Dubai may be forced to use Emirates airline as debt collateral

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Dubai’s flagship airline, Emirates, has emerged as a potential pawn in the city state’s scramble for financial stability.

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Dubai’s flagship airline, Emirates, has emerged as a potential pawn in the city state’s scramble for financial stability.

One of the world’s fastest growing carriers, the scale of Emirates’s ambition is underlined by its status as the biggest customer for the A380 super-jumbo and its lavish sponsorships of leading European football clubs including Arsenal and Paris St Germain.

But financial experts believe the airline’s future could be determined by Dubai’s sister emirate, Abu Dhabi, which could demand ownership of the company for bailing out its neighbour if the troubles at Dubai World worsen. Emirates is owned by the Investment Corporation of Dubai, which is in turn controlled by the Dubai government.

“It [Emirates] could be on the table. It is one of Dubai’s crown jewels, it has very strong market reputation and it also acts as a hub between Asia, the Middle East and Europe,” said Vivek Tawadey, head of credit portfolio strategy at BNP Paribas.

If Emirates continues its present growth trajectory it could become the world’s biggest long-haul carrier within a decade. It has ordered 58 A380s, each with nearly 500 seats, as it strives to make Dubai a major international travel hub, linking Europe and North America to the Middle East, Asia and Australia. In stark contrast with most of the international airline industry, the carrier is also profitable, posting a net profit of £163m after carrying 22.7 million passengers last year.

Cynical executives at rival airlines, browbeaten by losses, disparage Emirates’s profitability and argue its strong performance is propped up by covert state aid in the form of subsidies for fuel and landing fees. The airline’s chief executive, Sheikh Ahmed bin Saeed al-Maktoum, is the uncle of Dubai’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, but the airline says it pays the same fuel prices and landing fees as other carriers.

Tim Clark, Emirates’s president, was angered at an airline conference last year when he was publicly accused by fellow executives of enjoying state assistance, something the former BA executive denies vehemently.

Emirates was back on the defensive today as it reacted to speculation that it could be forced to merge with the Abu Dhabi carrier, Etihad.

Maurice Flanagan, Emirates vice-chairman, described the media response to Dubai World’s request for a debt moratorium as “hate Dubai week”.

In an interview with Bloomberg he added: “You wouldn’t know it from the media comment, but Dubai has a number of substantial businesses.”

Etihad said there are “no talks” about a deal with Emirates.

An aviation industry source said the Dubai government would be loth to let the airline go. “It’s the family silver. Although the airline cannot decide whether or not it is sold, it is probably the last thing that the government would want to go under the hammer,” the source said.

It is understood that some of Emirates’ business partners would not be averse to a deal nonetheless. Arsenal signed a sponsorship deal worth £90m with Emirates in 2004 and is believed to have received the majority of the airline’s investment already, with £28m outstanding. It is understood that Arsenal is aware of more lucrative deals being signed by its Premier League rivals and would not complain if Emirates scrapped a contract that gives the carrier naming rights over Arsenal’s stadium until the 2020-21 season and a shirt sponsorship deal until 2013-14.

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Editor in chief is Linda Hohnholz.