By Susan Carey And Rory Jones
As the battle intensifies over U.S. airlines' allegations of
unfair state subsidies to three Persian Gulf rivals, a look at how
the American carriers gathered data to support their claims sheds
light on the vast financial reporting divide between the two
sides.
Alarmed by the rapid U.S. expansion of Emirates Airline, Etihad
Airways and Qatar Airways, Delta Air Lines Inc. two years ago hired
forensic accountants to learn more about the overseas carriers'
funding. All three are government-owned, and Etihad and Qatar don't
issue public financial statements.
The effort--later joined by American Airlines Group Inc. and
United Continental Holdings Inc.--culminated in a trade complaint
lodged in January with the U.S. government. The U.S. carriers claim
the documents they found show the Gulf trio has received $42
billion in subsidies and unfair benefits since 2004, including
about $17 billion for Abu Dhabi-based Etihad, and $16 billion for
Doha-based Qatar Airways. The Gulf carriers say they are commercial
enterprises that aren't state subsidized.
Delta hired investigators to dig into their financial histories.
The three U.S. carriers say their gumshoes discovered about a year
ago that they could request and obtain copies of financial
statements for the three from corporate registry offices in some
countries where the Gulf airlines operate.
The investigators, which the airlines wouldn't name, searched in
nearly 30 jurisdictions, assembling their dossier mostly from
documents filed in the U.K., Singapore, Australia, India, Belgium
and Ireland, said Jill Zuckman, spokeswoman for the U.S. airlines'
coalition, called Partnership for Open & Fair Skies. They also
used bond-offering prospectuses for the Gulf carriers and their
governments to compile the information.
The picture remains incomplete, Ms. Zuckman said, given the
often interlocking relationships among the Gulf governments,
airlines, airport authorities and aviation service providers. The
U.S. coalition, which previously issued only a summary of its
claims, said it will release all its documents on Tuesday, giving
the Gulf carriers their first chance to evaluate and respond to the
assertions.
The U.S. airlines said they amassed 44 documents totaling 1,021
pages. The Wall Street Journal has viewed many of them, at least
one of which is in Flemish. Among other information, they indicate
that international auditors at times endorsed two of the airlines
as viable businesses--or "going concerns"--contingent on further
financial backing from their shareholders.
In Etihad's 2013 annual report, for example, KPMG LLP said it
audited the accounts on a going-concern basis "notwithstanding the
fact that the group had accumulated losses of $3.76 billion" as of
December 2013. KPMG said it had prepared the 2013 statements based
on approval of $3.5 billion in additional shareholder funding in
2014 by Abu Dhabi's ruling body.
The U.S. carriers, citing at least nine years of Etihad
financial statements, claim such shareholder funding was part of
$17 billion in state subsidies provided to Etihad since 2004.
Etihad says it has received equity investments and loans from
its government. It says it can't comment on specific claims because
it hasn't seen the full documentation behind the U.S. carriers'
previously issued summary.
The U.S. airlines said they also assembled 19 years of annual
accounts for Qatar Airways that show it received $16 billion in
total subsidies since 2004.
In Qatar Airways' 2009 financial statement, auditor Ernst &
Young LLP reported that the current- and previous-year losses
exceeded 50% of company capital. A special meeting was convened
that year to weigh options including dissolving the company.
Shareholders decided instead to fund its liabilities.
In the same statement, the auditors noted that the government
loans were non-interest bearing, had no specific repayment terms
and could be converted to equity because repayment wasn't likely to
occur in the foreseeable future.
Qatar Airways said Chief Executive Akbar Al Baker is expected to
address the U.S. carriers' allegations in presentations scheduled
for May 13.
Emirates has published its financial statements for the past 13
years and is starting to make earlier reports available as well.
But the U.S. carriers claim they also uncovered evidence that it
received at least $5 billion in subsidies since 2004.
Among other things, they pointed to a reduction from 15.1
billion U.A.E. dirhams to 5.6 million dirhams in fuel-price hedging
contracts on its books between 2008 and 2009, a time when many
airlines took hedging losses after jet fuel prices tumbled. The
majority of the contracts were transferred to a Dubai government
holding company, the financial statement said.
PricewaterhouseCoopers LLP audited the books.
Emirates declined to comment on the hedging contracts. Last
week, it said it had requested that the U.S. government release the
materials received from the U.S. airlines, as well as information
it had requested from them, so Emirates can "defend itself against
the pernicious falsehoods that have wrongly been advanced against
it."
Emirates, Etihad and Qatar Airways say they abide by
International Financial Reporting Standards. Qatar's books also
make that claim. All three companies say they have earned their
burgeoning traffic with superior service and a range of new
destinations. KPMG, PricewaterhouseCoopers, and Ernst & Young
declined to comment on client accounts.
The U.S. carriers want the Obama administration to revise
existing "open skies" air treaties with Qatar and the United Arab
Emirates to account for the purported government aid. Meanwhile,
the U.S. carriers also want the government to freeze additional
Gulf airline service to the U.S., retroactive to January,
restricting planned new routes.
The Gulf carriers and open skies air treaties generally have won
support from U.S. cargo airlines, discount carriers such as JetBlue
Airways Corp., and U.S. airport and tourism groups. Centre for
Aviation, a respected Australian aviation researcher, took the U.S.
airlines to task in a recent report for failing to account for the
customer benefits such new airplanes, exotic destinations and lower
fares provided by the Gulf carriers and not demonstrating serious
harm to U.S. airlines by their expansion.
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