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Sat 28 Jun 2014 01:50 AM

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Time to call time on the Etihad subsidies debate

European carriers like Lufthansa need to get used to the fact that what Etihad is doing is perfectly legitimate

Time to call time on the Etihad subsidies debate

It didn’t take long for Lufthansa’s new CEO Carsten Spohr to get into the swing of things. Appointed in February this year as boss of the German carrier, by April he had a pilot’s strike to contend with, and by May was doing what his predecessor liked doing — bashing the Gulf carriers.

“The biggest challenge for a chief executive of a European airline, just as for my counterparts in the United States, is running privatised companies in an industry where government-owned airlines are gaining more and more market share,” he told Reuters.

The world of no unions, no public sector obligation (PSO) routes and a bottomless pit of cash is a world every airline CEO would love to inhabit. How unfair it is that only the likes of James Hogan, president and CEO of Etihad, gets to do this.

Or so he would have you believe. This week, we devote six pages in the magazine to an extended interview with Hogan, who for the first time ever details the financing structure of the company. In recent weeks, Etihad has been the focus of all kinds of allegations. The name of the game for its competitors is simple enough: throw enough mud, and some of it will stick.

Fiction, fantasy and fact have been hard to separate. But let’s try. Firstly, does Etihad receive subsidies from the UAE government? No is the answer. It has, Hogan tells us, long-term loans, which were effectively start-up capital, used to build its fleet and infrastructure. And there is a repayment schedule. Let’s be clear: these are loans, not subsidies.

Does Etihad fly PSO routes? Yes, two out of 103 destinations are PSO routes and for that it receives financial assistance. These will be moved out of PSO within the next 24 months. Hardly a game changer.

Does Etihad receive funding for its Emiratisation programme? Yes — but once recruits have completed their training they move onto the Etihad payroll, and their salaries are 100 percent paid by Etihad. Perfectly normal business practice. Does Etihad pay for its sponsorships. Yes. End of story.

You can read Hogan’s detailed answers in our feature, but it’s pretty obvious what’s happening here. The likes of Lufthansa are struggling and desperate for the kind of supportive shareholder that Etihad has in terms of the government. They would like the same.  Make a lot of noise, throw a lot of mud, shout, scream, and keep doing all of this until someone takes notice. If Etihad becomes an unfortunate whipping boy in that process, so be it. If Etihad’s strategy of taking equity stakes in other carriers such as Air Berlin starts to get derailed by regulators, even better.

But will anyone take notice and start analysing exactly what is going on? Well, a good place to start would be Lufthansa’s own website.  It explains how, after the company had been formed in 1926, the nature of the industry changed.

“Larger aircraft could now fly longer routes — and therein lay the future, not in the “hop-and-skip-routes” of the early years, which merely cost subsidy money.”

Subsidy money? Hang on a minute… Ah, I get it now. That was all a long time ago, so it doesn’t count.

Well actually it does. As Hogan tells us this week, “The dominant position in their home markets is grandfathered. Their infrastructure is all grandfathered. We don’t argue about that.”

European carriers like Lufthansa need to get used to the fact that what Etihad is doing is perfectly legitimate. It operates on a different business model based on a different region. And the result is more choice for the consumer — something the whole industry should celebrate.

Hogan’s very thorough and candid answers in Arabian Business should bring this long-running debate over subsidies and level playing fields to an end. Whether it will, only time will tell.

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procan 6 years ago

Anil many except what Hogan has to say , but most in the West simply do not believe him . Then there is the issue of a negative view of Arab Businesses and the presumption that EU and North Americans are some how Arab customers is it rascist perhaps but it is the mind set such as it is . The view is the third world countries are yours to take but west not so much. There is a evolution occurring Fortress North America and EU block are on one side of it.

Fred 6 years ago

let Lufthansa pay back the EUR 500 million (yes, half a billion euro) the Austrian government paid (debt relief) on behalf of Austrian Airlines the moment LH bought them + cancel all their own PSO routes (more than two!), and then they can talk.

CAD 6 years ago

The interview is not convincing does not reveal any real news.

As long as Etihad operates without transparency and is state-owned, it will always be under scrutiny. At which interest rate are the loans running? Unless they run at market rate, we are looking at a subsidy. The fact that emiratization is sponsored at the beginning is a subsidy, even though this newspaper seems to disagree.

John Harte 6 years ago

There are many airlines that are state owned or subsidized, the difference is that such airlines are limited in landing slots of countries whose airlines are private and transparent, because understandably it is not a level playing field between the 2 carriers.

EY and EK are demanding the privileges that only private airlines enjoy, and yet they will not open up their books for scrutiny.

When EK and EY are listed on stock exchanges, then maybe Lufthansa is being unfair in its criticism; until then, the finances of both these airlines is shrouded in mystery.

Jezinho 6 years ago

Whilst the Govt of Abu Dhabi has tasked EY with becoming self-sustaining, your premise that the Govt's loans to the airline "are loans not subsidies" simply isn't true. Most of these loans are not repayable until the late 2020s (if indeed there is a contractual obligation to repay the loan - this is highlighted in their audited accounts) and they are non interest-bearing.

EY has borrowed more than USD 4.5 billion from its shareholder (with an additional USD 1 billion coming during 2013), for free. There aren't many airlines in the world that can access that sort of cheap capital. Whilst I generally don't support the arguments of legacy carriers such as LH, as EY offers a far superior product and is a very well run organisation, you cannot deny that such financial support is a direct subsidy. Furthermore, you also have to look at the cheap debt EY is able to source from Abu Dhabi Govt controlled banks.