Gulf Carriers’ Youth, 300-Plane Orders Squeeze Rivals

Emirates, Etihad Airways and Qatar Airways Ltd. say it’s their youth, not state aid, that has allowed them to put the squeeze on western rivals with almost 300 plane purchases worth $70 billion in three years.

The expansion of the Gulf carriers has drawn the ire of Air France-KLM Group Chief Executive Officer Pierre-Henri Gourgeon, who says Dubai-based Emirates has 3.5 billion euros ($4.7 billion) less in annual costs because it is state-owned. Tilting the playing field further, he says, is a treaty barring airlines in Britain, France, Germany, Spain and the U.S. from receiving credit guarantees for purchases from Airbus SAS and Boeing Co.

“I’ve got one secret weapon and it’s that I’m not a legacy carrier,” Etihad CEO James Hogan said in an interview in London. “If these chaps had been setting up an airline in the last seven years they’d be doing exactly what I am.”

Government officials discussed a revision of the export- credit rules during a meeting today at the Paris headquarters of the Organization for Economic Cooperation and Development, said Stephen Di Biasio, a spokesman for the intergovernmental body. At stake is dominance of some of the world’s most lucrative long-haul routes spanning Asia, Europe and North America.

While Air France says its Gulf rivals have lower taxes, airport charges and social levies, the region’s three top operators reckon ownership is irrelevant and that they pay the same fees as older airlines, only at a lower rate because they’re newcomers based in emerging markets.

‘Not a Penny Since’

Emirates, the world’s biggest carrier by international traffic, was founded 25 years ago with $10 million in government cash “and not a penny since, contrary to what they’re all saying,” said Tim Clark, the airline’s president.

Emirates has ordered 155 planes since November 2007, all of them wide-bodies for use on lucrative long-haul journeys. Abu Dhabi-based Etihad, established in 2003, has placed contracts for 100 aircraft over that period and 17-year-old Qatar Airways has added 34. Air France, whose KLM unit was founded in 1919 and is the oldest carrier still flying, has bought 25 planes and British Airways Plc, dating from 1924, just 11 regional jets.

What’s concerning western airlines most is how their rivals are deploying the new, more fuel-efficient airliners to turn their home bases into global hubs. Emirates, building a fleet of 90 Airbus A380 superjumbos, 70 more than any other carrier, offers waves of flights converging on Dubai at similar times to maximize opportunities to change planes as it seeks to strip inter-continental traffic away from London, Paris and Frankfurt.

Lower Airport Fees

“If you’re going between the U.S. and Asia you can start connecting through the Middle East and that’s certainly a concern to the big European transfer carriers,” said Chris Logan, an analyst at Echelon Research in London. “And when you begin with a clean sheet of paper you don’t have the heavily unionized workforces and overstaffing of the legacy carriers. The Gulf operators are effectively long-haul low cost airlines.”

Oman Air CEO Peter Hill says Middle Eastern operators have also shown a greater flair for quality and ease of travel.

“It’s all about commitment,” he said Nov. 9 in an interview in London. “You don’t see the same connectivity, in-flight entertainment and investment in seats among European carriers.”

Airport Access

Aiding the expansion are airport fees that undercut Europe’s major hubs, with charges at Dubai International about one-quarter of those paid by Air France at Paris Charles de Gaulle and Deutsche Lufthansa AG in Frankfurt, according to data compiled by aviation consultancy LeighFisher.

Airports in emerging markets are usually state-owned, with charges often kept artificially low to spur the wider economy, said Peter Mackenzie-Williams, a LeighFisher director. Gulf hubs also offer better aircraft utilization, being less congested and with fewer restrictions on hours of operation, Logan said.

Carriers in the Gulf region likewise benefit from lower taxes compared with airlines in western Europe and the U.S.

Qatar’s company tax burden is the world’s second-lowest, averaging 11.3 percent, according to the ‘Doing Business’ 2011 report compiled by the World Bank, while the United Arab Emirates is fifth-lowest at 14.1 percent. That compares with rates of 66 percent in France and 48 percent in Germany.

While social costs such as pension contributions also tend to be lower in the Gulf, those savings are partially offset by housing allowances and other grants to foreign staff. Emirates pays accommodation costs for 95 percent of workers, says Richard Vaughan, the carrier’s vice president of commercial operations.

Fuel Myth

Gulf carriers say it’s also a myth that the region’s oil wealth means they have lower fuel bills.

Etihad buys kerosene on international markets, often paying more in Abu Dhabi than at other airports, and engages in hedging like other airlines, it said in a report in July titled “State subsides -- the real story.” Richard Vaughan, head of commercial operations at Emirates, said in a Nov. 9 interview in London that aviation fuel in Dubai is “tankered in” from Singapore.

Air France’s Gourgeon says European and North American governments are handing traffic to Gulf carriers through their taxation and social policies and that taking steps to favor local operators would be in the national interest.

Share Performance

“These companies are operating a service which is essential for the rest of the economy,” Gourgeon said in an interview in Paris. “When the activity of carrying somebody by air is done by somebody from another part of the planet then the interests are misaligned.”

Air France fell 0.4 percent to 13.94 euros in Paris. British Airways slipped 0.9 percent to 270 pence. The eight- company Bloomberg EMEA Airlines Index lost 1.2 percent, paring its gains this year to 22 percent. Emirates, Etihad Airways and Qatar Airways are closely held.

The availability of export-credit financing to Gulf-based carriers has been the focus for the most recent clashes.

The Air Transport Association of America wrote to Treasury Secretary Timothy Geithner in October seeking a revision of regulations to ensure a level playing field. The plea was echoed by 24 U.S. and European carriers including Delta Air Lines Inc., Southwest Airlines Co. and British Airways, which said guarantees should be limited to companies unable to raise funding via commercial debt markets, excluding wealthier ones.

Islamic Finance

“It’s a distortion of commercial markets to use official export credits to enable aircraft sales to credit-worthy borrowers merely because conditions in commercial markets are relatively unfavorable,” the carriers said in a statement.

Emirates finances 23 percent of its fleet through export credit, 43 percent through operating leases and 20 percent via commercial banks, with the rest from bonds and Islamic finance. Investors and banks are willing to lend because of a $4 billion cash balance makes the airline a “beacon” in the industry, Clark said in an interview in London.

“These incentives were created by the Europeans and the Americans to sell aircraft, so the ball is in their court,” Clark said. “We’ll work with whatever we’ve got.”

A rule revision could be signed in the new year but backdated to Jan. 1, said Kostya Zolotusky, managing director for financial services at Boeing, which is involved in the talks. It’s not yet clear whether loan guarantees will be extended to those countries currently barred from receiving them, though the cost to existing recipients is likely to be higher, he said yesterday.

Whatever the outcome of the talks, Western airlines will struggle to match the Gulf’s appetite for expansion, said Echelon’s Logan.

“The U.S. and European carriers are not irrelevant, but they’re not that important anymore to the aircraft manufacturers,” he said.

To contact the reporters on this story: Steve Rothwell in London at srothwell@bloomberg.net; Laurence Frost in Paris at lfrost4@bloomberg.net; Stefania Bianchi in Dubai at sbianchi10@bloomberg.net.

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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