Originally Posted by
whimike
But, that is what we see ex-USA as well. All of my EK flights from the US have been packed with Indian's going to India. These EK planes aren't filled with US businessmen going to DXB (except for me), they are filled with Indian businessmen/IT/engineers going to India via DXB. So, yes, most ex-USA traffic is also transit traffic.
No question if EK was selling O/D they would be making a killing, but I would say over 75% of the flights ex-USA are not O/D. And, with the extremely cheap flights from USA-India, there is very little profit, if any, to be had. 2 years ago I flew SFO-DXB-ICN, round-trip for US$800, for sure they lost money on me. The fares to India are often sub-$1k.
I have heard before, from a reputable source, that EK doesn't make money with their economy cabins, they make their money with their premium cabins. This is quite the opposite of most other airlines. But, when running the numbers it makes sense. If they can use their economy cabins to cover, or nearly cover, their costs, then the premium cabin revenue is where their profit comes from (and perhaps cargo, too). This is likely why EK focuses on their premium-cabin customer's experience, if people are going to drop $5k - $20k on a ticket, put together a product to attract those people. I would venture a guess that Emirates has one of the highest percentage of premium cabins being filled with people paying real money for them, vs. other airlines where the premium cabins are filled with awards, upgrades, or below-market-priced corporate contracts.
Are those horses not dead yet! Let us flog them further!
I addressed the issue of connecting fares in a previous point - that the lowest Y fares price out at about 730USD net to EK rt (to BOM) - if we allocate that fare 3:1 between the USA and BOM sectors (rough back of the envelope calculation based on sector length) that's 547.50/2 which is 273.75 for the one way sector, which of course is a loss on that pax for that part of the journey, assuming the cost of fuel is maxed at 570USD and the fuel cost per EKs latest report is 38% of total costs - which gives us a maximum total cost per pax of 1500USD each way. Clearly EK is making a loss on super cheap fares ex-USA. However, this doesn't mean that the routes themselves are unsustainably loss making.
To elaborate: the max cost of flying an A380 to and from the USA is 735k USD each way. It is feasible for EK to get revenues of 800k-1M USD each way because:
- Not all fares are the super cheap fares
- Cargo
Additionally the cost is not going to be 1500USD per pax because:
- Cargo reduces the cost per pax - the max fuel load is based on a full cabin and and a full cargo compartment
- Jet-A fuel is no longer 3.1/3.2 USD/US gal, more like 2.8 USD/US gal - that reduces fuel costs by around 30k USD: equivalent to the fuel cost of 60 pax, or total costs of 20 pax (at the 1500USD rate) - that's 4% less load you have to find to breakeven.
If the cost per pax is 1300USD that works out at 635kUSD, 1200USD/586k, 1100USD/538k. You can see that these are difficult but achievable revenue targets. At a 2.4% industry average margin you only need 650k/600k/551k USD revenue to beat the competition. Feasible, I think.
Of course ex-USA EK needs more than super cheap Y fares to be profitable. But US statistics show that load factors range from 80-95% across all USA destinations. Anecdotal evidence shows us there is non-zero premium traffic on these routes - therefore it follows the routes can be profitable with no subsidy.
It also follows that A380s on ULH routes are most likely going to have the thinnest margins because of fuel costs. This means that the rest of the network had better not also be losing money, or EK is screwed. However, we can do similar calculations for the rest of EKs network and show that money is also made there - even if USA is only breakeven or at a slight loss, the rest of the network can support it with profits from operations. Therefore no subsidy needed.
When it comes to ULH demand let's not forget that most people are making round trips, so to fill 500 seats a day, you can pull that demand from both source and destination markets - and EK has a wide enough footprint to do that.
Your point about making money from premium pax is a good one and is also a tried and tested strategy: BA and now IAG's strategy was and is exactly that. That's why the 2007/8 financial crisis really screwed BA, but now they are in very good shape. It also explains why they have 2-4-2 TATL J seats in the majority of their fleet. I would argue that most mainline network carriers need to make their money in premium classes and the ones that are struggling now are the ones struggling to attract those yields. Y is there to make sure they can breakeven on some routes, and to position themselves in the market as being accessible (all J/F carriers seem to fail quite regularly -Maxjet, Eos Airlines anyone?) - but to find considerable Y profits you would have to look to the AirAsias, Easyjet and Ryanairs of the world.