# FINANCIAL & OTHER GOVERNMENTAL BENEFITS PROVIDED TO AMERICAN AIRLINES, DELTA AIR LINES & UNITED AIRLINES

May 14 , 2015Page 1 

## The Risk Advisory Group plc: background and research methodology

Risk Advisory is widely recognized as one of the world’s leading privately

- owned investigations, intelligence and security companies. We provide services to leading global financial services, multinational, multila teral organizations, governments and government departments.

We often work in close collaboration with advisors such as lawyers, insolvency experts and public relations consultants.

Our headquarters are in London, and we maintain operational offices in W ashington, DC, Moscow, Dubai, Al Khobar (Saudi Arabia) and Hong Kong. From these regional hubs we operate globally.

We employ approximately 140 permanent staff who come from a wide range of professional disciplines including lawyers, bankers, business ana lysts, journalist, the military and academic research.

In the last 18 years we have undertaken a very broad range of investigative and consultancy assignments. Our work product has been used in litigation and arbitration, public inquiries and to inform i nvestigative bodies’ decision making. For example, we were:

• Instructed to assist in investigations relating to the Bloody Sunday Inquiry

• Instructed by Reuters to investigate the death of one of its journalists in Iraq

• Instructed by the then Kenyan Gover nment to review the Kenyan Government's anti

corruption process and proceduresPage 2



### • Instructed to investigate allegations of malpractice in the lending department of a multilateral organization

• Instructed by many hundreds of multinational businesses to investig ate thousands of third parties, prior to the formation of business relationships.

Our experience and expertise includes a profound knowledge of legal process, a detailed understanding of the nature and reliability of evidence and a qualitative understandi ng of the nature and sources of information.

Engagement by Etihad Airways

On March 3, 2015 Etihad Airways PJSC (“Etihad”) engaged The Risk Advisory Group to perform a review of financial and other governmental benefits provided to American Airlines, Delta Air L ines and United Airlines. We were instructed to retain complete independence over the contents of our report and rely upon primary source materials, such as governmental records, litigation filings, annual reports and governmental and regulatory reports. We were instructed not to opine on the propriety of such financial or other governmental benefits, and this report makes no such judgments. The Risk Advisory Group is solely responsible for the contents of this report.Page 3



### Methodology The report consists of a detailed summary of a program of research undertaken

. In conducting our research we retrieved and analyzed documents and information filed electronical ly and in hard copy from the following types of sources:

Primary sources

 official governm ent records

 audited annual reports by airlines

 reports prepared by relevant regulators

 reports prepared by supranational bodies such as the European Commission

Secondary sources

 academic studies and literature

 recognized aviation industry trade publicati ons

 Media reports from reputable publications, such as Financial Times
, The Economist and others

 Secondary literature on the aviation industry

The figures in our report have been provided on the basis of attributable sources. In every case we have cited t he reference for our findings, giving preference to primary sources and citing secondary sources only in circumstances where we could not obtain the same data from a relevant primary source. We did not conduct any interviews in preparing this report.

The US Dollar has been used as the reference currency throughout this report.Page 4



### For the purpose of this report, we refer to American Airlines, Delta Air Lines and United Airlines

as they are currently configured . Thus, while some of the figures provided include data from Northwest Airlines and US Airways, they are included under Delta Air Lines and American Airlines, respectively.Page 5 

# Executive s ummary: quantifiable benefits to US airlines

We have identified the fo llowing quantifiable benefits to United Airlines, Delta Air Lines and American Airlines : United Airlines Delta Air

L ines American

Airlines Total

Bankruptcy debt relief One time cost savings $26.0 bn $4 .6 bn $0.36 bn $3 0 .96 bn

Recurring annual cost savings N/A $3.3 bn $1.2 bn $4.5 bn

Pension termination 1 Government guarantees (PBGC) $ 13.6 bn $ 3.46 bn $ 6.02 bn $23.08 bn

Cost to participants $ 3.2 bn $ 1.09 bn $ 2.06 bn $6.35 bn

Fuel subsidies (estimated) $ 1.6 bn $ 1. 7 bn $ 2.3 bn $ 5.6 bn
Other subsidies & preferential financing $ 6. 3 mn $ 868 mn $ 112 mn $0.99 bn
Gran d total $ 44.41 bn $ 15.0 2 bn $ 12.05 bn $ 71. 48 bn



### Of the $71.48 bn, more than $70 bn relates to the period since 2000.

Our analysis has also identified significant unquantified and unquantifiable benefits to these airlines.Page 6 

# US c arriers: d ebt r elief
Since 2002, US carriers have benefitted from protections provided under Chapter 11 of the United States Bankruptcy Code. Th ese protections allowed United Airlines, American Airlines and Delta Air Lines ( and their antecedents ) to restructure and eliminate debt, while receiving protection from creditors.

Based on court

- approved disclosure statements from United Airlines, Ameri can Airlines and Delta Air L ines and their antecedents
, each airline benefited from bankruptcy cost savings on the following basis:

United 2 Airlines American 3 Airlines Delta 4

Air L ines

One time cost savings Between $26.0 bn and $26.9 bn Between $0.36 bn and $1.26 bn Between $4 .6 bn

and $8 .6 bn

Recurring a nnual cost savings N/A $1.2 bn $3.3 bn

Total $26.0 bn

- $26.9 bn $1. 6 bn

- $ 2.5 bn $7 .9 bn

- $11.9 bn



### In the executive summary, we have in all cases included the lower of the range numbers above.Page 7 

# US carriers: p ension benefits
The Pension Benefit Guaranty Corporation (PBGC) is a federal agency created by Congress in 1974 [The Employee Retirement Income Security Act]. Its purpose is to ensure pension benefits for pension plan holders. The PBGC receiv es funding through Congressionally

- mandated insurance premiums, private equity, and assets tied to the plans under its care.

Both United and Delta have terminated pension plans, with partial liability transferred to PBGC. PBGC data (reprinted by the US G overnment Accountability Office in 2005) states the ‘full value of the [pension] benefits promised to participants prior to termination’ was as follows: 5



### United Airlines 6 

### American

Airlines 7 

### Delta

Air L ines 8



### Full value of pension prior to bankruptcy $16.8 bn $8.08 bn $4.55bn

PBGC l iability $13.6 bn $6.02 bn $3.46 bn

Cost to participants $3.2 bn $2.06 bn $1.09 bnPage 8 

# US c arriers: j et f

uel tax (Federal)
US federal tax on jet fuel is levied at a lower rate when that fuel is for commercial aviation: non
commercial carriers are taxed at 21.9¢ per gallon while commercial carriers are taxed at 4.4¢ per gallon. 9 

### The discounted federal rate of tax on jet fuel is not exclusive to US airlines

- it is levied on all carriers at the same rate.

The US Bur eau of Transportation provides data on jet fuel purchased by the three major carriers in the period from January 2009 until September 2014. 10 

### Applying the discounted rate of federal tax, our calculations indicate that the carriers have made the follow savin gs during that period 11 

### :

• Delta Air Lines : $1.7 bn

• American Airlines & US Airways : $2.3 bn

• United & Continental Airlines : $1.6 bnPage 9 

# US carriers: j et fuel tax (State)
State governments levy taxes on jet fuel at a different rate from the federal rate. The Tax Foundation has col lated state jet fuel tax rates. 12 

### We have calculated the average state tax rate as 7.7¢ per gallon for commercial carriers and analyzed jet fuel tax policies in the states in which the three principal US carriers are headqua rtered:

• Delta Air Lines is headquartered in the state of Georgia. Legislation enacted by the Georgia General Assembly in 2005 exempts all commercial carriers from state jet fuel taxes. 13 

### Georgia State Representative Earl Ehrhardt is currently leading an e ffort to remove this tax exemption, which is reported to be worth an estimated total between $21 and $23 mn to commercial carriers each year. 14



### • American Airlines is headquartered in the state of Texas, where there has been no state tax on jet fu el since a t least 2009. 15 

### The US Energy Information Administration (EIA) compiles total jet fuel consumption data by state. 16 

### Using available EIA consumption data for the state of Texas and the average tax rate (7.7¢) as a base of comparison, we estimate that carriers operating in Texas received a total discount of $5.3 mn during 2013. Further analysis of a wider data set may identify further benefits derived by the carriers.

• United Airlines is headquartered in the State of Illinois. The current state jet fuel tax in Illinois of 32.75¢ per gallon is the highest in the US. However, carriers have been exempt from paying the standard rate for all international flights since at least 2003. 17 

### Similarly, all carriers have been exempted from environmental impac t fees since 1996. 18Page 10 

# US carriers: m iscellaneous benefits
We have undertaken a preliminary review of domestic incentive programs involving the three US carriers:

Amer ican Airlines / US Airways

• American received between $80

- 85 mn subsidy from the State of Missouri in 2003 to help fund the redevelopme nt of a facility in the state. 19



### • Pennsylvania state and local governments provided an additional $26.25 mn incentive package for US Airways to build an operations cente r in Allegheny County in 2008. 20



### • In Texas, the Fort Worth City Council created a $6.5 mn tax incentive in 2014 for American Airlines’ operations center in the city. 21



### • US Airways received fuel tax refunds from North Carolina in 2012 and 2013, amounting to $16.6 mn and $9.2 mn

. 22



### United Airlines / Continental

• Colorado’s Office of Economic Development and International Trade reportedly provided $6.29 mn in tax credi ts to Un ited in 2011 and 2012. 23



### Delta Air Lines / Northwest

• Minnesota state records indicate that Northwest Airlines received a $838 mn financing package from the state in 1991 which was reduced to $761 mn in 1992. Northwest apparently used this sum to build fl eet maintenance facilities in the state. The packagePage 11 

### included a $270 mn loan from the Metropolitan Airports Commission and nearly $500 mn in

construction financing with terms varying duri ng Northwest’s financial difficulties

. 24



### • The Commonwealth of Pennsylv ania’s Community and Economic Development Department granted $30 mn in 2012 to Monroe Energy, a wholly owned subsidiary of Delta Air L ines, according to press releases issued by Delta Air Lines and the Pennsy lvania Office of the Governor. 25Page 12 

# US car riers: m iscellaneous benefits

- government bonds

United Airlines / Continental

• Indiana’s Transportation Finance Authority issued bonds for $369 mn to finance United Airlines’ construction of a maintenance facility at Indianapolis International Airport in 1991. An article from 2003 alleged further funding had been provided by local government authorities prior to the facility’s premature closure

. 26



### • T he City of Chicago provided $24.38 mn in tax financing to United for its involvement in an urban renewal project in 2009, in addition to $5.475 mn it provided for a similar project in 2007. 27



### American Airlines / US Airways

• Between 2002 and 2012, the New Yor k City Industrial Development Agency and Trust for Cultural Resources and Build NYC issued $1.3 bn in bonds to finance a new American Airlines Terminal at JFK airport, according to the New Yo rk Citizens Budget Commission. 28Page 13 

# US carriers: d omestic market pr otectionism
International carriers are forbidden from flying point

- to

- point destinations within the US. Quantifying the commercial benefit derived by US carriers from this domestic market protectionism is extremely difficult.



# US c arriers: Fly Americ a Act
Enacted by Congress in 1995, the Fly America Act mandates that government

- paid international air travel be performed by US carriers or those operating under a codeshare agreement. The law has its origins in the International Air Transportation Fair C ompetitive Practices Act of 1974.

It is difficult to quantify the amounts generated via this program for American Airlines , Delta Air Lines and United Airlines, due to the absence of reliable data.Page 14 

# US Carriers: State

- owned alliance partners
American Airlines, United Airlines and Delta Air Lines are members of airline alliances. Each of these alliances includes airlines that are partially or wholly

- owned by governments. Specifically:

• SkyTeam , the 20 partner alliance to which Delta belongs, has 10 members that are at least partially state

- owned: Aeroflot, Aerolíneas Argentinas, China Airlines, Czech Airlines, Garuda Indonesia, Middle East Airlines, Saudia, TAROM, Vietnam Airlines

• Oneworld , th e 15 partner alliance to which American Airlines belongs, includes five members that are at least partially state owned: Finnair, Royal Jordanian, SriLankan Airlines, Cathay Pacific and Qatar Airways

• Star Alliance , the 27 partner alliance to which United belongs, includes 11 members that are at least partially state

- owned: Adria Airways, Air China, Air India, Air New Zealand, Croatia Airlines, EgyptAir, Ethiopian Airlines, LOT Polish Airlines, Singapore Airlines, South African Airways and Thai Airways Inte rnational

In a number of cases, these government

- owned alliance partners have enjoyed significant benefits
, including direct financial support, from their governments and other associated government

- owned entities

.Page 15 

# US Carriers: Miscellaneous benefits under $5 mn

• Newark City, New Jersey reportedly provided grants to Continental in both 1997 and 2000, amounting to $753,900 and $1.34 mn , respectively, according to the New Jersey E conomic Development Authority. 29



### • Delta Air Lines received $3.5 mn from the P ort of Portland in 2009, according to a Pricewaterhous eCoopers annual audit in 2010. 30



### • The Commonwealth of Pennsylvania exempted US air carriers from state s ales tax on airline food in 2001, primarily benefiting US Airways, which operated hubs in the state. This amounts to an estimated value of $3.5 mn per year. 31Page 16 

# SOURCES

1 To the extent the one time cost savings depicted by the respective carriers were not itemized, it possible that some of the P ension Termination figures are also included in that total.

2 UAL Corporation, et al. Disclosure Statement: Case No. 02

- B

- 48191, U.S. Bankruptcy Court for the Northern District of Illinois. 7 September 2005. Article I Summary: C. Treatment of Claims and Interests & F. Claims Estimate s

. 3 In calculating the “one time cost saving s” debt relief figures on page 6 of the US section of the report, we have used figures from bankruptcy documentation filed by the three US carriers. In some cases, the total unsecured claim and debt recovery figures are provided in ranges, in l ieu of one definitive figure. Where a range of figures was provided, we multiplied the high and low debt recovery percentages by the high and low total unsecured claims amount. The resulting figures were then subtracted from the total in order to arrive at the ranges included on page 6 . In the executive summary, we included only the most conservative of our calculations. UAL Corporation, et al. Disclosure Statement: Case No. 02

- B

- 48191, U.S. Bankruptcy Court for the Northern District of Illinois. 7 Septembe r 2005. Article I Summary: C. Treatment of Claims and Interests & F. Claims Estimate s

. 4 Delta Air Lines, Inc., et al. Disclosure Statement: Case No. 05

- 17930, U.S. Bankruptcy Court for the Southern District of New York. Filed 7 February 2007. SUMMARY OF T

HE PLAN : 2. Other Claims and Interests

. ; Northwest Airlines Corporation, et al. Disclosure Statement: Case No. 05

- 17930, U.S. Bankruptcy Court for the Southern District of New York. Filed 30 March 2007. pp. iii.

5 Government Accountability Office. “Commerc ial Aviation: Bankruptcy and Pension Problems Are Symptoms of Underlying Structural Issues.” Table 6: Costs of Terminating Airline Pension Plans. pp 54. http://www.gao.gov/assets/250/248035.html

6 U S Government Accountability Office. “Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms of Underlying Structur al Issues.” Table 6: Costs of Terminating Airline Pension Plans. pp 54. http://www.gao.gov/assets/250/248035.html; Pension Benefit Guaranty Corporation. “PBGC Reaches Pension Settlement with United Airlines.” https://web.archive.org/web/20060625160949/http://www.pbgc.go v/media/news

- archive/2005/pr05

- 36.html ; 7 Government Accountability Office. “Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms of Underlying Structural Issues.” Table 6: Costs of Terminating Airline Pension Plans. pp 54. http://www.gao.gov/assets/250/248035.html ; 8 Pension Benefit Guaranty Corporation. “ Re: Consolidated Appeal; Case No. 205441; Delta Pilots Retirement Plan.” Overview of the Appeal and the Board’s Decision. Footnot e 4. pp. 5. http://www.pbgc.gov/documents/apbletter/Decision

-- Delta

- Pilots

- Retirement

- Plan

- 2013

- 27

- 09.pdf

9 Internal Revenue Service. “Kerosene for Use in Aviation.” Taxable Events. http://www.irs.gov/publications/p510/ch01.html#en_US_2013_publink1000116905

10 United States Bureau of Transportation. “Airline Fuel Costs and Consumptions (U.S. Carriers

- Scheduled), January 2000

- December 2014.” http://www.transtats.bts.gov/fuel.asp

11 In order to render the savings presented here, Risk Advisory multiplied 2013 Bureau of Transportation fuel consumption statistics for United Airlines, American Airlines and Delta Air Lines by the federal commercial and non

- commercial rate of tax in the United States

. We then subtracted the difference between fuel consumption statistics*non

- commercial and fuel consumption statistics*commercial rate.

12 Tax Foundation. “Combined Effective Commercial Jet Fuel Tax Rates and Fees by State.” http://taxfoundation.org/blog/combined

- effective

- commercial

- jet

fuel

- tax

- rates

- and

- fees

- state
13 Georgia General Assembly. “2005

- 2006 Regular Session

- HB 341.” Section 3, Point C. pp. 2. http://www.legis.ga.gov/legislation/en

US/display/20052006/HB/341Page 17 14 PolitiFact Georgia. “Delta spokesman correct on federal law and jet fuel tax breaks.” http://www.politifact.com/georgia/statements/2015/feb/23/trebor

banstetter/delta

- spokesman

- correct

- federal

- law

- and

- jet

- fuel

- t/ ; The State. “L awmakers may end tax break on jet fuel, to Delta’s dismay.” http://www.thestate.com/welcome_page/?shf=/2015/02/28/4016355_lawmakers

- may
- end

- ta x - break

- on.html

15 State of Texas. Tax Code. “Title 2. State Taxation.” Subtitle E, Chapter 162, Subchapter A, Section 162.104, subpoint 6. http://www.statutes.legis.state.tx.us/D ocs/TX/htm/TX.162.htm

16 U.S. Energy Information Administration. “Table F2: Jet Fuel Consumption, Price, and Expenditure Estimates, 2013.” http://www.eia. gov/state/seds/data.cfm?incfile=/state/seds/sep_fuel/html/fuel_jf.html

17 Illinois Administrative Code. Title 86, Section 130.321. “§130.321. Fuel Used by Air Common Carriers in International Flights .” http://il.eregulations.us/iac/t86_pt130_sec.130.321/; State of Illinois Department of Revenue. “ABC Airlines v. The Department of Revenue Of the State of Illinois.” http://tax.illinois.gov/legalinformation/hearings/st/st07

- 5.pdf ; Illinois General Assembly. “Joint Committee on Administrative Rules.” http://www.ilga.gov/commission/jcar/admincode/086/086001300C03210R.html

18 Illinois Revenue. “En vironmental Impact Fee & Underground Storage Tax.” Exemptions. http://tax.illinois.gov/Motorfuel/MFT/environmental.htm

19 Kansas City Business Journal. “American ‘pledge’ differs from c ontract.” http://www.bizjournals.com/kansascity/stories/2003/11/03/story1.html?page=all ; LakeExpo. “American Airlines is expected to close its KC overhaul base .” http://lakeexpo.com/news/top_stories/american

- airlines

- is

- expected

- to

- close

- its

kc

- overhau l

- base/article_f80488b0

- ff87

- 5445

- 970a

- 2d5b7985bcf8.html

20 Pennsylvania House of Representatives. “Matzie: US Airways

- American merger would enhance Pittsburgh region.” http://www.pahouse.com/Matzie/InTheNews/NewsRelease/?id=28859

21 Fort Worth Business Press. “Fort Worth Approves $6.5 mn in incentives for American reservations center.” http://fwbusinesspress.com/fwbp/article/1/5739/News

- Categories

- Real

- Estate/Fort

- Worth

- approves
- $6.5

- mn
- in

- incentives

- for

- American

- reservations

center.aspx ; Fort Worth Cit y Council. “Council Action: Approved on 6/10/2014.” Tax Abatement Agreement and Economic Development Program Agreement. http://www.fortworthgov.org/coun cil_packet/mc_review.asp?ID=19889&councildate=6/10/2014

22 North Carolina Department of Revenue. “Economic Incentive Refunds and Certain Industrial Facilities Refunds.” Pg. 2. http://www.dornc.com/publications/incentives/2014/sandu_inc_refunds_report12revised.pdf ; North Carolina Department of Revenue. “Economic incentive Refunds and Certain Industrial Facilities Refunds Claimed During Calendar year 2013. ” http://www.dor.state.nc.us/publications/incentives/2014/sandu_inc_refunds_report13.pdf

23 Colorado Office of Economic Development and International Tra de. “Funding and Incentives Authorized from January 1, 2011 through June 30, 2014.” Excel Spreadsheet. http://topsarchive.state.co.us/downloads/OEDIT_2014_updated120214. xlsx

24 Minnesota Legislative Reference Library. “Resources on Minnesota Issues: Northwest Airlines (Delta) and the State of Minnesot a.” http://www.leg.state.mn.us/LRL/Issues/issues.aspx?issue=nwa

25 Delta Air L ines. “Delta Subsidiary to Acquire Trainer Refinery Complex [Press Release].” http://news.delta.com/index.php?s=20 295&item=123929 ; PR Newswire. “Pennsylvania Governor Corbett: Commonwealth Helps Delta Subsidiary Acquire Trainer Refinery Complex.” http://www.prnewswire.com/news

- releases/pennsylvania

- governor
- corbett

- commonwealth

- helps

- delta

- subsidiary

- acquire

- trainer

- refinery

- complex

149672625.html

26 State of Indiana. “Comprehensive Annual Financial R eport For the Fiscal Year Ended June 30, 2001.” pp. 34, 63. http://www.in.gov/auditor/files/State_of_Indiana_2001_CAFR.pdf ; The New York Times. “States Pay for Jobs, but It Doe sn’t Always Pay Off.”Page 18

http://www.nytimes.com/2003/11/10/business/states

- pay
- for

- jobs

- but

- it

- doesn

- t

- always

- pay
- off.html ; The Bond Buyer. “Uni ted Airlines signs pact for Indiana plant; bonding for project seen near $1 bn.” http://www.bondbuyer.com/news/

- 6255

- 1.html

27 City of Chicago. “Lasalle Central Redevelopment Project Area, United A irlines Redevelopment Agreement.” pp. 19

- 20, 63. http://www.cityofchicago.org/content/dam/city/depts/dcd/tif/T_147_UnitedAirlinesRDA.pdf ; Council of Dev elopment Finance Agencies. “TIF RDA’s 2000 to July 30, 2010.” Pg. 1 http://www.cdfa.net/cdfa/cdfaweb.nsf/ordredirect.html?open&id=chicago

- tiflist.html

28 Cit izens’ Budget Commission. “Managing Economic Development Programs in New York City.” pp. 25. http://www.cbcny.org/sites/default/files/Interacti ve/2013_Conference/REPORT_EconDev_12062013.pdf

29 New Jersey Economic Development Authority. “Executed BEIP Grants.” pp. 6. http://www.njeda.com/web/pdf/BEIP_Activity_Alphabetical. pdf

30 The Port of Portland. “Report on Audit of Financial Statements and Supplementary Information.” Pp. 151

- 152. http://www.portofportland.com/PDFPOP/POP_Invstrs_Ofcl_Stmnt.pd f

31 Philly.com. “Tax breaks for airlines, regardless of merger.” http://articles.philly.com/2001

- 07

- 03/business/25315885_1_airline

- food

- sales

- tax

- aircraft

- repair

base ; Pennsylvania House Bill 334. pp. 4

- 5. http://www.legis.state.pa.us/CFDOCS/Legis/PN/Public/btCheck.cfm?txtType=HTM&sessYr=2001&sessInd=0&billBody=H&billTyp=B&billNb r=0334&pn=2375