COMMENTS OF QATAR AIRWAYS Q.C.S.C.

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COMMENTS OF QATAR AIRWAYS Q.C.S.C.

Re: Information on Claims Raised about State-Owned Airlines in Qatar and the UAE

Submitted to Docket Nos.: DOT-OST-2015-0082

DOC-2015-0001 DOS-2015-0016

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Table of Contents

I. INTRODUCTION AND EXECUTIVE SUMMARY ... 1

II. ABOUT QATAR AIRWAYS ... 9

III. APPLICABLE LEGAL STANDARDS ... 12

A. QATAR AIRWAYS’ SERVICES ARE ENTIRELY CONSISTENT WITH THE AGREEMENT ... 12

B. WTO/GATTRULES ARE INAPPLICABLE TO AIR TRANSPORT SERVICES ... 17

IV. SUBSIDY CLAIMS ... 19

A. THE BIG THREE PROPOUND AN OVERLY BROAD DEFINITION OF SUBSIDY ... 19

B. THE CAPITAL TRADE REPORT IS RIFE WITH FACTUAL AND METHODOLOGICAL ERRORS ... 23

C. FINANCIAL HISTORY OF QATAR AIRWAYS ... 29

D. REBUTTAL OF SPECIFIC SUBSIDY CLAIMS ... 32

E. THE BIG THREE HAVE FAILED TO MAKE ANY SHOWING OF COMPETITIVE HARM. ... 37

1. Claims of harm are entirely unfounded ... 37

2. Qatar Airways’ service growth is in line with regional trends. ... 41

3. Qatar Airways does not compete against US carriers. ... 43

4. Far from causing competitive harm, Qatar Airways has created important new service options in under-served markets. ... 46

5. The Big Three are pursuing a competitive strategy that focuses on mature (and capacity constrained) markets. ... 48

6. Qatar Airways Does Not Threaten US Employment. ... 52

7. The Agreement has created significant benefits for US business and consumers. ... 53

V. THE US GOVERNMENT SHOULD NOT ROLL BACK THE AGREEMENT... 57

VI. CONCLUSION ... 60 APPENDICES

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I. INTRODUCTION AND EXECUTIVE SUMMARY

A coalition of the largest US carriers (the “Partnership for Open & Fair Skies,” comprised of Delta, American and United, and their labor unions) (the “Big Three”) has issued a White Paper that urges the US Government to roll back its Open Skies agreements with Qatar and the United Arab Emirates, claiming that Qatar Airways and other Gulf carriers are subsidized, and therefore should not be permitted to fully exercise the traffic rights created under those agreements, which were drafted and propounded by the United States, and which have been in force (and used) for several years.

The Departments of Transportation, State and Commerce should reject calls to “freeze” the US-Qatar Open Skies Agreement, and recognize them for what they are – a transparent (and concerted) attempt by the Big Three to block

the introduction of air service options that offer an alternative to their own. While

the Big Three attempt to cloak their claims in pro-competitive rhetoric, the reality is that they object to the emergence of new competitors that are harnessing changes in aircraft technology to efficiently carry traffic to Qatar, the Gulf Region and the Indian subcontinent, markets that they have largely ignored over the years. While it is understandable why the Big Three might wish to have 100% of this traffic move over the inefficient and congested hubs of their European alliance partners, US aviation policy has been expressly designed to encourage innovation and the introduction of new service options. As Qatar Airways will show herein, its services have provided important

one-stop travel options to cities and parts of the world that never have been served by

US carriers, such as Cochin and Amritsar. In fact, many of the points that Qatar Airways serves behind its hub at Doha are cities that are not even served by the European partners of the Big Three.

The overblown nature of the claims being propounded by the Big Three should not be permitted to obscure the facts. Although the Big Three and their supporters have

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asserted that Qatar Airways is somehow a threat to 11 million US aviation jobs,1 the reality is that Qatar Airways does not compete against any US carrier on any nonstop

route. Qatar Airways is a member of oneworld, and actually code shares with (and

feeds traffic to) American Airlines,2 which also is a member of oneworld and a vocal

member of the Big Three. American claims to be under grave threat from Qatar Airways and others, even though it does not serve a single point in the GCC region or India. Compounding the irony of this is the fact that British Airways, American’s primary European alliance partner, has deliberately chosen to distance itself from this campaign,

expressing concerns about initiatives that would serve to limit consumer choice.3 The

US Government should reject these false and disingenuous claims, and find that, on the

contrary, Qatar Airways contributes greatly to both direct and indirect US employment.4

It is against this backdrop that the claims of the White Paper should be evaluated. The Big Three assert that the strong growth of Qatar Airways gives rise to

concerns about “overcapacity in the world market,” and “falling yields,”5 without

providing any substantiation of such concerns. Indeed, the Big Three have just completed one of their best financial years on record, and serve markets that are characterized by high load factors and yields. The truth underlying the claims of “excess capacity” made by the Big Three in the White Paper is that the service alternatives offered by Qatar Airways might loosen their ability to hold the line on competition, and prices. Indeed, a statement by the CEO of Air France at the most recent IATA AGM makes this clear:

It’s normal that capacity is deployed in an area that is profitable. Our joint venture with Delta Air Lines has a very

1 The Big Three include this claim on their website, without reference to a source. See

http://www.openandfairskies.com/subsidies/.

2 American also code shares with and is fed traffic by Etihad Airways, another carrier under attack in this

proceeding.

3See, Comments of International Airlines Group, at 2.

4 To add further perspective, Qatar Airways notes that the Big Three collectively operate a fleet in excess

of 2500 aircraft, compared to its own fleet of 158 aircraft (as at June 1, 2015). Given that Qatar Airway’s home base is located 8000 miles from the United States, in a city that is not served by any US carrier, one can only wonder how Qatar Airways is of any competitive concern to any US carrier.

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strong position. We have about 25% of the market with 900 flights a week across the Atlantic, but we are very wise as

regards to capacity. We would like everybody to be as

wise.6

The comment above exposes two critical truths: (1) that the Big Three have deliberately chosen to focus their competitive energies on the transatlantic routes because they enjoy market power; and (2) they look askance at any player, large or small, that threatens this position.

The Big Three have mischaracterized their claims of subsidy in the same manner that they mischaracterize the “threat” posed by Qatar Airways. Setting aside the fact that the US-Qatar Open Skies Agreement (“Agreement”) does not define the term “subsidy,” the claims include items of support that US carriers have themselves

received for decades, and items that never have been viewed as a form of subsidy.

Indeed, as several parties (including US parties) have acknowledged in these dockets, the Big Three have themselves been long-time beneficiaries of subsidies and favorable US policies and support.

The Big Three claim that they have been harmed by Qatar Airways, yet

have not used the clear remedies available to them under the Agreement. Should

a Party believe that a fare being offered is “artificially low due to direct or indirect

governmental subsidy or support,”7 then that Party can object to the fare.8 The Big

Three have not raised specific concerns about ticket prices offered by Qatar Airways (which is where the impact of subsidy would be felt) and this is in itself a clear indication that Qatar Airways’ fares are not the issue here. Rather, they are instead urging the US to abrogate its bilateral obligations by imposing a unilateral limit on Qatar Airways’ capacity. This step would be entirely unwarranted and would send a chilling message to the rest of the world about how the United States does business.

6 “Air France-KLM Cautions for Overcapacity on Transatlantic,” Aviation Daily, June 16, 2015, at 4

(emphasis added).

7 Agreement, Article 12.1 (c). 8 Agreement, Article 12.3.

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Ignoring the fact that the US-Qatar services offered by Qatar Airways are entirely permissible under the express terms of the Agreement, the Big Three try to argue that investments made by the State of Qatar in the airline are somehow improper based on the application of WTO trade principles, and US domestic trade laws that apply solely to

trade in goods. They do so even though the US Government for many years has

expressly opposed the inclusion of air transport services in the GATS, which is the

global trade regime that applies to trade in services. Qatar Airways rejects all efforts to apply legal regimes that are completely inapplicable to its operations. It would be especially egregious to apply “global trade rules” here, given that the Big Three derive enormous financial benefits (such as enjoying a protected home market) as a result of

their exclusion from those rules.9

Setting aside the impropriety of applying trade rules that are inapplicable to aviation, Qatar Airways must note that the “findings” made in the Capital Trade Report are replete with factual and methodological errors, if not outright

deceptions. The claims of subsidy being advanced by the Big Three are predicated on

“findings” made by the Capital Trade Group that Qatar Airways was not “creditworthy”

between 2004 and 2010.10 Those findings were based, in part, on highly selective

comparisons across inconsistent years. For example, even though the findings made covered 2004-2010, comparisons of Qatar Airways’ ROE to other carriers were confined

to the 2004-2007 time period,11 and were based on a comparison with only nine

carefully selected carriers12 (for example, one of these - TAM - reported a 289% ROE

for 2004, and Asiana reported 36%, which clearly skewed figures upward). The

Cherry-picked Nine had an average ROE of 9.2% for 2004-2007,13 but more globally

9 See Comments of Federal Express Corporation, Docket No. OST-2015-0082 at 8-9 (May 29, 2015). 10 Capital Trade Report, at 60.

11 Capital Trade removed 2008 from their ROE calculations, citing a financial crisis year, but of course did

not take the situation into account when reviewing the finances of Qatar Airways.

12 See Appendix 1.Not surprisingly,the sample group did not include any of the Big Three carriers (two of

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representative IATA industry statistics placed the industry figure for the same time period at just 4.17%.

While Capital Trade’s figures are plainly not representative of the industry, we also note that when reviewing Qatar Airways’ performance, Capital Trade chose to withhold figures that contradicted their desired findings. The financial data provided by

Capital Trade indicated that Qatar Airways had a 102.8% return on equity in 2005.14 If

comparative figures had been acknowledged and applied (i.e., providing an average figure for Qatar Airways’ ROE for 2004-2007 to compare against that of the nine carriers given, instead of merely saying that ROE was negative for most years), the report would have concluded that Qatar Airways had an average annual ROE of about 25.7% for the

2004-2007 time frame, a figure which is far higher than that of the baseline group.15 Of

course, Capital Trade did not cite that figure, or provide any specific comparative ROE figure for Qatar Airways for the 2004-2007 time period other than to note that the ROE

was not negative in 2005.16 The Capital Trade analysis betrays manipulation and

misrepresentation of data that warrants its complete rejection. Unfortunately, the problems noted above are not isolated.

The methodological problems of the report are compounded by factual errors that are so basic that the integrity of the entire analysis must be drawn into

question. For example, the Capital Trade Report at one point suggests that a “rational

investor” would not have made the decision to launch Qatar Airways, stating as follows: In the first decade of the 21st century, private investors

considering an investment into a start-up Middle Eastern

13 Capital Trade Report, Exhibit 3. In a footnote to a Capital Trade Exhibit, Qatar Airways found that many

computations made excluded 2008 due the financial crisis of that year, but of course the events of that year were in no way factored into the assessments made of Qatar Airways.

14 Capital Trade Report, Exhibit 12. 15See Appendix 2.

16 Capital Trade Report, at 49. In a similar vein, the Big Three fail to mention anywhere in their narrative

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long haul carrier would have taken into account the fact that Qatar Airways was pursuing a niche business model (a Middle East-based international carrier focused on long haul routes using wide body aircraft) already being pursued by two other major state-backed entities – Emirates and Etihad. Emirates is based less than 400 kilometers from Qatari’s home airport while Etihad’s home base in less than

320 kilometers away.17

Qatar Airways was launched in 1994, not in the 2000’s, and Qatar Airways was

launched nine years prior to Etihad, not after Etihad. The Company initially focused on

regional routes, and not on “long haul routes using wide body aircraft.” Errors such as these are fundamental and underscore the lengths to which the Big Three strained to reach their conclusions. The findings of the White Paper and Capital Trade Report are without support and must be rejected in their entirety.

Just as the claims of subsidy have fallen flat, so too has the proof of any

harm causally related to such subsidy. This is not surprising, given that Qatar

Airways does not compete with any member of the Big Three in any nonstop market. Indeed, up until very recently, Delta itself has said that “they [the Gulf carriers] are halfway around the world from us and we don’t really participate in a lot of flows that

they have the primary gateway for.”18 Although Delta changed its story for the White

Paper and for the press, it repeated much the same thing in an earnings call held just a few days ago.

The only specific harm the Big Three attribute to Qatar Airways is a drop in the overall US carrier share of the US-India/Indian Subcontinent/Southeast Asia market

over a multi-year period.19 Setting aside the fact that US carriers have been absent

from these markets for decades, these claims are unfounded as well. As Qatar Airways

17 Capital Trade Report, at 104.

18 Delta Airlines, Investor’s Day 2013, transcript found at

http://ir.delta.com/files/doc_presentations/2013/DAL%20Investor%20Day%20Transcript%2020131211.pd f (Remarks of Glenn Hauenstein, at 39)(emphasis added).

19 White Paper, at 46. Qatar Airways does not currently offer fifth freedom passenger service to the

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will demonstrate, while the Big Three’s market share may have declined, the number of passengers they carry has increased in absolute terms.

Many of the market developments lamented by the Big Three are not the product of “unfair competition” (or anything remotely related to subsidy), but are instead the byproduct of important advances in aircraft technology and

significant demographic changes. With ultra-long range B777 and B787 aircraft,

Qatar Airways can offer convenient one-stop services from points in the United States to secondary points in the Gulf Region (GCC), the Indian Subcontinent (ISC) and Southeast Asia that neither the US carriers nor their European partners serve at all, or only serve via longer, less efficient connections and routings. Qatar Airways’ catchment

area is a region that is home to sixty percent of the world’s population,20 and which has

a burgeoning middle class. The region is woefully short on road and rail transportation, and is almost entirely reliant upon air transport. In fact, far from injuring the public

interest, Qatar Airways benefits the public interest by offering convenient one-stop

service to the United States from cities such as Amritsar, Ahmedabad, Dhaka, Lahore and Kathmandu. As we show herein, by shaving hours off long and tedious journeys, Qatar Airways has helped to foster tourism, and has brought families and businesses closer together. While US carriers profess a newfound interest in these markets, they have heretofore chosen to focus almost all of their competitive energies on the mature European, Latin American and Asian markets.

Especially disingenuous is the claim of the Big Three that it is somehow “unfair” for Qatar Airways to capitalize on its geographic advantages and extensive regional network to support its US-Qatar services. US carriers have long benefited directly from many of the practices that they decry here. For example, having for years touted the “pro-competitive benefits” of their partners’ carriage of Sixth Freedom traffic and their own carriage of Fifth Freedom traffic, they now declare these rights – which are fundamental to open skies – to be unfair when exercised by Gulf carriers.

20 See

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The US Government must reject their transparent efforts to force US-GCC/ISC/Southeast Asia traffic to flow over the hubs of their European partners, routings that are far less convenient or attractive to consumers than those offered by Qatar Airways. Qatar Airways and other Gulf carriers serve routes that US carriers in the main do not serve, and provide valuable competitive alternatives in the few cases in which there is route overlap.

The US Government should reject the specious claims made in the White Paper, and recognize that its Open Skies agreements are working well, and

generating broad-based consumer, commercial and public benefits. Indeed, the

Agreement, which enabled Qatar Airways to provide scheduled air links between two important strategic, military and commercial partners, has been a particular success. Qatar Airways’ services to the United States have enabled American universities to expand their campuses in Doha, have facilitated travel between the two countries by governmental and commercial organizations, and have greatly expanded cooperation between Americans and Qataris.

Although the Big Three have been relentless in their campaign to block the future growth of Qatar Airways, the US Government should firmly resist demands to reopen the Agreement and, instead, close this inquiry. This would be appropriate because services offered by Qatar Airways are lawful, consistent with existing bilateral arrangements and are well-received by the traveling public.

Although Qatar Airways has concerns about the events that led to this review,21

Qatar Airways is pleased to share its views, and is confident that the facts will prevail. The Departments of Transportation, State and Commerce must reject the groundless claims that Qatar Airways is competing unfairly, and recognize the simple truth, which is that the Big Three are unhappy having to face competition from carriers such as Qatar

21 As is well known, the Big Three had circulated the White Paper and supporting documents amongst the

press, Congress and Executive Branch for several months, but refused to provide Qatar Airways (or the other Gulf carriers) with these materials. While Qatar Airways has attempted to refute the main claims advanced in the White Paper and elsewhere, it should be noted that it has not received any response to the Freedom of Information Act requests filed with the above-captioned agencies, and thus cannot be sure it has seen all relevant claims being made. Accordingly, Qatar Airways emphasizes that its omission of any point from this document is by no means a concession as to its validity.

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Airways, which offers convenient and premium service, and which has invested several years developing its own route network. The US Government should also be mindful that other US aviation trading partners have, over the years, lamented the growth and power of US carriers, and have sought (and sometimes obtained) limits on their growth. By wavering from its policy supporting Open Skies, the US would strengthen the hands of governments which oppose open trade in aviation, and jeopardize the broader public interest.

II. ABOUT QATAR AIRWAYS

History, fleet and network. Qatar Airways, the national carrier of the State of

Qatar, began operations in 1994. When launched, the airline was a small regional carrier serving a handful of routes with just 4 aircraft. The airline was re-launched in 1997. The Company, which has one of the industry’s youngest fleets, has been instrumental in the development of Doha as an important passenger and cargo hub, and is a catalyst for the diversification and expansion of Qatar’s economy. Doha is a regional home to various US universities, and has emerged as a major developing center of culture and tourism. Furthermore, Qatar serves as an important base for US military operations.

Qatar Airways operates 158 aircraft,22 113 of which are wide-bodies, and 45 of

which are narrow-bodies, serving markets on all continents.23 The Company has 6724

Boeing aircraft in its fleet, with an estimated value of $19 billion.25 The average age of

Qatar Airways’ Boeing fleet (both passenger and cargo) is 3.1 years.26 The Company

22 As of June 1, 2015.

23 Despite claims of the “threat” created by Qatar Airways, it is dwarfed by the Big Three. For a

comparison of the Big Three U.S. carriers versus Qatar Airways in key areas such as fleet size, operating revenue and destinations, see Appendix 3.

24 As of June 1, 2015.

25 These Boeing aircraft have engines manufactured by General Electric. Whenever possible, the

company selects GE engines for its Airbus aircraft.

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has a further 148 Boeing aircraft on order (including firm orders, options and purchase

right aircraft) with an estimated value of $50 billion27 in today’s prices.

From its hub at Doha, Qatar Airways serves 151 destinations28 spanning Europe,

the Middle East, Africa, South Asia, Asia Pacific, North America and South America. The airline serves numerous markets that are either underserved or not served at all by the big U.S. carriers, including many hubs and secondary cities in:

• The Indian subcontinent (India, Pakistan, Bangladesh, Sri Lanka)

• The Middle East (Iran, Iraq, Jordan amongst others)

• The Gulf region (all GCC countries)

• East Africa (Ethiopia, Eritrea, Mozambique, Tanzania)

• Southeast Asia (Cambodia, Indonesia, Thailand)

Service to the US, and partnership strategy. Qatar Airways initiated

passenger service to the United States in June 2007, offering flights initially from Doha to Newark via Geneva and in July the same year, following the delivery of its first pair of B777-300ER aircraft, nonstop service to Washington, DC, was added. In 2008, with an enlarged B777 fleet, Qatar Airways launched its nonstop service to JFK, and ended its one-stop Newark service. Following the arrival of its ultra-long range B777-200LR aircraft in 2009, nonstop service to Houston was launched. Subsequently, nonstop flights were added to Chicago in 2013, and Miami, Philadelphia and Dallas in 2014. The Company recently announced the introduction of new nonstop passenger services to Atlanta, Boston and Los Angeles in 2016. The Company also operates freighter service to Atlanta, Chicago and Los Angeles.

Qatar Airways has always sought to partner with US carriers. When Qatar Airways first initiated service to the United States, it established a codesharing arrangement with United Airlines, and later with US Airways as well. As a result of pressure from fellow Star Alliance partners, United terminated the codeshare agreement in 2012.

27 Estimated value based on 2014 list prices. 28 Operated or announced as of June 1, 2015.

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Qatar Airways in 2013 entered into a wide-ranging two-way codesharing arrangement with American Airlines. This arrangement covers US and behind-Doha gateway routings as well as US-Qatar nonstop and intermediate-hub routings. The Company has also implemented a one-way codeshare arrangement with JetBlue, pursuant to which JetBlue transports Qatar Airways passengers on certain domestic routes beyond the Company’s US gateways.

Alliances. Qatar Airways is a member of the oneworld alliance, and has

extensive codesharing relationships with other oneworld members. As we will explain in

greater detail below, American Airlines, one of the Big Three, is in fact Qatar Airways’ primary US codeshare partner and a fellow member of the alliance.

Emphasis on customer service. In a few short years, Qatar Airways has

emerged as a carrier renowned for its customer service. Qatar Airways is one of only

seven airlines worldwide currently ranked Five Star for service excellence by Skytrax,

the independent global aviation industry monitoring agency. Moreover, at the latest Skytrax award ceremony held in June, 2015, Qatar Airways was confirmed as the

Airline of the Year for the third time in five years, Best Airline in the Middle East for the

ninth year and its premium product was acknowledged with the award for world’s Best

Business Class Airline Seat. In 2014, Qatar Airways also won awards for the Best Business Class in the World for the second consecutive year and World’s Best Business Class Airline Lounge for the second year consecutively.

Differences from other Gulf carriers. The Big Three make repeated references

to the “Gulf Carriers,” as if all three companies were one and the same. While Qatar Airways, Emirates and Etihad come from the same region, it is essential to bear in mind that the carriers are of different sizes and maturity, and have very different histories and competitive strategies. The carriers compete vigorously with each other for regional and

international traffic.29

29 Emirates is the oldest and largest of the Gulf carriers. Emirates has been in operation since 1985, and

operates a fleet of 234 aircraft from its hub in Dubai. While Emirates is not a member of any of the global alliances, it maintains a codeshare arrangement with JetBlue. Unlike Qatar Airways, Emirates currently operates passenger fifth freedom service to the United States, serving the Milan-New York market.

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III. APPLICABLE LEGAL STANDARDS

A. Qatar Airways’ Services Are Entirely Consistent with the

Agreement

Although the Agreement forms the legal basis for Qatar Airways’ service to the United States, the White Paper addresses the Agreement only in passing. The template for this Agreement, which was drafted by the United States, has been offered to (and accepted by) more than 100 US trading partners. The version of the Agreement in

place between the US and Qatar was expressly designed to give US carriers the

freedom to fly from the United States to the foreign country (and beyond) over any routing, and to operate seventh freedom all-cargo services from that country. Given

longstanding disputes involving US carrier services and capacity offerings,30 the

Agreement governing “fair competition” (Article 11) enshrines the right of the airlines of each Party to determine the frequency and capacity they offer “based upon commercial considerations in the marketplace.”

In essence, the Big Three are complaining that Qatar Airways offers “excessive” capacity to the United States. Setting aside the fallacy of this statement (Qatar Airways

currently offers a single daily service from Doha to each of its US gateways),31 the

Agreement does not authorize parties to reject or block services proposed or operated

by carriers of the other Party.32 Indeed (and contrary to the demands of the Big

Three),33 the Agreement very clearly says that the Parties may not unilaterally limit the

Etihad is the youngest of the three Gulf carriers. Unlike Qatar Airways, Etihad is not a member of any of the three global alliances, but maintains a codesharing arrangement with American Airlines. Etihad has opted to expand its commercial presence through a series of equity investments in (and codeshare arrangements with) several other air carriers including Alitalia, Jet Airways, Air Berlin, Virgin Australia and Air Serbia.

30 Indeed, the US had disputes with both France and Germany in the 1990’s due to concerns about

“excessive” US carrier capacity being offered under liberal air service agreements. At Air France’s behest, the Government of France in 1992 renounced the US-France Air Service Agreement because US carriers were gaining market share on Air France, and Germany in 1992-1993 imposed temporary limits on US carrier capacity in the US-Germany market.

31 Qatar Airways has enjoyed strong load factors. See Appendix 4. 32 Agreement, Art. 11(2).

33 The Big Three effectively have demanded that the US Government place a freeze on the Gulf carriers’

U.S. service and capacity, contrary to Article 11(2) of the Agreement. See Letter of American Airlines, Delta and United to Secretaries Kerry, Foxx, and Pritzker, Docket OST-2015-0082 (Apr. 17, 2015).

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volume of traffic, frequency or regularity of service, or aircraft type operated by airlines

of the other Party.34 The relevant language follows:

Each Party shall allow each designated airline to determine the frequency and capacity of the international air transportation it offers based upon commercial considerations in the marketplace. Consistent with this right, neither Party shall unilaterally limit the volume of traffic, frequency or regularity of service, or the aircraft type or types operated by the designated airlines of the other Party, except as may be required for customs, technical, operational, or environmental reasons under uniform conditions consistent with Article 15 of the Convention.

The Big Three have attempted to sidestep the clear language of the Agreement35 by

instead referring to WTO and more general trade principles that are not, by their terms, applicable to air transport services, and asserting that Qatar Airways is only able to offer its level of frequency because of its (alleged) receipt of subsidy. These contentions should be rejected.

The Agreement does not define the term “subsidy,” let alone prohibit the receipt of subsidy. Rather than giving foreign trading partners the means of objecting to US carrier expansion, the US instead chose to create a more narrowly tailored remedy to object to competitive harm that may arise if prices being offered in the market are artificially low due to “direct or indirect governmental subsidy or support.”

34 Agreement, Art. 11(2).

35 In a March 15, 2015, questionnaire issued to the Big Three, the US Government asked the parties to

identify “the specific provisions of our bilateral aviation agreements upon which the UAE and Qatari government actions infringe.” Questionnaire, Question 25. Not surprisingly, the Big Three in their response chose to skirt the issue: “The United States does not need to allege a violation of a specific provision of the bilateral agreement in order to seek redress against the subsidies that Qatar and the UAE have provided to their carriers…” Response at 76. This deliberate obfuscation should be read for what it is – a concession that the services complained of are entirely consistent with the applicable agreements.

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Article 12(1) of the Agreement provides:

Each Party shall allow prices for air transportation to be established by each designated airline based upon commercial considerations in the marketplace. Intervention by the Parties shall be limited to:

a. prevention of unreasonably discriminatory prices or practices;

b. protection of consumers from prices that are unreasonably high or restrictive due to the abuse of a dominant position; and

c. protection of airlines from prices that are artificially low due to direct or indirect governmental subsidy or support.

If a Party believes that prices in the market are “inconsistent with the considerations set forth in paragraph (1) of this Article,” then the remedy for that unfair pricing is for the

complaining Party to seek consultations about such prices.36

To the best of Qatar Airways’ knowledge, the Big Three never have objected to a

fare offered by Qatar Airways under Article 12.37 In fact, aside from an unsupported Big

Three assertion in the White Paper that “basic economics suggest that prices will be

driven down”38 sometime in the future,39 the White Paper does not make any specific

claim that the government subsidies that Qatar Airways has allegedly received have led to artificially low prices in any relevant market. Indeed, the White Paper does not contain any specific claim that fares offered by Qatar Airways are unreasonably low at all.

If US Government negotiators had intended to include in its Open Skies template a mechanism to object to “excess” capacity or other factors believed to be affected by the receipt of government subsidies, then such language would have been included in

36 Agreement, Art. 11(2) and Art. 12(1) 37 Agreement, Art. 12(1)(c).

38 White Paper, at 46.

39 Setting aside the fact that unspecified fears of future harm are not actionable, the assertions made here

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the Agreement. By referring to subsidies only with relation to price, the US clearly intended to prevent foreign partners from unilaterally blocking the capacity offered by US carriers. This point is underscored by Article 11.2 of the Agreement, which makes this point expressly.

Despite this clear language, and despite the huge outcry that would be heard if the tables were turned, the Big Three have urged the US Government to impose a unilateral freeze on the introduction of new capacity by Gulf carriers while their

complaints are addressed.40 As FedEx and others have noted, such an action would

violate Article 11.2,41 and send a clear message to the rest of the world that the United

States supports Open Skies only when their counterparts fail to fully exercise those

rights.42

The Big Three have asserted that they might not have supported the US entering into Open Skies agreements with the Gulf States had they understood the growth

trajectory of the state-owned carriers in the region.43 Those claims ring hollow.

Although Qatar Airways was young at the time the US-Qatar Agreement was negotiated and signed, the US Government did not express concerns about Qatar Airways’ partial

State ownership,44 much less object to concluding an Agreement with a very small

nation.

What we see here is buyer’s remorse masquerading as a legal argument. The fact that Qatar Airways has grown faster than the Big Three would like is not reason for the US to abrogate the Agreement by imposing an illegal unilateral capacity freeze on the services of Qatar Airways. Similarly, the fact that Qatar is a small country that it is

40 See Letter of American Airlines, Delta and United to Secretaries Kerry, Foxx, and Pritzker, Docket

OST-2015-0082 (Apr. 17, 2015).

41See Comments of Federal Express Corporation.

42 This point is especially clear with regard to Fifth Freedom services. Although US carriers have a long

history of making (very) full use of their Fifth Freedom rights, and for fighting very aggressively to defend those rights, they are objecting very vigorously to Emirates’ operation of a single Fifth Freedom route (Milan-New York).

43 White Paper, at 53.

44 The US has concluded Open Skies agreements with many nations which own their flag carriers, such

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geographically well-positioned to be a transfer point for behind-gateway traffic should not be a cause for concern. After all, the United States deliberately selected the Netherlands and Singapore, countries which are home to powerful Sixth Freedom carriers, as its pioneering European and Asian open skies partners in part because arrangements with those countries might prod more recalcitrant trading partners to come to the table.

Complaints about Qatar Airways offering “excessive” Sixth Freedom capacity45

should also be rejected on the grounds that they are at odds with the letter of the Agreement, with US Government policy and with US carrier practice. Speaking at an aviation function, Douglas Steenland, the then-CEO of Northwest Airlines (which has since been merged into Delta) boasted that Northwest/KLM were offering high levels of frequency in the Detroit-Amsterdam market, despite the (very) small size of the local O&D market:

By linking Northwest’s domestic network to KLM’s Amsterdam beyond network and vice versa, each of Northwest and KLM has been able to introduce expanded transatlantic capacity. For example, look at Northwest’s

largest U.S. hub, Detroit. The Detroit–Amsterdam city

pair has approximately 85 passengers daily each way. Yet this summer, NW/KLM are operating 5 daily

nonstop wide body flights. 82% of the total traffic on the

NW/KLM Detroit-Amsterdam route connects behind Amsterdam. Even though Northwest’s U.S. hubs collectively account for slightly more than 4% of U.S.-Europe O&D bookings and KLM’s Amsterdam hub is smaller than Frankfurt, Paris, and London-Heathrow, the NW/KLM alliance has enabled Northwest and KLM to be an effective transatlantic competitive force, and our joint venture generates approximately $2 billion in annual revenues for

the two companies.”46

The Big Three may be displeased to face competitors that have taken a page from their own playbook by offering a comprehensive range of services between the United States and GCC (and from points behind the GCC), but the US Government

45See White Paper at 4-5.

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should not view the expression of this displeasure as any indication that the Agreement has been violated. On the contrary (and as Northwest/Delta itself has observed), “[t]o gauge the likely competitive impact of a proposal, competition authorities typically rely on consumer views as opposed to views of competitors. Indeed, complaints by competitors are routinely considered by such authorities to be strong evidence of the

pro-competitive nature of a transaction.”47 Passengers traveling to and from India have

weighed in strongly in support of Qatar Airways’ services,48 as have a plethora of other

consumer groups. These plaudits (and the support of US carriers other than the Big Three) are clear evidence that the Agreement is working and producing the very

benefits that are supported by US aviation trade policy.49

B. WTO/GATT Rules Are Inapplicable to Air Transport Services

Having failed to substantiate any violation of the Agreement, the Big Three now urge the US Government to apply the principles of an alternative (but inapplicable) legal regime to address their claims. Despite the fact that the GATT Agreement on Subsidies and Countervailing Measures (SCM) applies only to goods, the Big Three nevertheless argue that that the government should apply the SCM and general WTO principles to resolve their complaints. These efforts are both unlawful and entirely misplaced.

Air services between the United States and Qatar are governed solely by the Agreement. As discussed above, Article 12 of the Agreement is quite clear that if a Party believes that a price being offered in the market is “artificially low” due to direct or indirect subsidy, then that Party can object to the price, and seek consultations. Given

47Id. at 4.

48See Appendix 5.

49 The Department of Transportation has long rejected the view that benefits under an open skies

agreement must be precisely matched: “if we were to embark on negotiation initiatives only where we could anticipate precisely equal economic benefits we would have been deterred from some of the most successful agreements we have achieved in the last decade. See Defining Open Skies, DOT Order 92-8-13, at 2.

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this very clear language, efforts to refer to extraneous agreements are completely

improper. 50

Even if WTO rules were applicable here, the proper agreement to apply would be the General Agreement on Trade in Services (GATS). But the GATS expressly excludes air traffic rights from its coverage, and does not define, much less prohibit, subsidy. Moreover, it bears emphasis that the US Government has affirmatively

opposed the inclusion of air transport services in the GATS framework.51 While the Big

Three and their unions argue here that the WTO “principles” should be applied to achieve their desired result, it bears noting that they would likely object to the

application of these principles in other areas.52 As discussed further herein, the US

Government should be wary of these blatant efforts to cherry pick amongst facts,

statistics and legal regimes.53

Even if the WTO rules were applicable (and they are not), and even if the Big Three could prove the existence of subsidy (which they cannot), the inquiry would not end there. While the White Paper alleges that Gulf carriers have received subsidies, it fails to acknowledge that in order for a subsidy to be prohibited or actionable under the

applicable rules,54 the complaining party must show more than the bare fact that a

50 In addition to being improper, the efforts being made to apply WTO principles here are also pointless.

Even if these rules were applied and even if a subsidy (and harm related to subsidy) were to be found, the remedy would not be a denial of market access. Instead, the remedy would be the imposition of a duty to “countervail” the subsidized price. A variation of this remedy (the ability to object to a fare in the US-Qatar market) already is provided under the Open Skies Agreement. See also Comments of Federal Express, at 10.

51 In multilateral trade talks, the US Government has stood steadfastly behind its decision to decision to

oppose the inclusion of air transport services in the GATS. See WTO Council for Trade in Services, Report Of The First Session Of The Review Mandated Under Paragraph 5 Of The Annex On Air Transport Services Held On 12 September 2006, at para. 27. “[The U.S.] delegation continued to believe that the almost total exclusion of air transport services from the scope of coverage under the GATS had been farsighted and had contributed to the ongoing liberalization of air transport agreements through air services-specific agreements and the facilitating activities of ICAO and numerous regional fora. This was equally true for traffic rights and ancillary air services in support of traffic rights.”

52 Indeed, the cabotage rules and restrictions on airline ownership and control are squarely at odds with

GATS principles.

53 See section D, infra.

54See Subsidies and Countervailing Measures Agreement, 1869 U.N.T.S. 14 (1994) (hereinafter, “SCM

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subsidy exists. To be actionable, the parties must show injury,55 and a causal link

between the subsidized imports and the alleged injury.56 As will be shown below, the

Big Three have failed to make any showing on any of the prongs of the test.

IV. SUBSIDY CLAIMS

A. The Big Three Propound an Overly Broad Definition of Subsidy

The Big Three in the White Paper allege that Qatar Airways has received improper “subsidies” from its government. Included in the allegations are not only items that never have been viewed as subsidies, but also benefits that the Big Three have themselves received. For example, they cite as a “benefit” differences between the Qatari and US aviation regulatory regimes, as well as certain antitrust law exemptions

that apply to the air transport sector.57 Needless to say, the arguments being advanced

by the Big Three are highly disingenuous – they are propounding an overly broad definition of “subsidy” for Qatar Airways, yet ignoring all subsidies that they themselves have received.

If variations in national and local laws and practices can constitute a subsidy as

the Big Three suggest,58 it should be noted that the United States is amongst only a

handful of countries that allows insolvent companies to walk away from their debts and continue in business. According to the consultancy Risk Advisory Group, US carriers have received upwards of $30 billion in cost savings associated with their Chapter 11

restructurings,59 and respected publications such as the Economist also have

acknowledged the unique benefits that US carriers have enjoyed when they have been

permitted to walk away from their debts.60 Moreover, the Big Three have similarly

55 As defined by GATT 1994 Article VI and interpreted by the SCM Agreement. 56 SCM Agreement, § 11.2.

57See White Paper at 39. 58Id. at 36-39.

59 See Risk Advisory Group PLC, Financial & Other Governmental Benefits Provided to American Airlines,

Delta Air Lines & United Airlines, at 5 (May 14, 2015), available in Docket OST-2015-0082 (hereinafter, “Risk Advisory Group Report”).

60 The Economist, Flights of Hypocrisy: The Airline Business Is Riddled with Protectionism. The Answer

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walked away from their defined-benefit pension obligations, leaving the US taxpayer to foot the bill.61

It is particularly ironic that the White Paper cites the lack of applicability of certain aspects of competition law to the air transport sector in Qatar as a disguised form of

subsidy,62 given that each member of the Big Three is a core member of an immunized

joint venture that has received antitrust immunity (ATI) from the US Department of

Transportation.63 ATI enables these carriers to jointly set fares with their direct

competitors, and to coordinate (and limit) capacity in key international markets. Whilst

Qatar Airways is a member of the oneworld alliance and may consider future

opportunities to enter into an ATI-immunized joint venture, it must take strong exception to any assertion that operating under its national laws is somehow “unfair” when its detractors have benefitted from ATI, and have been active participants in mergers that

have sharply increased the level of concentration in the US air transport market.64

The Big Three also assert that Qatar Airways is not subject to independent

regulatory oversight, and that this confers an unfair benefit upon the Company.65 These

assertions are false. As the Department is aware, only carriers from countries that are placed in Category 1 under the FAA’s International Aviation Safety Assessment (IASA) program may launch scheduled passenger service to the United States. The Qatar Civil Aviation Authority (QCAA) underwent an exhaustive FAA audit of its aviation oversight and enforcement capabilities prior to Qatar Airways launching its US services, and has been subject to periodic re-evaluations since then. The FAA would not have approved Qatar Airways to operate direct air service to the United States if it had found that oversight of Qatar Airways by the QCAA was neither independent nor robust. Moreover,

61 Risk Advisory Group Report, at 7. 62 White Paper, at 39.

63 See DOT Order 2010-7-8 (Jul. 20, 2010) (Oneworld), DOT Order 2008-5-32 (May 22, 2008)

(SkyTeam); DOT Order 2009-7-10 (Jul. 10, 2009) (Star).

64 Setting aside the irony of these claims, it also should be noted that they are not true. As a global

carrier, Qatar Airways’ commercial activities fall under the jurisdiction of many national competition authorities.

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Qatar is not unique and many national aviation authorities, including the Civil Aviation Administration of China, have legal ties to their national carriers.

Over the years, US carriers have enjoyed many structural and government-financed benefits that have not been matched by other countries. These include:

• Exclusive access to government-financed traffic under the Fly America

program.

• Exercising their ability to eliminate or freeze their defined-benefit

pension plans.

• Subsidies through the Essential Air Services Program for providing

service to specific small communities.

• State-granted fuel tax exemptions and rebates (indeed, Delta is

currently complaining about the loss of a $23 million annual fuel tax

break from the State of Georgia).66

• Free land to construct aircraft maintenance facilities.

While the list of benefits bestowed upon US carriers is far longer than this, the fundamental point to be made here is that US carriers have themselves been very

significant beneficiaries of governmental largesse.67 Whilst Qatar Airways makes no

complaint about US carrier receipt of such benefits, it is essential to understand the fundamental inconsistency of the position being advanced by the Big Three, which is to have the US Government challenge as a “subsidy” policies that might benefit a carrier from a Gulf State whilst having the US Government turn a blind eye to any and all benefits enjoyed by US carriers.

As indicated above, the Big Three are seeking to have the US tear up its agreements with its critical Gulf trading partners because Gulf carriers have emerged and now (to some extent) compete with their European partners for Europe-Asia traffic

66 Indeed, Delta is currently complaining about a $23 million fuel tax break that it has received each year

from the State of Georgia. New York Times, “Lawmakers May End Tax Break on Jet Fuel, to Delta's Dismay” (Mar. 1, 2015), available at http://www.nytimes.com/aponline/2015/02/28/business/ap-us-jet-fuel-taxes.html?_r=0.

67 The US cabotage rules, which reserve access to the US domestic market to US carriers, can be viewed

as perhaps the biggest subsidy of all. Indeed, several commenters have noted the value of this benefit.

See, e,g., Comments of Federal Express at 9, and Comments of Hawaiian Airlines at 4, Docket DOT-OST-2015-0082. Other carriers note that the Big Three hold “grandfathered” slots at constrained airports now worth billions of dollars. See Response of Emirates, June 30, 2015, at 149-151.

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flows. While US carriers are free to make this request, it is critical to note that the very European carriers that the US Government would insulate from competition from Gulf carriers are airlines that themselves have received massive subsidies in their lifetimes. These subsidies have been taken the form of both direct state aid and the forgiveness and governmental assumption of significant financial obligations when these carriers

were privatized.68

Figure 1: Subsidies Received by European Airlines

Year Airline Amount (US $ million) 1991 Sabena 1,800 1991 Air France 338 1992 Iberia 830 1992 Finnair 175 1993 Aer Lingus 240 1993 British Airways 690 1994 TAP 1,965 1994 Air France 3,300 1994 Olympic 2,245 1994 Lufthansa 710 1994 KLM 620 1996/1999 Iberia 613 1995 Sabena 267 1995 AOM 49 1995 Lufthansa 400 1997 Alitalia 1,708

Qatar Airways’ State ownership is not unique, and should not be viewed as problematic. Indeed, many of the alliance partners of the Big Three currently are

State-owned, and have been reported to receive financial support from their governments.69

For example, Star Alliance members Air India and Turkish Airlines are each

68 Source: Doganis, R (2001), The Airline Business in the 21st Century, London Routledge & Raj S. Chari (2004), State Aids In The Airline Sector: A comparative analysis of Iberia and Aer Lingus, Studies in Public Policy 13, The Policy Institute at Trinity College Dublin.

69 Indeed, Delta just announced an investment in and expansion of its relationship with China Eastern, a

carrier which has been heavily subsidized by its government. See, e.g., “CAAC doubles subsidies to Chinese domestic carriers in 2014, “ http://www.ch-aviation.com/portal/news/24427-caac-doubles-subsidies-to-chinese-domestic-carriers-in-2014

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owned, but US carriers are not rushing to have the US Government abrogate their Open Skies agreements with those countries.

B. The Capital Trade Report Is Rife with Factual and Methodological Errors

The Big Three allege that Qatar Airways has received $16 billion in “subsidy” since 2004, with the largest amounts being characterized as loans ($8.4 billion) and

loan guarantees ($6.8 billion) from its shareholder,70 and other amounts including items

such as route incentives and favorable airport tax schemes that are replicated throughout the world. There are yet more claimed subsidies that are not quantified. The Big Three have taken a “kitchen sink” strategy with regard to their claims – they toss

everything in, regardless of its truth (or lack thereof) or relevance.71

The Big Three have attempted to “prove” their claims of subsidy by commissioning a study that applies WTO principles and the Department of Commerce “subsidy valuation methodology” to Qatar Airways and the other Gulf carriers. As stated above, the WTO/GATT agreement applies only to the trade of goods. Moreover, the United States has affirmatively resisted the inclusion of air transport services in the GATS, determining that US interests are better served by subjecting airline traffic rights to rules that are specific to the sector. The US Government should reject the efforts of

the Big Three to cherry pick their desired legal regime.72

Scrounging for a “smoking gun” which does not exist, the Big Three reviewed company materials that date back to 1995, when the carrier was in its infancy. Qatar Airways questions the relevance of any materials that so dramatically predate its entry into the US market, especially since the Company was privately held until 1999. It also bears noting that the Company stepped onto the competitive stage at a time when

70 White Paper, at 21.

71 Given this approach, Qatar Airways notes that it categorically denies the claims made by the Big Three,

even if it does not address in detail each and every claim that has been made.

72 While Qatar Airways opposes all efforts to apply extraneous legal agreements to services that are

clearly subject to the US-Qatar Air service agreement, it will offer commentary on the numerous factual and methodological flaws contained in the in the Capital Trade Study. As will be shown below, there is a pattern to these errors – data and facts are consistently misstated or manipulated in order to achieve a desired result.

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alliances were already being formed, and the Big Three (and their constituent carriers) were already mega-carriers with well-developed frequent flyer programs and route networks. The shareholders of Qatar Airways knew and understood at the time that the carrier needed to have a meaningful scope and scale in order to be relevant to consumers, and to be commercially viable. It also is worth noting that the Big Three came of age in a highly regulated (and protected) environment, and enjoyed massive

government supports of their own. 73

While the Big Three attempt to characterize these investments as “subsidies” using their strained application of (inapplicable) trade law principles, the fact is that there is nothing improper about a State owning an airline, or investing in that airline. Moreover, and as the Big Three’s own exhibits show, the Company’s revenues, and

value have grown steadily over time (see Section IV.C., below).74

About $15.2 billion of Capital Trade’s subsidy findings are based on their “determinations” that Qatar Airways was “uncreditworthy” between 2004 and 2010,

using “Department of Commerce subsidy valuation methodology.”75 Qatar Airways

rejects entirely the application of this methodology. Although the Capital Trade Group concedes in passing that “air transport services are not subject to conventional

international trade law conventions,”76 they nevertheless go to enormous lengths to

force their very large square peg into a very small round hole, regardless of the vast differences between manufacturers of goods and airlines, the latter which have a long and unchallenged history of being owned by States.

Capital Trade bases its creditworthiness “findings” in part by looking at financial metrics, and in part by comparing the financial returns of Qatar Airways against the returns of other businesses located within Qatar, and against other airlines, with the theory being that a private investor would not have made a decision to invest in a

73 US carriers received very significant government aid throughout their early years. See

http://wikileaks.org/wiki/CRS-RL30050.

74 Capital Trade Report, Exh. 12 75 White Paper, at 24.

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business that produced returns lower than its peers. For example, Capital Trade noted that for 2004-2007, Qatari businesses had an average return on equity of 12.6%, and cited a “Negative Return on Equity” for Qatar Airways in support of its assertion that the

carrier was not “creditworthy.”77

In addition to being untrue (more about this below), the comparison of returns between airline investments and investments in other sectors is entirely irrelevant to a discussion of subsidies. As is well known, the airline business for many decades has been at the bottom of almost all other industries in terms of Return on Invested Capital (ROIC). In fact, a recent IATA study has reviewed the performance of the commercial airline industry vis-à-vis other industries from 1965-2007, and placed the airline industry

dead last.78

The statistics above underscore the inappropriateness of applying a standard that applies to producers of goods to providers of air transport services. By this

standard, no party (private or public) would invest in any airline.79 Of course, States

invest in airlines in order to meet the needs of their citizens and businesses, and also take into account other development, strategic, and defense concerns (and benefits) that defy precise quantification.

But even if comparisons to non-transport related business are inappropriate, more troubling is the “cherry-picking” that was done to create an airline “control group” against which to compare the financial performance of the Gulf carriers. Despite the

77Id., at 50.

78 See International Air Transport Association, “Profitability and the Air Transport Value Chain,” June

2013, Chart 6, at 12 (showing airlines having the lowest ROIC of all industries surveyed between 1965-2007, available at https://www.iata.org/whatwedo/Documents/economics/profitability-and-the-air-transport-value%20chain.pdf.

79 Indeed, famed investor Warren Buffet has lamented the returns offered by airlines relative to other

investments: “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success…” Forbes.com, May 13, 2013, available at http://www.forbes.com/sites/tedreed/2013/05/13/buffett-decries-airline-investing-even-though-at-worst-he-broke-even/.

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widespread availability of industry-wide financial matrices, the findings about Qatar

Airways’ relative “creditworthiness” were based on comparison with just nine carriers.

This group includes Asiana, Air China, China Eastern, China Southern, EVA, Jet

Airways, JetBlue, TAM and US Airways.80 While the small size of the group is itself

problematic, its composition is especially questionable. Whilst the select group includes China’s three largest carriers, and two other Asian carriers, the Big Three and their

European JV partners are very conspicuously absent from the mix.81

Based on the carefully curated metrics of the control group, Capital Trade “found” that “the average return on equity for similarly placed airlines was approximately 9.2%

between 2004-2007.”82 The ROE figure given for 2004 was itself a whopping 32.6%,

with TAM reporting a 289% return for that year.83 An industry-wide snapshot of that time

period tells an entirely different (and far more accurate) story. According to IATA’s figures, industry-wide ROE for both 2004 and 2005 was 3%, for 2006 was 4.8% and

only reached 5.9% in 2007.84 The actual average ROE for the entire 2004-2007 time

period was 4.17%, which is less than half the quoted figure.

80See Capital Trade Report, Exhibit 3.

81 By point of reference, United, Northwest and Delta all were in bankruptcy in 2005, which suggests that

their inclusion in the ROE statistics might have altered the findings.

82 Capital Trade Report, at 50.

83 Capital Trade Report, Exhibit 3. (Appendix 1) (highlights added). Asiana showed ROE of 36%, and Jet

Airways 30%.

84 International Air Transport Association, “Profitability and the Air Transport Value Chain,” June 2013,

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Figure 2: Airline Industry ROE Year IATA 2004 3.00% 2005 3.00% 2006 4.80% 2007 5.90% 2008 1.50% 2009 2.10% 2010 6.70% 2011 5.00% 2012 4.50% 2013 3.60%

It also is critical to note that US carriers also were just beginning to recover from a very severe downturn during that time frame, as shown by figures provided in IATA’s Annual

Report for 2008.85

Figure 3: Regional Operating Profit Margins

While the figures above (a 289% 2004 ROE for TAM, and a 36% return for Asiana) are plainly not representative of the industry, we also note that when reviewing Qatar Airways’ performance, Capital Trade excluded figures that contradicted their desired findings. The financial data provided in Capital Trade’s own exhibits indicated

that Qatar Airways had a 102.8% ROE for 2005.86 If the same methodology were

applied to Qatar Airways over the same 2004-2007 time frame (i.e., that figure averaged over four years), the carrier would have had an average annual ROE of about 25.7%, a figure that is far higher than that of the comparison group. Of course, Capital Trade did

85 IATA Annual Report, 2008, at 13.

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not cite that figure, or provide any specific comparative ROE figure for Qatar Airways for

2004-2007 other than to note that the ROE was not negative in 2005.87 The

determination that Qatar Airways was not creditworthy is based on bogus comparisons and highly manipulated data, and should not be permitted to stand.

Unfortunately, these errors are not isolated. The methodological problems of the report are compounded by factual errors that are so basic that the entire analysis must be drawn into question. For example, the Capital Trade Report at one point suggests that a “rational investor” would not have made the decision to launch Qatar Airways, stating as follows:

In the first decade of the 21st century, private investors considering an investment into a start-up Middle Eastern long haul carrier would have taken into account the fact that Qatar Airways was pursuing a niche business model (a Middle East-based international carrier focused on long haul routes using wide body aircraft) already being pursued by two other major state-backed entities – Emirates and Etihad. Emirates is based less than 400 kilometers from Qatari’s (sic) home airport while Etihad’s home base is less

than 320 kilometers away.88

Qatar Airways was launched in 1994, not in the “first decade of the 21st century,” and

was in fact launched nine years prior to Etihad, not after Etihad. Moreover, as the flag

carrier of the State of Qatar, Qatar Airways was not pursuing a “niche business.” The Company initially focused on regional routes, and not “long haul routes using wide body aircraft.” Errors such as these underscore the lengths to which the Big Three strained to reach their conclusions, and why the “findings” of the White Paper and Capital Trade Report should be rejected in their entirety.

This outcome-based approach by Capital Trade is displayed elsewhere in the report. For the 2004-2013 time period, Capital Trade states that the mean ROE for the

87 Capital Trade Report, at 49. In a similar vein, the Big Three fail to mention anywhere in their narrative

that Qatar Airways had positive net income in three of the five most recent financial years.

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control group was 10.3%,89 even though the industry-wide figures shown above get nowhere near the double digits. Significantly, and disclosed only in a footnote was the statement that data for 2008 “was excluded from ROE averages due to financial crisis

year.”90 Of course, that extraordinary year (which was actually Qatar Airways’ first full

year of operations to the United States) was not excluded or even accounted for in Capital Trade’s discussions of Qatar Airways’ financials.

The picture painted in the narrative of the White Paper and in the Capital Trade

Report is inconsistent with the underlying financial data.91 According to Capital Trade’s

own analysis and exhibits, Qatar Airways had positive net income for three of the last

five financial years (2010, 2011, and 2013).92 Instead of acknowledging that reality,

Capital Trade dismisses the information, noting only that “financial ratios show some

improvement in the later years under consideration.”93 The US Government should give

no weight to this report, which is blatantly biased towards achieving a particular result and riddled with factual and methodological errors.

C. Financial History of Qatar Airways

As mentioned above, Qatar Airways, founded in 1994 and re-launched in 1997, is wholly owned by the State of Qatar. When the airline was first launched, it was privately owned. The State took a 50% share of the Company in 1999 and the airline became wholly owned by the State in 2013.

As noted earlier, Qatar Airways launched its first service to the United States in mid-2007, with services to New York and Washington. These services were a critical

89 Capital Trade Report, Exhibit 3.

90 The time frame for “financial ratios” that appear on pages 49-50 of the Capital Trade report vary

considerably, with some figures such as income and working capital covering 2009, and some spanning to 2008. Only the ROE figure ends at 2007, which is understandable, as inclusion of later years would have undercut the artificially high results.

91See Capital Trade Report, Exhibit 12.

92 Qatar Airways also turned a profit in 2014, but those figures have not yet been officially released. 93 Capital Trade Report, at 50. It should be noted, however, that all the “findings” of subsidy made by

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part of the Company’s network development, and part of its long-term strategic plan. As part of that plan, the Company took delivery of ultra-long range B777 aircraft.

Between 2009 and 2014, Qatar Airways undertook a planned expansion, financing its growth through a mixture of shareholder equity and debt. During this time, the size of Qatar Airways’ fleet doubled, from 68 aircraft to 136 aircraft. To maintain the Company’s debt-to-equity ratios within a consistent range, Qatar Airways’ parent increased its equity stake during this time. Just as the Company’s fleet and network expanded during this time, so did the value of the Company. As of March 2008, the total assets of the Company were $6.7 billion. By March of 2014, that figure had grown to $13.3 billion. The growth in the Company’s revenues tracked the expansion of the fleet,

growing from $3.99 billion in 2009, to $8.4 billion in 2014.94 The Company has had

positive net income in five of the past eight years.95 Qatar Airways has relied on global

markets to finance its aircraft purchases. As the State of Qatar is not a signatory of the Cape Town Convention, many commercial lenders require guarantees of some sort to secure the financed assets. This would be the case regardless of whether Qatar Airways was State-owned or not. Qatar Airways has never defaulted on any loan.

Despite the well-documented challenges facing the global aviation industry in the

early 2000’s, and despite the sensationalized claims set forth in the White Paper,96

Qatar Airways’ financial future has never been in doubt. Under the laws of Qatar (which, unlike the United States, does not permit insolvency), and the Company’s bylaws, Qatar Airways is required to monitor its capital ratios, and maintain continuous assurances that shareholders are prepared to stand behind the financial obligations of the

corporation.97 When the Company was first formed, its declared share capital (excluding

shareholders’ advances) was just $6.8 million, with this amount increasing to $39.5

94 Capital Trade Report, at Exhibit 12.

95 2008, 2010-2011, 2013, 2015. See Capital Trade Report, Exhibit 12. Qatar Airways reported net

income of $103 million last year. “Qatar Airways Reveals $103 Million Annual Profit, Wall Street Journal, June 15, 2015, available at http://www.wsj.com/articles/qatar-airways-reveals-103-million-annual-profit-1434384433.

96 Capital Trade Report at Exhibit 12.

Figure

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