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### US Department of Transportation, Department of Commerce and Department of
State Stakeholder Engagement on Gulf Carrier Subsidy Claims

– IAG Comments

1. Introduction

International Airlines Group (IAG), parent company of British Airways, Iberia and Vueling, welcomes the opportunity to submit comments to the US Departments of Transportation, Commerce and State open forum for stakeholders, concerning subsidy allegations made by three US airlines (American, Delta and United) against three airlines from Qatar and the UAE (Qatar Airways, Emirates and Etihad, collectively known as the “Gulf carriers”).

IAG and British Airways is pro

- co nsumer and pro

- co mpetition and is driven to win business by
offer ing the best products and service s to cons umers in all the markets it serves. We have consistently supported the liberalisation of air transport worldwide.

Competition is a fact of life for all our businesses; we believe that embracing it of fers IAG the greatest opportunities to deliver profitable growth and shareholder value over the long term. This includes markets where IAG competes successfully

– i.e. profitably

– with all three major Gulf carriers. British Airways has faced direct compe tition from Emirates for over 25 years.

IAG’s approach is entirely consistent with the rationale for pursuing Open Skies policies, as set out by the US Department of Transportation (DOT) on its own web site, which states:

“Open Skies agreements have vast ly expanded international passenger and cargo flights to and from the United States, promoting increased travel and trade, enhancing productivity, and spurring high

quality job opportunities and economic growth. “

It goes on to say:

“Open Skies agreements do this by eliminating government interference in the commercial decisions of air carriers about routes, capacity, and pricing, freeing carriers to provide more affordable, convenient, and efficient air service for consumers.”

IAG takes this US policy po sition as the starting point for our comments relating to the concerns expressed by the three largest US airlines in their recently

- published “White Paper”.

In this submission, IAG does not seek to defend specific carriers, nor go into detail on the indivi dual allegations; this will be for the carriers concerned to address. Rather, we aim to support the important principles outlined by the DOT above.

2. Benefits of the US “Open Skies” policy

Economic benefits of the US “Open Skies” policy that have accru ed over time stem primarily from the increased passenger and trade flows that have directly resulted from the freeing up of capacity and frequency limits on air services. This has enabl ed airlines to offer increased services on existing routes and to op en entirely new markets that incumbent carriers did not exploit, connecting many city pairs that previously did not feature in the networks of the older airlines, which are tied to their
historic hub markets.2

This burgeoning of new routes and high quality service has undoubtedly brought enormous benefits for US consumers, whether individuals or businesses, leading to enhanced trade and tourism opportunities and the wealth creation and employment that follows.

On the trade relationship between the US and t he UAE, f igures from the US

- UAE Business Council (citing US academic research) demonstrate that US exports to the UAE are growing strongly on the back of enhanced connectivity . T he UAE is now America’s largest export market in the Middle East. US exports and foreign direct investment to the UAE rose from $3.6 billion in 2004 to $24.6 billion in 2013, representing a 6

- fold increase in the space of just 9 years.

It can be no coincidence that this astonishing growth in trade is underpinned by the start of dir ect flights between the two countries in 2004 as a result of the enlightened “Open Skies” policy pursued by the US Government in its bilateral relationship with the UAE.

In addition to the trade benefits outlined above the US has also, in its leading role as an aerospace

manufacturing nation, been able to capitalise upon the growth of the Gulf carriers as they build their fleets. Orders of aircraft and engines by the Gulf carriers have dwarfed those of most other airlines around the world. Since Boeing airc raft represent the largest single category of US export earnings, and support many hundreds of thousands of jobs directly and indirectly in the US, it would be perverse not to take into account the value of the Gulf carriers to the US economy and US citize ns, a value that is made possible by the opening of markets that has been catalysed and (in many cases led) by the efforts of the US Government across the world.

A key element of the benefits the US secures from its pursuit of “Open Skies” is enhanced

con nectivity for many regional US points that would otherwise have no direct flights to the Middle
East.

This sharing of the benefits across the US brings the many benefits of direct connectivity with export markets and sources of tourism to US regions. The combined value of new services by Gulf carriers to US airports and their surrounding communities runs into billions of dollars per annum

. Emirates alone generates some $2.8 billion per annum, according to various publicly

- available studies conducted by or on behalf of US airports.

T he consumer benefits brought to the US travelling public by the Gulf carriers are hard to ignore. New flights have opened up an array of new destinations and direct city

- pairs, added to the choice
of airline s available on existing destinations, and introduc ed levels of customer service rarely seen in this market. Not only do Gulf carriers bring competitive service and prices, they also stimulate the market, so that much of the increase in their own passenger traffic is incremental, not tak en from existing op erators.

The White Paper makes much of the Gulf carrier impacts in relation to passengers travelling indirectly e.g. between India and the US, as if consumers should be denied this choice. P assengers travelling between two points on the globe do not “belo ng” to any particular airline or group of airlines. Airlines must compete to offer passengers what they want. The outdated concept of “ownership” of passenger traffic must be rejected by all governments.

The overall picture today is an overwhelmingly pos itive one for the travelling public and it is hard to reconcile the arguments made in the White Paper with the overall interests of American (and foreign) consumers.3

The benefits to US consumers, businesses and employment are plain to see. The global

compe titiveness of the US economy has been significantly enhanced by the aviation policies the DOT has pursued over the last 30 years. Turning the clock back now would be folly.

3. Alleged subsidies to Gulf Carriers

The White Paper’s allegations on subsidies t o Gulf carriers do not withstand scrutiny. IAG also has serious doubts about the way information is presented in the White Paper. It is heavily caveated due to difficulties in obtaining information. Yet, even where transparent accounts are available, many of the conclusions drawn appear inaccurate e.g. in relation to jet fuel subsidies or alleged fuel hedging support

. Some of the arguments relating to IAG in the White Paper are inaccurate and misleading

. Even where independent studies are used to support arguments, the evidence is deliberately misquoted to distort its meaning so that unfavourable conclusions can be drawn (“US white paper on Gulf carriers distorts my academic report”, Frankie O’Connell, ATW 26 A pril 2015).

Such examples call into question the integrity of the whole document.

Whilst IAG does not intend to make detailed points to rebut specific allegations in this paper, our own review of the published accounts of Emirates shows that it is a well

- run airline that is profitable and makes dividend payments to its shareholder. Similarly, the UK Department for Transport reached a similar conclusion with Qatar . I t has recently lifted long

- standing frequency restrictions
contained in the UK

- Qatar b ilateral on the basis of a satisfactory review of all information relevant to fair competition

. More generally, IAG believes that:

• Fuel subsidies to any of the Gulf carriers are non

- existent. It is not credible to make allegations simply because the States concerned have large oil and gas reserves, especially
when there is clear evidence that the carriers concerned have standard commercial contracts in place with well

- established jet fuel suppliers

.

• Alleged subsidies in the form of investments in airlines, where they have occurred, are no different from the many investments made by States in airlines across the world in the past,

or by governments elsewhere in the world, about which there appears to be no concern
whatsoever

.

• State investment in airports infr astructure is not, and never has been, regarded as “subsidy” anywhere in the world. In the Gulf, as in the UK, airports are (regardless of ownership) run on a commercial basis and commercial revenues from retail and car parking in particular (as opposed t o aeronautical revenues) frequently make up approaching half of the income of the airport concerned. This enables airports to attract business through reduced aeronautical charges. Provided charges are applied in a non

- discriminatory manner i.e. all
airlin es may benefit from the same charges, under Open Skies principles there can be no justification for complaint. It is good business and it translates to lower airport charges and lower fares for passengers. There is nothing wrong in that.

• The Gulf carriers are not protected from competition by their own governments. Competition at the Gulf hubs is fierce. This is the case in Abu Dhabi, Dubai and Doha

. In Dubai, well over 100 international airlines compete successfully against Emirates and fly4

d ubai. It is on e of the most heavily competed international hubs in the world, as well as the largest.

• Complaints regarding lower labour and social costs could apply to many countries which the US has Open Skies agreements with, and reflect local market conditions and policies

. The White Paper highlights a lack of trade unions in the Gulf States as a key issue yet OECD figures on union density (defined as the percentage of employees who are members of a union) for 2013 show that in the US th ese represent just 10.8% of t he workforce, significantly below the OECD average of 16.9%

. This compares with 25.4% for the UK, however IAG does not regard this relatively high figure as a legitimate reason to curb competition.

• Similarly, local tax regimes e.g. corporation tax and inc ome tax are a matter of national policy. Such matters are not within the scope of Bilateral Air Services Agreements and never
have been.

4. State support and practices that benefit US and EU carriers

Since the inception of international commercial airli ne service, nations have recognised the benefits of linking their peoples, businesses and governments to the world. With the recognition of those benefits, many nations also determined that it was essential to establish and support a homeland (national) ai rline ensure the reliability of those links. National support of such airlines over the decades took a variety of approaches

– state ownership and capital provision, sole

- source government contracts, state supported research and development of aviation equ ipment, airports and air traffic management systems

– are among the approaches often use d which directly
benefitted airlines

. IAG has consistently argued agains t state aid and has never attempted to place commercial restrictions on those in receipt of such aid.

There can be few major carrier s in the world that ha ve not previously benefited from S tate support of its business in one form or another or does not currently derive benefit from differences in national or local legislative, taxation and other p olicy regimes in different jurisdictions. Often it is a matter of definition or interpretation.

As mentioned already, infrastructure costs are frequently borne by States or that infrastructure was originally created by States to benefit carriers. This make s the Gulf States no different from other
nations.

In the US, there are many rules that differ from other countries which could be interpreted by other nations and their airlines as “unfair”. These include Chapter 11 reorganisation procedures, which

among other things has allowed airline pensions liabilities to be taken of carriers’ books, Fly America, where Government traffic must use US airlines (or their codeshare partners) not foreign airlines, the Department of De fense strategic airlift program , state and local air service development funding support, special state and local tax forgiveness incentive programs, and broadly, federal tax dollar support for research and development in aerospace. US airlines continue to be protected by ownership and control regulations which are more restrictive in the US than in many other
countries.

The EU has its own State Aids policy which has frequently been a cause for concern for airlines that have not benefitted from their homeland government’s largesse. Many carrie rs have benefited from “lawful” State Aid to enable restructuring of their business. These often massive injections of state subsidy are meant to be granted on a “one time last time” basis and subject to the “Market5

Economy I nvestor Principle” that aims to ensure capital injections are made on a commercial basis. However the rules may not always be applied as rigorously as they might, resulting in distortions to competition vis

- a

- vis other airlines (both EU and non EU). It is also the case that certain car riers have been able to have pension liabilities assumed by the State.

In addition to direct or indirect financial support, it is important to consider what some might describe as the largest and most pernicious

– for consumers and business alike

– forms o f support that any government can give, namely protection from competition. The US has led the way in removing these protections through its aggressive pursuit of its open skies policy. Reintroducing restrictions targeting the Gulf at the behest of three h ighly profitable US airlines would be little different from offering those American carriers a cash subsidy underwritten by US consumers.

But the US and EU are not unique in supporting the aviation sector. This is a global phenomenon that takes a variety of forms.

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. Conclusion

IAG believes that our industry functions best when competition is allowed to flourish. This delivers the best outcomes for consumers and businesses alike and we want to see more, not less, liberalisation. It is a matter of grave concern to see protectionism raising its ugly head at the first sign of effective competition from the Gulf countries.

IAG disputes the evidence and conclusions that unfair subsidies are being provided by the Gulf States to the Gulf airlines contained in the White Paper prepared by American, Delta and United. IAG
believes the evidence and therefore the conclusions to be unreliable and wholly inappropriate as a means of informing important government policy decisions. The White Paper’s arguments should be

r ejected as a return to international aviation policies that protect airlines from competitors instead of fostering competition.

As the US has demonstrated since it first liberalised its domestic air market in 1978, competition
benefits consumers. The inte rnational liberalisation that the US has had the foresight, determination and confidence to pursue in the intervening years fosters economic growth through enhancing trade, tourism and inward investment.

It is a sound and enlightened approach that delive rs enhanced prosperity to the US and its trading partn ers that must not be put at risk . T o shield US airlines from their competitors would be to grant them the biggest subsidy of all

.