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Op-Ed: Partnership for Open & Fair Skies is Wrong About Qatar Airways Financials

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Op-Ed: Partnership for Open & Fair Skies is Wrong About Qatar Airways Financials

Op-Ed: Partnership for Open & Fair Skies is Wrong About Qatar Airways Financials
June 28
08:19 2017

MIAMI – The Partnership for Open & Fair Skies, an anti-Middle Eastern airline lobby group, released an analysis claiming that Qatar Airways lost $703 million in 2017, contradicting the carrier’s annual report showing an operating profit of $540 million.

The analysis, conducted on behalf of the lobby group involving American Airlines, United Airlines, and Delta Air Lines by forensic accountants, also alleges that Qatar Airways received $491 million in additional government subsidies in 2016-17.

The specific claims made by the Partnership include the following:

The government granted a subsidy to the airline in the form of monopoly rights to operate a duty-free and liquor sales business, for which the airline reported $298 million in net profit.

The airline reported $37 million related to hotel operations, also granted by the government.

And, it included $591 million in gains from the sales of property, plant and equipment. Because these transactions are thinly disclosed in the financial reports, the sources and parties to the transactions are unknown, but most likely include the government.

The partnership also cited an analysis by Airline Weekly, a publication that we highly regard in presenting its case:

In its coverage of Qatar Airways’ supposed profits, Airline Weekly notes ‘these figures are misleading’ and explains ‘the larger point here is that Qatar Airways itself – the airline, in other words – almost assuredly did not make money last year.’ (Airline Weekly, June 19, 2017). The report makes clear that Qatar Airways has negative operating margins that would not sustain a viable operation absent government support. The same report also indicates Qatar Airways had the 4th worst financial performance in the entire global airline industry.

“No investor in their right mind would give money to a company that regularly loses hundreds of millions of dollars,” said Jill Zuckman, chief spokesperson for the Partnership for Open & Fair Skies. “Even with nearly half-a-billion dollars in new subsidies and marked-up alcohol and duty-free sales, Qatar Airways remains one of the worst performing global airlines, on par with failing carriers like Air Berlin and Alitalia.”

Claims have numeric merit


We attempted to reproduce the high-level analysis presented in the partnership’s press release with the financial statements released by Qatar and were able to more or less confirm the figures.

According to our analysis using present day exchange rates (thus creating a slight difference with the Partnership’s analysis), the duty-free operations did generate $545.3 million in revenue and $286.8 million in net profit. This includes both in-flight duty-free sales and duty-free sales at Doha’s Hamad International Airport.

Hotel operations also did generate $70.8 million in revenue and $35.9 million in profits. And according to the income statement, Qatar Airways did generate $569.7 million from the sale of property. It is also technically true that Qatar Airways would have lost money on paper if general and administrative expenses were removed ($355.3 million to be exact).

Hamad-International-Airport-Image

But they’re spurious in practice


So let’s tackle the two most egregious cases – where the partnership claims that the $298 million net profit on duty free sales (the moralizing about “markups” is truly flabbergasting given some of the expensive fees rolled out by US carriers in recent years) and the $37 million in net profit on hotel operations consist of a subsidy.

This notion misses the entire purpose of Qatar Airways to the state of Qatar – it is not meant to be a profitable airline by itself. Rather, Qatar Airways is meant to facilitate the broader flow of travelers and tourism to and from Doha and Qatar.

And given that purpose, it makes perfect sense that Qatar Airways would be given the concession to operate duty-free and own hotels. Travel conglomerates own both hotels and airlines all the time, and is it radically different than say Delta profiting from its Trainer Refinery?

Meanwhile, on the topic of Duty-Free, concessions are given to single operators to run duty-free shops exclusively all the time. Does anyone really think that Doha would have 31 million passengers traveling through its halls without Qatar Airways? It might have a fifth of that at best.

Qatar Airways absolutely should be able to profit off of the duty-free sales generated by that passenger volume. That’s $300 million plus in the $491 million overall figure.

The note about property sales is a reasonable one but it doesn’t affect the carrier’s profitability. It also is highly presumptuous in assuming that these sales are linked to the government. And it doesn’t change the fact that Qatar Airways reported an operating profit.

The point about general and administrative expenses seems off base, as it does look like those are not related to core business activities (since there are similar line items in the actual operating expenses portion of the P&L). And again, in that case, Qatar Airways was still operationally or grossly profitable (looking at something like EBITDAR margin).

Which is why even though Airline Weekly’s analysis is of course factually accurate, it misses the strategic point of Qatar Airways’ existence. The state of Qatar uses the airline as a loss leader to generate tourism and facilitate business through nonstop travel links.

It’s no different than a movie theater that sells tickets at a loss but makes a profit based on concession sales. Qatar Airways is a travel conglomerate, not an airline by itself, and so its financial performance should be judged through that lens.

Ultimately these financial statements were signed off on by Ernst & Young, who are not at all some shady mom and pop accounting shop. The reality of the way these modern accounting works is that with depreciation schedules, interest, net operating losses, and all of the other tax laws and regulations that are in effect, accounting is no longer an exact science.

As a result, I cannot endorse the analysis by the Partnership for Open & Fair Skies.

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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