Airlines and subsidy: our position ¬ Myth Airline subsidies are a “Gulf” problem FACT Market-distortingsubsidiesandgovernmentsupportaresadlypresentineveryworldregion

Myth Emirates is subsidised FACT Completelyunsubsidised.Wecampaignagainstairlinesubsidies

Myth Emirates accesses cheap or free fuel FACT False.WebuyfuelfromBP,ShellandChevroninDubaiandworldwideatmarketrates

Myth US and European airlines received support decades ago but are now subsidy-free FACT Bankruptcyprotectionandgovernmentbailoutscontinuetoexist

1

Airlines and subsidy: our position ¬Weunderstandthatdespitenoevidence,anoftrepeatedmythcanultimatelybeacceptedasconventionalwisdom.Inthisdocumentyouwillfindourviewsonsubsidyintheairlineindustry,thoroughexplanationsaboutEmirates’businessmodelandourresponsetomisrepresentationsthathavebeenlevelledagainstus-fromclaimsaboutsubsidisedfuel,financialsupportandstaffconditionstoenvironmentalregulationandairportcharges.

Emiratesbelieves:•AcommonsetoftransparentfinancialreportingmetricstomeasureandapplyagainstallinternationalcarriersshouldbedeterminedbyIATAandICAOonwhatdefinesasubsidy.

•Governmentsshouldnotprovideinjections,borrowingsorfinancingtoairlines,regardlessofshareholdingstatus.

•Allgovernmentsshouldpursueliberalisationandopenskieswiththeobjectivetoendthegreatestsubsidyofall–aero-politicalprotection.

Tim Clark, President, Emirates Airline

3

Introduction 4

Recentairlinesubsidies 5

Therhetoricalmerry-go-round 6

Governmentownershipandsupport 8

Statesupport:ahistorylesson 9

Doesanairlineneedtobepublicly-tradedinordertobe“transparent”? 10

AnalystsconfirmEmirates’independent,commercialstatus 11

Faircompetition 12

StarAllianceandstatesupport 13

Sourcesoffinance 14

Themythofthe“GulfCarriers” 15

Airlinearbitrage:varyingcostbasesaroundtheworld 16

Landingfees,chargesandsuppliers 18

Airportinfrastructure 19

Oil 22

AtransparentfulldisclosureofEmirates’subsidiaries 24

Environment 26

Conclusion 27

Contents ¬

4

Despitetheaviationindustry’sbestattemptstoreachaself-sustaining,profitableposition,airlinesandgovernmentsubsidieshaveoftengonehandinhand.

Inthelastdecade,globalcarrierslostUS$50billion,awoefulresultcausedbycompoundingfactorsincludingtheeventsofSeptember11,highfuelprices,flawedbusinessmodels,theglobalfinancialdownturnand,ofcourse,subsidisedandpropped-upunderperformingcarriers.

Withperiodssuchasthese,itisnotsurprisingthatsomecarriershavebeenunabletoservicetheirdebtsandhavesoughtrelieffromtheirgovernments.

AlthoughEmirates,asaprofitableandcommerciallyruncarrier,isfundamentallyagainstthepracticeofairlinesreceivingstatesubsidies,weunderstandthatitmaytaketimeforthepracticetobewhollyeliminatedfromourindustry.

Market-distortingsubsidiescantakemanyforms.Thestate-runKoreaDevelopmentBankfroze3.76trillionKoreanWon(US$3.3bn)worthofdebtsfromAsianaAirlinesin2010.Thisisaveryclearexampleofsubsidy,aswasthe€500million“brideprice”giventoAustrianAirlinesfromtheAustrianGovernment,priortotheSeptember2009takeoverbyLufthansa.

Taxbreaks,underwrittenwarriskinsuranceand“onetime”state-bankloansareformsofsubsidy,evenif“approved”bygovernments.

Althoughnotasubsidyperse,Chapter11protectionintheUSalsohasasignificantmarketeffect,byprovidingalevelofprotectionforairlinebankruptcyreorganisationthatisseldomfoundinothermarkets.

The Star Alliance is the world’s largest airline group and 13 of its carriers - nearly half of its membership - have received subsidies and state aid totaling more than €6.8 billion.

Oneofthosesubsidies,€800millionpaidintotheLufthansapensionfundbytheGermanGovernmentin1995,waspartofaseriesofEuropeanbailoutswhennationalairlineswereawardedwithfinancialcontributionstotalingmorethan€10billion.OtherbeneficiariesincludedAirFrance,BritishAirways,TAP,OlympicAirways,AlitaliaandAerLingus.

Morerecently,thedebatehasshiftedtotheMiddleEast,oneofseveralregionswitnessinghighgrowthratesforairtravel.

Astheregionhasinjectednewcompetitionintotheglobalaviationlandscape,thishasinducedacacophonyofcriticisms,complaintsanddistortionsregardingtheissueofsubsidy–withtheaimofprotectingthestatusquoofsomenon-MiddleEasternincumbents.

EmiratesacknowledgesthatsomeairlinesintheMiddleEastareindeedgovernmentsubsidised,butthecriticismsincorrectlypaintallcarriersintheregionwiththesamebrush.

WithEmiratesbeingthelargestandmostvisibleairlineintheregion,thecriticismsareoftenleveledatus,eventhoughself-sufficiencyandprofitabilityhasbeeninEmirates’DNAsince1985.Asyouwillfindinthisreport,allofourachievementsarewell-earned,transparentlydocumentedandborneoutofoureffortstosustainablybuildourcompany.

Introduction

“AtEmiratesweseemuchtobeencouragedabout:moreandmorecountriesrecognisethatliberalairaccesshasamultipliereffectontheireconomiesandbestservestheirnationalinterest.Yettherearestillcaseswheresomeflagcarriersortheirallianceproxiessuccessfullyblocknewcompetition,bycreatinganecho-chamberofrepeatedfalseassertionsaboutrivals.WerecognisethatoursuccesshasmadeusatargetandsomeairlineshavebeenwillingtomakegrossmisrepresentationsaboutEmiratesandDubaiinordertoservetheirinterests.Wehavenothingtohideandwelcomealldiscussiononouractivities.”Tim Clark, President, Emirates Airline

“ThechargesofunfaircompetitionfromthelikesofLufthansa,AirFrance-KLMandAirCanadafailtostackup.Althoughitisgovernment-owned,Emirateshasbeenprofitableineveryyearbutonesinceitstarted.Itsfast-growingfleet…isfinancedconventionally.Itpaysthesamepriceforfuelasotherairlinesandthesamefeesatitshomeairport.”The Economist

5

• TheEuropeanCommissionfoundthatfinancinggrantedtoHungarianflagcarrierMalévbetween2007and2010inthecontextofitsprivatisationandrenationalisationconstitutedillegalstateaid.Asaresult,inJanuary2012theCommissionorderedHungarytorecovernearlyFt100billion(US$406million)fromtheairline.

• Alitaliacontinuestobenefitfromstateaidamountingto€700millionoversevenyearsviaa2008‘SaveAlitaliaDecree’passedbytheItalianGovernment,whichamongstothersupportmechanisms,imposesanairporttaxof€3perpassengeronallairlinesservingItaly.

• CitingconcernsoveramarketingagreementbetweenTimisoaraairportinRomaniaandHungarianWizzAir,theEuropeanCommissioninMay2011launchedaninvestigationintonon-paymentofairportchargesamountingto€2.6millionandadditionalrebates.

• TheEuropeanCommissionhasanopeninvestigationintoaCZK2.5billionloangrantedtoCSA-CzechAirlinesin2009bythestate-ownedentityOsineka.s.,whichhasrecentlybeenexpandedtocoverotherrestructuringfundingtotheairline.

• TheCypriotGovernmentinMarch2011approveda€20millionbailouttoCyprusAirways.

• InNovember2011theEuropeanLowFaresAirlineAssociationcriticiseda€25milliongovernmentsubsidytoSpanair,bringingthetotalamountofsupportfromlocalandregionalSpanishgovernmentsto€120million.

• JALreceived¥350billionoffreshcapitalinearly2010fromtheJapaneseEnterpriseTurnaroundInitiativeCorporation(astate-controlledinvestmentfund),andanadditional¥600billionlineofcreditfromfinancialinstitutionsincludingthegovernment-ownedDevelopmentBankofJapan.

• InDecember2011,theIndianGovernmentfinalisedplanstoprovidemorethanUS$11billioninstatesupporttoAirIndia.Thisincludescoordinatingloansfrom14banksworthUS$5.7billionovera10-yearperiodandUS$4.7billiontofunditsfleetacquisitionplans.InMarch2012,theIndianGovernmentapprovedacashinjectionofUS$800millionunderthefederalbudgetfor2012/13.

Recent airline subsidies

6

“TheGulfcarriersareabletodumpcapacityintomarketssuchasCanadaandundercutincumbentaircarrierssuchasAirCanadabecauseofthevirtuallyunlimitedsubsidiesandsupporttheyreceivefromtheirrespectivegovernments.’’The Impact of Emirates on the Industry - Air Canada website

Emiratesoperatesitsflightsonafullycommercialbasis,respondingtodemandandmakingrationalmarketassessments.SinceAirCanadadoesn’toperateaservicefromTorontotoDubaiwearetheonlycarrieroperatingthisrouteandourflightsflew90%fullonaveragein2011,revealingmajorcapacityconstraints.Wesimplycannotaffordtoassignaircrafttorouteswherethereisnodemand,norareweinthebusinessofcapacitydumping.

“Ourcompetitorsareinstitutionallylinkedwiththeirgovernmentsandregulatorybodies,theirairportsandserviceproviders..therearenomeaningfulcompetitionrules,noconsumer-protectionrules,aswehaveinEurope..wehavenochoiceofgroundhandler,orcateringsupplier,wherewecanonlyconductbusinessthroughanappointedsalesagent.”Ulrich Schulte-Strathaus, Secretary General, Association of European Airlines (AEA)

EmiratesbelievesthatDubaiishometothemostliberalcompetitiveenvironmentofthemall:completelyopenaccesstoall150carriers

servingtheemirateunderitsOpenSkypolicy.DubaiisclearlybeingsingledoutbyMrSchulte-Strathaus,forifheweretrulyagainstthepracticeofsingle-concessionairemodelsforgroundhandlingandcatering,hewouldalsoneedtocriticiseSingapore,SouthKoreaandJapan,amongstmanyothers.

“Theseairlinesaremanagedwithoutthefinancialandeconomicconstraintsforprofitabilityofaneconomyopentoallplayers.Profitability,whichisanabsoluterequisiteforanyprivateeconomicplayer,isofsecondaryimportancefortheseairlines.”Jean-Cyril Spinetta, Chairman of Air France-KLM

MrSpinettadescribestheGulfregioninbroadtermsthatdistortreality.Dubaihasnoneoftheoilwealthofitsneighbours,whichiswhyitpioneeredservice-basedcompaniessuchasEmirates.Asaresult,EmiratesisuniqueintheMiddleEastforhavingconsistentlyproducedprofitsduetoourstrongcommercialmandate.WehavebeenruninthiswaysinceOctober1985.ThereisnothingsecondaryaboutprofitabilityforEmirates,whichtapsinternationallendersforitsfinancingneedsandthusneedstooperateonaprofitablebasisinordertoservicetheseloans.

“TheyexpandthehubDubairegardlessoftheprofitability.Becausetheonlyissuethatcountsisthedevelopmentofthelocation.Theowner

isthelawmaker,theregulator,ownstheairline,theairport,controlstheATCandisthefuelsupplier.Moneydoesnotmatter.Moreover,therearenoemploymentlawsandnoenvironmentalregulationsinDubai.ThisissimilartotheT-shirtsmadebychildlabour.…”Peter Malanik, former CEO, Austrian Airlines

Money,andprofitability,certainlymattersforEmirates,likeitdoesforanyindependentlymanagedcompany.AllofDubai’saviationfirmsarerunonacommercialmandateandthisiswhylocalairportdevelopmentswerepostponedbymorethan10yearsduetotheglobalfinancialdownturn.

HadMrMalaniktakenthetimetoexamineEmirates’labourandenvironmentalpractices,hewouldhavelearnedthatEmiratesoffersexcellentworkingconditions,withmorethan8,600employeeshavingserved10yearsormoreatthecompany,andinexcessof2,100staffwith20yearsormoreofservice.Emiratesalsogoesaboveandbeyondstandardairlinepracticetospendhundredsofmanhourseachyeardetailingourenvironmentalperformance.OurthreelargestfuelsuppliersareBP,ShellandChevron–nottheDubaiGovernment.

The rhetorical merry-go-round...OPERATE

WITH HUGELY SUBSIDISED FUEL

COSTS !

...T-SHIRTS MADE BY CHILD

LABOUR...!

7

Gulfairlines“donothavetheirownmarket,andtheydependonpassengersfromothermarkets.EmiratesservesGermany56timesaweekfromDubai,buttheydonotbringtheirownguests,theybringpassengersfromIndiaforexample.”Gulfairlinesalsohaveaccessto“unlimitedresourcessince-asstateownedairlines–theygetfinancedbytherespectiveemirate.FurthermoretheyaresupportedbyverylowcostsfortheinfrastructureandbenefitpartlyfromEuropeanandUSexportfinancing.”Stephan Gemkow, the Chief Financial Officer of Lufthansa

Theeconomicbenefitsofairlinecompetitionareclear:everynewairserviceboostsemploymentinthetrade,tourismandaviationservicesectors,creatingadditionaljobsandopportunitiesforexports.EmiratesbelievesLufthansaistryingtopushtheGermanGovernmentintoaCanada-styleprotectionistaviationpolicy,ratherthantheliberalaviationpoliciesoftheUSthatGermanyismorealignedwith.Lufthansaomittedthat,likeEmiratesandallairlines,thecarriageoftransferpassengersisalsoanimportantpartofitsbusinessmodel.EachyearLufthansacarrieshundredsofthousandsofCanadianpassengerstoIndiaviaitshubinFrankfurt.

Regardingexportcreditfinancing,Emiratesagreesthatallairlinesshouldbeentitledthesame

accesstofinanceandsupportedtheOECD’sFebruary2011decisionthatraisedthecostofsomeformsofcapital.

“Gulf-stateairlineslikeEmirates…owntheairportsinthosecountriesandgetamassivesavingonlandingfees,terminalfees,orairportusagechargesintheirhomestate.Thesesamekings,emirsandprincesalsoownalargebulkoftheworld’soilreserves,whichisagreathelptotheairlinesbecauseitallowsthemtooperatewithhugelysubsidisedfuelcosts.’’Paul Howes, National Secretary Australian Workers’ Union

WithoilallaroundusintheMiddleEast,ourcriticshavefoundtheperfectlieinaccusingusofreceivingcheapfuel.Butthefactshavealwaysbeenhidinginplainsight:Dubaihasextremelylimitedoilreserves,andonlyonesmall-scalejetfuelrefinery.Becauseofthis,ourprimarykerosenesuppliersareWesternenergyfirms,whichchargecommercialprices.

“...itisverydifficulttounderstandhowEmiratescouldbeprofitableattheircurrentrateofexpansionwithoutsomeformofgovernmentfinancialsupport”Shakeel Adam, Athena Aviation

EmiratesreceivesnofinancialsupportfromtheGovernmentofDubai.Ourfinancialbooks

arepublishedannuallyandauditedbyPwC.WerepeatedlyurgethosewhoclaimEmiratesreceivesfinancialsupportfromtheGovernmentofDubaitoconsulttheseauditedannualreports,whichwehavepublishedfornearlytwodecades.

8

Airlineshavelongbeenseenaskeyelementsofamodernfunctioningeconomybasedonglobaltradeandinterconnectivity.Asaresult,nationalairlines,knownas“flagcarriers”wereaffordedmeasuresofsupportfromtheirgovernments.

Thepastfewdecadeshaveseenmanyairlinesprivatised,althoughmanyflagcarriersarestillownedbythestate.Asthisdocumentexplains,mostofthebiggestprivatelyrunairlinesinEuropehaveturnedtotheirgovernmentsforsubsidiesandbailoutstothetuneofseveralbillioneurosintotal.

AirFrance,forexample,wasgiventhreecapitalinjectionsbetween1991and1994fromtheFrenchGovernmenttotalling€3.8billion.Justayearlater,theGermanGovernmentsteppedintosupportLufthansawith€800milliontoplugagapinthenationalairline’spensionfund.

ThestoryofEmiratesisfardifferent.WeareownedbytheGovernmentofDubaithroughitscommercialinvestmentarm,theInvestmentCorporationofDubai(ICD),whichhasholdingsinfinance,transport,energyandrealestate.

In1985EmiratesreceivedUS$10millionfromtheGovernmentofDubaiinstart-upseedcapitalandUS$88millioninvestedininfrastructure,whichincludedtwoBoeing727aircraftandtheEmiratesTrainingCollegebuilding.Thishasbeenmorethanrepaidbydividendpaymentsto

theGovernmentofDubai,whichhavetotalledUS$2.3billiontodate.TheDubaiGovernmentandthemanagementofEmirateshaveconsistentlymadeitclearthatEmiratesisrequiredtobeself-sustainableandprofitable.

Dubai’scorporatemodelhasitsoriginsinthecity’shistoricpositionasanentrepôt,whichhasfreetradeandcompetitiveopenmarketsatitscore.WhilstthereisacloserelationshipbetweenthegovernmentandmanyofDubai’sstrategiccommercialentities,Dubaiisatitsessencedrivenbycommercialentrepreneurialprinciples.

Eachcommercialentityisanindependentcompanywithitsownprofittargetsandoperationalautonomy,includingEmiratesandDubaiAirports.ThesecorporatestructureswerepioneeredbySingapore,andreplicated

bysimilarapproachesthroughoutAsia,suchasChina,HongKongandTaiwan.Singapore’ssuccesshasprovidedinspirationformanygovernmentsintheMiddleEasthopingtospurgrowth.

AlthoughstateownershipisanissuethatforeignairlinesoftenusetocriticiseEmirates,EuropeanUnion(EU)lawandthestatementsoftheEuropeanCommissionmakeitclearthereisnopreferenceforpublicversusprivateownership,aslongasneitherreceivescompetition-distortingsubsidiesorisfavouredbylegislation.

Government ownership and support

ThebusinesscentresofSingapore,HongKongandDubaiallbeganastradinghubs.

9

State support: a history lesson

AerLingus €200millionIrishGovernmentcapitalinjectionin1996.AirFrance €300millionand€580millionFrenchGovernmentcapitalinjectionsin1991and1992. €3billionFrenchGovernmentcapitalinjectionin1994.Alitalia €1.5billionand€1.2billionItalianGovernmentcapitalinjectionsin1997and2005.BritishAirways £160millionUKGovernmentdebtwrite-offpre-privatisationin1981.Iberia €560millionSpanishGovernmentcapitalinjectionin1996.Lufthansa €800millionGermanGovernmentcontributiontoLufthansapensionfundin1995.OlympicAirways €2.6billionGreekGovernmentaccumulateddebtwrite-offin2008/09.Qantas A$1.4billionAustraliaGovernmentdebtwrite-offin1992.TAP €1.8billionpackageofPortugueseGovernmentaidmeasuresin1994.Swiss US$1.5billionstateaidin2002.

Many airlines – Lufthansa and Air France among them – have received cash injections from their governments in tough times or pre-privatisation. Here is a list of some of the biggest bailouts.

£160m

€580m

A$1.4b

€300m €3b

€2.6b

€560m

€200m

€800m

€1.8b US$

1.5b

€2.7b

1981 1992 1991 / 92 / 94 1994 1995 1996 1996 1997 / 2005 2002 2008 / 09

10

Does an airline need to be publicly-traded in order to be “transparent”? Inthemodernaero-politicaldebate,muchattentionisgiventostate-ownedairlinesandtheirleveloftransparency.SomeofEmirates’rivals,suchasLufthansa,haveaccusedusofbeingsomehowsecretlysubsidised.Althoughtheyhavenotofferedanyprooftobackuptheiraccusations,theyandothersusethefactthatwearenotpubliclytradedtosuggestthatwemaybehidingsomething.WhileEmiratesisnotpubliclytraded,theissueisirrelevantbecauseEmirateshaspublishedauditedfinancialreportsfornearlytwodecades,whichare

allfullyaccessibleontheinternetatekgroup.com.Theannualreportisalsoavailableinprintedformat.

EmiratesfinancialstatementsarepreparedconsistentlyinaccordancewithInternationalFinancialReportingStandards(IFRS),whichisusedbycompaniesinmorethan100countries.OneoftheprincipalobjectivesofInternationalAccountingStandardsBoard,theindependentstandard-settingbodyoftheIFRSfoundationistodeliverasinglesetofhighqualityglobalaccountingstandards.

OurauditisconductedbyPwC,Dubai,whichisamemberfirmofthePwCglobalnetworkinaccordancewithInternationalStandardsofAuditing(ISA)issuedbytheInternationalFederationofAccountants(IFAC).Over125countriesuseorareintheprocessofadoptingtheISA.ThusourauditiscompletedtothesamerigorasnumerouspubliclylistedcompanieswhichareauditedunderISA’s.AnauditcompletedinaccordancewithISAalsorequirescompliancewithIFAC’sInternationalStandardonQualityControl(ISQC),whereethicalaswellasengagementandqualityreviewstandardsarespecified.OtherformsofEmiratesdisclosurearemadetostockexchanges,sincesomeofourinternationalfinancingcomesfrombondslistedwiththeSingaporeandLondonlistingauthorities.Tofulfilrelateddisclosurerequirements,Emiratesisrequiredtoregularlyfileauditedfinancialreportstosuchlistingauthorities.AsasignofourhighlytransparentbusinessapproachandduetothequalityofEmirates’AnnualReports,Emirateswasawarded“ExcellenceinFinancialReporting”withintheMENAregionfromtheInstituteofCharteredAccountantsofEnglandandWalesinDecember2011.

11

“ThemaincriticismleveledatEmiratesbyrivalsisthatitbenefitsfromindirectgovernmentsubsidiesintheformofcheaperfuel,verylowlandingfeesandcheapaircraftfinancing.ThefactisthatEmiratespaysmarketrateforfuelandthatonlyaround20%ofitsfleetisfinancedthroughexportcreditagenciessuchastheUSExport-ImportBank.ItistruethatlandingfeesarelowatDubaicomparedtootherhubsbutthelegacycarriersinEuropealsoenjoyasignificantadvantagehavinginheritedaroundhalfthevaluableslotsattheirrespectivehubairports.ThemaincostadvantageofEmiratescomesfromhigheremployeeproductivity.”Deutsche Bank

“Anoverviewoftheauditedfinancialaccountscontainsnomaterialsurprisesonceonegetsusedtoseeingconsistentprofitsatanairline…Emirates’keycompetitiveadvantageisitsrelativeyouth(thefleetandthecompany),thelocationandefficiencyoftheDubaihub,andstrongmanagement.”UBS

“WecannotfindanythinginEmirates’accountswhichindicatesthatthebusinessissubsidiseddirectlyorindirectlyorgivenanyunduepreferences”…“WeareencouragedbythehighlevelofdisclosurethatEmiratesoffers,evenasanunlistedcompany.”JP Morgan

“GulfcarriersremainamaterialstrategicchallengetotheEuropeanlegacyindustry.Butwedonotseetheirgrowthcreatinganinevitablestructuralcrisisintheindustry.WewouldexpectEuropeancarrierstocontinuetolobbyagainsttheadvantagesoftheGulfcarriers…Themostsuccessfulstrategy,however,inourview,willbetofocustheirdevelopmentonrouteswheretheyhavestructuralgeographicadvantageoverGulfcarriers,ratherthanchasingthosemarketswhereDubai’slocationandEmirates’strongnetworkgiveitamajoradvantage.”RBS

Analysts confirm Emirates’ independent, commercial status

12

Faircompetitionininternationalairservicesisacentralconcernforgovernmentsandairlines.IneveryAirServicesAgreement(government-to-governmentagreementsthatregulateallinternationalairtraffic)thereisaclausesimilartotheonebelow:

“There shall be a fair and equal opportunity for the designated airlines of both [sides] to operate ….”

Thepointofthisclauseistoensurethateachairlinefacesthesameconditionsasothers,sothatthereisnounfaircompetition.Itisimportanttorealisethat‘fair’inthiscontextdoesnotmean‘equal’.Thereisnorequirementforequalityinairservices:whilethiswasthecasemanyyearsago,whenprices,thenumberofseatsandevenmealswereregulated,itisnolongertrue.

Rather,a‘fairandequalopportunitytocompete’simplymeansthattheremustbenon-discriminatorytreatmentofallcarriers.Differentcountrieshavedifferentrulesinplacewithregardtomanythings,suchasadvertising,taxesandconsumerprotection.Thereisnoobligationthatcountriesharmonisetheirlaws.Whatthe‘fairandequal’clausemeansisthatthoserulesshouldapplytoallcarriersdoingbusinessthereandnotjusttosome.Equaltreatmentisnot‘unfair’justbecausetherulesaredifferentfromanothercountry.

Inrecenttimesconcernregardingfaircompetitionininternationalairserviceshasfocusedontheissueofsubsidy.TheEUhasstrictrulesinplaceaboutthegrantofsubsidiestoailingbusiness,becauseagrantgiventoonebusinesscanaffectallotherbusinessesinthesameindustry.ItisunfairintheSingleMarketforonestatetobailoutanairlinewhenairlinesfromotherstatescannotbegiventhesamegrant.Concernabouttheeffectofstateaidtonon-EUairlinesledtoRegulation868,whichallowstheCommissiontotakeactionwhereasubsidisedforeigncarrierisseriouslythreateningtheairlines

oftheEuropeanCommunity.TheEUanditsMemberStates,aswellascountriessuchastheUSandCanada,haveaskedforprovisionsonthetreatmentofsubsidiestobeincludedinAirServicesAgreementswiththirdcountries.

Emirateshasnoissuewithfaircompetitionclausesperse,andsomethirdcountryproposalstodateseemfairandreasonable.Butotherthirdcountryclausesareclearlyasham:apoliticalexerciseproposingtheabsurdandimpossiblesothatanyreasonablerejectionofbiasedtermscanbepaintedasdemonstrationofguilt.

Fair Competition

13

CertainStarAlliancecarriersoftenmakereferencestosubsidiessupposedlyreceivedbyEmirates.Let’sexaminethelevelofsupportthatthesecarriersreceived:

Star Alliance and state support

Airline Government funding/support

AdriaAirways Lost€3.2millionin2008and€13.9millionin2009-bothabsorbedbytheSlovenianGovernment.€50millioncapitalinjectionfromthestateapprovedinSeptember2011.

AirCanada CA$250millionloanfromthegovernment-ownedExportDevelopmentCorporationin2009,ofwhichCA$100millionwasfromaspecialcabinet-controlledEDCaccount.

AirNewZealand NZ$885millioncapitalinjectionin2001.

Asiana DebtofKRW3.76trilliontostate-ownedKoreaDevelopmentBankwasfrozeninJanuary2010.

AustrianAirlines €500millioninstateaidfromtheAustrianGovernmenttocanceldebtspriortoSeptember2009takeoverbyLufthansa–onthebackofa€200millionloanfromtheAustrianGovernment.

BrusselsAirlines Loanof€125milliontoSNAirholding(stakeholderinSNBrusselsAirlines)grantedfromFederalInvestmentCompanyin2002.

CroatiaAirlines 195millionCroatianKunainstateaidbetween2007and2009.

Lufthansa €800millionGermanGovernmentcontributiontoLufthansapensionfundin1995.

SAS SoughtanewcapitalinjectionofSEK4-5billionin2010,halfofwhichcamefromtheGovernmentsofSweden,NorwayandDenmark-followingasimilarinjectionin2009fromthesamesources.

SouthAfricanAirways

ZAR1.5billionloanfromtheStatein2009/10inexchangeforshares,followingaZAR3billionloanfromtheStatein2008.

Spanair €120millioninloansandcapitalincreasesfromtheCatalanGovernmentin2010/11.

Swiss US$1.5billionstateaidin2002(equivalentto€1.5billion).

ThaiAirways THB23billionloanfromfourThaibanksin2008/2009,includingonestate-ownedinstitution.

The Lufthansa GroupLufthansa €800millionAustrian €700millionBrusselsAirlines €125millionSwiss €1.5billionTotal €3.125 billion

14

Operating Leases43%

Commercial Banks19%

Ex-Im12%

Bonds9%

ECA13%

Islamic4%

US$26 billion financed over last 15 years

Emirateshasalwaysraisedfundsonacommercialbasis.NofinancinghasbeenobtainedfromInvestmentCorporationofDubai(ICD)ortheGovernmentofDubai.UnlikesomeairlinesintheGulfregionwhobenefitfromsovereigndebtguarantees,theDubaiGovernmentdoesnotactasguarantorforanyofEmirates’loans.

EmirateshasraisedatotalofUS$26billionoverthelast15yearsforfinancingaircraftandothercorporatefinancerequirements.Emiratesfinancesitsaircraftthroughawiderangeofsources,includingoperatingleases,European/USExportCreditAgencies(ECAs)andcommercialasset-backeddebtaswellasnon-conventional

sourcessuchasIslamicfundingandequityfromJapanese,Germanandotherinvestors(aspartoftax-basedcrossborderleveragedleases).OurlendershailfromaroundtheglobeincludingfirmslikeCitibankoftheUS,France’sCreditAgricoleandSumitomoMitsubishiofJapan.

Recentdebateonexportfinancecreditsandthe‘homecountryrule’washijackedbysomeofEmirates’detractorsinbothEuropeandtheUS,whoarguedthatEmirates’limiteduseofexportcredits,whichfundaround25%ofitsfleet,constitutedamarket-distortingsubsidy.OnesuchfalsehoodinvolvedacomparisonbetweenEmiratesandDeltaAirLines.Theallegationwas

thatcreditavailabletoDeltaforfinancing27Boeingaircraftwaspricedunfairlyhigh.Thiswasaflawedcomparison,sincethetransactioninquestionwasforolderjetsdatingbackto1999and2000–thusacompletelydifferentassetandlendingriskassessment.Inaddition,Delta’sriskprofilewasvastlydifferentthanEmiratesatthetime,havingrecentlyemergedfromUSChapter11bankruptcyprotection,wheniteliminatedjobs,cutcostsandrestructureditsfleet.

ItisuntruethatAmericancarriersarebarredfromaccessingattractivefinancingrates.Delta’scompetitor,Continental,inMarch2012raised$892millionatanall-ininterestrateof4.38%.AmericanAirlinesraised$726millioninSeptember2011,albeitatahigherinterestrate,despitefilingforbankruptcytwomonthslater.

TheOrganisationforEconomicCo-operationandDevelopment(OECD),withaneyeontheUSandEuropeanjobssupportedbysuchexports,concludedanAircraftSectorUnderstanding(ASU)agreementinFebruary2011.Thisrejectedcallsfortargetedcapsonexportfinanceborrowingbutdidraisethecostofsomeformsofcapital.

InDecember2011,AirFrancesuccessfullyconcludedfinancingforoneA380withexportcreditbacking.

Sources of finance

15

ItfitstheobjectivesofsometoclassifythecarriersintheGulfasoneunit-asifpolicies,governments,businessesandindividualsareallalikeacrossthisdiverseregion.Therationaleissimple:rivalairlinesusetheterm“Gulfairlines”inlobbyingeffortsaspartofawiderstrategytoservetheirprotectionistinterests.

Manyinthemediarepeatthisdescription,therebyboostingtheimpactofthispejorativelobbying,whichrangesfromseekingsupportfromtheirgovernmentsagainstnewcompetitionoropposingotherliberalisingpolicymeasures.

TheGulfregionisnotasingleentity.DubaihasalmostnohydrocarbonreserveswhilethesituationisvastlydifferentinoilwealthySaudiArabia,QatarandAbuDhabi.Sowhywouldtheairlinesfromtheseareasallbethesame?

Intruth,therearemorethan35separateairlinesintheMiddleEastwhichcompeteagainsteachotherandagainstcarriersbasedinotherregions.IntheGulfthereare15airlines,includingagrowingnumberfocusedonbudgettravel.

EmiratesisproudofthefeaturesthatsetitapartintheMiddleEastandinternationally:profitability,transparency,andsustainability.Itisthemostprofitableairlineintheregion,competingwithcarriersthatareloss-makingandsubsidised.Inour2010/11financialyearEmiratesAirlinepostedaprofitofUS$1.5billion.

In2010/11wealsoexperiencedconsistentlyhighloadfactors,whichaveraged80%.Highdemandforourserviceswaspresentacrossournetworkincludingtrans-TasmanservicesbetweenAustraliaandNewZealand,whichaveraged75.1%loadfactors-despitesomeofourdetractorsmisreadingAustraliangovernmenttrafficdataandsuggestingwewereguiltyofcapacitydumpingandoperatingflightsonlyhalf-full.

Withitsissuanceofauditedfinancialandenvironmentalstatements,Emiratesisalsothemosttransparent.

Sinceitsfoundingin1985,Emirates’developmenthasbeenthemostmeasuredamongtheregion’slargelong-haulcarriers.WhatEmirates

accomplishedgraduallyoverthefirst20yearsinoperation,intermsoffleetsizeandroutes,otherairlineshavedoneinlessthanhalfthattime,asaresultofmassive,growth-at-all-costsstrategies.

Ratherthanreceivestatesubsidy,asisoftenincorrectlyclaimed,Emiratesisfullyindependentandinsteaddisbursesaportionofitsannualprofitstoitsmainshareholder,thestate-ownedInvestmentCorporationofDubai.ThesedividendshavetotalledUS$2.3billionoverthepast25years.

EmiratesalsooperatesinanopenskiesenvironmentinDubai,whereitcompetesagainst150foreigncarriers,aswellasflyinginhighlycompetitivemarketsaroundtheworld,receivingnoprotectionagainstcompetition.

The myth of the “Gulf Carriers”

16

Asnationsbecomeinterdependentintheglobalisedeconomy,airlinesfromdifferentregionsareengagingmoreandmoreindirectcompetition.Inthepoliticaldebatesoverfaircompetition,someairlineshavecomplainedthattheirrivalsenjoyloweroperatingcosts.

Thisisanundeniablefactoflife.EmiratesdoesenjoysomeadvantageswhenitcompetesagainstairlinesinEuropeandNorthAmerica,whicharesubjecttohigherlabourcosts.

However,EmiratesitselfisatadisadvantagecomparedwithSingaporeAirlines,whichhaslowerrelativelabourcostsandcanalsotakeadvantageofSingapore’sstatusasajetfuelrefininghub,wherethepriceofabarrelofjetfuelisthelowestintheworld.Thisisacommercialreality.Emirateshasnoqualmsaboutthisandishappytocompeteinthisoperatingenvironment.

ThereisnothingnefariousaboutEmirates’costbase.ItdoesnotreceivecostexemptionsforitsoperationsinDubaiandpaysforitsmainheadquarters,engineeringfacilitiesandothercorporateoverheads.Thesecostsareaccountedforinitsannualauditedfinancialstatements.

ThereisnoarrangementtouseDubaiGovernmentbuildingsorotherpropertiesfreeofcharge.

EuropeanairlineshaveattemptedtouseEmirates’costbaseasproofthatit“exploits”labourfromneighbouringnations,suchasfromtheIndianSubcontinent.Nothingcouldbefartherfromthetruth:outofthe11,000IndiannationalsworkingforEmirates,asignificantpercentagehavereceivedlong-serviceawards.Intotal,morethan8,600currentstaffhaveservedfor10yearsorlongerandinexcessof2,100havebeenwiththecompanyfor20yearsormore.Emiratesreceivesonaverage25,000newemploymentapplicationseachmonth.

ManyareattractedtoEmirates’profitsharingplanforstaff,whichhasbeeninplacesince1996andhaspaidatotalofUS$653milliontoitsstaff.Emirateshasconsistentlydeliveredprofitsforthepasttwodecadesandallowsouremployeestoshareinthewindfallthroughthisprofitsharingplan.Unlikeotherairlines,ourprofitsharingschemeappliestoallstaff,ratherthanjustseniormanagers(whichhasaveragedfiveweeks’payforallstaffeachyearbetween1996and2011).

ThisandotherfactorshelpexplainwhyEmirateshasenjoyedextremelyhighstaffretentionrates.

Likeallairlines,Emirates’highestproportionofoperatingcostsisrepresentedbyfuel(34.4%oftotalin2010/11),withemployeecostssecondat16%.

Emiratesalsoincurscostsonservicesthatmanyotherairlinesdonotprovide.Itpaysthecostofexpatriateemployeebenefitssuchasaccommodation,children’seducationanddedicatedcompanyhealthcareformanagement,pilots,engineersandotherstaff-whichtotalmorethanUS$500millioneachyear.

Airline arbitrage: varying cost bases around the world

17

Thefollowingchart,showingaveragelabourcostperemployeeforEmiratesand13otherairlines,highlightsthecostdisparitiesbetweenairlinesbasedinEurope,NorthAmerica,theMiddleEastandAsia.

WhereaslabourcostsaveragedUS$94,575peremployeeforthefiveairlinesfromEuropeandNorthAmerica,labourcostsaveragedaroundhalfofthisamount(US$49,510)fortheremainingeightairlines1.EvenCathayPacific,whichhasarelativelyhighlabourcostforanAsianairline,haslabourcostsaroundathirdlowerthantheaverageforthefiveEuropeanandNorthAmericancarriers.

Geographyplaysacentralroleinanycostcomparisons,reflectinglowerwagecostsinnon-EuropeanandUSmarkets.EmiratesandSingaporeAirlineshaveverysimilarlabourcostsatUS$47,000andUS$45,000respectively,reflectingsimilarbusinessmodelsandasharedrelianceonrecruitingstafffromabroadonexpatriatepackages.SingaporeAirlinesevenhasaverysimilarprofitsharingplantothatofEmirates.

DespiteenjoyingalowercostbasethaninEuropeandNorthAmerica,Emiratesalsohasaskilledworkforcewithproductivityrateshigherthantheindustryaverage.

Emirates’unitcostofUS11.75cperseatmileiscomparabletoitspeerairlinessuchasSingaporeAirlinesandCathayPacific.

1Theseareweightedaveragesacrosstheairlines(usingemploymentasweights),toreflectdifferencesinthesizeofthevariousairlines.

Labo

ur c

ost p

er e

mpl

oyee

(US$

000

s)

Labour cost per employee, financial year ending 2010

0

20

40

60

80

100

120

Lufth

ansa

Air F

ranc

e-KL

M

Qan

tas

Unite

d Ai

rline

s

Amer

ican

Airl

ines

Briti

sh A

irway

s

Cath

ay P

acifi

c

Thai

Airw

ays

Emira

tes

Sing

apor

e Ai

rline

s

Mala

ysia

Airl

ines

Air I

ndia

Jet A

irway

s

Sri L

anka

n Ai

rline

s

110 100 92 92 88 77 65 47 47 45 34 24 23 17

Source:OxfordEconomics,airlineannualreports

US c

ents

per a

vaila

ble

Seat

Mile

Unit Cost Comparison 2010-2011

0

5

10

15

20

25

30

4.04 3.54 5.59 4.43 5.06 4.72 4.28

EK TK SQ BA CX LH QF

7.71 7.27 10.63 10.59 8.94 21.82 12.66

Source: Published financial reports

Fuel Excluding Fuel

18

Emirates pays the full published landing charges atitsmainoperationalbase,DubaiInternationalAirport-asdotheover150otherairlinesthatflytoandfromDubai.Emiratespaysthesameairporthandlingfeestodnata(anEmiratesGroupcompanyandtheground-handlingagentatDubaiInternationalairport)aswouldasimilarhighvolumeairlinecustomer.Emiratespaysthesamestandardover-flightchargesacrossitsnetworkasappliedtootherairlinesandissubjecttothestandardcustomsdutiesandgovernmentchargesbothintheUAEandelsewhere.

ThisdoesnotstoprivalairlinesfromcastingaspersionsaboutEmirates’landingcosts.AstheGlobeandMailsummedupinFebruary2011:“SeekingtoprotecttheirFrankfurthub,thetwopartners(LufthansaandAirCanada)allegethatEmiratesreceivessubsidiesfromtheDubaiGovernmentintheformofcheaplandingfeesatDubaiInternationalAirport,anaccusationthatEmirateshotlydisputes.”

Infact,datacollectedbytheInternationalAirTransportAssociationshowsthatDubaiInternationalofferscompetitivepricesforlandingchargesandotherfees.IncomparisonagainstinternationalhubsbasedintheMiddleEast,AsiaandEurope,DubaiInternationalrankedasthefifthcostliestairport,moreexpensivethanchargesinBeijing,KualaLumpurandDoha.

Separately,astudycompiledbyOxfordEconomicsinJune2011,titled“ExplainingDubai’sAviationModel”foundthatoverallchargingatDubaiInternationalAirportwasbothhighlycompetitiveandcommerciallybased-withDubaibeingclosetotheaveragewhenlookingatairportchargesattheworld’slargestairports.

PaulGriffiths,theChiefExecutiveofDubaiAirports,wasrecentlyquoteddescribingthecommercialstrategyforDubaiInternationaltobe“competitiveonaeronauticalcostsinordertoattractmoreairlinesandmorepassengers”,whichhesaidinturnboostsnon-aeronauticalrevenues.

“Becauseofthis,Emiratespaysthesamecompetitiveratesaseveryoneelse,”Griffiths

noted.“Thisapproachalsorecognisesandcapturesthebroadereconomicvalueofaviationfarbetterthanthelegacymodelsbeingusedinmorematuremarketswhereregulationandtaxationhaveconspiredtohikecostsandcripplegrowth.”

“Aviation’sgrowthisdrivingwidereconomicbenefitsintermsofincreasedemploymentandtourismtotheemirate,”headded.

OxfordconcludedthatthechargesatmostairportsinDubai’speergroupareverysimilar.Thereare11airportsinthisgroup,includingDubaiInternational,whichchargelessthanUS$35perpassenger.Thehighestairportchargeamongthe96largestairportsintheworldisatLondonHeathrowwheretheyamounttoUS$126perpassenger.

Landing fees, charges and suppliers

SIN BKK BOM IST DXB CAI AUH PEK KUL BAH DOH-

1,0002,0003,0004,0005,0006,0007,0008,0009,000

10,00011,000

Terminal and runway charges Passenger charges Others

Airport charges at Dubai International and 10 other international airports*

Source: IATA *B777-300 August 2011

(in U

S$)

19

Airportsaroundtheworldarefundedinwidelydifferingways,withavarietyofownershipstructuresandrelationshipstothe‘home’carrierandrespectivenationalgovernments.DubaiInternationalAirportispartofDubaiAirports,aDubaiGovernment-ownedentitythathasresponsibilityforallaspectsofairportdevelopmentinDubai.

Itisnotuncommonforgovernmentsorstate-controlledentitiesaroundtheworldtohelpfinanceexpansionofairportinfrastructure,viewingthemaskeydriversforeconomicgrowthandessentialforconnectivitytotheglobaleconomy.

Some78%ofEurope’sairportswerepublicly-ownedandafurther13%hadsomeelementofpublicpartnership,accordingtoa2010studybyACI,theinternationalassociationoftheworlds’airports.Inaddition,a2007ICAOreportnotedthat70%ofthemorethan600internationalairportswerepubliclyowned.

FollowingtheSecondWorldWar,Australiaembarkedonamajorprogrammetobuildandfinanceairportsacrossthecountry,whichwereheldingovernmenthandsforahalfcenturyuntilrecentprivatisationefforts.

ThefourrunwaysatParisCharlesdeGaullewerebuiltbyAéroportsdeParis,whichwaswhollyownedbytheFrenchGovernmentfor22yearsuntilitsprivatisationin2006.TheFrenchfederalandregionalgovernmentsstill,however,retainsignificantstakesinthecompany.

ViennaAirportwasgovernmentheldfor50yearsuntilitspartialprivatisationinthe1990s;itisnow40%statecontrolled.

AsimilarhistoryisfoundatMunichandFrankfurt.FrankfurtAirport(Fraport)isnow51%controlledbytheGermanregionalandcitygovernment(withLufthansaowning10%,andprivateinvestorsholdingtherest).Forthefirstfivedecadesofitsexistence,however,itwasfullygovernmentowned.

LufthansaisanexampleofEuropeancarriersmakingloudclaimsaboutairportownershipinDubaiandtheGulf,despitethemselvescontinuingtobenefitfromstate-fundingofairports.InApril2011,theEuropeanCommissionopenedaninvestigationintoLeipzig-Halleairport,whichreceived€225millioninfundingforinfrastructurefromitsstateowners,makingchargeslowerthanwouldbethecaseiftheairporthadtofundtheimprovementsatmarketrates.Lufthansa,operatingaround30%ofall

flightsfromtheairport,hasbenefittedthemostfromthispublicfunding.

Norisitunusualforanairlineoritsalliancegroupingtohavededicateduseoffacilitiesatahomeairport-BritishAirwaysatLondonHeathrow’sTerminal5,AirFranceatParisCharlesdeGaulleandLufthansaatMunichTerminal2(whichitjointlyfinanced)arenotableexamples.Evengovernmentsthatclaimtobeoutoftheairportbusiness,likeCanada,arenotimmunefromfundingairportprojects.Forexample,since2006,Canada’sfederalgovernmenthassetasideCA$65millionforprojectsatQuebecCity’sairport.

Airport infrastructure

20

While Emirates is a major carrier at Dubai International Airport, it is also worthwhile looking at some of the world’s other large hub airports and how home carriers and respective alliances stack up in terms of market shares and the amount of competition faced.

Top20

Airport

Internationalpassengers-12monthsending

Dec2011-inmillions

Homecarriershareofinternationalflightdepartures

-Apr2012

Leadallianceshareofinternationalflight

departures-Apr2012

Totalallianceshareof

internationalflight

departures-Apr2012

Numberofinternationalcarriers-Apr2012

1 LondonHeathrow 64.69 BritishAirways-43% oneworld-48% 83% 912 ParisCharlesdeGaulle 55.67 AirFrance-54% SkyTeam-62% 80% 1043 HongKongInternational 52.75 CathayPacific-29% oneworld-31% 57% 924 DubaiInternationalAirport 50.19 Emirates-46% Star-4% 8% 1505 AmsterdamSchiphol 49.68 KLM-57% SkyTeam-67% 79% 936 FrankfurtInternationalAirport 49.48 Lufthansa-61% Star-76% 86% 1077 SingaporeChangiAirport 45.43 SingaporeAirlines-35%* Star-30% 41% 708 BangkokSuvarnabhumiInternational 35.01 ThaiAirways-28% Star-36% 53% 939 IncheonInternationalAirport 34.54 KoreanAirlines-33% SkyTeam-46% 84% 6110 MadridBarajas 32.45 Iberia-40% oneworld-45% 72% 7011 LondonGatwick 29.92 BritishAirways-18% oneworld-18% 23% 3812 MunichAirportInternational 27.88 Lufthansa-63% Star-75% 84% 7213 NaritaInternationalAirport 26.33 JapanAirlines-17% Star-38% 88% 6314 KualaLumpurInternational 25.92 MalaysiaAirlines-28% SkyTeam-5% 11% 5415 FiumicinoAirport(Rome) 24.45 Alitalia-28% SkyTeam-38% 63% 9416 NewYorkJohnFKennedy 24.16 DeltaAirLines-18% oneworld-28% 64% 7517 IstanbulAtatürkAirport 23.83 TurkishAirlines-73% Star-78% 85% 6418 ZurichAirport 23.63 Swiss-54% Star-67% 77% 6619 TaiwanTaoyuanInternationalAirport 23.14 ChinaAirlines-28% SkyTeam-39% 58% 4420 BarcelonaAirport 21.66 Iberia-9% Star-18% 42% 66

*SilkAirincluded Source:ACI,OAG,FGProandDubaiAirports(internationalcarriersincludecargoandcharteroperators)

21

Source:DubaiAirportsanddnata

Airlines serving Dubai

≥ A C G A i rCa rgo Ge rmany≥ Ae ro f l o t ≥Aerologic≥AerosvitAir l ines ≥ Afr icanExpress Airways ≥ AirAlgerie ≥ AirAlmaty ≥AirArabia≥AirAstana≥AirBaltic≥AirBerlin≥AirBucharest≥AirChina≥AirFinland ≥ Air France ≥ AirIndia≥AirIndiaExpress≥AirTransport International ≥ Airblue≥ AircompanyScat ≥ Alitalia ≥Al-NaserAirlines≥ArianaAfghan≥ArkAirways≥ArmaviaAviaCompany≥

AtlasAir≥ AustrianAirlines≥AzerbaijanA i r l i n e s≥ B a h r a i n A i r ≥ B iman Ba ng l a d e s h ≥≥ B r i t i s h Airways ≥ Cargoitalia ≥ CargoluxAirlines Intl≥CargoluxItalia ≥CaspianAirlines≥CathayPacific≥ChinaAirlines≥China Eastern Airlines ≥ChinaSouthern≥Condor≥CoyneAirways≥DaalloAirlines≥DeltaAirlinesInc.≥DHLInternationalE.C.≥Donavia≥DonbassAeroAirlines≥EasternSkyjets≥EgyptAir≥Emirates≥EPLFzco≥EritreanAirlines≥EthiopianAirlines≥EtihadAirways≥Euro-AsiaAirIntl≥ExpoAviation≥FalconExpressCargoAirlines≥FarsAirQeshm≥FederalExpress≥FelixAirways≥Finnair≥FlyDubai≥FreeBirdAirlines≥GarudaIndonesia≥GeorgianAirways≥GlobalJet≥GMGAirlines≥GryphonAirlines≥GulfAir≥HainanAirlinesCo≥IndigoAir≥Investavia≥IranAir≥IranAsemanAirlines≥IranianAirTransportNaft≥IraqiAirways≥JadeCargoInternational≥JazeeraAirways≥JetAirways≥JubbaAirways≥KamAir≥KenyaAirways≥KingfisherAirlinesLimited≥KishAirline≥KLM≥KoreanAir≥KubanAirlines≥KuwaitAirways≥KyrgyzstanAirCompany≥LatcharterAirlines≥Lufthansa≥M.E.A≥MahanAir≥MalaysiaAirlines≥Martinair≥MihinLanka≥Nasair≥NationalAirCargo≥NationalAirServices(NAS)≥NationalAirline≥Neos≥NepalAirlinesCorporation≥NorwegianAirShuttle≥OmanAir≥OrenburgAirlines≥PakistanIntl≥QatarAirways≥RomanianAir≥RoyalBruneiAir≥ Royal Jordanian ≥RusAviationLLC≥RwandairExpress≥SafiAirways≥SaudiArabianAirlines≥ShaheenAirIntl≥SiberiaAirlines ≥SilkWayAirlines≥SingaporeAirlines≥SomonAir≥S r iLankan Airlines ≥ Starlight Airlines ≥ SudanAirways≥ Swiss Intl AirLines≥SyrianArabAir≥TAAGAngolaAirlines≥ TabanAirlines≥TaimyrAirlines≥Thai

Airways Int ≥ Thomas Cook AirlinesSk ≥ TNT Airways ≥ TransaeroAirline ≥ TravelSvcsA.S. ≥ Tui

Airlines -Arkefly ≥ TunisAir ≥TurkishAirlines ≥ TurkmenistanAirlines ≥ Ukraine IntlAirlines

≥ United Airlines ≥ UnitedAirways (BD) ≥ United

NationsOrganization≥United Parcel Service ≥U r a l A i r l i n e s ≥

Uzbekistan Airways ≥V i m A i r l i n e s ≥Virgin Atlantic ≥

YemeniaYemenAir

OpencompetitionandfreemarketslayattheheartofDubai’sstatusasatradinghub.Everyday,Emiratesgoesheadtoheadwithmorethan150rivalairlinesservingDubaiInternationalAirport.

22

ItisundeniablethatmanyMiddleEastgovernmentsareoil-rich.ButmythsaboutEmirates’accesstofreeordiscountedoilfallflatontheirface.Dubaihasextremelylimitedoilresources,forcingittoinnovateintootherfieldsandopeningthewayforforeignfuelsupplierstodominateatDubaiInternational.

AsCNNonceaptlyputit,“Dubaiisastoryofsurvival-howonesmallcityrunningoutofoilsaveditselfwithamixtureoftourism,commercialism,andpizzazz.”

Asaresult,Emirates’fuelcostsarewhollycomparablewiththoseofothermajorlong-haulcarriers.In2010/11fuelaccountedfor34.4%(US$4.6billion)ofEmirates’totaloperatingcosts-upbyover40%onthepreviousyear.

ManycountriesintheGulfareblessedwithabundantoilreserves,makingiteasytoofferbelow-marketratesforjetfuel.SaudiArabianAirlinesforexampleenjoysfavourablefuelprices.

ButDubaiwasnotblessedwithoil,whichinturnforcedittocreateaservice-basedeconomy,leadingtotheestablishmentofgloballycompetitivefirmssuchasEmirates,dnata(withoperationsin38countries)andDPWorld,theworld’sthirdlargestportsoperator.

Emiratesprocuresitsfuelatmarketratesfrommultiplesuppliersatallairportstowhichitoperates,includingDubaiInternationalAirport.

ThemajorityofEmirates’fuelissourcedfromBP,ShellandChevrongiventhereisminimaljetfuelrefiningcapacityinDubai.

OutsideofDubai,Emirates’mainfuelsuppliersarealsoExxonmobil,BP,ShellandChevron.

EmiratesrecentlywrotetoShell,BPandChevronaskingthemtoverifythecompany’scredentialsasfullycommercialclientswithcontractsonparwiththeirotherairlineclientsaroundtheworld.

Chevron -“…happytoconfirmthatourpresentcontractandallourpreviouscontractscovering

jetfuelsupplytoEmiratesAirlineatDubaihaveallbeennegotiatedandagreedwiththesameconsiderationsasforthosejetfuelcontractswithourotherairlinecustomers…withnofreefuelandwithnoeconomicsubsidy.”

BP -“…havebeenasupplierofjetfueltoEmiratesatDubaisince1985throughacommercialfuelsupplycontractwhichiscompetitivelytenderedperiodically.”

Shell -“OurcontractwithEmiratesAirlineistheresultofafairnegotiationprocessinlinewiththenegotiationsthatwehavewithothermajorcustomers…andtheitemsinvoicedaresimilarintypetothosechargedtoourothercustomers…”

Oil

23

ThefollowingchartshowsfuelpricespaidbyEmiratesatmajorairportsaroundtheworldrelativetothepricepaidinDubai,alongwithanalysisofcomparativefuelcosts.AlmosthalfofallfuelupliftedbyEmiratesisdonesoatairportsoutsideofDubaionitsnetwork.

Relative fuel prices paid by Emirates in 2010/11

Source:Emirates

Inlinewithmarketprices,Emirates’fuelcostperATKM*increasedby25.7%between2009/10and2010/11andcomprisesasignificant34%ofitsoperatingcostin2010/11,upfrom27%in2005/06.

Airline unit cost break-up – fuel as a percentage of unit cost

Source:Publishedfinancialreports

Analysisoftheauditedaccountsforthelastfinancialyearrevealsthat,inpercentageterms,Emirates’fuelbillisinlinewithwhatothermajorinternationalcarrierspayforfuelperannum.

Likemanyotherairlinesoperatingonafullycommercialbasis,Emirateshasnotbeenimmunetothechallengesposedbyvolatilityinoilpricesduringthelastdecade.Inthelastfinancialyearmorethanoneineverythreedollarsspentacrossthecompanywasonfuel.ThefollowingtableprovidesevidenceofthedirectinfluenceandcloserelationshipbetweenaveragejetfuelpricesandEmirates’expenditureonfuelandoil.

Emirates’ fuel and oil expense per ATKM vs average jet fuel prices

*ATKM(Availabletonne-kilometres)–overallcapacitymeasuredintonnesavailableforcarriageofpassengers/cargoloadmultipliedbythedistanceflown**Source:EnergyInformationAdministration

100%

102%

100%

103%102%

97%

Dubai Frankfurt Hong Kong London(LHR)

Los Angeles Singapore

0

20

40

60

80

100

29% 34% 34% 36% 18%

71% 66% 66% 64% 82%

BA EK SQ CX LH

Fuel Others

0

50

100

150

200

250

300

US c

ents

per U

S ga

llon

US c

ents

0

5

10

15

20

Average jet fuel prices ** Emirates' fuel and oil expense per ATKM*

2005/06 2006/07 2007/08 2008/09 2009/10 2010/11

24

EmiratesFlightCatering(EKFC)-whichis90%ownedbyEmiratesand10%byDubaiAirportsCorporationisastand-alonecommercialentityservingallforeigncarriersatDubaiInternationalAirport.

ThisisverysimilartothesituationatmanyairportsinEurope,wheresingle-sourcecateringcontractswerecommonformanydecades.

CompetitionwasgraduallybroughtintoEuropeanairportsandthisisalsothecasewiththeUAEeconomy.InDecember2011,adraftlawallowing100%foreignownershipofcompaniesoutsideoffreezonespassedthroughthelegislativeprocess,promisingfarmorecompetitionacrossallindustries,includingaviation.

Inaddition,whilesomeofEmirates’rivalsmaycomplainpubliclyabouttheownershipofEKFC,thecateringproviderisrecognisedinternationallyforitscompetitivepricesandconsistentlyhighqualityofservice.Forexample,BritishAirwaysawardedEKFCits“PartnersinExcellence”awardin2001,2003and2005,DeltaAirLinesnamedittheCateringUnitoftheYearin2009,whileAirFrance,LufthansaandSingaporeAirlinesawardeditsimilaraccolades.

Doing business in DubaiInternationalairlines,bytheirverynature,willinevitablyencounterdifferentrulesandregulationsoneachnewroutethattheyoperate.Thebilateralagreementsregulatingairtransportbetweencountriesusuallyinclude‘doingbusiness’provisionsforairlines,butinallcasestheserightsareexercisedinconformitywithapplicablenationalrules.Importantly,bilateralagreementsdonotattempttoharmonisecompanyestablishmentlaws,labourrulesorotherdomesticlegislation,sincetheseareoutsidethecompetencyofaeronauticalauthorities.Justasforanyothercompany,eachairlinemustexaminetheregulatoryenvironment

inaprospectivemarkettodeterminewhetheritiswillingandabletomeetthenecessaryobligationstodobusiness.RuleswithintheUAE,forexample,ontheestablishmentofcompanieshavenotstopped150internationalairlinesfromoperatingtoDubaiorfromselectingalocalagencytoactasaticketingoutlettopassengers.WithintheDubaiAirportFreeZoneover1,100companiesoperate-includingglobalfirmslikeAudiVolkswagenandPanasonic-allofwhomaccessDubai’smarketthroughdistributors.

Inaddition,theUAEcompanieslaw,whichwasapprovedinDecember2011,willallowcompaniestoexistwith100%foreignownershipoutsideoffreezones.ThisshouldgreatlydiversifythecompetitivelandscapeoftheDubaieconomy.

A transparent full disclosure of Emirates’ subsidiaries

25

TaxesSomecompetitorsandafewgovernmentsraisetheissueofEmiratesnotpayingcorporatetaxinDubai;afiscalpolicysettingconsistentacrosstheGulfregionandinmanyotherpartsoftheworld.AmericanAirlinesfamouslymovedfromNewYorktoTexasin1979tosecurelowertaxes.Andofcoursethe150foreignairlinesoperatingoutofDubaidonotpaycorporatetaxesontheirDubai-basedoperationsandprofits.

Themoreimportantelementofanytaxdebateisthecommercialrealityofactualprofitabilityandwhattaxespayforandhowtheyarecollected.Airlineshavetobeprofitabletopaytaxes.Hencein2009-10,alargenumberofairlinesinEuropedidnotpaytax.Furthermore,inmostcountriesthereistheabilitytocarrylossesforwardtoreducefuturetaxpaidifprofitabilityreturns.Soinmanycasesoverthepastdecade,airlineshavepaidnoeffectivetaxatalltotheirgovernments.Consideralsothatthroughconsolidation,ahandfulofthedominantandgiantairlinemultinationalscancapturethelossesofacquiredentitiesintheirbalancesheetstoreducetheirtaxationpositionsintheirdomiciledstates.

Thebiggerpointiswhytaxesarepaidandwhattheyareusedfor,namelytheprovisionofsocialbenefits.InEmirates’case,apilotispaidapackageofwhichsome20%to30%ofadditionalbenefits,duetotheneedtoattractskilledexpatriates,aremetbytheemployer.Inthisregard,thereisareasonable(albeithypothetical)comparisontobemade:IfanAirCanadapilotispaid$100,ofwhich$30is‘lost’(paid)intax,equallyanEmiratespilotispaid$70andEmiratespaysanadditional$30toprovidehisfamily’shealthcare,housing,transportation,educationandpensionneeds(itisalsowhyweattractsomanyhighly-skilledCanadianpilots).

Emiratesfullysupportstheeffortsofthewiderairlineindustrytoreduceunfairandunnecessarytaxation,toallowcarrierstobuildupsustainableandprofitablebusinesses.

EmiratesvillasatDubaiSiliconOasis

26

Theissueofenvironmentaltaxesandemissionschargesareincreasinglydrawnintothediscussionaboutsubsidyintheaviationindustry.EmiratesisopposedtotheEU’sunilateralapproachtoreducingcarbonemissions,namelytheapplicationoftheEUEmissionsTradingScheme(EUETS)tointernationalaviationasfrom1January2012.Nonetheless,ithascompliedwiththenecessarylegalrequirementstodate.

IthasbeenclaimedthattheEUETSwouldcreateregionaldistortionbypushingpassengerstoflyvianon-EUdestinationstoavoidpayingadditionalETS-relatedcharges,withtheexampleofDubaibeingoftenusedtoarguethecase.

However,followingaseriesofimpactstudies,theEuropeanCommissionconcludedthattheaviationindustryis“notconsideredtobeatriskofcarbonleakage”.

Nonetheless,someEuropeanairlineshaveinrecenttimescalledontheEuropeanCommissionfor‘additionalemissionsallowances’toprotectthemagainst‘carbonleakage’.Thisisessentiallyarequestforback-doorsubsidies.

EmiratesitselfwillbesubjecttotheEUETSforallofitsover30,000annualflightsto/fromEurope,andthecostofcomplianceforthecompanyisestimatedattensofmillionsofEurosin2012andhundredsofmillionsofEurosoverthefirsteightyearsoftheprogrammethroughto2020.

Morebroadly,Emiratesstronglybelievesitisappropriatethatall(orasignificantportion)offundsraisedbytheEUETSaswellasotherexisting‘environmentaltaxes’intheUK,AustriaandGermany,shouldgobackintoimprovingaviationefficiency,specificallyforclimatechangeandaviationemissionsreductionprojects.Theyshouldnotgointogeneralrevenueofgovernments.

Environment

Emirates’WolganValleyResortandSpainAustralia.

Estimated top 10 purchasers ofEU aviation allowances

Lufthansa

BritishAirways

AirFrance

Iberia

Ryanair

Emirates

SingaporeAirlines

KLM

DeltaAirlines

VirginAtlanticSource:RDCAviation

27

Subsidyisanunpalatablereality.Whetherstatesanctionedorpermittedunderanotherlabel,governmentsaroundtheworldhaveoftenbeenreadyandabletointerveneinstabilisingindustriesofnationalimportance.Thisisespeciallysointhistimeofglobaleconomiccrisis,whenfinancialbailoutsandstateinterventionbygovernmentsareemployedtopropupeconomies.Emirates’viewisthatsubsidiesareanaffronttowhatwestandforandwhatwestrivetobuildforourcompany.Weunequivocallydisapproveofsubsidies,butrecognisetheydohappeninourindustry.

Wereaffirmourcommitmenttoopenandtransparentoperations,freeofsubsidy.

Emirateswelcomesafactbaseddebateonstateaidandhopesthisappliestoallindustryparticipants.Vocalrivalcarriers,whichthemselveshavebenefittedfromgovernmentalsupport,arepeddlingself-servingfalsehoodswhentheyallegethatEmiratesissomehowatanadvantage.

Conclusion

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