Carriers want to cash the ash cloud

There were times last week when it appeared that the skies over Europe could be closed for months due to the volcanic eruption in Iceland. For six days a large part of Europe's airspace was closed, stranding millions of passengers and leaving airlines to count the cost.

As the crisis dragged, on it was clear that the airlines felt that the air regulators had overreacted. In the end, British Airways called the bluff of the regulators and launched 26 planes for Heathrow. The message was clear: BA didn't think the ash cloud was a risk and was bringing its planes home with or without air-traffic approval. This was a high-stakes game of brinkmanship but it paid off as the regulators caved in and reopened Europe's skies.

It appears that the meteorologists and volcanologists had assumed that all parts of the ash cloud over Europe would be damaging to aircraft engines when, in fact, the cloud was only dense enough in some areas to be of real concern. Of course, it is better to be safe than sorry but the airlines could see the losses adding up while their planes were on the ground.

The International Air Transport Association (IATA) has estimated that the industry lost $1.7 billion (Dh6.23bn) during the volcano shutdown – money that it can ill afford to lose. Airlines have been hit hard by the recession and the last thing they needed was a freak event like an Icelandic volcano adding yet more pressure to their balance sheets.

Airlines are not the only ones to be suffering from the ash cloud. Europe's economy is estimated to have lost €500 million (Dh2.44bn) a day because of lost productivity and the sudden spike in rail and bus fares could push up inflation this quarter.

European governments may also find themselves out of pocket as the continent's airlines have demanded compensation for their losses. This request for state aid seemed opportunistic at first but the amount of noise made by carriers like BA, Lufthansa and Air France seems to have given the call momentum.

If carriers do receive money for repatriating stranded passengers it will once again show that when it comes to subsidies, the airline industry is a master of hypocrisy. Those very airlines that are likely to receive state aid for volcano losses are the same ones that frequently complain about the alleged subsidies their rivals in the Gulf receive.

Emirates airline is usually at the forefront of these allegations, which are used by European carriers to encourage governments to block Emirates from certain airports or limit the number of flights it can offer.

"There is widespread concern that there is an uneven playing field," the German Civil Aviation Authority is quoted as saying of the Gulf carriers. "They benefit from financial support from their local state," Air France has claimed. In an unusually frank document published last week, Emirates sought to rebut these claims and set the record straight about its relationship with the Government of Dubai. One of the most persistent allegations is that Emirates' rapid growth and huge aircraft orders have been underwritten with cheap financing from Dubai.

The airline said that it has arranged financing worth $21.6bn since 1996. Of that, $2.2bn was raised from bonds, $4.7bn from commercial loans and $700m in Islamic bonds. A further $1.9bn came from European credit agencies and $2.8bn from the export bank of the USA. The remaining $9.3 billion came from operating leases.

This breakdown looks pretty similar to the balance sheet of any other airline and apart from a $10m loan to set up Emirates in 1985 and $88m invested in infrastructure, the carrier has never received discounted financing rates from the Investment Corporation of Dubai or Government of Dubai.

Another regular complaint against Emirates is that it has an unfair cost advantage, which is usually attributed to cheap fuel and discounted airport rates. But looking at Emirates' cost structure reveals that its overheads are about the same as a number of other well-run airlines. Its cost of transporting one seat a mile is 13.32 US cents, slightly above Singapore Airlines' 13.27 cents and slightly below Cathay Pacific (13.62 cents), Air Canada (15.25 cents) and Qantas (14.07 cents).

Its fuel cost of 3.81 cents per seat per mile is lower than most (Singapore is 4.82 cents; Cathay Pacific is 4.96 cents) but is actually higher than Qantas' 3.34 cents. If Emirates is, therefore, being given a fuel subsidy, the airline's management should be reprimanded for their appalling ability to negotiate a meaningful advantage.

Certainly, some of Europe's older airlines are hamstrung by the high costs associated with expensive workforces and enormous pensions obligations – but that is hardly Emirates' fault. And the $400m a year the airline spends on expatriate benefits is about the same that BA has to invest in its pension fund, so perhaps the playing field is more level than some in Europe realise.

Finally, Emirates is said to benefit from a zero rate of corporate tax in Dubai. It is worth remembering, however, that airlines in some other countries also enjoy very low or zero tax rates (Cathay and Singapore) and with so many carriers losing so much money due to the recession the issue of tax on profits is rather meaningless anyway.

As a state-owned airline, Emirates has to return surplus profit to the government in the form of a dividend. Tax or dividend, what is the difference? Dubai has received $1.3bn in direct payments from Emirates, which is probably more than it would have received if the airline had been taxed instead.

The ash cloud disruption of last week cost Emirates at least $50 million but unlike Europe's airlines it won't be getting any of that money back. No wonder then that Dubai's airline gets so angry when accusations of subsidies and unfair advantage are levelled against it.

- The writer is Business Correspondent of The Times of London. The views expressed are his own

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