said to represent for example in the case of one of these carriers a staggering 25% of its revenues for the period 2010-2013.

Moreover these subsidies appear to keep in the market non-commercially viable players, as it is candidly stated in the financial statements presented for both Etihad Airways and Qatar Airways, offering unnecessary capacities at non-economical prices with the objective of gaining market shares at the expense of airlines operating under normal commercial conditions.

At this stage, we note that we have not heard or seen any convincing elements that would challenge the evidences brought forward by the three US carriers. On the contrary, we can only observe that considerable financial means are being invested to demonstrate - unconvincingly in our view - that US airlines would have been subsidized alike or that subsidies should not be mixed up with State investment. This however points to the main issue which is precisely that there is no applicable regulatory framework in the Gulf countries which allows drawing a distinction between (1) State and airline or (2) subsidy and investment.

While the US industry has only recently started to be faced with significant competition from the Gulf carriers, the European carriers, including Air France and KLM, have experienced it for over 10 years with dramatic consequences (see document attached):

• between 2004 and 2014 the Gulf carriers have increased the number of points served in Europe from 23 to 69 and their overall capacity has grown by more than 400 %. From 8 million passengers in 2004 they have reached the 25 million mark in 2014 enjoying an average growth on these European routes of more than 13% almost three times the average growth of the industry worldwide;
• during the 2008-2014 period their market share between Europe and India/South-East Asia has grown from 22 to 34% while the share of the EU and Asian carriers fell down from 38 to 27%. Emirates, Etihad and Qatar Airways now operate 80% of the total capacity between Europe and the Middle-East. Capacity flown between Europe and the Gulf is now higher than that offered between Europe and China, Japan and Korea taken together;
• as a consequence, European carriers have closed routes and reduced overall capacity. Air France during this period terminated services to Abu Dhabi, Doha, Jeddah, Chennai, Hanoi and Pnom-Penh and lost major growth opportunities to these regions.

Considering that today the Gulf carriers serve only 12 points in the US it is not very difficult to imagine the situation in the US market 5 or 10 years from now specially looking at the magnitude of the aircraft orders of these three airlines.

On top of this impact on the long-haul network of EU carriers, the injection of funds by foreign State companies in a number of European carriers estimated at several billion euros raises the issue of why European State investments are being scrutinized and subjected to the so-called "Market Economy Investor Principle" while it is not the case when third country States are concerned. Such State investments have the potential to severely distort competiion.

Finally, as extensively described in the AA/DL/UA document, this downsizing of European airlines operations is also not without significant consequences on the benefits that the partnerships between European and US carriers are bringing to their customers as, with the rapid expansion of non-stop Gulf-US services, a growing share of the connecting traffic to and from the US is bypassing European hubs (James Hogan, CEO of Etihad: "Europe is no longer a hub, but an endpoint"). This negative impact would of course be increased if the Gulf carriers were to exercise the fifth freedom traffic rights between the EU and the US that are enshrined in the open skies agreements signed by the US with the UAE and Qatar.

Given the dramatic consequences faced today by the EU and Asian airlines and tomorrow by the US airlines there is an urgent need in our view for a reaction proportionate to the magnitude of the threat.

Air France KLM fully supports the approach suggested by AA, DL and UA that, in the framework of the US open skies agreements with the UAE and Qatar, bilateral consultations are being held at the earliest allowing (1) these countries to fully disclose the audited financial statements of their carriers as well as of all the government-owned entities providing goods and services to these carriers (2) the USG to be in position to determine whether the principle of fair and equal opportunities to compete is actually abided by and, if needed, take appropriate measures to guarantee in the long run a level playing field.

Air France KLM also believes that, as the Gulf carriers are already impacting the partnerships between EU and US airlines and are already directly (by using available fifth freedom traffic rights) or indirectly participating in the EU-US market, this issue should be discussed in the framework of the US-EU Bilateral Air Services Agreement with the objective of defining a coordinated approach in order to safeguard the benefits of the ground-breaking US-EU agreement.

There is in our view the need for a rapid reaction from the regulators in the US and elsewhere to avoid a situation where less than a handful of state-owned airlines would dominate, without further in depth transparency as to their conditions of operation, major long-haul markets and define the global connectivity of the US and EU economies at the expense of airlines subject to strict market economy principles, their employees and their customers.

Finally it is worth noting that, as other regions of the world are also confronted with the same issue, a global approach to fair competition is probably needed. A number of countries including the EU member states are actively working on the subject of fair competition within International Organizations and are making concrete proposals that could serve as a basis for a future worldwide framework. The US Government may consider a more active role in these fora.