NOIR

Europe isn't going any where with this, so don't hold your breath to long. The French have a saying "say a lie three times, and it's half true".

In the United States if I remember correctly your innocent until proven guilty, and from what I see the US3 haven't proven anything. Alleged yes, but proven nothing what so ever. ^

I actually think that you, and the original poster just don't understand, but even worse. You don't understand that you don't understand, and that's why we keep going in circle's with you guys.

DYKWIA

UA1K_no_more

He's a propeller age "expert", which coincidentally is the same time period where a certain someone claimed that if you repeat a lie enough times, people will think it's true.

If an airline is based in a country/emirate where the economy isn't doing great, and tourism numbers are down, that makes the airline a "scam"? That's your latest "logic"? Wow, you're getting desperate, aren't you?
According to your "logic," the US3 airlines were "scams" after 9/11 and in 2009-2009, and the same thing applies to many other airlines that you refer to as "real." They must all be "scams"...

Some questions for you:
* Have you event flown on EK?
* How much money do you have invested in US3 stock?
* Do you currently work for, or have you ever worked for, the US3 or any of the companies that they have acquired or merged with?

Answering these questions will reveal your true reasons for starting this thread.

eternaltransit

With regards to EK and the economic factors affecting its home city, I think the truth lies more in between the two viewpoints on this page of the thread - clearly the majority of EKs passengers transfer and couldn't care less about stopping in Dubai nor the economic situation there. But also, it is obvious from fare data that O&D traffic to Dubai is high yielding and high margin, in all classes - after all, round trips to DXB cost the same or more than additional 6 hours sectors (e.g. EU-Asia the same price as EU-DXB). So, the economic situation in the wider Middle East and Dubai's tourism attractiveness are clearly going to have an impact on EKs revenues and margins. Whether that's enough to tip it into the red remains to be seen, but given the razor thin margins, it is not outside of the realms of possibility.

In reply to the OP in 1538 and 1543, I think the reason you don't hear about EK talking about all of these challenges on a regular basis is because they don't have public equity markets to which they have to report to on a quarterly basis. But they do report every year and mention some of these challenges if they persist on a yearly basis.

Also, I thought the OP's working hypothesis was no one went to Dubai anyway, so the Bloomberg article he linked is moot. Assuming that the economic situation in Dubai is worsening, does this not undermine his point, if load factors continue to stay high (therefore people are transiting, as most people on this thread point out), and Dubai will also have no money to continue with their alleged financial charade, so the house of cards should start to collapse fairly soon (or be propped up by a neighbour!).

It's hardly a money making machine - you seem to now be shifting the goalposts to saying that if it's not making bundles of cash like other successful (by the metrics of equity investors), then it's loss making and being propped up. That is unfair - EK is simply a highly leveraged, highly risky business that is working now, delivering small but sustained net margins, but clearly has risk factors in the future: their success is pegged on the assumption of inexorable economic growth in their major source markets and being able to fill their planes continually to pay for their operating leases. They don't have much of a margin for error.

In terms of investment - no, I probably wouldn't invest in EK. Better returns at lower risk elsewhere I think.

As to the question about debt: it's a similar thing - it's I think pointless to judge EK by economic "Best Practice" - it is clear that EK is borrowing on commercial (at least in the aviation industry) terms, given the fact its creditors are mainly incorporated in more transparent jurisdictions and they access debt capital markets on regulated exchanges. No airline investor in public equity markets in 2015 is going to be happy with the margins EK achieves, but given the constraints they operate under (2 competitors with bigger pockets nearby, competitive fares compressing margins), perhaps those margins are not bad if evaluated by the potential of what is possible being based in DXB and the competitive pressures of people around the world wanting cheap travel and not minding discomfort.

Clearly EK has not made enough money and had retained earnings after dividends over the life of the company to pay upfront for all of its planes and future planes. That is why EK borrows money like any other company that wants to expand but doesn't have cash on hand (or does, but projected returns beat borrowing costs) - it borrows. This is a perfectly valid, albeit risky strategy, given the airline industry's history and it remains to be seen whether a major shock will cause big problems for EK, given its competitors in the region actually do have rich owners who can bail out losses (unlike EKs owner). As of last report, equity stood at 25.5 bn AED and non-current (aka lease/finance obligations) borrowings/liabilities at 42.4 bn AED. Even if you discount 16bn AED in cash from those borrowings, you're still looking at a gearing ratio of over 100%. That is very risky! http://www.theemiratesgroup.com/engl...al-report.aspx

It's also telling that over the past 5 years, the dividend payout as dropped every year, as the company conserves cash.

As to questions about who pays for orders and deposits - clearly the people who are buying the aircraft put down the deposits (a contribution to which may or may not be EK). EK puts up 3-6 months of lease/rent payments, although as a great customer, maybe they get better terms. To try and insinuate EK is fraudulent because it wouldn't have enough money to buy all their planes outright or put down massive deposits for all of the orders placed is just inaccurate and shows a lack of understanding as to how EK finances its fleet: entirely (with a few exceptions) by contracting with lease financing companies and debt capital markets. Not from retained earnings (which clearly aren't going to be enough). So yes, in 1535 - where is the money coming from indeed, because it clearly isn't coming from the Dubai government, they haven't got any! The answer of course is: leasing companies, investors in the investment trusts that own A380s which get leased to EK, as well their associated commercial loans, bond issues likes the ones on the LSE and in Berlin, EETC backed issuances to fund more planes that then get leased to EK https://www.moodys.com/research/Mood......--PR_275801, http://www.goldmansachs.com/s/2012an...nt_Stories.pdf - here's what GS had to say:

Of course, perhaps GS are in the on scam too - a bit like when they helped Greece join the Euro! But then, clearly the GS/Doric/Airbus/EK deal is much more transparent, considering you can pick up all the details with a quick Google search.

FD1971

And this is the scary part of the fairy tale, which brings us back to the original point I made months ago...

There is no doubt that EK received massive state aid to establish itself, nothing new in this expensive industry. There is nothing wrong with it, actually dipping deep into the pockets of the taxpayer is the norm.

There is no doubt that EK benefits from a vast potpourri of affiliated companies, official and inofficial accounts, monopolies etc

There is no doubt that certain services DNATA provides cross-subsidize the unprofitable part of the Emirates Group, for example the core business of flying aircraft.

What makes it scary and gives us an even clearer picture is the pile of debt, which increased more and more and more over the last couple of years..., but one should never forget one thing:

Emirates has always been profitable and never concluded a financial year with a loss.

So it is really fair to conclude that Emirates is not a scam, but a beautiful fairy tale from the 1000 and 1 night region, which is well known for creative fantasties.

It would be nice, actually simply amazing, if the business model of offering brilliant service at rock-bottom cost would be sustainable. Paying companies like Sixt CD €uro 100 for a Transfer, paying travel agents a nice commission, expecting SQ or ANA like service levels makes aviation far more civilised again, unfortunately it does not really cover your cost, so we have to rely on airlines like Ryanair (!), BA and LH to provide us with best cases how to make money in this industry while the ME3 give us best in class examples what is possible, if you do not have to mind the bottom line.

irishguy28

Can you please explain why the state of the Dubai economy would have much impact on Emirates (except for your crazy idea that the Government is apparently pouring billions into the airline, continually, to keep it afloat - so a Dubai downtirn would lead to a collapse of the airline, surely?).

A downturn in Dubai may even help Emirates; its local costs would reduce, and tourism numbers may increase if the price of a holiday in Dubai drops.

Germany has, supposedly, Europe's strongest economy, but neither of its two main airlines are performing well. Greece's economy is in the toilet; yet they have a profitable airline in the shape of Aegean.

Perhaps you and iahphx are some unusual travellers who pick an itinerary solely on the basis of how well the economy of the transit city is faring. I would say that that puts you in a minority of two.

UA1K_no_more

Here are a couple of other companies that, according to stuck-in-the-past "experts" with outdated degrees, would never make it because their business ideas were based on "creative fantasies":
Spotify
Amazon
eBay

If I ever need advice on if an airline should use a DC-3 or an L-188, I'm sure that your knowledge will be useful.

NOIR

"Look! Up in the sky!"
"It's a bird!"
"It's a plane!"
"It's SuperEK!"

"Yes, it's SuperEK - strange visitor from another planet who came to America with powers and abilities far beyond those of mortal men. SuperEK - defender of law and order. champion of equal rights, valiant, courageous fighter against the forces of hate and prejudice, who disguised as Sir Clark, mild-mannered Airline President for a great metropolitan Open Skies Policy, fights a never-ending battle for truth, justice and the American way."

Up, Up and Away!

"Faster than an airplane, more powerful than a locomotive, impervious to bullets. 'Up in the sky - look!' 'It's a giant bird.' 'It's a plane.' 'It's SUPEREK!'

SupermEK - a strange visitor from a distant planet: champion of the oppressed, physical marvel extraordinary who has sworn to devote his existence on Earth to helping those in need."

A Job for SuperEK

'UP, UP AND AWAY!'"

"This looks like a job - FOR SUPEREK."

Having fought mad scientists, atomic weapons and other supernatural menaces for years, SupermEK took up the battle against racial and religious intolerance

"SuperEK's Hooper rating has risen perceptibly since the change in plot,"

You want to go where?

How does amassing debt make it a scam? Everyone knows about it. You may be right that it won't be able to pay of that debt - that it will fail. Businesses go into bankruptcy every day - like all of the US3. If amassing debts to the point you cannot pay them is a scam then practically the entire US airline industry is a scam. And talk about subsidies. We have all ignored the giant subsidies which the US3 have gotten in Chapter 11. Sure, those subsidies weren't provided by the government, but they were effectively enforced by the government. Why don't the US3 use their record profits to pay back the pensions that they and their predecessor companies stole from so many of their employees? Now that is the real scam.

FD1971

With all due respect, I do not expect any poster to have enough knowledge to be able to understand a complex industry, as far as I know FT does not check the competence during the sign-up process, but do you honestly expect me to comment on a possible relation between the local economy and the performance of an airline.

Wow!

BTW, LH just earned a cool billion from ops. in 2014, despite wars not far away, despite currencies crashing in important markets and a major strike of its pilots and is on course to increase the profits by another 60% this year, so I really do not know what you are talking about.

P.S.

For starters, there are interesting theories (by all those self-proclaimed experts with 'a degree in Aviation Management') about a possible relation between the economy, i.e. GDP development and the performance of airlines.

Maybe, a tip for the long weekend ahead

DYKWIA

So you're now admitting to not understanding the complex aviation industry.

Outstanding!

FD1971

You have to understand one important thing.

We are not talking about a competition here, nobody cares which airline won Silver, let alone Gold.

The US3 are a massive failure and declared bankruptcy at least once. Some of the filings left the market with a lot of question marks, the word strategic bankruptcy did not only originate with Conti back in the 1980's, it also came back during some filings in later decades. But despite their lackluster performance, they still have a point and they came up with a sum close to $40 billion...

Coming back to EK, they accumulated a lot of debt and I just wonder why considering that everything is highly profitable...

The never-ending transit provided some answers, I also looked for other answers from the apologists aka ambassadors, but so far (surprisingly...) nobody explained to me why the EK accumulated such a pile of debt.

Hence, I can only suggest one thing:

Keep discovering.

FD1971

Faktencheck, let us pick Amazon and take a closer look at the last three FYs.

Year Net income in USD
2012 - 39 million
2013 274 million
2014 - 241 Million

What happened, 1k?

eternaltransit

Despite it being a complex industry (although you yourself did note the fundamental rule which is that revenue must simply be higher than costs) - it is not really an opaque mystery as to how it operates. There's a false equivalence between an operating with lots of apparent moving parts with it being "too complicated" to analyse. Much of the information required to understand the industry and company is available in the public domain: for our purposes we simply need to find any inconsistencies that may be there - and be very open with our assumptions and what they are based on, instead of claiming very strong positions with nothing to verify that independently.

All that aside, let's take a counter-example to the idea that airline profitability is inextricably linked to home country economic performance (although LH in 2014 is perhaps a good example: major issues that you described, German economic weakness in 2014, yet still making a profit) - and even less so in airlines that operate a similar model to EK: SQ and CX

Let's go to the Asian Financial Crisis of 1997-1998. Weakness in home markets, so you would expect crashing losses, perhaps - but SQ made 1 bn SGD profits in each year (margins of 12%): http://www.singaporeair.com/pdf/Inve...report9899.pdf, CX made a small loss in 1998 (500m HKD - although there was significant depreciation, and we all know that airlines are not above adjusting depreciation lengths to make their books look better, such as LH did in 2014 - a/c depreciation is now 20 years, not 12 resulting in a 340m EUR gain in operating results (their words, not mine), and 350m in 2015 - http://www.lufthansagroup.com/en/pre...icle/2847.html - but in 1999, CX then made 2.1 billion HKD.

So clearly, connecting carriers are more insulated from domestic economic troubles than carriers which rely a lot on big O&D volumes such as BA during the financial crisis.

-
Yes - there is nothing wrong with airlines establishing themselves with capital from governments, or on the back of aviation infrastructure developments like government owned airports and the roads/public transport that link it, or the tourism developments sponsored to spark some sort of passenger demand.

But can all of those infrastructure developments really be classed as state aid - taking the EU definition:http://ec.europa.eu/competition/stat.../index_en.html.

I think the only thing you could possibly point to as "aid" would be the start up capital, planes and buildings given to EK (only 100 million USD) - but there is a very good argument that could simply be regarded as start-up equity, considering that EK has returned dividends to its owner (if you believe their representations).

No one disputes any of this. What is under dispute is that they haemorrhage money from operations so much that they require constant cash injections and that they lie through their teeth with their published financials.

-

There is a doubt as to whether they do benefit from transactions with related parties - there is little information out there, so we can't conclude very much. What we can do is work out a proportion of costs and services that are provided by these third parties, and see whether they are in line with comparable competitors globally, and look for any inconsistencies or if something is anomalously low or high, and see if there is an explanation for that that isn't "we don't know, so it much be fraudulent", which is rather unhelpful as there may be other explanations that need to be eliminated first.

Then you make adjustments to bring them in line with expected norms (if you think costs etc. are anomalous) and see how that affects the numbers.

-

dnata's results are broken out separately and published now - but I thought the thesis was that operations were so absurdly expensive that they "must be" losing money from flying planes. In that case, how can something like airport services ever prop up an airline, considering that the costs for the services that dnata provide are so tiny in proportion to the on-balance sheet costs that operations require: fuel and salaries.

-

the debt may be scary if one is averse to the idea of debt fuelled growth, but clearly this is not an issue for Dubai. They are well used to that, I think...results of course, may vary

As to years of profitability, I will discuss that below, but I think EK are a victim of their own marketing success here. They like to project this image of being an unstoppable juggernaut that makes bundles of cash and is just superior to all the old guard, but under the covers you see that they run a risky business model with high gearing and low margins. That doesn't imply fraud though.

-

brilliant service and rock-bottom prices is possible: there is no correlation between service and cost. Take for example, the vaunted SQ, where pax unit costs were 9.1 singapore cents per km, or 7 US cents per km, and AF where it's 7.45 US cents per km. http://www.singaporeair.com/pdf/Inve...report1314.pdf, http://www.airfranceklm.com/en/finance.

All the sales and marketing costs, of which commissions would be allocated to, are already taken into account when calculating net margins - and of course, EK do like to push people to their website. Do you know many travel agents? If you do, you will know that EK is one of the most stingy when it comes to commissions and rarely, if ever, offers consolidators. Obviously this is anecdotal evidence, but given this thread is full of such statements, I thought I might add to the mix...

Clearly the chauffeur drive transfers are part of the ticket price, and few journeys are going to be 100 EUR: that is why there are limits on the range of the service, with excess to be paid by pasengers. It is more like 50 EUR, and given that chauffeur drive is the cost of F&B for a journey, especially if one drinks a bottle of F wine, it's really not going to be that much, considering ticket prices. If you can save 20-30% on your salary costs, you can afford to throw in little things like chauffeur drive (which is not taken by every passenger), reducing costs.

Far be it from not minding about the bottom line (although QR and EY perhaps have questionable density on their premium cabins), EK shows what is possible: not the best, not the worst, if you don't mind about maximising margins.

I will take a stab at providing a plausible explanation for debt accumulation.

EK over its lifetime (of published accounts), has generated in potential retained earnings: 34542m AED on top of 527476m AED revenues. That is a margin of 6%. (9.2bn USD on 143bn USD revenue)

Consider that 33% of that is dividended away to its owner in distributions. This gives EK, potentially, 23bn AED in retained earnings over its lifetime. That is only
6.2bn USD - strangely enough that's about the amount of cash/short term deposits they have on hand, but enough about that.

Now - EK have realised that they are not the only kid in town: there are two close competitors with lots and lots of money. EK doesn't have the money or the profit margin to fit out planes with low density premium configurations, or offer lots of frills in Y - after all, their seat back entertainment system ICE is there to cover for fewer frills in Y, like amenity kits or whatever. After all, if you didn't care about profit at all, why is your J product 2-3-2 config and why do you have 76 in J on the A380 and 14 in F, when your competitors are doing things like 1-2-1 in J on smaller planes, and 7+2 in F in the same space? Why is your Y product a standard 3-4-3 on all airframes?

EK realise their only competitive advantage, given their average hard product, is, in the future, going to be their network and schedule. They have had a big head start with marketing (they have become a default choice for many because of it), and with their route network. Thus, they need to expand the route network as fast as possible to entrench. Exactly your spokes and wheel analogy a few pages ago.

But, how does one expand one's route network, without the cash to buy planes, considering you have only have (and could ever have) 6 bn USD cash on hand. Your owner isn't going to give you the money, because your owner would have to borrow it anyway. So you do what any rational company does with a good track record - find external capital. Your owner is not going to be selling equity, but luckily you are in a business with good, proven financing models like operating leases and debt capital markets (and new ones, EETCs! http://en.wikipedia.org/wiki/Equipme...st_certificate) - and you can sell your story of growth market track record, you have good security: the aircraft itself - so you can, if you like pay-as-you-go. Your problem is...keeping up with the rent payments. If it all goes under, then you will be left with not much, very quickly.

So far be it from being "highly profitable", EK is marginally profitable, considering most of its cash flow goes into paying the rent for these planes (all bar 6 of them, that's over 190). Their marketing makes them look unstoppable, investors believe this and finance their planes, they continue to deliver the goods (given the load factors and low costs) and make the lease payments. All are happy, apart from the owners, if the owners were really looking for maximum economic return. But they seem to be happy with single digit margins, so that's ok as well.

Does that sound like a plausible explanation as to why you would accumulate debt, if you were in EKs position?

UA1K_no_more

Are you suggesting that Amazon won't make it?
Perhaps they should invest in some old propeller planes to diversify their business.
Using your stuck-in-the-past degree and knowledge, would you advise them to buy a DC-3 or an L-188?